TMI Blog1965 (11) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee and to substitute in its place another figure, if he was, for sufficient reasons, satisfied that the figure given by the assessee was wrong. But he did not find any such reasons to do so. When he accepted the figure shown by the assessee himself, he did the right thing and there is nothing to complain about. The High Court was right in answering the first question in the affirmative. Till the company in its general body meeting accepts the recommendation and declares the dividend the report of the directors in that regard is only a recommendation which may be withdrawn or modified as the case may be. As on the valuation date nothing further happened than a mere recommendation by the directors as to the amount that might be distributed as dividend, it is not possible to hold that there was any debt owed by the assessee to the shareholders on the valuation date. The High Court rightly answered the second question in the negative. We agree with the conclusion arrived at by the Gujarat High Court. We, therefore, hold that the liability to pay income-tax is a debt within the meaning of section 2(m) of the Wealth-tax Act and it arises on the valuation date during the acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h "A", not only disallowed the claims of the assessee but also allowed the appeal of the department in regard to Rs. 30,305 subject to certain directions given by it. At the instance of the assessee, the following three questions were referred to the High Court under section 27 of the Wealth-tax Act: (1) Whether, on the facts and in the circumstances of the case, the Wealth-tax Officer was justified in taking the value of the assets of the assessee as shown in its balance-sheet on the relevant valuation date ? (2) Whether, on the facts and in the circumstances of the case, in computing the net wealth of the assessee the amount of proposed dividend was deductible from its total assets ? (3) Whether, on the facts and in the circumstances of the case, in computing the net wealth of the assessee, the amount of the provision for payment of income-tax and super-tax in respect of the year of account was a debt owed within the meaning of section 2(m) of the Wealth-tax Act, 1957, and as such deductible in computing the net wealth of the assessee ? The High Court answered the three questions against the assessee. Hence the present appeal. Mr. Palkhivala, learned counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduced in the balance-sheet. Under section 211 of the Companies Act, 1956, every balance-sheet of a company must give a true and fair view of the state of its affairs as at the end of the financial year. When the assessee himself has shown the net value of the assets at a figure, the Wealth-tax officer, in our view, rightly accepted it, as no one could know better the value of the assets than the assessee himself. It was open to the assessee to convince the authorities that the said figure was inflated for acceptable reasons ; but it did not make any such attempt. It was also open to the Wealth-tax Officer to reject the figure given by the assessee and to substitute in its place another figure, if he was, for sufficient reasons, satisfied that the figure given by the assessee was wrong. But he did not find any such reasons to do so. When he accepted the figure shown by the assessee himself, he did the right thing and there is nothing to complain about. The High Court was right in answering the first question in the affirmative. The second question does not call for a detailed scrutiny. Under section 2(m) of the Wealth-tax Act, "net-wealth" means the amount by which the aggregat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether the liability to pay income-tax and super-tax became a debt owed by the assessee on March 31, 1957, or on April 1, 1957 : if it was a debt on the latter date, it could not be deducted from the gross assets of the assessee to arrive at the net wealth ; if it was on the former date, it could be. Mr. Palkhivala argued that the liability to pay tax arose by virtue of the charging section, i.e., section 3 of the Income-tax Act, and that it arose not later than the close of the previous year though the quantification of the amount payable was postponed till the Finance Act was passed and that, therefore, it being a liability in praesenti existing on the valuation date, it was a debt owed by the assessee on the said date. Mr. A. V. Viswanatha Sastri, learned counsel for the revenue, argued that the expression " debt owed " meant an obligation to pay an ascertained amount, that the said obligation to pay income-tax arose only on the passing of the Finance Act and that, therefore, on the valuation date no debt was owed by the assessee to the department within the meaning of section 2(m) of the Wealth-tax Act. At the outset it will be convenient to gather the material provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany, local authority, unregistered firm or other association of persons, not being a registered firm, or the partners of the firm or members of the association individually, an additional duty of income-tax (in this Act referred to as super-tax) at the rate or rates laid down for that year by a Central Act. Section 67B: If on the 1st day of April in any year provision has not yet been made by a Central Act for the charging of income-tax for that year, this Act shall nevertheless have effect until such provision is so made as if the provision in force in the preceding year or the provision proposed in the Bill then before Parliament, whichever is more favourable to the assessee, were actually in force. " The Finance (No. 2) Act, 1957 (Act No. XXVI of 1957). (It received the assent of the President on September 11, 1957.) " Section 2: (1) Subject to the provisions of sub-sections (2), (3), (4) and (5) for the year beginning on the 1st day of April, 1957,----- (a) income-tax shall be charged at the rates specified in Part I of the First Schedule, and, in the cases to which Paragraphs