Wealth tax---

--- Asset---Assessee shareholder in company---Company wound up and revived subsequently with loan from Government undertaking ---Assessee mortgaging her property to secure loan for company ---Assessee's interest in property was right to equity of redemption---Sale of property and debt in favour of assessee in books of company---Tribunal finding that company's liabilities exceeded its assets---Book debt did not represent any value to assessee which could be included in her net wealth.

The assessee was a shareholder in a company. She was having substantial interest in the company as more than 20 per cent. of the shares of the company were-held by her close relatives. The company was running at a loss and when the factory was destroyed by fire, it went into voluntary liquidation on July 27, 1965. In the light of a policy announced by the Central Government for revival and reconstruction of industrial undertakings which were discontinued because of extensive damage or destruction to their building, machinery, etc., as a result of natural calamities, the contributories of the company met on July 10, 1967, and decided to revive the company utilising an amount of Rs. 6 lakhs by way of loan from the Kerala Financial Corporation, a Government undertaking. A compromise or arrangement for reconstruction of the company was thereupon proposed between the company and its members and creditors and under orders passed by the Court on December 20, 1967, the liquidator of the company convened separate meetings of the shareholders, secured creditors and unsecured creditors to consider the compromise or arrangement. Meetings were held on February 27, 1968, and the compromise or arrangement was approved with certain modifications and by order dated April 2, 1968, the Court sanctioned the scheme subject to the terms and conditions in the said order. The Court also granted sanction by order dated March 13,,, 1969, for execution of the mortgage, The assessee was one of the parties to the compromise or arrangement. The company thereupon applied for a loan of Rs.20 lakhs for its reconstruction. The loan was sanctioned by the Kerala Financial Corporation against the mortgage of the properties belonging to the company and properties belonging to the guarantors, namely. the assessee and some other shareholders. In connection with the wealth tax proceedings of the assessee for the years 1976-77 to 1986-87, the question -about the valuation of certain property extending to 1 74 acres mortgaged to the Kerala Financial Corporation arose. The Wealth Tax Officer noted that the above property was sold in October, 1981, and January, 1982 for a total consideration of Rs.11,84,000. The above sale consideration was treated as the basis for computing the value of the property for the years 1976-77 to 1981-82. The calculation was made on the basis of 10 per cent. increase in value for each year. In the previous year relevant to the assessment year 1982-83, the assessee was credited with a sum of Rs.10,80,000 by the company in its books of account as the assessee had discharged a part of the debts due from the company to the Kerala Financial Corporation by sale of her property. The Wealth Tax Officer included a sum of Rs.10,80,000 in the net wealth of the assessee. The first Appellate Authority affirmed the findings of the assessment authority. On appeal before the Tribunal, accepting the contention raised by the assessee, it was held that since the assessee was a co-mortgagor and the sale was effected under the terms of the mortgage deed at the instance of the Kerala State Financial Corporation, the entire sale value could not be considered as belonging to the assessee. Only the value of the right of equity of redemption could be considered for the purpose of inclusion in the net wealth of the assessee and since the entire sale proceeds of the mortgaged property were appropriates by the Financial Corporation towards the loan amount due to it, the value of the right of equity of redemption could only be taken as nil for the assessment years 1977-78 to 1981-82. The Tribunal also found that considering the balance-sheet of the company and also the fact that the entire loan to the Financial Corporation was not wiped out even after the sale of the assessee's mortgaged property, a sum of.Rs.10,80,000 shown in the accounts of the company to the credit of the assessee could not represent any value to the assessee until it was realised. The Tribunal, therefore, deleted the addition of Rs.10,80,000 for the assessment years 1982-83 to 1986-87.

