(a) Interpretation of statutes‑‑‑

‑‑‑‑ Principle that "where two equally reasonable constructions are possible, one strict and other beneficial to the assessee, the later should be preferred in a taxing statute‑‑‑Cardinal principle of interpretation of a fiscal statute that all charges upon the subject are to be imposed by clear and unambiguous words, would apply only to charging sections and not to machinery sections or to the provisions which give relief to the taxpayer.

1993 PTD 69; PL D 1977 Lah. 292 and 1993 SCMR 274 = 1993 PTD 69 ref.

(1985) 153 ITR 11 rel.

(b) Wealth Tax Act (XV of 1963)‑‑‑

‑‑‑‑S. 2(1)(16)(ii)‑‑‑Net wealth‑‑‑Debt owed‑‑‑Admissibility‑‑‑Loan obtained against foreign currency US dollar account in respect of which wealth tax was not payable under the law‑‑‑Such amount was claimed as debt owed being the amount out of which advance was made to a company and assessee declared such advance as taxable asset in the return‑‑‑Assessing Officer rejected the claim of the assessee on the ground that assessee had obtained loan by offering foreign currency account as security and since this asset was exempt from wealth tax, the loan obtained against the same was not deductible‑‑‑First Appellate Authority set aside the assessment for de novo decision on the ground that claim of liability had been rejected without proper rebuttal of the arguments of the assessee‑‑‑Validity‑‑‑Asset against which loan from the Bank was secured was the foreign currency US dollar account in respect of which wealth tax was not payable under the Wealth Tax Act, 1963‑‑ Assessee could not be given double benefit by allowing such loan as a deductible debt and maintaining the tax‑exempt status of the foreign currency account which also gave further benefit to the assessee in terms of appreciation/profit on US dollar remaining exempt under Part I of the Second Sched. to the Wealth Tax Act, 1963‑‑‑Liability to the extent of assets created out of the Bank loan also could not be granted‑‑‑If the said liability is allowed, then the asset created out of Bank loan will not become taxable but would be offset against the corresponding liability thus neutralizing the effect of taxation in respect of the net wealth of the assessee‑‑‑Assessee's claim of debt representing loan from Bank obtained upon the security of the exempt asset was rightly disallowed by the Assessing Officer being an inadmissible debt in terms of S.2(1)(16)(ii) of the Wealth Tax Act, 1963‑‑‑First Appellate order was vacated and that of the Assessing Officer was restored by the Tribunal.

1996 PTD (Trib.) 1; (1987) 66 ITR 338; (1980) 123 ITR 464; (1990) 186 ITR 91; (1982) 134 ITR 315; (1985) 153 ITR 11; CIT v. Rajam (1982) 133 ITR 75 and 2002 PTD (Trib.) 252 rel.

Aslam Anwar for Appellant (in W. T. A. No. 1004/IB of 1999‑2000).

Abdul Jaleel, D.R. for Respondent (in W.T.A. No. 1004/IB of 1999‑2000).

Abdul Jaleel, D.R. for Appellant (in W.T.A. No.32/IB of 2000‑2001)'

Aslam Anwar for Respondent (in W.T.A. No. 32/IB of 2000‑2001).

Date of hearing: 4th October, 2001.

ORDER

JAMEEL AHMED BHUTTO (ACCOUNTANT MEMBER),----These cross appeals are directed against the appellate order, dated 29‑2‑2000 passed by the learned CWT (A), Rawalpindi, in respect of the assessment year 1998‑99 whereby the assessment made under section 16(3) of the Wealth Tax Act, 1963 (hereafter the Act) has been set aside for de novo decision on the question of admissibility of "debt" under section 2(1)(16)(ii) of the Act.

