Wealth Tax Act (XV of 1963)

----S. 2(m)(ii)---Net wealth----Debt owed"---Connotation---Advance rent of property cannot be equated with "loans or advances" as commonly understood in commercial parlance which do not become the property of the recipient but remain a debt or a security to be paid back in accordance with the terms agreed upon---Such a sum is more clearly identifiable as an asset which is to be aggregated towards net wealth and not a liability to be grouped as a debt owed for adjustment against aggregated assets.

Clause (m) of section 2 of the Wealth Tax Act prescribes that net wealth shall represent "the aggregate value of all assets" as exceeds the "aggregate valued of all debts owed". There can be no quarrel with this, but the difficulty is that the word "debt" has nowhere been defined in this legislation.

"Debt" is a sum of money which is now payable (or will become payable in future) by reason of a present obligation. In other words, debt is a present liability to pay an amount in future, though it may not be ascertained but may become ascertainable. The words "owed" is used with reference to the assessee i.e. the debtor and not with reference to the creditor, hence all the debts which an assessee owed ought to be excluded from his "assets" though the time for payment of these debts may be a little remote. The Wealth Tax Officer is not to regulate the relationship of the assessee but is only to recognize the existence of the relationship of debtor v. creditor, and to notice whether a particular debt is owed by the assessee or not.

In the present case the "advance rent" was received by the assessee not envisaging its repayment but only an adjustment against rent becoming due successively from month to month. The eventuality called for refund of the unadjusted balance could arise if the tenancy was to be terminated earlier than the stipulated period. The subtlety is that in respect of loans/advances/securities the refund is an expected end to a successful termination of the transaction for which the amount is received, in contrast in such situation as of the assessee, the unadjusted balance of "advance rent" would be liable to be refunded only if the events were to take an unexpected unfortunate turn, not foreseen originally. It thus emerges that the sum of money akin to "advance rent" becomes the property of the recipient as a tangible assets have sufficient permanency giving an undisputed right to its utilization in any manner, including the discretion to convert it into other assets so as to enjoy the usufruct or benefit. Therefore, it appears difficult to equate "advance rent" with "loans or advances" (as commonly understood in commercial parlance), which do not become the property of the recipient but remain a debt (or a security) to be paid back in accordance with the terms agreed upon. The subtle distinction due to the concept of complete ownership of the money received as "advance rent" with only a remote and far-off chance of its refund would result in disentitling the owner of such amount of money, to classify it as "debt owed" for deduction from the aggregated value of all assets. Such a sum us more clearly identifiable as an "asset" which is to be aggregated towards "net wealth" and not a liability to be grouped as a "debt owed" for adjustment against the aggregated assets.

C.W.T. v. Mst. Fauzia Mughees 1988 PTD 629; C.W.T. (Central), Karachi v. Paracha Textile Mills Ltd. 1983 PTD 335; Karachi-Sindh Development Corporation v. C.I.T., West Zone, Karachi 1989 PTD 472; W.T.As. Nos. 1 to 10(PB) of 1980 and 1.T.A. No. 196(LB) of 1985-86 ref.

F.D. Qaiser, D.R. for Appellant.

Tajammal Hussain, A.CA. for Respondent.

Date of hearing: 11th October, 1992.

ORDER

A.A. ZUBERI (ACCOUNTANT MEMBER).---These three appeals by the Department have been filed to assail consolidated order dated 2-5-1985 passed by the learned Commissioner (Appeals) in respect of the assessment years 1982-83, 1983-84 and 1984-85. The Respondent an individual, owns both movable and immovable assets.

2. The discussion with the two Representatives revealed that the Respondent owns share in property Nos. 10/1 and 10/1-AK ..........R.........R.........which is assessed as an A.O.P. This property was let out to Habib Bank Ltd. and "advance rent" received, which was shared between the co-owners. In the assessment years under consideration liability in respect of this "advance rent" was claimed at Rs.99,000 in 1982-83, Rs.81,000 in 1983-84 and Rs.63.000 in 1984-85. The assessing officer disallowed the claim in -all the years holding the "advance rent" is legally not `debt owed'. However, on appeal, the learned Commissioner held that it represents liability "until and unless the amount is adjusted against the payable rent" and that it partakes the nature of a debt which the Respondent owed to his tenants. With this the Department is dissatisfied.

