1985 (3) TMI 82 - AT - Wealth-tax

Debts on exempt deposits not deductible from net wealth under Wealth-tax Act. Relevant case precedent cited.

The ITAT held that debts related to exempt deposits cannot be deducted from net wealth under the Wealth-tax Act. Borrowings for acquiring excluded assets ... Debt Owed, Wealth Tax Issues:- Computation of net wealth for wealth-tax purposes- Deductibility of debts owed by assessees from the value of assetsAnalysis:The judgment by the Appellate Tribunal ITAT Allahabad-A involved two partners in a firm who borrowed sums of money from the firm and kept them in fixed deposits with a bank, against which the firm took overdrafts. The assessees claimed exemption from wealth tax for the fixed deposits and also sought deduction for the loans under section 2(m) of the Wealth-tax Act, 1957. The Wealth Tax Officer (WTO) wrongly noted the exemption section as 5(1)(xv) instead of 5(1)(xxvi). The WTO rejected the deduction claim on the grounds that the firm had taken advantage of the overdrafts on the deposits made by the assessees. The assessees appealed to the AAC, who allowed the claim, considering the loans as liabilities to be deducted. The department appealed to the ITAT, arguing that the loans could not be deducted as they were related to deposits exempt from wealth tax.The ITAT held that while section 2(m) allows for the computation of net wealth by deducting debts from assets, there are exceptions. One such exception, under sub-clause (ii) of section 2(m), states that debts related to property not chargeable under the Wealth-tax Act are not deductible. In this case, the borrowings by the assessees were related to exempt deposits, and thus, the debts could not be deducted from their net wealth. The ITAT disagreed with the AAC's decision, citing that borrowing for acquiring an excluded asset like a fixed deposit cannot be deducted from asset value. The ITAT referenced the Allahabad High Court case of Jiwan Lal Virmani v. CWT but found it not relevant as it dealt with debts secured on non-taxable property, unlike the current scenario. Therefore, the ITAT reversed the AAC's orders and reinstated those of the ITO, albeit for different reasons. Ultimately, the ITAT allowed both appeals in favor of the department.