MEHROTRA C.J. - The following question of law has been referred under section 27(1) of the Wealth-tax Act, 1957 (hereinafter called "the Act"), for opinion by Income-tax Appellate Tribunal, Calcutta Bench :
"Whether, on the facts and in the circumstances of the case, provisions for taxation amounting to Rs. 2,25,000, Rs. 2,40,000 and Rs. 2,90,933.84 np. for the assessment years 1957-58, 1958-59 and 1959-60 were proper deductions in the ascertainment of the net wealth of the company as on the respective valuation dates ?"
The assessee which is a private limited company is doing business in tea. The assessment years in question are 1957-58, 1958-59, and 1959-60 and the corresponding valuation dates under the Act are 31st December, 1956, 31st December, 1957, and 31st December, 1958. In the balance-sheet the assessee company has made provisions for taxation amounting to Rs. 2,25,000, Rs. 2,40,000 and Rs. 2,90,933.84 np. in respect of the calendar years 1956, 1957, and 1958 respectively. These amounts are shown in the balance-sheet as provisions for taxation under the head "current liabilities and provisions". The Wealth-tax Officer did not exclude these amounts from the net wealth of the company. The order of the Wealth-tax Officer was affirmed by the Appellate Assistant Commissioner. On appeal the Tribunal took the view that the liabilities for taxation were deductible from the assets of the company for determination of its net wealth and relied upon an earlier decision of the Full Bench of the Tribunal. Dissatisfied with the order of the Tribunal an application was made by the department for reference to this court.
The relevant provisions of the Act are set out below. Section 2(m) defines the "net wealth" as follows :
"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; and
(ii) debts which are secured on, or which have been incurred in relation to, any asset in respect of which wealth-tax is not payable under this Act."
Section 3 which is the charging section, provides :
"3. Subject to the other provisions contained in this Act, there shall be charged for every financial year commencing on and from the first day of April, 1957, a tax (hereinafter referred to as wealth-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."
Section 7 of the Act provides for the determination of the value of the assets. It runs as follows :
"7. (1) The value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date.
(2) Notwithstanding anything contained in sub-section(1), -
(a) where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth-tax Officer may, instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole having regard to the balance-sheet of such business as on the valuation date and making such adjustments therein as the circumstances of the case may require;..."
Only the relevant portion of the section have been quoted above. Reading of these sections shows that the wealth-tax is charged on the net wealth of an assessee. The net wealth is arrived at by deducting certain debts from the value of the assets determined in accordance with the provisions of section 7. Before the net wealth can be determined the value of the assets has thus to be determined under section 7.
The question for consideration before us is whether the amount kept apart in the balance-sheet for the discharge of the tax liability is deductible from the value of the assets for the purposes of determining the net value or not.
Mr. Lahiri for the assessee contends that apart from the question whether the tax liability can be regarded as a debt within the meaning of section 2(m) of the Act, in finding out the value of the assets, the amount of tax set apart in the balance-sheet should be taken into consideration and as no net wealth can be determined without ascertaining the value of the assets, this court can within the scope of the question referred decide whether for the purposes of determining the value of the assets the amount set apart in the balance-sheet for the payment of the tax should or should not be taken into consideration. He relies upon section 7(1) which has already been set out, and argues that the Wealth-tax Officer instead of determining separately the value of each asset held by the assessee when the assessee is a business company can take the balance-sheet into consideration in determining the net value of the assets of the business. But this sub-section does not lay down that all items of the liability set out in the balance-sheet are bound to be deducted by the Wealth-tax Officer in determining the assets of the company. The liabilities which are likely to affect the value of the assets may be taken into consideration. But every amount which is set apart in the balance-sheet for discharging some liability which may be a contingent liability cannot be relevant for determining the value of the assets. If the liability which is set out in the balance-sheet is a debt in praesenti and not a contingent liability, in that event such an amount will be deductible from the value of the assets under the definition of the net wealth itself and not under section 7(1). In the present case the matter proceeded before the Tribunal and the department on the assumption that the value of the assets has been rightly ascertained under section 7 and the only question was whether in arriving at the net wealth the amount set apart to discharge a tax liability was to be deducted from such value of the assets or not and the point urged by the counsel for the assessee does not arise out of the order of the Tribunal.
The next question, however, is whether this amount could be deducted from the value of the assets for determining the net wealth of the assessee. The contention of the counsel for the department is that the tax liability does not become a debt till the assessment order is passed and the liability is quantified. Till the assessment order is passed, it remains a contingent liability. The liability in our opinion to pay the tax arises as and when the income is earned. The liability may be quantified after the assessment order has been passed but the liability cannot be said to be contingent arising only after the determination of the amount by the assessment order.
As observed by Lord Dunedin in the case of Whitney v. Inland Revenue Commissioners :
"....there are three stages in the imposition of a tax : there is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment. That, ex hypothesi, has already been fixed. But assessment particularizes the exact sum which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay."