On a reference

Held, that in the light of the decision of the High Court in the income-tax case of the assessee (see (1997) 227 ITR 802) there was not much scope for the Revenue to contend that the relevant document was not a deer of mortgage. The terms of the document made it clear that there was a transfer of interest in specific immovable property belonging to the assessee, to the Kerala Financial Corporation for the purpose of securing payment of money advanced by it to the company by way of loan. The right to sell mortgaged properties. had-been given to the corporation even without any further consent from the mortgagor company or co-mortgagors, in case of default by the mortgagor company in making repayment as per the terms of the agreement. Merely because the time for repayment was spread over a period of 8'/2 years, it could not be contended that the liability was created for perpetuity. As a matter of fact, in this case, the property of the assessee was brought to sale at the instance of the mortgagee-Kerala Financial Corporation. The Tribunal was justified in holding that for the assessment years 1976-77 to 1981-82, the only right the assessee had in the property mortgaged to the Kerala Financial Corporation was the right of equity of redemption. The Tribunal was fully justified in holding that the book debt did not represent any value to the assessee until it was realised and, therefore, it was not liable to be included in the net wealth of the assessee. The Tribunal came to the above finding after considering in detail the liability of the company which was much in excess of its assets. Actual realisation may not be necessary to include the book debt in the net wealth of the assessee. But it must have a value, namely, a prospective buyer should be willing to get the same transferred in his name for consideration. In the facts of the case the Tribunal came to the conclusion that such value was nil and, therefore, the inclusion of the amount of Rs.10,80,000 in the net wealth of the assessee was deleted. The value included in respect of the mortgaged property had to be deleted for the assessment years 1976-77 to 1981-82. The inclusion of Rs.10,80,000 had to be deleted for the assessment years 1982'-83 to 1986-87.

CIT v. Thressiamma Abraham (Snit.) (No.l} (1997) 227 ITR 802

(Ker.); CWT v. Sikand (P.N.) (1977) 107 ITR 922 (SC); Matlub Hasan v.

Mt, Kalawati AIR 1933 All. 934 and Pandit Lakshmi Kant Jha v. CWT (1973) 90 ITR 97

(SC) ref.

P.K.R. Menon and N.R.K. Nair for the Commissioner.

P.G.K. Warrier and M.K. Kesavan for the Assessee.

JUDGMENT

MRS. K.K. USHA, J.---In I.T.R. Nos.6 to 11 of 1994 relating to the assessment years 1976-77 to 1981-82, the common questions referred by the Income Tax Appellate Tribunal. Cochin Bench, at the instance of the Revenue are as follows:

"(1)Whether, on the facts and in the circumstances of the case and also in view of the finding by the Tribunal that the private assets of some of the shareholders like the assessee are mortgaged to it as security for the amount to be advanced by he Corporation, the Tribunal isright in law in holding---

(i)the only right that the assessee had over the property was the tight to equity of redemption.

(ii)in order to ascertain the value of such right one has to see whether any surplus remained on such sale after the repayment of, mortgageloan

(iii) on a perusal of the documents, the assessee is not only a guarantor but also a co-mortgagor ?

(iv)the value of the right to equity of redemption to so far as theassessee is concerned is nil and nothing is includible?

(v)such right did not have any value as the sale proceeds of the mortgaged property fell short of the loan amount and are not the above findings and approach wrong, against law, uncalled for and unwarranted ?

(2)Whether, on the facts and in the circumstances of the case and also in view of the fact that the property was mortgaged by the assessee not for her needs and liability but for a third party company, the Tribunal is right in law in holding that 'the only right that the assessee has over the property was the right to equity of redemption and is not the above finding and proposition against fundamentals law and all canons of property laws "

(3)Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact---

(i)in deleting the value included in respect of the mortgage property from the assessment

(ii)in finding the value at nil ?"

In I. T.Rs. Nos. 12 to 16 relating to the assessment years 1982-83 to 1986-87, the following common questions are referred at the instance of the Revenue:

"(1)Whether, on the facts and in the circumstances of: the case, the Tribunal is right in deleting the inclusion of Rs.10,80,000 from assessment ?

