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TMI Blog1978 (6) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year 1964-65, for which the previous year was S.Y. 2019. The assessments for these two years were, however, pending. Thereafter, Parliament enacted the Finance Act, 1965, which, inter alia, provided for voluntary disclosure of certain income under s. 68 of the said Act. Taking advantage of the scheme, the assessee first made a voluntary disclosure on 30th March, 1965 (though dated 27th March, 1965), of an income of Rs. 16,16,193. He made a subsequent disclosure on 19th May, 1965 (though dated 17th May, 1965), of a further income of Rs. 1,75,000. Thus, the total disclosure was in the aggregate amount of Rs. 17,91,193. With regard to the amount initially disclosed, viz., Rs. 16,16,193, the assessee was liable to pay tax at the flat rate of 57% of the amount disclosed, which was duly paid before the stipulated date. With regard to the further disclosure of Rs. 1,75,000, he was liable to pay income-tax at the flat rate of 60% which was also paid before the stipulated date. The aggregate tax so paid totalled Rs. 10,26,230. Now, according to the first disclosure, the income of Rs. 16,16,193 was represented by the total assets held by the assessee on 15th November, 1963. Again, accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 193 --------------------------------------------------------------------------------------------------------------------------------------------------- contd.... --------------------------------------------------------------------------------------------------------------------------------------------------- Net wealth I.T. according to Tax at 57% or Tax claimed as assessed Finance Acts 60% as per deduction (as earned income) sec. 68 of ( being Finance Act, "debt owed " ) 1965 --------------------------------------------------------------------------------------------------------------------------------------------------- 5 6 7 8 --------------------------------------------------------------------------------------------------------------------------------------------------- 14,74,645 11,19,534 8,47,644 8,47,644 14,75,342 11,21,072 8,48,782 8,41,686 14,58,246 11,21,460 8,49,070 8,41,232 14,69,947 11,32,092 8,56,940 8,39,071 14,86,992 12,25,912 8,88,592 8,57,698 15,56,438 13,39,520 9,36,387 8,86,732 16,82,106 14,22,182 9,95,874 8,31,845 16,86,522 15,15,292 10,26,230 9,47,003 16,92,030 13,01,610 10,26,230 10,26,230 --------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee as a debt owed on the respective valuation dates. " Accordingly, the Tribunal dismissed the appeals for the several years under consideration. Being aggrieved by this decision, the assessee has carried the matter further and invited the High Court to give its opinion on the question which we have earlier set out. Before us counsel on behalf of the assessee has urged that the tax at the flat rates paid by the assessee under s. 68(3) of the Finance Act, 1965, is income-tax which is payable under the I.T. Act, although at the rate fixed by s. 68(3) of the Finance Act, and, therefore, the matter would be squarely covered by the decision in Kesoram Industries and Cotton Mills Ltd.'s case [1966] 59 ITR 767, in which the Supreme Court had held that this was a debt owed which was liable to be allowed as a deduction in computing the net wealth for the purpose of levy of wealth-tax. In other words, it was submitted that s. 68 of the Finance Act, 1965, was not the charging section but merely prescribed the procedure for assessment of concealed income and the rate of tax. According to this submission, the charging section remains what it was under the I.T. Act, i.e., s. 3 of the Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deductible in computing the net wealth of the assessee-company. It was held by a majority, (i) that the word " owe " meant " to be under an obligation to pay " ; it did not really add to the meaning of the word " debt " (ii) that " debt owed " within the meaning of s. 2(m) of the W.T. Act,1957, could be defined as the liability to pay in praesenti or in futuro an ascertainable sum of money, (iii) that the charging section for the purposes of income-tax was s. 3 of the Indian I.T. Act, 1922, and the annual Finance Acts only gave the rate for quantifying the tax, and (iv) that a liability to pay income-tax was a present liability though the tax became payable after it was quantified in accordance with ascertainable data. It was held further that there was a perfected debt at any rate on the last day of the amounting year and not a mere contingent liability. It was observed that the rate was always easily ascertainable; if the Finance Act was passed, it was the rate fixed by that Act; if the Finance Act was not yet passed, it was the rate proposed in the Finance Bill pending before Parliament or the rate in force in the preceding year, whichever was more favourable to the assessee. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. WTO [1971] 82 ITR 410. In that decision, the learned single judge of the Kerala High Court upheld the action of the WTO in not deducting income-tax liability on the various valuation dates for the four years in question on the amount declared by the assessee under s. 68(2) of the Finance Act, 1965. This was on the basis of the reasoning which was subsequently observed as unsatisfactory by a Division Bench of the Gujarat High Court, which came to a similar conclusion but for different reasons. We need not examine this decision further inasmuch as the decision of the learned single judge was subsequently set aside in appeal by a Division Bench of the Kerala High Court in C. K. Babu Naidu v. WTO [1978] 112 ITR 341. The Division Bench of the Kerala High Court has observed whilst allowing the appeal that if the provisions of s. 68 of the Finance Act, 1965, are read along with s. 4 of the I.T. Act, 1961, the irresistible conclusion would be that the Finance Act, 1965, only provided the rate of tax that is to be imposed and the same was considered to be only a machinery provision to provide for what was envisaged under s. 4 of the I.T. Act,1961. According to the Division Bench, the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Act, 1961, and payment of income-tax under section 68 is not in satisfaction of that liability. Sub-section (1) of section 68 provides that where any person makes a declaration in respect of the concealed income, he shall, not withstanding anything contained in the Income-tax Act, be charged income-tax at the rate specified in sub-section (3) in respect of the concealed income so declared, if one of the three conditions specified in clauses (i) to (iii) is satisfied. The important words in sub-section (1) are 'charged income-tax'. These words show that sub-section (1) imposes a charge to income-tax on the concealed income disclosed by the assessee. Now, it may be argued that these words are used in the same sense in which the words 'income-tax shall be charged' are used in various Finance Acts. They have reference to charge of income-tax under the Income-tax Act but that charge has to be made in accordance with the rate specified in sub-section (3). What sub-section (1) seeks to provide is that the disclosed income shall be charged to tax under the Income-tax Act not at the rate laid down in the Finance Act but at the rate specified in sub-section (3). The emphasis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be charged under the Income-tax Act. It does not provide a method of quantification of the liability to income-tax under the Income-tax Act. It enacts a new charge to tax, on an ad hoc basis, on disclosed income irrespective of the assessment year in which it was earned..." The Division Bench of the Gujarat High Court thereafter considered the provisions of sub-s. (6) of s. 68 and observed that if the conditions specified in sub-s. (6) of s. 68 are satisfied, the concealed income disclosed by the assessee would cease to be liable to be included in his total income for the purpose of assessment under the I.T. Act. This was obviously because it had already home tax under s. 68. Thus, according to the Division Bench : " This item of income having been subjected to a distinct and separate process of assessment under section 68 is taken out of the purview of assessment under the Income-tax Act. " On these considerations the Division Bench came to the conclusion that the tax paid on the concealed income disclosed by an assessee under s. 68 was not in satisfaction of any liability under s. 3 of the Act of 1922 or under s. 4 of the Act of 1961 but in satisfaction of a new liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hird ITO [1975] 101 ITR 24, in which the power of Parliament to impose a new charge by a Finance Act was considered and upheld. It is true that counsel for the appellants before the Supreme Court expressly gave up the challenge to the power of Parliament ; but the court proceeded to consider the argument observing that the concession was properly made and gave its reasons for the observation. Section 68 of the Finance Act, 1965, once again came to be considered by a Division Bench of the Allahabad High Court in CWT v. B. K. Sharma [1977] 110 ITR 902, where, without referring to the judgment of the Delhi High Court, the learned judges of the Allahabad High Court considered the statutory provisions. They examined the judgment of the Gujarat High Court in Sahigara's case [1974] 93 ITR 288 and expressly differed therefrom. The Division Bench of the Allahabad High Court upheld the allowance of deduction to the assessee applying the ratio of Kesoram Industries and Cotton Mills Ltd.'s case [1966] 59 ITR 767 (SC). In the reference before the Allahabad High Court, the assessee concerned had made a voluntary disclosure of his concealed income of rupees five lakhs under s. 68 of the Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tax. The liability to pay