1981 (3) TMI 9 - HC - Wealth-tax

Deduction for loan against exempted assets disallowed in net wealth calculation

The court held that a deduction for a loan secured against exempted assets like LIC policies is not admissible in the calculation of net wealth, ... Net Wealth, Wealth Tax Issues:1. Whether a deduction on account of a loan obtained from LIC against the security of exempted assets is admissible in the calculation of net wealth if the loan taken was used for a purpose not exempt from wealth-taxRs.Analysis:The case involved a dispute regarding the admissibility of a deduction for a loan secured against LIC policies in the calculation of net wealth for the assessment year 1974-75. The assessee had claimed a deduction of Rs. 35,005 for a loan taken from LIC, which the WTO disallowed, leading to an appeal before the AAC. The AAC allowed the deduction, prompting the Department to appeal before the Appellate Tribunal, which upheld the AAC's decision based on precedents from other Tribunal benches.The key legal provisions under consideration were Section 2(m)(ii) of the Wealth-tax Act, which defines net wealth, and Section 5(1)(vi), which exempts the right or interest of the assessee in any insurance policy from wealth-tax. The court emphasized that only debts not secured on property exempt from wealth-tax are deductible for computing net wealth. The Tribunal's consideration of the loan's purpose in allowing the deduction was deemed irrelevant, as the source of the debt was the crucial factor.The assessee's argument that the insurance policy's right or interest was chargeable under the Act but exempt from wealth-tax was dismissed. The court clarified that the right or interest in an insurance policy falls under assets not chargeable under the Act, as per Sections 3 and 5. A similar precedent was cited where a loan secured on a life insurance policy was not deductible for computing net wealth.Ultimately, the court held that the deduction for a loan secured against exempted assets like LIC policies is not admissible in the calculation of net wealth, irrespective of the loan's purpose. The Tribunal's decision allowing the deduction was deemed incorrect in law, and the reference was answered in favor of the Department, with no order as to costs.