3. The learned D.R. argued that as per Section 16 of the Wealth Tax Act the assessing officer is required to work out the net wealth. The term "net wealth" is defined at clause (m) of Section 2 of the Wealth Tax Act and sub -clause (ii) of this clause acts as a bar to allow such debts as related to assets in respect of which wealth tax is not payable. The D.R. pleaded that no wealth tax in respect of the property for which "advance rent" was obtained was offered for wealth tax assessment by the present Respondent and, therefore,no adjustment could be allowed for this so-called liability. The learned Counsel for the Respondent on his turn pleaded that the demand of sub-clause (ii) of Section 2(m) was that the property should be liable to tax under the Wealth Tax though not specifically so in the hand of the claimant. This property was offered for taxation under the Wealth Tax Act in the hands of the A.O.P., consequently, the deduction was rightly allowable as a liability moreso when in the event of termination of tenancy the unadjusted balance of the advance was to be refunded. The learned Counsel submitted that certain movable assets were created by this advance which were offered for taxation by the Respondent. He was, however, at a loss to identify the assets so created and with great difficulty traced out a Bank Statement for the year 1982-83 wherein this amount appears as a deposit.

4. We have considered the rival arguments addressed to us by the two sides and also gone through the relevant provisions of the Wealth Tax Act. Clause (m) of Section 2 of the Wealth Tax Act prescribes that net wealth shall represent "the aggregate value ...of all assets" as exceeds the "aggregate value of all debts owed". There can be no quarrel with this, but the difficulty is that the word "debt" has nowhere been defined in this legislation. A controversy about this had come up for adjudication before the Lahore High Court in re: C.W.T. v. Mst. Fauzia Mughees 1988 PTD 629. The learned Judges after examining various authorities and definitions concluded that debt is a sum of money which is now pay able (or will become payable in future) by reason of a resent obligation. In other words, debt is a present liability to pay an amount in words "owed" according to the learned Judges is used with reference to the assessee i.e. the debtor and not with reference to the creditor, hence all the debts which an assessee owed ought to be excluded from his "assets" though the time for payment of these debts may be a little remote. The Wealth Tax Officer, the learned Judges ruled, is not to regulate the relationship of the assessee but is only to recognize the existence of the relationship of debtor v. creditor, and to notice whether a particular debt is owed by the assessee or not.

5. In addition to the above-referred judgment by the Lahore High Court, we have gone through decisions reported as 1983 PTD 335 in re: C.W.T. (Central), Karachi v. Paracha Textile Mills Ltd. and 1989 PTD 472 in re: Karachi-Sindh Development Corporation v. C.I.T., West Zone, Karachi. All these decisions (on which we could lay our hands) relate to loans/advances/securities which from the very beginning entailed a commitment for repayment to the creditor having almost no possibility of non payment (or forfeiture) except in such contingencies as the breach of contract etc. In the case in hand, the "advance rent" was received by the Respondent not envisaging its repayment but only an adjustment against rent becoming due successively from month to month. The eventuality called for refund of the unadjusted balance could arise if the tenancy was to be terminated earlier than the stipulated period. The subtility is that in respect of loans/advances/ securities the refund is an expected end to a successful termination of the transaction for which the amount is received, in contrast in such situations as of the Respondent, the unadjusted balance of "advance rent" would be liable to be refunded only if events were to take an unexpected unfortunate turn, not foreseen originally. If thus emerges that the sum of money akin to "advance rent" becomes the property of the recipient as a tangible assets have sufficient permanency giving an undisputed right to its utilization in any manner, including the discretion to convert it into other assets so as to enjoy the usufruct or benefit. Therefore, it appears difficult to equate "advance rent with "loans or advances" (as commonly understood in commercial parlance) which do not become the property of the recipient but remain a debt (or a security; to be paid back in accordance with the terms agreed upon. This angle of looking at the impugned transaction prompts us to adhere to the conclusion reached by this Tribunal's Peshawar Bench decision dated 26-12-1983 or W.TAs. Nos. 1 to 10(PB) of 1980 and to distinguish this Tribunal's earlier decision such as I.TA. No. 196(LB) of 1985-86 dated 30-5-1989 where the scrutiny was conducted from a different angle. The subtle distinction due to the concept of complete ownership of the money received as "advance rent" with only a remote and far-off chance of its refund, in our opinion, would result in disentitling the owner of such amount of money, to classify it as "debt owed" for deduction from the aggregated value of all assets. Such a sum, to our mind, is more clearly identifiable as an "asset" which is to be aggregated towards "net 6 wealth" and not a liability to be grouped as a "debt owed" for adjustment against the aggregated assets. On this view, we feel no hesitation in vacating the treatment meted out by the learned Commissioner. The appeals consequently succeed.

M.BA./24/T.T

Appeals succeeded.