tax arises much earlier, namely, on the close of the previous year in which the income is earned. It follows that if the assessee had offered these two amounts for assessment in the relevant assessment years but the assessments had not been made on the valuation dates, even then the assessee would be entitled to deduct the income-tax payable by him and such liability would amount to a debt owed by him. The fact that he did not disclose this income at the appropriate time and evaded the tax does not mean that he was not liable to pay the tax. As stated earlier, the liability to pay income-tax arises when the income is earned and not when it is disclosed or discovered. The quantification and determination of tax may be delayed because of the attempt of the assessee to conceal it from the department but his liability remains. " The position as expounded by the Allahabad High Court in respect of the normal income-tax liability for the amount of concealed income was not seriously disputed at the bar by counsel for the revenue. But it was urged that the position would be different in respect of payment of income-tax under s. 68 of the Finance Act, 1965, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in s. 68(1) of the Finance Act, 1965, and its conclusion based on such reading of the said statutory provisions. It is true that payment of income-tax under s. 68 may be broadly stated to be in lieu of the liability of the assessee to pay income tax under the charging sections of the Income-tax Acts read with the relevant Finance Acts for the appropriate years. But that would not be saying that it is the identical liability which is being provided for by a new rate or that this would merely constitute the Finance Act, 1965, a machinery provision like the usual Finance Acts for every year of account. Here again, the Allahabad High Court seems to have missed or avoided giving consideration to certain provisions to be found in s. 68 which have been considered by the Gujarat High Court, particularly sub-s. (6) of s. 68 of the Finance Act, 1965, which provides that if certain conditions are satisfied, the item of concealed income disclosed, on which income-tax as provided by s. 68(3) has been paid, would be excluded from the total income of the assessee for a particular year of account. This would seem to suggest that this is a different liability which is being provided for and a ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity to pay income-tax is a present liability though it becomes payable after it is quantified in accordance with its ascertainable data. The liability to pay tax on undisclosed income is also a present liability. It may become payable when it is discovered and brought to tax or it may become payable when it is disclosed under section 68 of the Finance Act, 1965, or otherwise disclosed. The liability is always there and is quantified either in the regular course under the Income-tax Act or under the said scheme as laid down by section 68 of the Finance Act. All the ingredients of a debt are present in such a case. " It was submitted by learned counsel for the revenue that the view propounded by the Gujarat High Court was the correct view and that it was impossible on a careful reading of the provisions of s. 68 of the Finance Act, 1965, to hold that this was a mere machinery section which provided for the rate, a special rate at which income-tax was to be charged on one item of total income. On the other hand, counsel on behalf of the assessee submitted that the view expressed and the conclusion reached by the Gujarat High Court had been considered and expressly dissented from sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed it at the appropriate time. Such concealment, even if successful, and the consequential non-disclosure in the year of account would seem to make no difference to the principle enunciated by the Supreme Court in Kesoram Industries and Cotton Mills Ltd.'s case [1966] 59 ITR 767 and subsequently reiterated in Setu Parvati Bayi's case [1968] 69 ITR 864. It was submitted that on a proper and fair reading of the voluntary disclosure scheme, the income-tax paid under s. 68 of the Finance Act, 1965, must be considered and accepted to be income-tax paid in lieu of the ordinary charge of income-tax under the I.T. Acts. This submission was made on the footing that the court may not be prepared to accept the principal contention that this was income-tax charged under the I.T. Act quantified by a special rate. It was urged that even if it be regarded as composition of the ordinary liability of income-tax at an amount less than the ordinary normal income-tax liability, and even though quantified on a different footing the assessee would be entitled in the computation of his net wealth to deduct this lesser figure even though it may not be strictly considered to be the income-tax charged und ..... X X X X Extracts X X X X X X X X Extracts X X X X
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