TMI Blog1980 (3) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... rket value which was more than the cost price of the shares and, therefore, since the market value was the notional wealth, a notional tax liability in the form of capital gains tax should be taken into account while valuing the net wealth of the assessee. The assessee's case was that on the basis of the market value of the shares and debentures, the capital gains tax liability would be about Rs. 80,200 and that this amount must be deducted while computing the net wealth of the assessee. Needless to say that this contention was rejected by the WTO as also by the AAC before whom it was raised in the appeal filed against the order of the WTO. The assessee had appealed against his assessment to the Appellate Tribunal and dealing with the claim for deduction of the notional capital gains, the Tribunal took the view that though by taking the market value, there was a notional capital gain, the, notional capital gain cannot be said to be chargeable to any tax. The appeal filed by the assessee, therefore, came to be rejected. That is how the question reproduced earlier has been referred to this court. Shri H. G. Advani, appearing on behalf of the assessee, has fairly brought to our no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration of the decision of the Supreme Court in Sikand's case [1977] 107 ITR 922. The question which was referred to the Allahabad High Court by the Tribunal arose out of the valuation of certain unquoted shares held by the assessee which the WTO valued in terms of r. ID of the W.T. Rules. The WTO had rejected the submission of the assessee that while computing the net wealth on the valuation date, the estimated amount of capital gains tax which would be payable by him in the event of the sale of these shares should be rejected. The Allahabad High Court was, therefore, called upon to deal with the question as to whether the assessee was entitled to a deduction of the estimated amount of capital gains. The Allahabad High Court held that Sikand's case [1977] 107 ITR 922 (SC) was distinguishable on facts. The High Court also negatived the claim of the assessee that the estimated amount of capital gains should be treated as " debt owed within the meaning of s. 2(m) of the Act and observed that the word " debt " as used in s. 2(m) referred to debts actually and really owned by the assessee and did not extend to notional debts. Consequently, the High Court took the view that the estima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 968] 69 ITR 897. That was a decision in which the validity of the W.T. Act was challenged and while dealing with the nature of the tax, the Supreme Court has observed as follows (p. 900) : " It is a tax imposed on the capital value of the assets of individuals and companies, on the valuation date. The tax is not imposed on the components of the assets of the assessee it is imposed on the total assets which the assessee owns, and in determining the net wealth not only the encumbrances specifically charged against any item of asset, but the general liability of the assessee to pay his debts and to discharge his lawful obligations have to be taken into account." (Underlining ours) The contention advanced before us by the learned counsel was that the Supreme Court has pointed out that the net wealth can be determined only after taking into account the liability of the assessee to discharge his lawful obligations and the liability to pay capital gains tax being a lawful obligation, that must be taken into account for the purposes of determination of net wealth. We shall first consider the argument of the learned counsel based on the decision in Sikand's case [1977] 107 ITR 922 (SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance 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 ........" The definition of net wealth refers to the aggregate value of all the assets computed in accordance with the provisions of the Act. The relevant provision for the purposes of the present case is in s. 7(1) of the Act. We may incidentally point out that s. 2(e) of the Act defines " assets " as including property of every description, movable or immovable, with certain exceptions with which we are not immediately concerned. Now, the charging provision in the Act is in s. 3. Section 3 provides that subject to the other provisions contained in the Act, there shall be charged for every assessment year commencing on and from 1st day of April, 1957, a tax in respect of the net wealth on the corresponding valuation date of every individual, HUF and company at the rate specified in Sch. I. Wealth-tax is, therefore, charged on the net wealth of the assessee on the correspo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Delhi High Court from which decision the appeal was taken to the Supreme Court. The property assessable to wealth-tax in that case consisted of a leasehold interest in the land together with the building upon it. The land belonged to the President of India. Under the agreement of lease, the lessee could not part with her interest in the land without the sanction of the Chief Commissioner of Delhi and upon transfer of her interest with such sanction, the lessor (the President of India) was entitled to recover at the time of transfer 50% of the unearned increase in the value of the land, that is, the difference between the premium already paid and the current market value. The premium for the grant of the lease was Rs. 24,400. The lessor had also a pre-emptive right to the property of deducting 50% of the unearned increase as aforesaid. The assessee had constructed a large building on the land and in the wealth-tax assessment, though the value of the property on the basis of annual rent came to Rs. 8,29,560, the WTO reduced the value of the property to Rs., 6 lakhs since that was the figure accepted by the revenue in the earlier assessments. The contention of the assessee bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also assume that the consent of the lessor has been obtained. This consent under the terms of the lease was not to be granted without entitling the lessor to recover 50% of the unearned increase in the value of the land at the time of transfer. If we have to assume a sale, as indeed we have to, then there is no escape from assuming the existence of this liability to the extent of 50% of the said unearned increase in the value of land as well. This would, therefore, be a debt owed by the assessee on the valuation date. In order to ascertain the amount by which the aggregate value of the assets on the valuation date is in excess of the aggregate value of the debts owed