1. These are appeals by the WTO against the orders of the AAC for the assessment years 1974-75 and 1975-76.
2. The point raised in these appeals is concerning the deduction of two amounts, namely, Rs. 4,02,026 and Rs. 3,12,084, respectively, for these two assessment years as debts owed by the assessee on the valuation dates. These amounts represented the amounts that were due on the valuation dates as the income-tax liability of late Shri Kumaraswamy Reddiar, father of the karta of the assessee-HUF, namely, Shri Radhakrishnan. The WTO considered that these two amounts were outstanding for more than 12 months on the respective valuation dates and, therefore, cannot be allowed as a deduction in the computation of the net wealth in view of Section 2(m)(iii)(b) of the Wealth-tax Act, 1957 ("the Act"). The assessee questioned the action of the ITO on two grounds. The first ground was that in the hands of the assessee-HUF the character of the liability is not that of income-tax payable but a liability like any other liability. The second ground was that the assessee has been given instalments, facility for the payment of these taxes, that the assessee had been keeping up the payment of such instalments without default and, therefore, it cannot be said that these amounts were outstanding for more than twelve months as envisaged under Section 2(m)(iii)(b). The AAC agreed with the assessee that these amounts cannot be considered to be income-tax liabilities to which the provisions of Section 2(m)(iii) would apply as they were the income-tax liabilities of late Kumaraswamy Reddiar. He considered that it was unnecessary to go into the question whether the amounts as tax were outstanding for more than twelve months He held that these liabilities should be allowed as a deduction. In doing this, he referred to the order of the Income-tax Appellate Tribunal, Cochin Bench, dated 3-5-1978, in IT Appeal No. 67 (Coch.) of 1977-78 in the case of the assessee itself for the assessment year 1974-75. The revenue is in appeal against this order of the AAC.3. It is contended that the AAC was in error in holding that these liabilities are not to be treated as income-tax liabilities of the assessee here. It is also contended that these are income-tax liabilities which have been outstanding for more than twelve months. On behalf of the assessee reliance is placed on the order of the Tribunal for this assessment year in the income-tax proceedings and it is submitted that this cannot be considered to be income-tax liabilities of the assessee so as to bring into play the provisions of Section 2(m)(iii)(b). It is also contended in the alternative that the taxes cannot be stated to be outstanding for more than twelve months as the assessee has been keeping up the instalments allowed to it for the payment of this liability. There has been no default on the part of the assessee and, therefore, it cannot be said that these amounts were outstanding on the valuation dates within the meaning of the term in Section 2(m)(iii)(b).
4. The facts in this regard as stated before us are these : Late Kumaraswamy Reddiar made a will on 22-9-1967 and died on 10-7-1968. The business carried on by this person devolved upon a HUF consisting of two sons, Radhakrishna Reddiar and Muthukrishna Reddiar. The business carried on by the late Kumaraswamy Reddiar was his proprietary business when he was alive, except for a short period when it was carried on by him in partnership with others. There is no dispute that on the date of the will, namely, 22-9-1967, the business was the proprietary concern of Kumaraswamy Reddiar. The assessments on Kumaraswamy Reddiar were reopened for the assessment years 1957-58 to 1963-64. There is also no dispute that during the previous years for those assessment years the business was the proprietary business of Kumaraswamy Reddiar and he was assessed as an individual. The liability that arose on such assessments amounted to about Rs. 11,00,000. This liability had become final and in fact was the subject of a settlement with the Commissioner. The mode of payment of the liability was also a part of the settlement and the liability was allowed to be paid in instalments after an initial lump sum payment of Rs. 5,00,000. One method by which the liability was to have been met was for the department to purchase at an agreed price of about Rs. 1 lakh, the property that originally belonged to Kumaraswamy Reddiar and subsequently devolved upon the assessee-HUF. It would appear that this particular part of the settlement term has not so far been put through. The payments have been made in the instalments which were fixed at the time of settlement at certain figures but which were subsequently modified at the request of the assessee here from time to time. It is the balance amounts that were so outstanding that were claimed as deductions by the assessee here.
5. The assessee under appeal is a HUF of which Radhakrishna Reddiar is the karta. The HUF consisting of Radhakrishna Reddiar and Muthukrishna Reddiar, that came into being on the death of Kumaraswamy Reddiar, got partitioned on 12-3-1972. Under this partition, Radhakrishna Reddiar took over the cloth business (which was run by Kumaraswamy Reddiar originally) and also the income-tax liability. The settlement with the department took place on 2-2-1972.