A, B and C of that Part apply, shall be increased by a surcharge for purposes of the U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come to a conclusion which is unjust on the face of it ? The problem presented can satisfactorily be solved by answering two questions, namely, (1) what does the expression "debt owed" mean ? and (2) when does the liability to pay income-tax and super-tax under the Income-tax Act become a debt owed within the meaning of that expression ? If we ascertain the meaning of the word "debt", the expression "owed" does not cause any difficulty. The verb " owe " means " to be under an obligation to pay ". It does not really add to the meaning of the word " debt ". What does the word " debt " mean ? A simple but a clear definition of the word is found in Webb v. Stenton, wherein Lindley L. said : "......debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation; debitum in praesenti, solvendum in futuro." This view was accepted by the other Lord Justices. The Court of Appeal in O'Driscoll v. Manchester Insurance Committee considered the word " debt " in the context of fees payable by the National Insurance Committee to panel doctors. The insurance committee entered into agreements with the panel doctors of their district by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n September 22, 1937. The company contended that the sum was a debt due from the respondent to the Inland Revenue as from January 1, 1935. As the offer was not accepted, it was held that the sum was not a debt. It was argued that even if there was a liability on January 1, 1935, that liability did not become a debt within the meaning of the Finance (No. 2.) Act, 1939. Adverting to that argument, Macnaghten J. observed : "It is true that the word 'debt' may, in certain connections, be used so as to cover a mere liability, but I think that in this Act it is used in the proper sense of an ascertained sum and that the contention of the Attorney-General is well founded." This decision, while holding that in the context of the Finance Act of 1939, there was no debt until the liability was quantified, conceded that the expression "debt" was wide enough to take in a liability; it also did not define the scope of the expression " ascertained ", that is to say, whether the said expression would take in amounts ascertainable. The King's Bench Division in Seabrook Estate Co. Ltd. v. Ford held that money in the hands of a receiver for debenture-holders was not a debt owing or accruing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be any debt. This decision does not throw any light on the question that now arises before us. The principle of the matter is well put in the Annual Practice, 1950, at age 808, thus: " 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 pavment rest in the future. In the former case there is an attachable debt, in the latter case there is not. If, for instance, a sum of money is payable on the happening of a contingency, there is no debt owing or accruing. But the mere fact that the amount is not ascertained does not show that there is no debt." In our view this is a full and accurate statement of law on the subject and the said statement is supported by English decisions we have discussed earlier. We shall now notice some of the decisions of the Indian courts on this aspect. A Special Bench of the Madras High Court in Sabju Sahib v. Noordin Sahib held that a claim for an unliquidated sum of money was not a debt within the meaning of the Succession Certificate Act, 1889, section 4(1)(a). The claim was to have an account taken of the partnership business th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A Full Bench of the Madras High Court in Doraisami Padayachi v. Vaithilinga Padayachi ruled that " a promise to pay the amount which may be found due by an arbitrator on taking accounts between the parties is not a promise to pay a 'debt' within the meaning of section 25 of the Indian Contract Act, 1872, the amount not being a liquidated sum. " This was because the liability to pay the amount arose only after the arbitrator decided that a particular amount was due to one or other of the parties. The Calcttta High Court in Jabed Sheikh v. Taher Mallik held that " a liability for mesne profits under a preliminary decree therefor, though not a contingent liability, does not become a 'debt' till the amount recoverable, if any, is aecertained and a final decree for a specified sum is passed ". That conclusion was arrived at on the basis of the principle that a claim for damages does not become a debt till the judgment is actually delivered. We have briefly noticed the judgments cited at the Bar. There is no conflict on the definition of the word " debt ". All the decisions agree that the meaning of the expression " debt " may take colour from the provisions of the concerned Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s construction will harmonize the apparent conflict between the two Acts. When you look at section 2 of the Finance Act, it shows that income-tax shall be charged at the rates specified in Part I of the First Schedule, and super-tax, for purposes of section 55 of the Income-tax Act, 1922, shall be charged at the rates specified in Part II of the First Schedule. The primary object of the Finance Act is only to prescribe the rates so that the tax can be charged under the Income-tax Act. The Income-tax Act is a permanent Act, whereas the Finance Act is passed every year and its main purpose is to fix the rates to be charged under the Income-tax Act for that year. That should be the construction is also made clear by section 55 of the Income-tax Act, whereunder super-tax shall be charged for any year in respect of the total income of the previous year of any individual, Hindu undivided family, company, etc., at the rate or rates laid down for that year by a Central Act. This section brings out the distinction between a tax charged and the rate at which it is charged. This construction is also emphasized by section 67B of the Income-tax Act, whereunder if, on the 1st day