One of the persistent areas of friction between assessees and the I-T department relates to interpretation of debt owed in calculating net wealth for wealth tax purpose.

R. Anand

The Wealth Tax Act 1957, amended over a period of time, has more or less outlived its utility and purpose. Today, it is applicable in respect of a few specified assets such as guesthouse, motorcars, jewellery and urban land. With a threshold limit of 15 lakh and 1 per cent levy in respect of net wealth over and above that limit, the quantum of wealth tax paid in relation to corporate and personal income taxes is fairly insignificant.

However, some of the old controversies in relation to valuation and applicability in respect of assets still continue and engage the attention of courts. One of the persistent areas of friction between assessees and the I-T department relates to interpretation of debt owed in calculating net wealth for wealth tax purpose. The issue came up for analysis in the Thermax Ltd vs Deputy Commissioner of Wealth tax (2008 299 ITR AT 141 Pune) case. Basically all the debts owed on the valuation date is to be deducted from the aggregate of all assets, including deemed assets but excluding exempt assets.

The assessee-company floated a scheme to enable its employees own vehicles and to provide reimbursement of conveyance expenses, so that the employees may use their own vehicles in discharge of their official duties. As per the scheme, a policy of vehicle loan was laid down, according to which, the employee would have to pay a certain percentage of the cost of the vehicle as initial contribution and the loan would be to the extent of the remaining amount.

The scheme also provided that during a period of five years, the balance value plus interest would be recovered from the employees salary in 60 monthly instalments. A further condition was laid down that the vehicle would remain in the name of the company, that is, the assessee, till the loan was completely repaid.

In the case of premature retirement or resignation without completing the scheme, a wear and tear margin at 9.5 per cent per annum would be admissible. Interest at the vehicle scheme rate would be charged on the loan amount. In the assessment year 1999-2000, the assessee claimed deduction of Rs 1,09,15,787 on account of tied-up loans from the employees from the value of vehicles.

The tied-up loans from vehicles represented the amount of security deposit and the amount collected from the employees in respect of vehicles used by those employees. Those deposits and amounts collected were considered as debts owed by the company against the respective vehicle.

According to the assessing officer (AO), the scheme did not show that the amount collected from the employees had been utilised by the assessee to purchase the cars. Therefore he concluded that the assessee was not entitled to deduction under Section 2(m) of the Wealth-tax Act, 1957. The Commissioner (Appeals) confirmed the addition and the matter reached the Tribunal.

The crux of the matter relates to whether the security deposit collected by the employees would come under the category debt owed and, hence, reduced from the aggregate of assets. The tribunal come to the conclusion that the said deposits were debts owed by the company and hence deductible. The tribunal reasoned that the word debt as defined in the Blacks Law Dictionary (page 403) is a sum of money due by a certain and express agreement. A specified sum of money owing to one person from another, including not only obligation of debtor to pay but right of creditor to receive and enforce payment (State vs Ducey, 25 Ohio App.2d 50, 266 N.E. 2d 233, 235).

The main issue was that though the deposits were not directly used for the purchase of the motorcars they do have a proximate relationship with the assets in question and coupled with the fact the motorcars were owned by the company there was a clear and inextricable relationship between the motorcars and the security deposits collected from the employees.

The Tribunal in the context of the deposits collected from the employees in relation to the loans provided to them came to the conclusion that these deposits would constitute debt owed by the company in relation to the assets that are liable for wealth tax. Interestingly, there have also been controversies in respect of motorcars given on lease by leasing companies to various customers.

In the case of leasing companies motorcars are assets but if they are treated as stock-in-trade or used in the business of running them on hire they are not eligible to wealth tax. After the introduction of AS19 (accounting for leases), motorcars given on lease are not reflected as fixed assets but only as current assets.

Hence a stand can be taken that they are akin to stock-in-trade and hence exempt. If the cars are used by the lessee in the business of hiring then they are exempt on that plank too. Though wealth tax is now restricted to a few specified assets, corporates can plan the effective outgo by using debt owed in relation to these assets and ensure they are properly captured and deducted from the assets.