Commissioner of Wealth Tax Vs. Palm Court Hotels (P) Ltd. - Court Judgment

Excerpt:
- c.n. ramachandran nair, j.1. the question raised in the connected wealth tax appeals filed by the revenue against the very same assessee is whether the tribunal was justified in confirming the order of the c.w.t. holding that sale consideration for acquisition of urban land credited in the account of the land owners who are members of the company for allotment of shares is debt owed to be deducted from value of the assets under section 2(m) of the wealth tax act, 1957 (for short 'the act').2. we have heard standing counsel appearing for the appellant and sri. pathrose mathai, senior counsel appearing for the respondent/assessee.3. the assessee/company was formed in the year 1995 to start a hotel business. one of the directors agreed to sell an item of property to the respondent/company for a consideration of rs. 66,99,106/-. the sale agreement was sent for approval before the appropriate authority constituted under the income tax act, 1961 (for short 'the i.t. act') which opted for purchase of property to government of india. this led to litigation between the land owner viz., the director of the company and the government. when the high court allowed the director's case, the sale deed was executed in favour of the respondent/company. however, the respondent/company, instead of making payment in cash to the director concerned, credited the entire amount towards the advance received for allotment of shares. however, the revenue took up the matter to the supreme court and by the time, the supreme court rendered their decision, the company lost earlier approvals obtained for construction of the building and commencement of business. therefore, the project was abandoned. besides the above item of property, the company acquired another item of freehold land from strangers for a value of above rs. 18 lakhs. the assessing officer computed net wealth by taking urban land value as the same constitutes 'assets' within the meaning of the act. even though the assessee claimed deduction of the sale consideration which is shown as advance received by the seller of the land who is the director of the company for allotment of shares as a debt in relation to the asset within the meaning of section 2(m) of the act, the assessing officer rejected the claim. in the appeal filed, though c.w.t (a) held that both the items of land constitute 'assets' for the purpose of assessment, the liability shown in the accounts of the company as advance received for allotment of shares to the director for the major item of property purchased was allowed as deduction. the department's appeal before the tribunal was unsuccessful and therefore, this appeal is filed before us against the order of the tribunal confirming the c.w.t.(a)'s order.4. the only question to be considered is whether sale consideration for the urban land purchased by the company from its director which is credited in the account as advance received from director for allotment of shares is a debt owed by the assessee and which have been incurred in relation to the asset involved. for easy reference, section 2(m) of the wealth tax act 1957 is quoted as follows:2(m) '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 assets 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 owed by the assessee on the valuation date which have been incurred in relation to the said assets;the standing counsel submitted that the respondent's liability to issue shares against the amount credited in the name of director, who sold the land to the company, is an independent transaction. in other words, the debt incurred by the company in favour of the director is not in relation to the asset treated as part of the wealth. senior counsel appearing for the respondent/assessee, on the other hand, contended that the debt incurred by the company is directly attributable to purchase of land and therefore, debt is in relation to the asset acquired. we feel, the assesee's case is tenable because the assessee had no fund to acquire the land involved and therefore, the land was purchased treating the sale consideration as due to the director who sold the land and in his name, the credit entries are made in the books of the company treating the same as advance received from him for allotment of shares. since the company abandoned the project, there is no occasion to allot shares and therefore, the sale price which was credited in the account of the director who sold the land was paid by sale of the very same land by the company. in our view, the asset acquired, viz., the land from the director directly led to creation of liability to the company to allot shares equal to the value of the land which is a liability incurred by the company only for acquiring the land and so much so, it is debt incurred in relation to the asset viz., the land purchased from the director. so much so, in our view, the debt owed by the company is to be deducted from the value of the assets in the computation of net wealth under section 2(m) of the act. consequently, we dismiss all the appeals filed by the department.