of April in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mely, (i) " under the express terms of section 3 of the Indian Income-tax Act, 1922, the subject of charge is not the income of the year of assessment, but the income of the previous year; and (ii) the Indian Income-tax Act, 1922, as amended from time to time, forms a code, which has no operative effect except so far as it is rendered applicable for the recovery of tax imposed for a particular fiscal year by a Finance Act." A combined reading of the said two principles leads to the position that though the Income-tax Act has no operative effect till the Finance Act is passed, after the passing of the said Act, the charge to tax would be under the Income-tax Act in terms of the relevant provisions of the said Act. In Doorga Prosad v. Secretary of State the Judicial Committee held that income-tax was calculated and assessed by reference to the income of an assessee for a given year, but it was due when demand was made under sections 29 and 45 of the Income-tax Act. The Judicial Committee in that decision was not considering the question of liability to pay income-tax but only the payability. The Federal Court in Chatturam v. Commissioner of Income-tax, after considering the releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... area in 1939-40, the income of the assessee was liable to tax in that year and, therefore, it had escaped assessment within the meaning of section 34 of the Income-tax Act. The reasons for that conclusion were given by the learned judge thus : "Thus income is chargeable to tax independently of the passing of the Finance Act but until the Finance Act is passed no tax can be actually levied." The learned judge also added : "........ according to the scheme of the Act the quality of chargeability of any income is independent of the passing of the Finance Act." This court, therefore, accepted the principle that the liability to pay tax arose under the Income-tax Act, though its quantification depended upon the passing of the Finance Act. If there was no liability under the Income-tax Act during the relevant accounting year, no question of escaped assessment during that year would have arisen in that case. The same principle was reiterated by this court in Kalwa Devadattam v. Union of India. There, the question was whether the liability of a Hindu undivided family arose before or after partition of the family. In that case, this court, speaking through Shah J., stated in cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in Commissioner of Wealth-tax v. Travancore Rayons Limited held that the said liability did not become a debt until April 1, 1959, when the rate of tax for that accounting year would be available. For the reasons we have stated earlier, we agree with the conclusion arrived at by the Gujarat High Court. We, therefore, hold that the liability to pay income-tax is a debt within the meaning of section 2(m) of the Wealth-tax Act and it arises on the valuation date during the accounting year. We will close the discussion on this subject with the words of Earl Jowitt in British Transport Commission v. Gourley: " The obligation to pay tax---save for those in possession of exiguous incomes---is almost universal in its application. That obligation is ever present in the minds of those who are called upon to pay taxes, and no sensible person any longer regards the net earnings from his trade or profession as the equivalent of his available income." We are glad that our conclusion coincides with the current conception of net wealth in the commercial sense. Mr. Palkhivala, learned counsel for the assessee, raised an alternative contention in regard to the manner of ascertaini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct imposes a charge for every financial year commencing on and from the first day of April, 1957, for tax 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. The expression " valuation date " by section 2(q) means in relation to any year for which an assessment is to be made the last day of the previous year as defined in clause (11) of section 2 of the Income-tax Act if an assessment were to be made under that Act for that year. " Net wealth " as defined in section 2(m) at the relevant time meant the amount by which the aggregate value computed in accordance with the provisions of the Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in the net wealth as on that date under the Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than ...... Charge of the wealth-tax under the Act is, it is plain, on the terms of section 3 imposed on the net wealth of the assessee computed on the valuation date after adjusting the debts owed by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of every firm and other association of persons or the partners of the firm or the members of the association individually." The charge imposed by the Income-tax Act is on the assessable entities enumerated in section 3 in respect of the income of the previous year and not on the income of the year of assessment. But the charge is for the tax for the year of assessment, and levied at the rate or rates fixed on the total income of the assessable entity computed in accordance with and subject to the provisions of the Income-tax Act. The Income-tax Act is the basic and permanent statute. Tax under that Act is directed to be charged in accordance with and subject to the provisions of the Act in respect of the income of the previous year of the assessable entities, but the charge imposed by the Income-tax Act is an inchoate or incomplete charge. Until the annual Finance Act is passed, imposition of the charge of income-tax does not, on the plain words used in section 3, become complete or effective, for, income-tax is to be charged in accordance with the Income-tax Act, when the Finance Act for the year enacts that the tax shall be charged at the rate or rates prescribed thereby. