TMI Blog1994 (2) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... eductible as debts owed by them in determining the net-wealth of these companies ? The question arises in these circumstances: M/s. J. K. Cotton Manufacturers Ltd., the assessee, is a limited company engaged in the manufacture of cotton textiles, etc., and the assessment involved is the wealth-tax assessment for the year 1957-58 based on the valuation date, September 30, 1956. It appears that as a result of proceedings taken and a settlement arrived at in 1952 under the Taxation on Income (Investigation Commission) Act, 1947, a sum of Rs. 15,99,041 was determined as payable by the assessee-company on its secreted profits and a scheme for the payment of the said liability by instalments was laid down. Out of this, a sum of Rs. 10,50,000 had been paid before the valuation date (September 30, 1956) and Rs. 5,49,041 remained unpaid on that date. The assessee-company claimed that the balance of the demand that had remained unpaid was a debt owed by it and should be allowed as a deduction while computing its net wealth for the concerned year of assessment (1957-58). In the case of M/s. J. K. Jute Mills Co. Ltd. the assessment involved under the Wealth-tax Act is also for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, but which are nevertheless to be included in the net wealth of the assessee by virtue of the provisions in s. 4(1); that s. 6(1) repeats the provision in s. 2(m)(i) excluding the debts located outside India where corresponding assets are excluded ; and according to the Tribunal these provisions indicated a scheme of the Act which suggested that debts which qualified for deduction in the computation of the net wealth were only those which were incurred in relation to the assets declared by the assessee, that is to say, in computing the net wealth the principle to be adopted was that when any assets were included the corresponding debts should be allowed but that when such assets were excluded or were liable to be excluded from the net wealth the corresponding debts should also be excluded. The Tribunal further observed that since in the case of the two companies it was not disputed on their behalf that the tax demands made by the Investigation Commission were in respect of secret profits which were not disclosed in their books of account and since it was also conceded that the assets shown in the balance-sheets did not include any assets acquired out of such secret prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve the nature and source thereof failing which the cash credit is regarded as his income from undisclosed source (a rule previously enunciated by judicial decisions which now finds a statutory recognition in s. 68 of the I.T. Act, 1961). Secondly, counsel contended that since the deductions claimed were in respect of tax liabilities which were outstanding for period of more than 12 months on the valuation dates, the deductions could not be allowed under s. 2(m)(iii) of the Act. On the other hand, counsel for the assessee-companies supported the view taken by the High Court on the first contention and as regards the second it was urged that since the same did not find favour either with the AAC or with the Tribunal and was not even urged before the High Court the Revenue must be taken to have given it up as being without any substance. In any event, the tax liabilities herein do not fall within the exclusionary provision contained in s. 2(m)(iii). In order to examine the first contention it will be necessary to set out the concerned provisions including the charging provision contained in s. 3 of the Act. Section 3 provides that there shall be charged for every assessment year com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of section 5 shall apply in relation to such assets as if such assets were assets belonging to the assessee." Section 5 exempts certain assets held by an assessee from being included in his net wealth and provides that wealth-tax shall not be payable by him in respect of those assets and then follows a list of a large number of such exempted assets. Section 6 deals with exclusion of assets and debts outside India and provides that in computing the net wealth of an individual who is not a citizen of India or of an individual or an HUF not resident in India or resident but not ordinarily resident in India, or of company not resident in India during the year ending on the valuation date, the value of assets and debts located outside India and the value of assets in India of the types specified in cl. (ii) shall not be taken into account. The question is whether the aforesaid provisions of the Act on which reliance has been placed by counsel for the Revenue indicate a scheme of the Act suggestive of the principle that only such debts as are incurred in relation to the assets declared or disclosed in the books qualify for deduction in computing the net wealth of an assessee ? In o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgument of counsel for the Revenue, such overdraft would become disallowable because the liability is not referable to any asset reflected in his books but obviously under the scheme of s. 3 read with the definition of net wealth under s. 2(m), such a liability will have to be allowed as debt owned by the assessee in computing his wealth-tax. Similarly, if a limited company after earning a certain amount of profits in a year were to distribute the whole of it to its shareholders by way of dividends, it would be absurd to suggest that the income-tax payable on such profits would not be allowable as a debt owed by the assessee in the computation of its net wealth simply because such profits are no longer available for being reflected in its books while aggregating its total assets. In the absence of an appropriate provision in the exclusionary part of s. 2(m), therefore, it is difficult to accept the counsel's contention that a restricted meaning as suggested should be given to the expression " all debts occurring in s. 2(m). Turning to the other provisions, namely, s. 2(m)(i) and (ii), s. 4(3) and ss. 5 and 6 of the Act, we are in agreement with the High Court's view that these pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umption can be raised that such secret profits were still retained by them on the valuation date in the circumstances of the case ? In the first place, the analogy of the rule applicable in income-tax cases would be inapplicable in wealth-tax cases inasmuch as in the former case the unexplained cash credit item is regarded as income of the assessee from undisclosed source having accrued to him during the accounting year while in the latter case only the valuation date is relevant on which date the assets (secret profits) must be held by the assessee and it will not do that such asset was held by him some time during the concerned year. Secondly, after a lapse of a sufficiently long period, no presumption can be raised that a secret profit earned some time during the concerned year has continued to be held by the assessee on the valuation date. In the instant case the secret profits admittedly earned by the assessee-companies related to assessment years prior to September, 1948, (as proceedings under the Taxation on Income (Investigation Commission) Act, 1947, could be taken only in respect of assessment years Prior to September 1, 1948) and the tax liability in respect thereof was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st day of the previous year and, therefore, becomes payable on the expiry of the last day irrespective of quantification of the dues would be irrelevant having regard to the express language of s. 2(m)(iii). Sub-cl. (iii)requires that the tax liability must be one which is " payable in consequence of any order passed " under any law relating to taxation on income or profits, etc., such liability so payable under an order passed must remain " outstanding for a period of more than 12 months on the valuation date ". The alternative submission that the tax liabilities in the instant case must be taken to have become payable in 1952 under the Investigation Commission's order and must be regarded as having remained outstanding since 1952 is equally of no avail for the payability of the dues must depend upon the terms of the Commission's order and admittedly a scheme for payment of the dues by instalments was provided in the order and each instalment would become payable on the date on which it is directed to be paid. In our view, the expression " outstanding " in s. 2(m)(iii)(a) and (b) will have to be construed in the background of the phrase " amount of tax ...... payable in consequenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lement was arrived at in 1952 and a sum of Rs. 15,99,041 was determined as payable by the assessee on its secreted profits and a scheme of payments of such liability by instalments was agreed upon. Similarly, in the case of M/s. J. K. jute Mills Co. Ltd., a settlement was arrived at in 1952 under the aforesaid Act and a sum of Rs. 42,93,392 was determined as payable by it on its secreted profits and a scheme of liquidation of such liability was agreed upon. It is true that as a result of the admission made by the assessee, the assessee made profits, in which year and when, we have no material, though the income-tax liabilities for the same had been settled in 1952. There is no evidence to show whether these profits had remained with the assessee either in the form of assets in the balance-sheet or otherwise. The relevant valuation dates were much later, September 30, 1956, and December 31, 1956, respectively, in the case of the two companies. Had there been any finding that these profits, in some form either as assets in the balance-sheet or otherwise, were with the assessee, it could have perhaps been examined whether so long as the assessee does not bring those profits in the com ..... 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