TMI Blog1966 (12) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... , been rejected by the Wealth-tax Officer (respondent No. 1) whose orders have been upheld by the Commissioner of Wealth-tax and the Central Board of Revenue (respondents Nos. 2 and 3). The petitioner now challenges the correctness of those orders on the plea that the wealth-tax authorities had wrongly interpreted the provisions contained in section 2(m) of the Act. Under section 3 of the Act, which is the charging section, wealth-tax is to be paid by every individual, Hindu undivided family and company at the rate or rates specified in the Schedule to the Act. The expression " net wealth " has been thus defined in clause (m) of section 2 of the Act : " (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 other than,-- (i) debts which under section 6 are not to be taken into account ; (ii) debts which are secured on, or which have been incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the debts owed by an assessee have to be deducted from his total assets in determining the net wealth on which he can be called to pay tax under section 3 of the Act. He further argues that once the assessee has incurred liability for payment of the tax, it amounts to a debt owed by him and, accordingly, the amount which he is liable to pay as tax, irrespective of the fact whether his liability has actually been quantified or not by assessment or a notice of demand issued against him, constitutes a debt owed by him. In this connection, he has cited Chatturam v. Commissioner of Income-tax, Commissioner of Wealth-tax v. Ahmed Tea Co. (Pvt.) Ltd., Commissioner of Wealth-tax v. Raipur Manufacturing Co. Ltd., Commissioner of Wealth-tax v. Ajit Mills Ltd. and Commissioner of Wealth-tax v. D. C. Basappa. The Federal Court decision in Chatturam v. Commissioner of Income-tax does not directly deal with the point, but it was observed therein by Kania J. (as he then was), who delivered the judgment of the court : " The liability to pay the tax is founded on sections 3 and 4 of the Income-tax Act, which are the charging sections. Section 22, etc., are the machinery sections to determine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs be laid before my Lord the Chief Justice for affording me the assistance of another learned judge of this court to dispose of these petitions in accordance with rule 1(xx)(b) of Chapter 3B of the Rules and Orders of the High Court, Volume V. Mr. Awasthy requests for an early hearing, as guidance of this court is needed by the respondent authorities in dealing with a number of similar cases pending before them. Order of the Division Bench (Dec. 23, 1966) GURDEV SINGH J.--This order will dispose of four petitions under articles 226 and 227 of the Constitution (Civil Writs Nos. 1841 to 1844 of 1962), which involve common questions relating to the interpretation of the expression " net wealth " as defined in section 2(m) of the Wealth-tax Act, 27 of 1957 (hereinafter referred to as the Act). Under section 3 of the Act, which is the charging section, wealth-tax is to be charged for every financial year commencing on and from the 1st day of April, 1957, in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule to the Act. The valuation date as defined in section 2(1) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or revision under section 25 of the Act against this order was rejected by the Commissioner of Wealth-tax (respondent No. 2) on 28th April, 1962. The petitioner's submission before the wealth-tax authorities was that the wealth-tax to which he was liable for the particular year under assessment constituted a debt which he owed, and he was entitled to its deduction from the aggregate value of his assets in computing the net wealth on which tax was payable by him for that year notwithstanding the fact that the tax had not till then been assessed and no demand notice for its payment issued to him. In rejecting this contention, the Commissioner of Wealth-tax, to whom revisions against the orders of the Wealth-tax Officer were taken, observed : " The important thing to be considered is whether the tax demands, which have not yet been determined, can be held to be debts owed by the assessee. A debt is owed only when it has actually been determined. It is only after the order of assessment has actually been passed and the officer has issued a notice of demand claiming upon the assessee to make the payment by a particular date that it can be said that the assessee owes the amount of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequence of any order passed under or in pursuance of this Act or any law relating to taxation of income or profits, or the Estate Duty Act, 1953 (34 of 1953), the Expenditure-tax Act, 1957 (29 of 1957) or the Gift-tax Act, 1958 (18 of 1958),-- (a) which is outstanding on the valuation date and is claimed by the assessee in appeal, revision or other proceeding as not being payable by him, or (b) which, although not claimed by the assessee as not being payable by him, is nevertheless outstanding for a period of more than twelve months on the valuation date. " From this it is obvious that in computing the net wealth debts owed by an assessee on the date of valuation, excepting those specified in clauses (i), (ii) and (iii) have to be deducted. It is, however, not disputed that none of these clauses has any applicability to the facts of the case before us. The question whether the amount of wealth-tax, expenditure-tax and gift-tax, for the payment of which the petitioner had incurred liability in various years, can be deducted from his total assets in computing his net wealth for the purpose of wealth-tax depends upon the interpretation of the expression "debts owed" by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titioner's plea that the taxes for which the petitioner had incurred liability during the accounting year were debts owed by him and had to be excluded from consideration in arriving at his net wealth. The matter has, however, been set at rest by the recent decision of their Lordships of the Supreme Court in Kesoram Industries Cotton Mills Ltd. v. Commissioner of Wealth-tax, wherein the view expressed by the Division Bench of the Gujarat High Court in Commissioner of Wealth-tax v. Raipur Manufacturing Co. Ltd. was expressly approved. The decisions to the contrary thus stand overruled. This case came up before their Lordships of the Supreme Court on appeal against the judgment of the Calcutta High Court in Kesoram Cotton Mills Ltd. v. Commissioner of Wealth-tax, in which a Division Bench of that court had