COMMISSIONER OF WEALTH TAX VS CHAMPA PROPERTIES LTD.
1996 P T D 431
[206 I T R 567]
[Calcutta High Court (India)]
Before Ajit K. Sengupta and Shyamal Kumar Sen, JJ
COMMISSIONER OF WEALTH TAX
versus
CHAMPA PROPERTIES LTD.
Income-tax Reference No. 422 of 1991, decided on 20/07/1992.
(a) Wealth tax---
----Valuation of property---Computation of net maintainable rent---Amount paid to lessees under agreement to allow assessee to let out property at higher rent-- Deductible---Indian Wealth Tax Rules, 1957, R.1-BB.
The assessee-company owned a house property. The Assessing Officer determined the value of the house property on the basis of the "net maintainable rent" under rule 1-BB of the Wealth Tax Rules, 1957. Before the Assessing Officer, the assessee claimed deduction of Rs.72,000 while working out the "net maintainable rent". The said amount was payable to three lessees at the rate of Rs.2,000 per month under agreement under which these lessees permitted the assessee to let out the property at a higher rent. The Wealth Tax Officer rejected this claim of the assessee and added Rs.72,000 while computing the value of the house property under rule 1BB. The Tribunal found that the building had been given on rent to the Government of India. In fact before the agreement with the Government of India for renting out the entire premises was executed, the assessee entered into three separate agreements with the lessees for obtaining vacant possession of the building in order to fetch higher rental income from the tenant. The Revenue did not dispute the genuineness of the agreement. It was also not in dispute that the agreement had been acted upon. The Tribunal, therefore, accepted the assessee's claim.
The Assessing Officer also added Rs.5,13,566 and 5,83,183, respectively to the net wealth of the assessee for the assessment years 1984-85 and 1985-86 in view of section 40 of the Finance Act, 1983, which revived, in a limited way, the levy of wealth tax on companies which was suspended by the Finance Act, 1960. The Assessing Officer found that the assessee had shown the above amounts as representing unpaid municipal taxes as liabilities in the balance-sheet of the relevant period and allowed them as liability. According to the Assessing Officer, the amounts of unpaid Corporation taxes were utilised by the assessee by way of loans and advances and deposits in banks as also for acquiring shares. The said deposits and investments were debts secured on house property and, therefore, liable to be included in the total wealth of the assessee under clause (viii) of section 40(3) of the Finance Act, 1983. On appeal, the addition made was deleted by the Commissioner of Wealth Tax (Appeals) and his action was upheld by the Tribunal. On a reference:
Wealth Tax Officer was not justified in adding the sum of Rs.72,000 in determining the net maintainable rent under rule 1BB.
(b) Wealth tax-
----Assets---Debts secured on assets---Municipal taxes remaining unpaid utilised for making advances---Not debts secured on, assets---Not assessable---Indian Finance Act, 1983, S.40.
Assessee was entitled to get the deduction of liabilities for the Corporation taxes even though unpaid as these were liabilities on the respective valuation dates. Municipal taxes could not be treated as a debt secured on one or more assets taxable under clause (viii) of subsection (3) of section 40 of the Finance Act, 1983. The Tribunal was right in law in holding that Rs.5,13,566 and Rs.5,88,138 could not be assessed to wealth tax under subsection (3) of section 40 of the Finance Act, 1983, in the assessment years 1984-85 and 1985-86, respectively.
L.K. Chatterjee for the Commissioner.
JUDGMENT
AJIT K. SENGUPTA, J.---In this reference under section 27(1) of the Wealth Tax Act, 1957, for the assessment years 1984-85 and 1985-86, the following questions of law have been referred to this Court:
"(1) Whether, on the facts and in. the circumstances of the case, the Tribunal was right in law in upholding the deduction of Rs.72,000 in computing the net maintainable rent under rule 1BB of the Wealth Tax Rules?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that Rs.5,13,566 and Rs.5,88,138 could not be assessed to the wealth tax under subsection (3) of section 40 of the Finance Act, 1983, in the assessment years 1984-85 and 1985-86, respectively?"
The facts leading to this reference are that the assessee Messrs Champa Properties Limited were assessable to tax for the assessment years 1984-85 and 1985-86 under section 40, of the Finance Act, 1983. The assessee, on the valuation dates, owned a house property at 36A, Shakespeare Sarani, Calcutta, and the value of the above property was to be assessed under the above section. The Assessing Officer determined the- value of the house property on the basis of the "net maintainable rent" under rule 1BB of the Wealth Tax Rules.