6. On the instalments that were allowed to be paid by the assessee in respect of the tax liability of Kumaraswamy Reddiar for the assessment years 1957-58 to 1963-64, the ITO levied interest under Section 220(2).
For the assessment year 1974-75, the assessee had claimed a deduction of the interest in the computation of its income. This was the subject of the appeal before the Tribunal in IT Appeal No. 67 (Coch.) of 1977-78. The Tribunal has held that this was clearly not the tax liability of the assessee-HUF but the tax liability of Kumaraswamy Reddiar which has been taken over by the assessee-HUF along with the cloth business. Thus, it was like any other liability. The example considered by the Tribunal for the purpose of comparison was the liability to the bank. On this reasoning, the Tribunal held that the interest levied on the assessee by the ITO under Section 220(2) in "respect of the tax liability of Kumaraswamy Reddiar for the earlier assessment year should be allowed as a deduction in the computation of the business income.
7. It has been argued by the departmental representative that this is an income-tax liability on the assessee under Section 159. It is only on this basis that interest under Section 220(2) has been levied on the assessee-HUF and is, therefore, within the purview of Section 2(m)(iii) as the tax liability of the assessee. It is submitted that the genesis for the liability contemplated under Section 2(m)(iii) should be one of the direct tax enactments. If the liability arose under or in pursuance of such enactments, then, it would satisfy the description of this liability as given in Section 2(m)(iii). It is further submitted that the mere fact that Shri Kumaraswamy Reddiar was not alive at the time when this was levied and the further fact that the liability was taken over by the assessee by virtue of the partition on 12-3-1972 would not render such tax liability as not liability to income-tax as contemplated under Section 2(m)(iii). It is pointed out that the Calcutta High Court in CWT v. Jhagrakhand Collieries (P.) Ltd. [1968] 67 ITR 572 has held that the subsequent issue of a certicate by the Certificate Officer, that is, subsequent to the raising of the demand as an income-tax liability, would not denature the income-tax demand.
It is urged that the original nature of this liability as income-tax payable would not be obliterated by the fact that the liability has been taken over by the assessee in a partition along with the business assets. It is further stated that the order of the Tribunal in the income-tax proceedings of the assessee for the assessment year 1974-75 has only held that the interest levied under Section 220(2) is to be allowed as a deduction in view of the circumstances of the case, namely, the take over of the liability by the assessee. It is submitted that the Tribunal's order has not converted this liability into a non-income-tax liability.
8. On the question whether these amounts could be considered to be outstanding on the valuation dates, it is urged that the word "outstanding" appearing in Section 2(m}(iii) should be given its natural meaning of its describing merely an obligation without the further overtone of its being an obligation due in point of time on the valuation date. It is pointed out that in spite of the granting of instalments, the amounts should be considered to be outstanding on the valuation dates and if the assessee commits a default in any instalment the whole amount would become due immediately as provided in Section 220(5) of the Income-tax Act.
9. On behalf of the assessee, it is urged that the Tribunal has held these amounts as not income-tax liability. This according to the assessee would conclude this facet of the case. It is urged that the liability does not relate to the assessee and, therefore, even the provisions of Section 40(a)(iia) would not apply to this liability. It is argued that the liability to the assessee arose out of a contract, namely, the settlement with the Commissioner. It is not a liability which can be compared to the normal income-tax liability of an assessee. It is pointed out that Section 2(m)(iii) refers to a dispute of the demand by an assessee. The assessee here has not disputed this demand. It is submitted that in view of this part of Section 2(m)(iii), it is necessary that the tax liability for being considered under Section 2(m)(iii) should be the tax liability of the assessee and not the tax liability of any other person which the assessee was required to discharge. It is further submitted that the instalments granted for liquidating this tax liability have been scrupulously adhered to by the assessee. If any variation was required in such instalments, the assessee has sought the permission of the authorities for such variation which permission has also been granted to the assessee here.
In these circumstances, it is submitted that in view of the decisions of the various High Courts, these two amounts cannot be considered to be outstanding on the relevant valuation dates.