held that in computing the net wealth of the assessee, provision for payment of income-tax and super-tax in respect of the year of account was not a "debt owed" within the meaning of section 2(m) of the Wealth-tax Act, 1957, and accordingly it was not deductible in computing the net wealth of the assessee. On a consideration of the relevant provisions of the Wealth-tax Act, the F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee during the accounting year is the income earned by him minus the tax payable by him in respect of that income. If a person earns Rs. 1,00,000 during the accounting year and has to pay Rs. 60,000 as tax in respect of that income, it will be incongruous to suggest that his wealth at the end of that year is Rs. 1,00,000. A reasonable man will say that his income is only Rs. 40,000, which represents his wealth at the end of the year. But it is said that what is just is not always legal. This court has, on more than one occasion, emphasized the fact that the real income of an assessee has to be ascertained on commercial principles subject to the provisions of the Income-tax Act. Is there any provision in the Wealth-tax Act which compels us to come to a conclusion which is unjust on the face of it ? " The following passage from the Annual Practice, 1950, (page 808) was quoted with approval as " a full and accurate statement of the law on the subject " supported by English decision : " But the distinction must be borne in mind between the case where there is an existing debt, payment whereof is deferred, and a case where both the debt and its payment rest in the future. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... took place during the corresponding year of the assessment of the wealth-tax and the payment was also made before the assessment of the wealth-tax for all the four years from 1957 to 1961 was finalised. The assessment of Rs. 2,519 on account of gift-tax for the Wealth-tax Act assessment year 1960-61 was finalised during that year and the amount of the tax was paid on the 18th of February, 1961, i.e., before the wealth-tax for the corresponding year was assessed. Thus, we find that the deductions which the petitioner claims on account of expenditure-tax and gift-tax were not in the nature of debts that had to be paid in future, but liability that had been incurred and discharged as well during the corresponding year of the assessment. The mere fact that the amount of tax was determined later would neither alter the nature of the petitioner's liability nor justify the refusal of the authorities to allow deduction of these amounts in arriving at the net wealth for corresponding accounting years. As liability for these taxes had been incurred, they were "debts owed" within the meaning of that expression in accordance with the rule laid down in Kesoram Industries' case. In dealing wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Expenditure-tax Act and the Gift-tax Act are similar. The expenditure-tax is levied upon the expenses incurred in the previous year and the gift-tax is also on the gifts made during the previous year. It is, thus, obvious that liability for tax under both these Acts arises not later than the close of the previous year. Thus, the principle laid down by their Lordships of the Supreme Court in Kesoram Industries' case in dealing with the claim for reduction of income-tax and super-tax, will also apply to taxes payable under the Expenditure-tax Act and the Gift-tax Act in assessing the net wealth as defined in section 2(m) of the Wealth-tax Act. The rates of both these categories of taxes being fixed under the Schedules to the relevant Acts, the liability incurred for their payment was neither uncertain nor contingent, but in praesenti, though the demand and payment of the same was made later. In the words of their Lordships of the Supreme Court, such liability has all the ingredients of a debt and is a present liability of ascertainable amount. In Maharajah of Pithapuram v. Commissioner of Income-tax Lord Thankerton observed : " Under the express terms of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that date was assessed at Rs. 94,77,191 on which he was assessed to the payment of Rs. 82,121.17 as wealth-tax. If the petitioner's contention is accepted, it would mean that his net wealth for the purposes of the assessment year 1957-58 would be Rs. 94,77,191 minus Rs. 82,121.17 which equals Rs. 93,95,069.83. As a necessary consequence it would follow that the wealth-tax for that year had to be paid not on Rs. 94,77,191 but on Rs. 93,95,069.83. In that case, the amount of tax would be less than Rs. 82,121.17. This will create a queer and anomalous situation. If the correct amount of the wealth-tax which, according to the petitioner, he was liable to pay for the assessment year 1958-59 was not Rs. 82,121.17 but much less, he cannot insist that Rs. 82,121.17, the tax that had been assessed by the authorities, should be deducted from his total assets. This illustration goes to show the ridiculous results that would follow. If the wealth-tax which is to be assessed on the net value is itself deducted from the total assets to arrive at the net wealth, it will be impossible to determine the net value as, unless the exact amount of the tax payable is known, it cannot be deducted from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t assets, it is impossible to deduct the amount of the tax which is legally payable in respect of the net wealth. We should not lose sight of the fact that the wealth-tax is different in nature from such taxes as income-tax, expenditure and gift-taxes. The wealth-tax is to be levied on the net assets in the hands of the assessee on the date of valuation. The total assets held by an assessee on any date prior to the date of valuation are not relevant for that purpose. The position with regard to income-tax, expenditure-tax and gift-tax is, however, different. The assessee's liability to pay these taxes arises on the day his income, expenditure or value of gifts exceeds the amount which is exempt from such taxes under the respective Acts, though his full liability for such taxes will be ascertained at the close of the accounting year. As the assessment of wealth-tax is to be made on the valuation date, which is the last date of the previous year, it cannot be said that the liability to tax had already arisen and was, thus, in the nature of debt owed by the assessee. It may happen in some cases that one may not be in possession of any assets or his net assets may be much below the t ..... 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