2. The relevant facts leading to these appeals are that the assessee obtained loan from Emirates Bank International amounting to Rs.38.48,843 against his foreign currency US dollar account. He claimed that such loan was a debt owed by him and was deductible for the purpose of computing his "net wealth" as defined in section 2(1)(16) of the Act. The Assessing Officer observed that the claim was not admissible in terms of sub‑clause (ii) of clause (16) of subsection (1) of section 2 of the Act because the assessee had obtained loan by offering foreign currency account as security and since this asset (i.e US dollar account) was exempt from wealth tax, the loan obtained against the same was not deductible. The assessee was confronted through a notice under section 16(3) in response to which the assessee expressed his view‑point in writing as follows:

"It is submitted that the assessee obtained loan amounting to Rs.38,48,843 from Messrs Emirates Bank International during the year out of which loan of Rs.33,80,000 has been advanced to Messrs M. Iman Din Janjua & Co. (Pvt.) Ltd. The assessee has included this asset (Loan advanced) out of the loan amount that was obtained from Messrs Emirates Bank International in his total wealth for wealth tax purposes and has claimed liability payable to the Emirates Bank International out of which this asset (Loan advance) was created. As the asset created out of the loan obtained is not exempt under Wealth Tax Act, thus the amount payable to the Bank as a liability utilized to the extent of asset created is to .be allowed against the total wealth which included assets created out of the loan obtained.

The provisions of section 2(16)(ii)‑of the Wealth Tax Act, 1963 mentioned in your. above referred notice under section 16(3) of the Wealth Tax Act relate to the assets that have been created out of the loan as such are exempt under the provisions of Wealth Tax Act, thus the liability against which these exempt assets have been created, is not to be allowed as deduction against other assets which are taxable.

.You are, therefore, requested to please allow the claim of liability, incurred by the assessee utilized to the extent of asset created which is liable to tax."

The above point of view was not accepted by the Assessing Officer on the ground that the debt of the assessee was secured on the asset in respect of which wealth tax was not payable under the Act as per the situation stated in sub‑clause (ii) of section 2(16) of the Act. This disallowance of the claim in respect of the loan taken from Emirates Bank International was contested in the first appeal. It was contended by the leaned A.R. of the assessee that being a Director of a private limited company, the assessee obtained loans of Rs.38,48,843 from .Emirates Bank International out of which an amount of Rs.33,80,000 was advanced to the company and declared as taxable asset in his return; therefore, the same was clearly a "debt" under section 2(16)(ii) to that extent. It was added that while disallowing the loan, the Assessing Officer had misinterpreted the provisions of clause (ii) of subsection (16) of section 2 of the Act and had taken a wrong meaning of the language of the clause. It was further argued that the words "secured on" were taken by the Assessing Officer to mean security (collateral) whereas it meant "obtained", got or taken etc. It was also argued that the intention of the legislature was manifest from the second portion of the clause reading "or which have been incurred in relation to any asset in respect of which wealth tax is not payable under this Act". Thus the second portion of the clause was said to be clarification of the words "debts which are secured on". The learned CIT(A) perused the assessment record and observed that the assessee's claim of liability had been rejected without proper rebuttal of the arguments put forth by the learned counsel for the assessee which was against the principle of natural justice. He, therefore, set aside the assessment for de novo decision. Hence these cross appeals.

3. We have heard the 'learned representatives of both the parties and considered the facts and circumstances of the case in the light of the orders passed at the lower forums and the written arguments submitted M. Aslam Anwar, Advocate, representing the assessee.

4. For proper understanding of the language used in the relevant clause of section 2(1)(16) of the Act, we deem it appropriate to reproduce the relevant provision of this section, duly underlined, as under‑

"(16) `Net wealth' means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located belonging to the assessee on the valuation date including asset required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owned by the assessee on the valuation date other than‑‑‑

(i) debts which under section 6 are not to be taken into account; and

(ii) debts which are .secured on, or which have been incurred in relation to any asset in respect of which wealth tax is not payable under this Act."

The above quoted provision was also examined by the Division Bench of this Tribunal in the case reported as (1995) 72 Tax 19 (Trib.) wherein it was held that any loan secured against an asset which is not subject to the levy of wealth tax is not a debt owned irrespective of its subsequent utilization which is immaterial. This finding was based on the views expressed in a number of unreported cases decided by the Tribunal as well as the reported cases from Indian jurisdiction viz. (1987). 66 ITR 338, (1980) 123 ITR 464 and (1990) 186 ITR 91. The learned counsel for the assessee is aware of these decisions but argues that the interpretation of section 2(16)(ii) made in these cases is not correct. His arguments run as follows:‑‑

