Wealth-tax deduction for house construction loan allowed unless the borrowing is directly secured against non-taxable property.

Under section 2(m)(ii) of the Wealth-tax Act, a debt is deductible only if it is incurred in relation to property not chargeable to wealth-tax. Where a loan is used for construction of a taxable house, the borrowing remains deductible in computing net wealth unless it is shown to be directly secured against a non-taxable asset. On the stated facts, the insurance policy was treated only as collateral, not as the principal security for the loan, so the deduction was allowed against the taxable value of the house.

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Issues: Whether a loan taken from the Life Insurance Corporation and utilised for construction of a house could be deducted in computing net wealth, where the loan was alleged to be secured against an insurance policy not chargeable to wealth-tax.

Analysis: The relevant test under section 2(m)(ii) of the Wealth-tax Act, 1957 is whether the debt is one incurred in relation to property in respect of which wealth-tax is not chargeable. The loan amount was shown to have been used for construction of a house, thereby resulting in a taxable asset. It was not established that the insurance policy was the principal security for the loan or that the value of the policy fully covered the borrowing. On the facts, the alleged security against the insurance policy was treated at best as collateral.

Conclusion: The deduction was allowable against the taxable value of the house, and the Revenue's challenge failed.

Ratio Decidendi: A debt incurred for construction of a taxable asset does not cease to be deductible in computing net wealth merely because the borrowing is also connected with an asset not chargeable to wealth-tax, unless it is shown that the debt was directly secured against such non-taxable property within the meaning of section 2(m)(ii).

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