1967 (12) TMI 26 - HC - Wealth-tax

Liability incurred in purchasing the assets - Whether the assessee was entitled to deduction of the entire liability from the aggregate value of its assets - Held yes

Summary

Issues Involved:
1. Applicability of sub-clause (ii) of clause (m) of section 2 of the Wealth-tax Act, 1957.
2. Whether the liability of Rs. 31,26,000 is a debt owed within the meaning of section 2(m) of the Wealth-tax Act.

Issue-wise Detailed Analysis:

1. Applicability of sub-clause (ii) of clause (m) of section 2 of the Wealth-tax Act, 1957:
The primary issue in the case was whether the liability of Rs. 31,26,000 incurred by the assessee for the purchase of assets from G. F. Kellner and Company could be deducted in computing the net wealth under section 2(m) of the Wealth-tax Act, 1957. The revenue argued that this liability was related to the shares held by the assessee in Kellner, which were exempt from wealth-tax under section 5(1)(xix), and thus should be excluded as per sub-clause (ii) of clause (m) of section 2. However, the court found that the liability incurred for purchasing the assets of Kellner was unrelated to the shares. The purchase of shares was a separate transaction that occurred earlier. Clause 8 of the resolution of the board of directors of the assessee dated February 4, 1930, merely provided an option for the assessee to surrender shares in case of Kellner's liquidation to reduce the liability, but it did not create a nexus between the liability and the shares.

2. Whether the liability of Rs. 31,26,000 is a debt owed within the meaning of section 2(m) of the Wealth-tax Act:
The court examined the statutory provisions and concluded that the liability of Rs. 31,26,000 was indeed a debt owed by the assessee as per section 2(m) of the Act. The court emphasized that the liability was incurred for purchasing assets, which should be included in the computation of net wealth. The court rejected the revenue's argument that the liability was related to the shares, noting that the balance-sheet entries and the resolutions did not support this view. The court also dismissed the notion of merging the rights and obligations of the two companies, highlighting that both companies were distinct legal entities with separate rights and liabilities. The court cited principles from company law and previous judgments to reinforce that the corporate veil should not be pierced unless there is statutory provision or exceptional circumstances like fraud.

Conclusion:
The court concluded that the liability of Rs. 31,26,000 incurred by the assessee for the purchase of assets from Kellner was a debt owed and should be deducted in computing the net wealth under section 2(m) of the Wealth-tax Act. The court answered the question referred to it in favor of the assessee and awarded costs with a counsel's fee of Rs. 250.