by the assessee on that date, which would be " net wealth" as defined in section 2(m), this 50% of the unearned increase has to be deducted as debt owed by the assessee on the valuation date out of the value which has been determined without considering this condition as an important limitation attached to the property." Thus, the Delhi High Court took the view that the assessee was entitled to deduct from the valuation of the asset the 50% of the unearned increase on either of the two grounds, viz., (1) that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the leasehold interest must be duly discounted in estimating the price which the leasehold interest would fetch. To value the leasehold interest on the basis that this burden or disadvantage were to be ignored would be to value an asset different in content and quality from that actually owned by the assessee. " Analysing the effect of the right to 50% of the unearned increase in favour of the lessor, it was pointed out that what vested in the lessor was not merely the reversion but in addition to that, there was something more and that this something would necessarily be subtracted from the interest of the lessee and to that extent, the interest of the lessee would stand reduced. Thus the Supreme Court took the view that what goes to augment the interest of the lessor would correspondingly reduce the interest of the lessee and it could not be taxed as the wealth of both the lessor and the lessee. Consequently holding that the leasehold interest is cut down by the burden or restriction and some right or interest is subtracted from it, the Supreme Court pointed out that the problem of valuation became a difficult one and some method has to be evolved for resolving it. The on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount never belonged to the assessee, it could never be treated as a part of his wealth, The notional liability of capital gains tax determined on the basis of the value of the shares does not in the least go to affect the interest or ownership rights of the assessee in the shares and debentures absolutely held by the assessee. There is no comparison between the nature of the obligation of the lessee in Sikand's case [1977] 107 ITR 922 (SC) and in the liability of an assessee to pay tax on income though the tax is paid out of the income. The liability to pay capital gains tax is liability which accrues on the sale of these shares. It was no doubt true that in case the shares were sold, the amount of capital gains is fictionally deemed to be the income of the assessee under s. 45 of the I.T. Act. But the entire value of the asset sold belongs to him absolutely and the obligation to pay tax is to be discharged only when the entire value received is first treated as his income. The liability to pay tax cannot be described as an overriding charge. The concept of the overriding charge and application of income is fully explained by the Supreme Court in the decision in CIT v. Sitaldas T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pay capital gains tax. Possibly realising this infirmity in the argument, the learned counsel contended that more appropriately, the amount of capital gains should be treated as " debt owed ". Mr. Advani has fairly not disputed that the liability cannot be said to be a present liability. What was, however, argued was that if for the purposes of s. 7(1) there is a fictional sale and as all the material facts necessary for giving effect to the fiction must be assumed, the fictional liability to pay capital gains tax must also be taken into account while construing the words " debt owed ". As already pointed out, in Kesoram Indutsries' case [1966] 59 ITR 767 (SC), the concept of debt owed has been fully explained after a review of several English and Indian authorities in the following words at page 784: " To summarize: A debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in praesenti or in futuro : debitum in praesenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened. A liability to pay income-tax is a present liability though it becomes payable after it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appreciated value of the shares and the debentures or for the matter of that, any asset, that alone will have to be taken into consideration. Having regard to the view which we have taken on the nature of the valuation under s. 7(1), the market value of the shares and the debentures in the instant case will alone have to be taken into consideration. Now, it is no doubt true that such a value is determined after assuming certain facts, namely, a hypothetical sale and the assets being sold in the open market on the valuation date when in fact there may be no sale at all, but we cannot lose sight of the fact that s. 2(m) provides for the manner of determination of net wealth and what can be subtracted from the aggregate value of the assets is the aggregate value of only the debts owed. The definition of net wealth by itself does not import nor does it permit any fiction to be imported in the concept of debt owed. On the contrary, the words " debt owed " on the valuation date contemplate actual debts owed or debts owed factually in the sense that there is a present liability which has accrued. Clearly, the fictional liability to capital gains tax on the basis of the value of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the unearned increase as a debt owed, but that part of the decision does not seem to have been expressly approved or disapproved by the Supreme Court. But we fail to see how that part of the decision can be of any assistance to the assessee. The Supreme Court has in its decision, while dealing with the second ground on which it has come to the conclusion that 50% of the unearned increase has to be excluded, has positively referred to the fact that the amount is being collected on behalf of the lessor. The view of the Delhi High Court that deduction of 50% of the unearned increase would be permissible as " debt owed " would thus be contrary to the view taken by the Supreme Court that 50% of the increase was being collected on behalf of the lessor. In view of the decision of the Supreme Court, the view of the Delhi High Court that 50% of the unearned increase could be deducted as debt owed cannot now be relied upon by the assessee. Having thus considered the arguments advanced on behalf of the assessee in this case, it is not possible for us to take the view which is canvassed before us, which according to the learned counsel, was also supported by certain observations by the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X
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