Before the Assessing Officer, the assessee claimed deduction of Rs.72,000 while working out the "net maintainable rent". "The said amount was payable to three lessees at the rate of Rs.2,000 per month as per agreement under which these lessees permitted the assessee to let out the property at a higher rent. The Wealth Tax Officer rejected the claim of the assessee and added Rs.72,000 while computing the value of the house property under rule 1BB of the Wealth Tax Rules.
The assessee, being aggrieved, challenged the above addition before the Commissioner of Wealth Tax (Appeals) and contended that similar additions of Rs.72,000 made under the Income-tax Act, 1961, for the assessment years 1977-78 to 1980-81 were deleted in appeal. The Commissioner of Wealth Tax (Appeals) directed that deduction as claimed by the assessee should be granted in line with the relief granted in the income-tax case. He directed the Wealth Tax Officer to revalue the property according to the correct procedure.
The Revenue challenged the above direction of the Commissioner of Wealth Tax (Appeals) before the Appellate Tribunal. The Tribunal found that the premises at 36A, Shakespeare Sarani, Calcutta, were let out to three persons (hereinafter referred to as "the lessees") at a certain rent for 20 years from August 1, 1966. Later on, the assessee-company was able to secure higher rent and, therefore, agreements were arrived at between the assessee and the lessees to share the higher receivable rent. The lessees under the agreements permitted the assessee to let out the house property, at a higher rent subject to payment of Rs.2,000 per month to each of the lessees. On account of the above, a sum of Rs.72,000 payable to the lessees was deducted from the gross receivable rent while declaring income of the house property in question.
The Assessing Officer under the Income-tax Act, 1961, treated Rs.72,000 as "application of income" and, therefore, not deductible in determining the annual letting value of the property under sections 22 and 23 of the Income-tax Act. However, on appeal, the Tribunal, to the assessee's case for the assessment years 1982-83 and 1983-84 as per order dated January 1, 1988, deleted the addition.
The Tribunal, while hearing the appeal under the Wealth Tax Act, followed the order dated January 7, 1988, and upheld the orders of the Commissioner of Wealth Tax (Appeals). The Tribunal, after considering the definition of "maintainable rent" under rule 1BB(2)(a) of the Wealth Tax Rules, held that the amount of Rs.72,000 was deductible while determining the net maintainable rent.
The Assessing Officer also added Rs.5,13,566 and Rs.5,83,183, respectively, in the net wealth of the assessee for the assessment years 1984-85 and 1985-86. The Assessing Officer found that the assessee had shown the above amounts of unpaid Corporation. taxes as liabilities in the balance-sheet of the relevant period. According to the Assessing, Officer, the amounts of unpaid Corporation taxes were utilised by the assessee by way of loans and advances and deposits in banks as also for acquiring shares. The said deposits and investments were debts secured on house property and, therefore, liable to be included in the total wealth of the assessee. On appeal, the addition made was deleted by the Commissioner of Wealth Tax (Appeals)
The Revenue challenged the deletion of the amounts in appeal before the Appellate Tribunal. The Tribunal found that the Assessing Officer had duly allowed deduction of unpaid corporation taxes as liabilities. It further held that the assessee might have utilised some funds for acquiring assets which would not have been available if the liability to tax had been discharged. But the un-discharged liabilities towards municipal taxes could not be treated as a debt secured on one or more assets taxable under clause (viii) of subsection (3) of section 40 of the Finance Act, 1983. It accordingly held that the assets mentioned by the Assessing Officer like advances to parties, shares or deposits in banks, etc., were clearly not covered by clauses (i) to (vi) of the aforesaid subsection (3). The Tribunal, accordingly, held that one of the clauses (i) to (viii) was applicable to the facts of the case and, therefore, the addition made by the Assessing Officer was unjustified. The addition was rightly deleted by the Commissioner of Wealth Tax (Appeals). With the above observations. the Tribunal upheld the action of the Commissioner of Wealth Tax (Appeals) deleting the addition of Rs.5,13,565 and Rs.5,83,183 for the assessment years 1984-85 and 1985-86, respectively.