10. We have carefully considered the submissions. We are of the opinion that the AAC has not been correct in holding that Section 2(m)(iii) would not apply to the two amounts claimed as liabilities and, therefore, for deduction by the assessee in these two assessment years (sic). The assessee has relied upon the order of the Appellate Tribunal, Cochin Bench, for the assessment year 1974-75 under the income-tax proceedings. It is true that the Tribunal had held that this cannot be treated as an income-tax liability of the assessee so as to disentitle the assessee for the deduction of the interest paid under Section 220(2) of the Income-tax Act. But this order of the Tribunal must be considered to have been given only for the purpose of deciding the claim that was before it, namely, whether the interest under Section 220(2) of that Act can be allowed as a deduction in the computation of the business income of the assessee in view of the fact that this particular liability did not relate to any assessments made on the assessee here but related to assessments of the income of the father of the karta of the assessee here and that the assessee has only taken over such liabilities along with the business left by the father.
We do not think that this order of the Tribunal can be extended to hold that these sums for the two assessment years do not represent the category of liability considered under Section 2(m)(iii), namely, the amount of tax, penalty or interest payable in consequence of any order passed under or in pursuance of any law relating to the levy of what is generally described as the direct taxes. This included income-tax, wealth-tax, gift-tax, expenditure tax and estate duty. On behalf of the assessee, the provisions of item (a) of Sub-clause (iii) of Clause (m) has been pointed out. This particular item refers to an item outstanding on the valuation date claimed by an assessee in appeal/revision or other proceedings as was not paid by him. It is seen from the papers submitted by the assessee before us that the settlement was evidenced by an agreement which has been entered into by the karta of the HUF as the legal heir of late Kumaraswamy Reddiar. Since Radhakrishna Reddiar is the legal heir of the deceased Kumaraswamy Reddiar, the assessments in respect of these assessment years would have been made on Radhakrishna Reddiar even if no settlement has been reached and Radhakrishna Reddiar would have been able to agitate the liability in appeal/revision or under other proceedings. In that sense he would be an assessee satisfying the requirements of item (a) of Sub-clause (iii) of Clause (m) of Section 2.
11. It has been pointed out by the departmental representative that the mere facts of the devolution of the property of Kumaraswamy Reddiar, the subsequent partition and the passing of the order of the Tribunal in the income-tax appeal proceedings would not denature the income-tax liability. The departmental representative has relied on the decision of the Calcutta High Court in Jhagmkhand Collieries (P.) Ltd. (supra).
We consider that this decision does support the stand taken by the department that these amounts which arose as liability under the Income-tax Act does not cease to be income-tax liability merely because there has been a partition of a HUF under which such liability has been taken over by one member of the family.
12. However, we feel that the assessee's claim that these amounts cannot be considered to be outstanding on the valuation dates should be considered on merit. The assessee has relied on a number of decisions.
These are: CWT v. Banarashi Prasad Kedia [1970] 77 ITR 159 (Cal.), Moti Lal Padampat Sugar Mills Co. (P.) Ltd. v. CWT [1970] 77 ITR 583 (All.), J.K. Cotton Manufacturers Ltd. v. CWT [1971] 80 ITR 34 (All.), J.K.Cotton Spg. &Wvg. Mills Co. Ltd. v. CWT [1971] 80 ITR 685 (All.), CWT v. Padampat Singhania [1972] 84 ITR 799 (All.) and CWT v. Kantilal Manilal [1973] 88 ITR 125 (Guj.). These decisions do support the claim of the assessee that the amounts in question cannot be considered to be outstanding for more than twelve months on the valuation dates. This is particularly with reference to the claim advanced on behalf of the assessee that the assessee has been keeping up the payment of instalments as directed from time to time by the income-tax authorities. This, however, requires to be verified as the departmental representative was not able to state before us that this claim of the assessee is to be taken as having been verified. We consider that the matter should go back to the AAC for the purpose of verifying the factual position, namely, whether the assessee has been keeping up the instalments and not defaulted in the instalments on the valuation dates. If the assessee has been keeping up these instalments without default, then the ratio of these decisions would clearly apply and the assessee would be entitled to the deduction as such deductions cannot be considered to be prohibited by Section 2(m)(iii)(a). The AAC will verify this and allow the claim of the assessee if the factual position points to this. He will allow both the ITO and the assessee an opportunity in this regard so that the facts regarding the payment of the instalments without default can be properly verified.