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion applied, the Judicial Committee observed: "The argument which has been used in favour of the appeal seems to involve the fallacy that liability to tax attached to the income in the previous year. That is not so. No liability to tax attached to the income of this company until the passing of the Act of 1925, and it was then to be taxed at the rate appropriate to a company." In Western India Turf Club's case income of the previous year was earned by an unincorporated association, and if liability to tax attached to the income of the previous year, it, would have been taxable on that footing. But the Judicial Committee held that the income of the company which came into existence in the year of assessment had to be taxed, and liability did not attach to the income of the company till the Finance Act was enacted. In Maharajah of Pithapuram v. Commissioner of Income-tax, by certain deeds of trust and settlement, the Maharajah of Pithapuram had settled properties on each of his daughters with a provision reserving to himself power to revoke the settlements or to make fresh dispositions as he deemed fit. For the assessment year 1939-40, the income-tax authorities held that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the tax, and for imposition of liability, therefore, was lacking. Counsel for the company however sought to contend, notwithstanding the view expressed in the cases cited, that under the Income-tax Act, 1922, liability to pay income-tax arises at the latest on the last day of the previous year, and that being the valuation date under the Wealth-tax Act, in computing wealth-tax, income-tax payable for the year ending March 31, 1957, could be regarded as a debt owed by the company on the valuation date. Counsel relied upon the following observations made by the Judicial Committee in Wallace Brothers and Co. Ltd. v. Commissioner of Income-tax : " The general nature of the charging section is clear. First, the charge for tax at the rate fixed for the year of assessment is a charge in respect of the income of the ' previous year ', not a charge in respect of the income of the year of assessment as measured by the income of the previous year. That has been decided and the decision was not questioned in this appeal. Second, the rate of tax for the year of assessment may be fixed after the close of the previous year and the assessment will necessarily be made after the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rregular. The court was not concerned to express any opinion on the question whether liability of the undivided family to pay tax arose before the years of assessment commenced. In my judgment, on the terms used in section 3 of the Income-tax Act, liability to be taxed becomes effective not later than the last day of the year of account. But the liability to pay tax arises only when the Finance Act becomes operative on the first day of April of the assessment year either by enactment of an Act or by virtue of section 67B of the Income-tax Act. The company sought to deduct in its balance-sheet an estimated amount as the probable amount of tax which it would have to pay in the year of assessment. Out of this amount advance tax was deducted. We have held in Commissioner of Wealth-tax v. Standard Vacuum Oil Co. Ltd. that liability to pay advance tax arises when a demand notice is issued under section 18A of the Act. For the balance taken into account in the balance-sheet there was no liability arising in the previous year which could be regarded as a debt owed by the company. Liability to be assessed to tax may and does arise under section 3 on the last day of the year of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India and a computation in accordance with clause (a) cannot be made by reason of the absence of any separate balance-sheet drawn up for the affairs of such business in India, the Wealth-tax Officer may take the net value of the assets of the business in India to be that proportion of the net value of the assets of the business as a whole wherever carried on determined as aforesaid as the income arising from the business in India during the year ending with the valuation date bears to the aggregate income from the business wherever arising during that year." By the first sub-section the Wealth-tax Officer is authorised to estimate, for the purpose of determining the value of any asset, the price which it would fetch, if sold in the open market on the valuation date. But this rule in the case of a running business may often be inconvenient and may not yield a true estimate of the net value of the total assets of the business. The legislature has therefore provided in sub-section (2)(a) that where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth-tax Officer may determine the net value of the assets of the business as a whole, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer upon the tax officer to make adjustments in the valuation of assets in the balance-sheet, and in clause (b) no such power is conferred. But it must be remembered that under clause (b) the tax officer's powers in determining the income of a foreign company arising from the business in India and the aggregate income from the business wherever arising are not subject to any artificial rule. The argument raised by counsel for the assessee is that substantially section 7(2) is a definition section, which extends, for the purposes of the Act, the definition of the " net wealth " of assessees carrying on business. There is no warrant for this argument in the language used in section 7(2). Counsel was unable to suggest any rational explanation why, if what he contends was the intention, Parliament should have adopted this somewhat roundabout way of incorporating a definition of net wealth in a section dealing with valuation of assets. In my judgment, neither clause (a) nor clause (b) of section 7(2) is directed towards the determination of the net wealth, and it would be impossible to hold that the legislature intended that the net wealth for the purpose of the charge to tax unde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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