"This Tribunal has already given its decision reported as 1996 PTD (Trib.) 1. In 'my humble view the interpretation of S.2(16)(ii) placed by the Tribunal in this case and other cases relied upon by it is not correct. The conclusion arrived at by the Tribunal defeats the scheme of the statute. In none of the cases cited in 1996 PTD (Trib) 1 including the reported case itself, attention of the Tribunal was drawn towards the meaning of the word `secure' used in section 2(16)(ii) of the Act. It has been taken for granted that it means security or collateral against which a liability was incurred. If the word secure is understood to mean to take to obtain, to get etc. the scheme of the provision is fulfilled because according to this provision two types of debts are forbidden to be deducted to arrive at net wealth. One is contained in section 2(16)(i) i.e. debts located outside Pakistan. Here the Scheme is very much clear because one‑ may incur a liability outside Pakistan, spend there and come to get adjustment from the Gross Wealth in ' Pakistan. The other exception is debt obtained against asset which are not liable to Wealth Tax. This is contained in section 2(16)(ii). Here the fiscal object of the Statute is that one should not claim liability/expenditure incurred on asset which is not taxable. But if a liability is incurred securing a loan against the security of an exempt asset e.g. F.E.B.C. or Foreign Currency Accounts and creates a taxable asset, the Scheme of the Act is not defeated. For this purpose it makes no difference if a loan is taken on the security .of a taxable asset or exempt asset if the liability entails creation of an asset offered for Wealth Tax. The main intent of section (16)(ii) is that a debt should not be allowed deduction from gross wealth if asset created out of it is exempt. The provision is meant to safeguard the Revenue, for one may get a loan on the security of a taxable asset and yet it might have been spent on creation of an asset which is exempt e.g. loan taken and spent on personal expenses. Loan taken and purchased Defence Saving Certificates. Invested in Regular Income Scheme etc. Loan taken and spent in the construction of residential house or acquiring a shop, claimed exempt under basic exemption. There can be so many situations of this type."

These arguments of the learned counsel are devoid of logic and rationale. The interpretation made by him has never found favour with the judicial authorities including the superior Courts of India. Thus in the case reported as (1982) 134 ITR 315, it was held that the ‑loan obtained against a security of insurance policy and invested in business to acquire taxable assets was the debt secured on property exempted from wealth tax and; therefore, not deductible in computing net wealth under the Wealth Tax Act, 1957, where similar provision is contained in section 2(m)(ii). This interpretation was based on the view of Madhya Pradesh High Court (Indore Bench). as follows:‑‑

"The governing expression in section 2(m) of the Act is `all the debts owned by the assessee on the valuation date other than' and then follows the list of the categories of debts which are not to be included in the aggregate value of the debts which have to be deducted from the aggregate value of the assets. We are concerned with the category enumerated in clause (ii) of section 2(m) of the Act. In this clause, one class of debts is, which are secured on any property in respect of which wealth tax is not chargeable under the Act. It cannot be doubted that in view of section 5(1)(vi) of the Act quoted hereinabove, an insurance policy which has not yet matured for payment is an asset which is exempted from the computation of not wealth.

The upshot of the foregoing discussion is that a loan raised on the security of an insurance policy clearly falls within the ken of section 2(m)(ii) of the Act. In such a setting of the legal position, it has to be held that the loan of Rs.41,588 obtained by the assessee from the LIC of India against the security of his life insurance policies falls within the purview of section 2(m)(ii) of the Act and. is not deductible as a debt in calculating the net wealth of the assessee. This view of ours is in line with the view of the Allahabad High Court in Jiwan Lal Virmani v. CWT (1967) .66 ITR 338. " .

5. In another case reported as (1985) 153 ITR 11, the Full Bench of Madras High Court held that if the entire asset is completely excluded in the computation of net wealth, the debt in question obtained on the security of the said asset cannot be deducted in computing the net wealth. This finding was based on the interpretation reproduced hereunder:‑‑