This passage was quoted with approval in the case of Chatturam v. Commissioner of Income-tax by Kania J. Section 3 of the Income tax Act, which is the charging section, makes it clear that the liability to pay the tax arises as and when the income is made. The liability as said by Lord Dunedin has been ex hypothesi fixed by section 3 of the Income-tax Act. The counsel for the department even went so far as to suggest that the liability cannot be deducted unless the amount of liability is actually paid. If the amount is actually paid the question of deducting the amount would not arise. By actual payment the value of the assets has already been reduced and thus the question will only arise where the liability exists and it has not been discharged, but the amount has been set apart for the discharge of the liability. It cannot, therefore, be said that the liability to pay income-tax is a contingent liability depending upon the assessment order being made. The contingent liability will be one which will arise on the happening of a certain event. If the liability to pay tax arises when the income is made and does not depend upon the passing of an order of assessment, it cannot be said to be a contingent liability. When the money was set apart for the discharge of the tax liability, the liability was in existence and it could not be argued that it will come into existence only after the assessment order has been passed.
The next contention is that even though the liability may have arisen, the liability is not a debt till the amount is particularized. A debt may be defined to be a certain sum due from one person to another either by record, under a specialty or deed or under simple contract by writing or oral. It cannot be said that the tax amount becomes a debt only if it is quantified by an order of the assessing authority. The amount has been ascertained by the assessee himself. As the liability was there, the assessee sets apart certain amount which he thinks will be necessary for discharging the tax liability and thus the amount of the liability has been ascertained and it cannot be said that the amount is not a debt which can be deducted to find out the net wealth of the assessee. Reliance was placed by the counsel for the department on the case of Doorga Prosad Chamaria v. Secretary of State. Particular reference is made to the following passage at page 289 :
"The last objection to the certificate is that in column 4 no period for which the demand is due was stated as required by the heading to that column. In their Lordships opinion, although income-tax may be popularly described as due for a certain year, it is not in law so due. It is calculated and assessed by reference to the income of the assessee for a given year, but it is due when demand is made under section 29 and section 45. It then becomes a debt due to the Crown, but not for any particular period."
The point which came up for consideration in that case was whether the certificate was defective inasmuch as, in column No. 4, no period for which the demand was due was stated. Their Lordships pointed out that though income-tax is calculated with reference to income of an assessee for a particular period, it cannot be said to be due for that year. The tax can be technically called to be due for the year to the Crown when a demand is made. This case does not lay down that the tax liability does not come into existence till the demand is made. As observed by their Lordships of the Privy Council the debt becomes due to the Crown but not for any particular period. This case has no application to the point for consideration before us.
Reference may be made to the provisions of the Finance Act of 1959, by which section 2 of the Wealth-tax Act has been amended. Section 20 of the Finance Act provides that in section 2 of the Wealth-tax Act, 1957, in clause (m) after sub-clause (ii) the following sub-clause shall be inserted, namely :
"(iii) the amount of the tax, penalty or interest payable in consequence 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 data 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."
In our opinion this sub-clause which has been given retrospective effect only lays down that certain outstanding tax payable in consequence of any order passed under or in pursuance of the Income-tax Act will not be deductible if the assessee has in appeal, revision or otherwise claimed that he is not liable to pay that tax. Secondly, even if he has not claimed in appeal or revision, the amount will not be deductible if it has remained unpaid for a period of more than twelve months. This sub-clause does not deal with the case where the assessment order has not been passed and thus whether an amount set apart for the discharge of the tax liability without an order of assessment is deductible or not will depend upon the interpretation of the word "debt" and not of the amended sub-clause. The purpose underlying this amendment is very clear. If an assessee has challenged the amount of tax assessed in appeal, he cannot on the one hand take advantage of the wealth-tax and claim a deduction from the value of his assets and at the same time deny his liability to pay the said amount to the department. Further, if a tax has been assessed, the assessee cannot go on setting apart the amount in the balance-sheet for the discharge of the tax liability and thus claiming a deduction and not paying the amount of the tax. The purpose of the amendment is only to force the assessee after the assessment to pay the tax within a year. In cases where the tax has not been assessed, there is no default on the part of the assessee if he does not actually pay the tax. If, however, he sets apart the amount of the tax and has not been given benefit to deduct this amount from the value of the assets, the result will be that on account of the delay in assessment made by the department the assessee would suffer. Moreover, if the tax liability becomes a debt only after an assessment order has been passed there is no reason why such a debt should be permitted to be deducted only if it has been outstanding for less than a year.
It was then contended by Mr. Choudhuri that clause (b) of the newly added sub-clause (iii) to section 2 of the Wealth-tax Act is attracted and the assessee is not entitled to deduct this amount. The opening sentence of sub-clause (iii) makes it clear that it applies only to the amount of tax payable in consequence of any order passed under the Act and not to any other tax liability.
Before pronouncing the judgment Mr. Choudhuri drew our attention to the case of Kesoram Cotton Mills Ltd. v. Commissioner of Wealth-tax. We respectfully differ from the opinion expressed by the learned judges of the Calcutta High Court that the tax unless it is determined by the income-tax authorities is not a debt which can be deducted from the assets in determining the net wealth.
The question referred to us is answered in the affirmative.
The reference is answered in the affirmative with costs which we assess at Rs. 100.
DUTTA J. - I agree.
Question answered in the affirmative.