(2)Whether, on the facts and in the circumstances of the case theTribunal is right in law and fact in holding---

(i)the book debt created by the company in favour of the assessee cannot be taken at its face value and no outsider would be willing to pay the book value

(ii)it is reasonable to hold that the book debt in a sum of Rs.10,80,000 does not represent any value to the assessee until it is realised and are not the above findings wrong, unreasonable, against law ?

(3)Whether, on the facts and in the circumstances of the case and in view of the legal position that the Wealth Tax Officer can and had rightly taken the balance in the assessee's name in the books of the company which will come under movable assets, and also in view of the legal position that the Wealth Tax Officer need not look into the recoverability of a particular account balance, the Tribunal is right in law and fact in holding the value as nil and in deleting the inclusion of Rs.10,80,000 ?"

The matter arose under the Wealth Tax Act, 1957. The assessee is common in all the reference cases. She is a shareholder in National Tyre and Rubber Company of India Ltd., hereinafter referred to as "the company" She was having substantial interest in the company as more than 20 per cent. of the shares of the company were held by her close relatives. The company was running at a loss and when the factory was destroyed by fire, it went into voluntary liquidation on July 27, 1965. In the' light of a policy announced by the Central Government for revival and reconstruction of industrial undertakings which were discontinued because of extensive damage or destruction to its building, machinery, etc., as a result of natural calamities, the contributories of the company met on July 10, 1967 and decided to revive the-company utilising an amount of Rs.6 lakhs by way of loan from the Kerala Financial Corporation a Government undertaking. A compromise or arrangement for reconstruction of the company was thereupon proposed between the company and its members and creditors and as per orders passed by this Court on December 20, 1967, the liquidator of the company convened separate meetings of the shareholders, secured creditors and unsecured creditors to consider the compromise or arrangement. Meetings were held on February 27, 1968, and the compromise or arrangement was approved with certain modifications and by order dated April 2, 1968, this Court sanctioned the scheme subject to the terms and conditions in the said order. This Court also granted sanction by order dated March 13, 1969, for execution of the mortgage. The assessee was one of the parties to the compromise or arrangement.

The company thereupon applied for a loan of Rs.20 lakhs for its reconstruction. The loan was sanctioned by the Kerala Financial Corporation against the mortgage of the properties belonging to the company and properties belonging to the guarantors, namely, the assessee and some other shareholders. The mortgage is evidenced by an indenture dated September 22, 1969, between the company. Sri P.C. Abraham, the assessee alongwith some other shareholders and the Kerala Financial Corporation.

In connection with the wealth tax proceedings of the assessee for the years 1976-77 to 1986-87, the question about the valuation of the Palarivattom property extending to 1.74 acres mortgaged to the Kerala Financial Corporation arose. The Wealth Tax Officer noted that the above property was sold in October, 1981, and January 1982, for a total consideration of Rs.11,84,000. The above sale consideration was treated as the basis for computing the value of the property for the years 1976-77 to 1981-82. The calculation was made on the basis of 10 per cent. increase in value for each year.

In the previous year relevant to assessment year 1982-83, the assessee was credited with a sum of Rs.10,80,000 by the company in 'its books of account as the assessee had discharged a part of the debts due from the company to the Kerala Financial Corporation by sale of her property. The Wealth Tax Officer included a sum of Rs.10,80,000 in the net wealth of the assessee overruling the objection of the assessee that the above sum was an irrecoverable debt since the company had become defunct and its liabilityexceeded its assets. These factors are relevant for the assessment years 1982-83 to 1986-87 in addition to the facts relevant .for the years 1976-77 to 1981-82.