"Section 2(m) prescribed the manner in which the net wealth of an assessee can be arrived at. It states that the net wealth is said to mean the amount by which the aggregate value of all the assets required to be included in the assessee's net wealth exceeds the aggregate value of all the debts owed by the assessee. The words `including assets required to be included in his net wealth' found in section 2(m) is not without significance. This is so because section 4 specifies certain assets which, shall be included in computing the net wealth of an individual. Similarly, section 5(1) states that the assets specified therein shall not be included in the net wealth of the assessee. Therefore, the first step to be taken in arriving at the net wealth of an. assessee is to take the aggregate value of all his assets including those which are required to be included in his net wealth as per the provisions of the Act. Since the net wealth has to be computed in accordance with the provisions of the Act, the asset which ere specified in section 5(1) have necessarily to be excluded in arriving at the aggregate value of all his assets for the purpose of section 2(m). The second step will be to deduct from the aggregate value of all the assets so arrived at, the aggregate value of all his debts: In computing the aggregate value of all the debts owned by the assessee, we have to exclude debts covered by section 2(m)(i), (ii) and (iii). Section 2(m)(ii) speaks of debts which are secured on, or which have been incurred in relation to any property in respect of which wealth tax is not chargeable under the Act. Taking the entire scheme of the chargeability of assets to wealth tax, the true meaning that can be given to section 2(m)(ii) can only be that the debts referred to therein shall only be debts which are secured on, or which have been incurred in relation to any property which have not been taken into reckoning for the purpose of arriving at the net wealth. From this, it must necessarily follow that debts which are secured on, or, which have been incurred in relation to any property which had not been taken into reckoning for the purpose of arriving at the net wealth have to be excluded and debts which are secured on or, which have been incurred in relation to any property which have been taken into account have to be deducted from the aggregate value of the assets. No doubt, section 5(1) contemplates cases of assets which are entirely excluded from being included in the net wealth of an assessee. There is no difficulty at all in excluding debts which are solely secured on or which have been solely incurred in relation to any such assets which has been excluded in entirety under section 5(1). This proposition is fully supported by the decision in Srinivasan v. CWT (1980) 123 ITR 464 (Mad.)

6. In yet another case reported as (1982) 133 ITR 75 re: CIT v. Rajam, the Bench of Madras High Court observed thus (page 80):‑‑‑

"For an answer to the question, the basis on which section 2(m)(ii) excludes the debts from deduction must be ascertain. The real basis is not far to seek. The Legislature does not wish to grant an assessee a double advantage as it were, in his assessment‑‑‑‑once by exempting the value of the asset and a second time by permitting the debt secured on that asset to be deducted. The logic behind the legislative policy is clear enough. If you include the value of an asset, then exclude the debt secured on it; but where you just exclude the value of the asset, that is quite a relief in itself, and you cannot have another relief by way of deduction of the debt secured on the asset. Section 2(m)(ii), thus sees debts in a dichotomous' classification; (i) debts secured on assets (which may be described colloquially as taxable 'assets); and (ii) debts secured on assets (which may be described, again, colloquially, as exempted assets)."

7. We also find that in the case recently decided by the Lahore Bench of I.T.A. reported as 2001 PTD (Trib.) 252 the provisions of section 2(16)(ii) of the Act have been found to be quite explicit and it has been held that the assets against which liability contrived by obtaining bank loan is secured must be actually available for levy of wealth tax in order that the liability be admitted for set off against the total assets declared by the assessee.

8. In view of the above quoted judgments and decisions, we cannot make a different interpretation of the provision contained in section 2(1)(16)(ii) of the Act merely because the learned counsel for the a5sessee thinks that the words "secured on" were not meant for any security or collateral against which the loan was obtained. For arguments sake, even if these words were to be understood to mean "to take, to obtain, to get etc.", there would be no change in the interpretation made by the superior Courts that any‑loan obtained against an asset which his not subject to the levy of wealth tax cannot be treated as a debt owed by an assessee irrespective of its subsequent utilization for creation of any taxable asset or otherwise.

9. The learned counsel for the assessee has further argued that if the interpretation becomes doubtful then the benefit should go to the taxpayer and such interpretation should be adopted which favours taxpayers because the benefit of ambiguity would be given to the assessee. Reference in this behalf has been made to (1993) PTD 69 (SC Pak.), PLD 1977 Lah. 292 and 1993 SCMR 274 = 1993 PTD 69 and others wherein it has been held generally that where two equally reasonable constructions are possible, one strict and other beneficial to the assessee, the later should be preferred in a taxing statute especially when the cardinal principle of interpretation of a fiscal statute is that all charges upon the subject are to be imposed by clear and unambiguous words. Such an argument of .the learned counsel is also fallacious because the said principle of interpretation or rule of construction of a taxing statute would apply only to charging sections and not to machinery sections or to the provisions which give relief to the taxpayer. Thus in the case reported as (1985) 153 ITR 11 re: CI.T v. Vaidyanathan and others, the Full Bench of the Madras High Court observed:‑‑

