MUZAFFAR ALI VS COMMISSIONER OF WEALTH TAX, 2015 PTD-LAHORE-HIGH-COURT-LAHORE 2549 (2015)

Wealth Tax Act (XV of 1963)---

----S.2(m)---Wealth Tax Rules, 1963, R.8---"Debt owed"---Advance rent---Liability in wealth tax return---Assessee claimed that advance rent received by him for five years was a liability in wealth tax return and sought deduction of amount from his gross wealth---Validity---Advance rent of five years was received by assessee which was being adjusted every month and in the event of pre-mature termination, the amount of advance rent was refundable---Appellate Tribunal rightly found that at the most it could be termed as contingent liability i.e. on premature termination of tenancy agreement otherwise its character was of advance rent for five years---As the advance rent was adjustable and was an uncertain liability on the valuation date, therefore, it could not be termed as "debt owed" within the meaning of S.2(m) of Wealth Tax Act, 1963---Reference was answered in the affirmative.

Union of India v. Harbhajan Singh Dhillon (1972) 83 ITR 582 and Commissioner of Wealth Tax v. Noor Rai Ibrahim 1992 SCMR 766 ref.

Mian Ashiq Hussain for Applicant.

Dr. Ishtiaq Ahmad Khan, Additional Commissioner Inland Revenue, LTU, for Respondent.

Date of hearing: 12th May, 2015.

JUDGMENT

SHAHID JAMIL KHAN, J.---Following question of law is referred, on the instance of applicant assessee, for our opinion, which is asserted to have arisen out of order dated 12-3-1995 passed by erstwhile Income Tax Appellate Tribunal ("Appellate Tribunal"):--

"Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the unadjusted advance rent of Rs.3,00,000 was not a 'debt owed' within the meaning of Section 2(m) of the Wealth Tax Act, 1963, when the amount was refundable in the event of premature termination of the lease by the lessee?"

2. Facts as found by Appellate Tribunal are that assessee had received advance rent for five years against a property offered for wealth tax. The advance rent was to be adjusted against monthly rent. The assessee claimed unadjusted rent as liability in wealth tax return and sought deduction of amount from gross wealth of the assessee. Wealth Tax Officer refused to treat the unadjusted advance rent as loan within the meaning of Section 2(m) of the Wealth Tax Act, 1963 ("Act of 1963"). First Appellate Authority treated the advance rent as loan and accepted assessee's appeal. On further appeal, Appellate Tribunal agreed with the findings of Wealth Tax Officer and refused to treat the advance rent as loan adjustable as loan/debt. Appellate Tribunal through an elaborate order, discussed and distinguished the judgments relied upon by assessee and arrived at following conclusion:--

"11. It is also pertinent to point out that the learned AR of the assessee in his arguments has contended that advance rent could be best considered a contingent liability and it could be deducted from the assets of the assessee while calculating the net wealth. In the reported case 1988 PTD (Trib) 585 the learned Members while discussing the contingent liabilities also discussed the case reported as (1967)-63-ITR-470 (Standard Mills v. CWT Bombay (India) S.C. The Lordships of the Indian Supreme Court have held "that gratuity payable on termination of employment was a mere contingent liability which arose only when the employment of an employee was terminated by the death or other in-capacity, retirement or resignation." Their Lordships were of the view "that it was not liability existing in prasenti, hence could not be treated as debt".

12. Because of the above reasons, we are not inclined to agree with the arguments of the learned AR that advance rent is a debt owed within the meaning of section 2 (m) of the Wealth Tax Act, 1963, therefore for the foregoing reasons, we accept the appeals of the Department, vacate the order of the learned CIT (Appeals) wherein the advance rent has been treated as debt owed within the meaning of section 2 (m) of Wealth Tax Act, 1963 and restore the orders of the WTO. "

3. Learned counsel for the applicant has also filed written arguments in addition to his submissions. Submits that the advance rent was returnable on termination of contract, therefore, was a liability deductible from the value of immovable property. He has read Rule 8 of the Wealth Tax Rules, 1963 ("Rules of 1963") to submit that value of immovable property is the market value of that property on the valuation date. Explains that the property in question if sold on the valuation date, the advance rent received would be reduced from the price. He has placed reliance on a judgment from Indian jurisdiction reported as Union of India v. Harbhajan Singh Dhillon [(1972) 83 ITR 582] (S.C. India), where under capital value of an asset is defined as selling price between a willing seller and a willing purchaser. He has also relied on a judgment by Hon'ble Supreme Court of Pakistan in Commissioner of Wealth Tax v. Noor Rai Ibrahim [(1992) 65 Tax 262], relevant part of which is reproduced:--

"The essence of the word 'debt' is the obligation to pay and the amount which is payable. It is a liability to the person who has an obligation to pay the amount which may be certain or calculable readily."

4. Dr. Ishtiaq Ahmad Khan, Additional Commissioner Inland Revenue, LTU, Lahore, appearing for the respondent has opposed the arguments and submits that the advance rent is admittedly adjustable, therefore, cannot be said as liability.

5. Heard, record perused.

6. Admitted facts of this case are that the advance rent of five years was received by the assessee which was being adjusted every month. However, in the event of premature termination, the amount of advance rent was refundable.

7. We are in agreement with the findings of Appellate Tribunal that at the most it could be termed as contingent liability, i.e., on premature termination of tenancy agreement. Otherwise, its character was of advance rent for five years, which under normal circumstances was adjustable in five years. We agree with the contention by Additional Commissioner Inland Revenue that the alleged liability is not a fixed one and is reducing upon each passing month with the corresponding reduction in the total amount of advance rent. The factum of receipt of advance rent is a contractual undertaking which the landlord and the tenant has undertaken and does not enhance or reduce the value of the property on the valuation date. Even otherwise, on the valuation date, the advance rent was not returnable, therefore, was not a liability. The Appellate Tribunal has dealt with this issue elaborately by relying on a judgment by Appellate Tribunal wherein it is observed that a security which carries attributes of certainty can be termed as liability but not the advance rent which is admittedly being adjusted every month. The Hon'ble Supreme Court of Pakistan has also observed, as reproduced supra.

Since the advance rent was, admittedly, adjustable and was an uncertain liability on the valuation date, therefore, it could not be termed as "debt owned" within the meaning of section 2(m) of the Act of 1963.

8. For the reasons noted above, our answer to the proposed question is in Affirmative, i.e., against the applicant assessee.

CTR is decided against the applicant assessee.

9. Office shall send a copy of this order under seal of the Court to the Appellate Tribunal as per Section 136 (6) of the Repealed Income Tax Ordinance, 1979.

MH/M-184/LQuestion answered in affirmative.