The first appellate authority affirmed the findings of the assessing authority. On appeal before the Tribunal, accepting the contention raised by the assessee, it was held that since the assessee was a co-mortgagor and the sale was effected as per the terms of the mortgage deed at the instance of the Kerala State Financial Corporation, the entire sale value could not be considered as belonging to the assessee. Only the value of the right of equity of redemption could be considered for the purpose of inclusion of the net wealth of the assessee and since the entire sale proceeds of the mortgaged property were appropriated by the Financial Corporation towards the loan amount due to it, the value of the right to equity of redemption could only be taken as nil for and from the assessment years 1977-78 to 1981-82. The Tribunal also found that considering the balance-sheet of the company and also the fact that the entire loan to the Financial Corporation was not wiped out even after the sale of the assessee's mortgaged property, a sum of Rs.10,80,000 shown in the accounts of the company to the credit of the assessee could not represent any value to the assessee until it is realised. The Tribunal therefore deleted the addition of Rs.10,80,000 for and from the assessment years 1982-83 to 1986-87. These findings are under challenge in the present proceedings at the instance of the Revenue.

It was contended by learned standing counsel for the Revenue that the document dated September 22, 1969, cannot take the character of a mortgage. It can only be taken as a document creating a charge on the property of the assessee. This contention is based on the provision in the instrument that the company was unable to pay off the debt in instalments spread over a period of 8'h years. According to learned counsel, liability is not created for a definite period and, therefore, the burden on the property is only in the nature of a charge. In support of the above contention, he relied on a decision of the Allahabad High Court in Matlub Hasan v. Mt. Kalawati, AIR 1933 All. 934. On the other hand, learned counsel for the assessee would submit that all the three authorities have understood the document dated September 22, 1969, as a deed of mortgage and there is no reason to give it a different interpretation as contended by the Revenue. It was also pointed out that the very same document came up for consideration before this Court in I.T.R. No.87 of 1992, CIT v. Thressiamma Abraham (No.l) (1997) 227 ITR 802, in the matter of assessment under the capital gains of the very same assessee, and this Court has considered the transaction as one of mortgage. Learned counsel referred to the relevant portions of the judgment in I.T.R. No.87 of 1992, CIT v. Thressiamma Abraham (No.l) (1997) 227 ITR 802, dated September 16, 1996.

We find considerable merit in the contention taken by the assessee that in the light of the decision of this Court in I.T.R. No.87 of 1992 CIT v. Thressiamma Abraham (No. l ) (1997) 227 ITR 802, there is not much scope for the Revenue to contend that the relevant document is not a deed of mortgage. We have also independently considered the different terms of the document which is produced as Annexure "D". We find that going by the terms of the document, it is clear that there is a transfer of interest in specific immovable property belonging to the assessee to the Kerala Financial Corporation for the purpose of securing payment of money, advanced by it to the company by way of loan. The relevant portions of the document are quoted to the common order of the Tribunal. The right to sell mortgaged properties had been given to the Corporation even without any further consent from the mortgagor company or co-mortgagors, in case of default by the mortgagor company in making repayment as per the terms of the agreement. The decision relied on by learned counsel for the Revenue has no application in this case. That was a case where a registered document called deed of agreement was executed by a lady under which she provided that she would pay Rs.20 per month to her daughter-in-law and that the said maintenance allowance should continue to be paid to her descendants from generation to generation. She further provided that maintenance allowance should be a charge on certain property and the said share shall remain hypothecated in lieu of the payment of the said maintenance allowance. She further provided that after her death, only that portion of the property which would devolve upon her son would remain charged and hypothecated. The question arose whether the document is a deed of mortgage. The Allahabad High Court held that when the intention of the parties is to create a liability in perpetuity not capable of being redeemed absolutely at any time, the transaction cannot be a mortgage. But, it will create only a charge on the property. As far as the present case is concerned, it is nobody's case that a liability is created in perpetuity not capable of redemption. Merely because the time for repayment is spread over a period of 8t/i years, it cannot be contended that the liability is created for perpetuity. As a matter of fact also in this case, the property of the assessee was brought to sale at the instance of the mortgagee-Kerala Financial Corporation. We, therefore, reject the contention taken by the Revenue that the status of the assessee is not that of a mortgagor in the light of the terms of the document dated September 22, 1969. If that be so, the Tribunal was justified in holding that for the assessment years 1976-77 to 1981-82, the only right the assessee had in the property mortgaged to the Kerala Financial Corporation was the right of equity of redemption. Even though an attempt was made to contend that the assessee had a right of reimbursement of the money paid to the Kerala Financial Corporation by sale of her property from other mortgagors in the absence of any such specific provision in the document and also in view of the fact that the assessee was made personally liable to the Corporation for the debts of the company as a guarantor, this contention is only to be rejected.