"Let us now take up for consideration the arguments of the learned counsel for the assessee that taxing statutes are to be construed strictly and in favour of the assessee. No exception can be taken to the proposition that fiscal statutes should be interpreted strictly and in cases of doubt, the benefit of construction must be given in favour of the assessee. However, this rule applies only to charging sections and not to machinery sectidns or to provisions which give relief to the taxpayers. In Gursahai Saigal v. CIT (1963) 48 ITR (SC) 1,‑it has been held that the rule of strict construction applies primarily to charging provisions in a taxing statute and has no application to a provision not creating a charge for the tax but laying down the machinery for its calculation or procedure for its collection and such machinery provisions have to be construed by the ordinary rules of construction. One important consideration in construing a machinery section is that it should be so construed as to effectuate the liability imposed by the charging section and to make the machinery workable (vide Sanjana v. Elphinstone Spinning and Weaving Mills. AIR 1971 SC 2039). In this case, section 2(m) is not a charging section, but it is only a machinery section for the calculation of the net wealth of an assessee. In other words, it is a machinery section as opposed to section 3 which is the charging section. In the circumstances, the rule of strict construction relied upon by the learned counsel for the assessee cannot be applied. Section 2(m)(ii) can, only be interpreted in such a way as to make the machinery workable."

10. The learned counsel for the assessee has also argued that his case stands yet on another leg as follows:‑‑

"In all the cases decided by the Tribunal, it has held that clause (ii) of subsection (16) of section 2 of the Wealth Tax Act, 1963 contains two portions. One part says that the loan should not have been taken on the security of an exempt asset to qualify deduction and according to the second portion the assets created out of the debt should result in the creation of assets liable to wealth tax. This view is also incorrect. In fact the word `or" used in the clause has created this ambiguity. The language of the provision, if read under the rules of punctuation, speaks of only one situation. The word `or' is not disjunctive. It is conjunctive. After the word `or' the words `which have been incurred in relation to' do not create a different situation but actually clarify .the words `debts which are secured on'. Read in this way, the provision of clause (ii) means that to qualify admissible deduction, debt should not have been taken and incurred‑on an asset which is not liable to Wealth Tax. It is the only logical interpretation and is supported by two comas‑‑‑one before the word `or' and the other after the words `in relation to.

The above line of argument is out of the context and does not support the case of the assessee. Sub‑clause (ii) of clause (16) of section 2(1) clearly lays down that any debt which is either obtained upon the security of an asset not chargeable to tax or is obtained for acquiring an asset which is not so chargeable shall not be deductible from the assets to arrive at the figure of net wealth. In the instant case, the asset against which loan, from the bank was secured was the foreign currency US dollar account in I respect of which wealth tax was not payable under the Act: The assessee, could not be given double benefit by allowing such loan as an deductible debt and maintaining the tax‑exempt status of the foreign currency account which also gave further benefit to the assessee .in terms of appreciation/profit on US dollars remaining exempt under Part I of the Second Schedule to the Act. The prayer of the assessee that liability should be allowed at least to the extent of assets created out of the bank loan also cannot be granted. If the said liability is allowed, then the asset created out of bank loan will not become taxable but would be offset against the corresponding liability thus neutralizing the effect of taxation in respect of the net wealth of the assessee.

11. For the facts and reasons stated above, we hold that the assessee's claim of debt representing loan from Emirates Bank International obtained upon the security of the exempt asset i.e. U5 dollar foreign currency account was rightly disallowed by the Assessing Officer being an inadmissible debt in terms of section 2(1)(16)(ii) of the Act. The learned CIT(A) was, therefore, not justified to set aside the assessment for de novo decision at the level of the Assessing Officer, since the case required his own consideration and positive finding. The impugned appellate order is, therefore, vacated and that of the Assessing Officer restored.

12. As a result of this order, the appeal of the assessee stands rejected and that of the department succeeds.

C.M.A./192/Tax (Trib.)Order accordingly.