Companies generally provide car loans to their employees. The cars are purchased by the company and they continue to be owned by the company until the loans are fully paid by employees. Under the Wealth tax Act 1957, the value of cars has to be included in the value of assets, which are liable to wealth tax every year. However, such value would have to be reduced to the extent of the loan. Under section 2(m), the amount by which the aggregate value of all assets belonging to the assessee 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 these assets, is liable to wealth-tax.
The first condition is that an asset should belong to an assessee. The next condition is that a debt should be owed by the assessee. The word “debt” as defined in the Black’s Law Dictionary is “a sum of money due by 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 v Ducey, 25 Ohio App 2d 50, 266 NE 2d 233,235.
It is also defined to mean a fixed and certain obligation to pay money or some other valuable thing or things, either in the present or in the future. In a still more general sense, the definition would cover that which is due from one person to another, whether money, goods, or services. The word ?owe? means to be under an obligation to pay. The term “debt owed” is defined to be a liability to pay in praesenti or in futuro an ascertainable sum of money.
The next condition is that the debt should be in relation to the asset, which is liable to wealth tax. The term “in relation to” has been considered at length by the Income-tax Appellate Tribunal, Mumbai Bench in the case of Rati M Fyzee (82 ITD 548), wherein it was held that, it is not necessary that the debt should have a direct or immediate relation with the concerned asset; the relationship can be a little remote or even indirect, having regard to the broad language used by the provision.
It should not, however, be illusory or tenuous. There must be some appreciable or intelligible nexus or relation between the debt and the asset in question and the question whether there is any such relation between the debt and the asset concerned is a question in each case.
An identical view has also been expressed in another decision of the Income-tax Appellate Tribunal, Kolkata Bench in the case of SG Investments and Industries Ltd (89 ITD 44) though in the context of the applicability of the provision of section 14-A of the Income-tax Act, 1961.
This point was considered by the Income-Tax Appellate Tribunal in Thermax Ltd v Deputy CWT (299 ITR (AT) 141). The facts in this case were that, the assessee floated a scheme and the object of the scheme was to enable its employees to own vehicles and to provide reimbursements of conveyance expenses, so that 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, employees 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 policy provided that during a period of 5 years, the balance value plus interest would be recovered from the employee’s salary in 60 monthly installments. Further, the vehicle would remain in the name of the company, i.e., the assessee, till the loan was completely repaid. In the case of separation, a wear and tear margin at the rate of 9.5% per annum would be admissible. Interest at the scheme rate would be charged on the loan amount. For 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, the scheme did not show that the amount collected from the employees had been utilised by the assessee in the purchase of the cars and that the assessee could not produce any document to show that the loan had been given to purchase the assets. Therefore, he concluded that the assessee was not entitled to deduction under section 2(m) of the Wealth-tax Act, 1957. The commissioner (appeals) relying upon the assessee’s own case for the assessment year 1998-99, which had been decided in favour of the revenue by his predecessor, followed that decision without any further discussion on the subject. On further appeal, the Pune bench of the Income-tax appellate tribunal held that “net wealth” as prescribed in section 2(m) of the Act was the amount by which the aggregate value of all the assets belonging to the assessee was in excess of the aggregate value of all the debts owed by the assessee on the valuation date which had been incurred in relation to the assets. Under the scheme, the ownership of the vehicles remained in the name of the assessee till the loans were repaid. Hence, the assets were to be treated as wealth of the assessee.
According to the tribunal, there must be some appreciable or intelligible nexus between the debt and the asset. The facts of the case established that such relationship was undoubtedly established.
It was not the case of the Revenue that the repayment terms had no nexus with the asset, i.e., the car. The accepted position was that the employees had to contribute in instalments towards the cost of cars. Thus, the debt was in relation to the asset. The claim of debt was to be allowed.
In the light of the aforesaid decision, companies would secure substantial relief when cars are purchased and the value thereof is recovered from employees over a period of time, and the cars are ultimately taken over by the employees. Such cars would generally be valued based on the book value shown in the accounts of the company, ignoring their depreciated value under the Income-tax law. Such amount would be further reduced by the quantum of the outstanding loan for determining the net wealth taxable in the hands of companies.