Borrowed funds used for exempt assets must be proved on evidence before liability disallowance is sustained

Where allowability of liabilities depends on whether borrowed funds were used to acquire exempt assets, the extent of such utilisation must be established on evidence before disallowance is sustained. The wealth-tax authorities had disallowed liabilities on the basis that loans were applied to shares and house property falling within the exemption field, but the record did not clearly show how much of the borrowings were so deployed. The matter was therefore remitted for fresh examination of the books and related evidence, with the assessee to be heard, and the issue of deductibility of liabilities was left open for de novo consideration.

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Issues: Whether the liabilities claimed by the assessee could be disallowed on the footing that the borrowed amounts were incurred for acquiring exempt assets, and whether the extent of such disallowance required fresh factual examination.

Analysis: The liabilities claimed by the assessee were partly disallowed by the wealth-tax authorities on the view that the loans had been utilised for purchase of shares and construction of house property falling within the exemption field under the Wealth-tax Act. The appellate authority sustained that view in principle but directed verification of the exemption available in respect of the relevant assets and corresponding restriction of the disallowance to the extent of such exemption. On further appeal, the material on record did not clearly establish how much of the borrowed funds had actually been deployed for the house property or for acquiring shares. In the absence of such proof, a fresh examination of the books of account and related materials was necessary before the admissibility of the liabilities could be finally determined.

Conclusion: The matter was remitted to the wealth-tax authority for fresh determination after examining the assessee's books and after giving the assessee an opportunity of producing evidence and being heard.

Final Conclusion: The adverse findings on the limited issue of deductibility of liabilities were set aside and the question was left open for de novo consideration on proper evidence.

Ratio Decidendi: Where the allowability of a liability depends on whether borrowed funds were actually applied towards exempt assets, the extent of such utilisation must be determined on evidence before disallowance is upheld.

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