So far as the first question is concerned, the finding of the Tribunal is that the Revenue never disputed the genuineness of the agreement dated June 15, 1971, by and between the assessee and the three lessees. It was also not in dispute that the agreement has been acted upon. The Tribunal, in its order for the assessment years 1982-83 and 1983-84 in the income-tax appeal, observed as follows:
"In the instant case, the lease rent payable as per original agreement dated May 6, 1966, as modified by deed dated September 16, 1966, by each of the three lessees at Rs.1,000 per month has been deducted by the Income-tax Officer in computing the disallowance of Rs.72,000 by deducting Rs.1,000 from the sum payable of Rs.3,000 as fixed in the agreement dated June 15, 1971, entered into by the assessee with each of the three partnership firms, i.e. Rs.3,000--Rs.1,000 = 2,000 x 3 x 12 = Rs.72,000. He considered the extra sum paid Rs.2,000 to each of the three lessees as ' an application of income' on the ground that the same was paid after the income was earned by the assessee. In fact before the agreement with the Government of India for renting out the entire premises was executed, the assessee entered into three separate agreements with the lessees for obtaining vacant possession of the building in order to fetch higher rental income from the tenant, i.e., the Department of Rehabilitation Branch Secretariat, Government of India. The agreement dated June 15, 1971, which the assessee entered into with each of the three lessees has not been found sham or in genuine by the authorities below. That being so, we hold that the Income-tax Officer was not justified in including Rs.72,000 to the assessee's house property income as, in our opinion, the said sum did not form part of the assessee's income by virtue of the agreements entered into by the assessee with each of the three lessees, dated June 15, 1971. We, accordingly, uphold the Commissioner of Income-tax (Appeals)'s order for each of the assessment years under appeal and dismiss the Departmental appeals."
In our view, having regard to the aforesaid findings of the Tribunal which have not been challenged, the conclusion is inevitable that the Wealth Tax Officer was not justified in adding the sum of Rs.72,000 in determining the "net maintainable rent" under rule 1BB of the Rules.
We, therefore, answer the first question in the affirmative and in favour of the assessee.
We now turn to the second question.
Section 40 of the Finance Act has revived, in a limited way, the levy of wealth tax on companies which was suspended by the Finance Act, 1960.
For the purposes of determining the net wealth of, the company, the value of only the following assets will be taken into account, namely:--
(i) gold, silver, platinum or any other precious metal or any alloy containing one or more such precious metals.
(ii) precious or semi-precious stones whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;
(iii) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel; .
(iv) utensils made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals;
(v) land other than agricultural land;
(vi), building or land appurtenant thereto, other than building or part thereof used by the assessee as factory, godown, warehouse, hotel or office for the purposes of its business or as residential accommodation for its employees whose income (exclusive of the value of all benefits or. amenities not provided for by way of monetary payment) chargeable under the head "Salaries" does not exceed Rs.18,000 or as a hospital, creche, school, canteen, library, recreational centre, shelter, rest room or lunch room mainly for the welfare of such employees and the land appurtenant thereto;
(vii) motor cars; and '
(viii) any other asset which is acquired or represented by a debt secured on, any one or more of -the assets referred to in clauses (i) to clause (vii) above.
To illustrate, if a company has obtained a loan on the security of gold owned by it and has acquired, with the amount of the loan, shares in any other company, the value of such shares would be liable to wealth tax in the assessment of the company.
In the instant case, the Assessing Officer allowed deduction of unpaid Corporation taxes as liabilities. It is nobody's case that such liabilities are not deductible. The assessee is entitled to get the deduction of liabilities of Corporation taxes even though unpaid as these are liabilities on the respective valuation dates. It may be that the assessee, by not discharging the liabilities, could have some funds for acquiring the assets, but, by no stretch of imagination, can it be said that un-discharged liabilities towards municipal taxes can be treated as a debt secured on one or more assets taxable under clause (viii) of subsection (3) of section 40 of the Finance Act, 1983. None of the clauses (i) to (vii) is applicable to the facts of this case. The assessee has not, by reason of not paying the taxes, acquired any asset by any debt secured on any one or more of the assets referred to in clauses (i) to (vii).
The assessee, no doubt made provision for taxes and might have utilized the funds for acquiring other assets which, if the liability to tax were discharged, was not available to the assessee, but those assets are shown in the balance-sheet. In the annexure, only assets mentioned in subsection (3) are chargeable to wealth tax. It appears that the Wealth Tax Officer made addition under clause (viii) of subsection (3) which is as under:
"any other asset which is acquired or represented by a debt secured on any one or more of the assets referred to in clause (i) to clause (vii)."
Thus, provision for un-discharged liabilities towards municipal taxes was treated as a debt secured on one or more assets referred to in clauses (i) to (vii). But the assets mentioned by the Wealth Tax Officer like advances to parties, shares or deposits in banks are clearly not covered by clauses (i) to (vii) of subsection (3). That apart, provision for unpaid disputed liability cannot be treated as a debt secured on any asset of the company. Municipal liability was admitted to be a debt incurred in relation to the house properties brought to charge as assets.
For the reasons aforesaid, the second question is answered in the affirmative and in favour of the assessee. There will be no order as to costs.
SHYAMAL KUMAR SEN, J.---I agree.
M.B.A./428/T.F. Reference answered.