Regarding the common questions raised in ITRs Nos. 12 to 16.of 1994, in respect of the assessment years 1982-83 to 1986-87, learned counsel for the Revenue submitted that what is contemplated under law is only computation of the hypothetical market value of the property which need not be the actual sale price. Reliance was placed on two decisions of the Supreme Court in support of the above contention, namely, Pandit Lakshmi Kant Jha v. CWT (1973) 90 ITR 97, and CWT v. P.N. Sikand (1977) 107 ITR 922. Learned counsel for the Revenue submitted that if the company was highly indebted. it would be possible that a third party would be willing to buy the debt due to the assessee for a lesser amount and that could be taken as the market value. Therefore, according to learned counsel, the Tribunal has committed a grave error in coming to the conclusion that the book debt in the sutra of Rs.10,80,000 would not constitute an asset in the hands of the assessee which is includible in the wealth of the assessee from 1982-83 onwards. The assessee would submit that in the facts of the case, the Tribunal was fully justified in holding that the book debt does not represent any value to the assessee until it is realised and therefore, it is not liable to be included in the net wealth of' the assessee. The Tribunal came to the above finding after considering in detail the liability of the company which was much in excess of its assets. According to learned counsel for the assessee, after considering all the relevant materials, the Tribunal has come to a factual finding that the book debt created by the company in favour of the assessee cannot be taken at its face value and no outsider will be willing to pay the book value. The above finding is a finding of fact. Section 7 of the Wealth Tax Act as it stood before the amendment in the year 1989 provided that subject to any rules made in this behalf, the value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the option of the Assessing Officer, it would fetch if sold in the open market on the valuation date. Rule 20 under Part H in Schedule III is the relevant rule regarding valuation of a chose in action, in this case, the credit entry is the books of account of the company. According to the assessee, the Tribunal has considered this question in the light of the above rule and has come to a factual finding that the value of the book debt created by the company in favour of the assessee would be nil.

We find merit in the contention raised on behalf of the assessee. What has been elaborately considered by the Tribunal in paragraph 15 of its common order is about the value that the book debt may fetch in the open market. The Tribunal found that out of the outstanding loan liability of Rs.20,00,000 with interest thereon, only an amount of Rs.11,84,000 had been paid by the sale of the assessee's mortgaged property. The balance was still outstanding. The land, buildings, plant and machinery of the company are all still under mortgage to the Kerala Financial Corporation. Therefore, the company's right over its assets was restricted to its right to equity of redemption. That apart, the company has got, as on December 31, 1983, a liability for hundi acceptance in a sum of Rs.11,22,000 and the same figure continued for the accounting year December 31, 1984 also. It had not paid interest accrued on its own loans in an amount of Rs.2,53;922 as at December 31, 1984. Further, there are preferential payments remaining unpaid, details of which are given in the order of the Tribunal. Apart from the above, there were other unsecured loans and advances received from outsiders. There was also carried forward loss of Rs.59,50,699 as on December 31 1984 Above all, the company was not functioning. It was in this background, the Tribunal took the view that no outsider would be willing to pay the book value assuming the assessee is willing to transfer the debt in favour of the prospective buyer. This being the position, we are of the view that even for a lesser amount than the book value of the debt, no outsider would willing to buy the debt as suggested by the Revenue.

The two decisions relied on are not of much help to the Revenue. In Pandit Lakshini Kant Jha v. CWT (1973) 90 ITR 97 (SC), the question that arose for consideration was whether in computing the market value of shares and stocks held by the assessee, the assessee was entitled to deduction of the brokerage commission from the valuation of the shares as given in the stock exchange quotations or quotations furnished by well known brokers. The Supreme Court held that the assessee was not entitled to make such deduction. This view was taken by interpreting section 7(1) and holding that there is nothing in the language of section 7(I) of he Wealth Tax Act, which permits any deduction on account of expenses of sale which may be borne by the assessee if he were to sell the assets in question in the open market. The value, according to section 7(1), has to be the price which the assets would fetch if sold in the open market. What has been considered in this case by the Tribunal is what would be the value that the book debt could fetch in the open market and, therefore, it cannot be said that the Tribunal's finding is against the principles laid down by the Supreme Court in the above case. In CWT v. P.N. Sikand (1977) 107 ITR 922 (SC), the question that came up for consideration was whether 50 per cent. of the unearned increase in the value of the land which had to be diverted to the lessor as per the terms of the acquisition of the leasehold interest in a plot of land before it reached the hands of the respondent would form part of the price of the land for the purpose of computation under section 7(1) of the Wealth Tax Act. The Supreme Court took the view that in determining the value of the leasehold interest of the assessee in the land for the purpose of assessment to wealth tax, the price which the leasehold interest would fetch in the open market were it not encumbered or affected by the burden or restriction contained in one of the conditions of the lease deed would have to be reduced by 50 per cent. of the unearned increase in the value of the land on the basis of the hypothetical sale on the valuation date. The relevant covenant in the document was a covenant running with the land and it would bind whosoever was the holder of the leasehold interest for the time being. Therefore, it had the effect of depressing the value which the leasehold interest would fetch if it were free from the burden or disadvantage. We do not see how this decision would be of any help to the contention raised by the Revenue before us.

Then the only other question to be considered is whether it is correct to hold that unless the value is realised the book debt in a sum of Rs.10,80,000 cannot be included in the net wealth of the assessee. Even though there is a sentence in para. 15 of the common order of the Tribunal that the book debt would not represent any value to the assessee until it is realised, from a reading of the discussion on this point in the same paragraph it is clear that what the Tribunal has meant is that the book debt created by the company in favour of the assessee cannot be taken at its face value when in the circumstances of the case its market value is nil. Actual realisation may not be necessary to include the book debt in the net wealth of the assessee. But it must have a value, namely, a prospective buyer would be willing to get the same transferred in his name for consideration. In the facts of the case, the Tribunal came to the conclusion that such value is nil and, therefore, the inclusion of the amount of Rs.10,80,000 in the net wealth of the assessee was deleted.

We, therefore, agree with the Tribunal that the value included in respect of the mortgaged property has to be deleted for the assessment years 1976-77 to 1981-82. We also agree with the Tribunal in its finding that the inclusion of Rs.10,80,000 has to be deleted for the assessment years 1982-83 to 1986-87.

In the result, we answer the common question raised in I.T.R. Nos.6 to 11 of 1994 in the affirmative, in favour of the assessee and against the Revenue. In I.T.Rs. Nos. 12 to 16 of 1994, we answer question No. l in the affirmative, in favour of the assessee and against the Revenue. Question No.2(i) is answered in the affirmative, in favour of the assessee and against the Revenue.

In the light of our discussion in paragraph 10 (page 822) of this judgment, we recast question No.2(ii) as follows:

"Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that book debts in a sum of Rs.10,80,000 does not represent, any value to the assessee unless it is realisable?"

We answer the question in the affirmative, in favour of the assessee and against the Revenue. Question No.3 is answered in the affirmative, in favour of the assessee and against the Revenue.

A copy of this judgment under the seal of this Court and the signature of the Registrar shall be forwarded to the income Tax Appellate Tribunal, Cochin Bench, for passing consequential orders.

M.B.A./1708/FCReference answered.