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Income-tax Referred Case No. 21 of 1963, decided on 14th July 1964.

S. 2 (m)-"Net wealth"-Computation Liabilities, when deductible.

Under section 2(m) of the Wealth-tax Act, 1957, in calculating the net wealth for purpose of levying wealth-tax, liabilities which have not matured into debts, that is, liabilities which cannot be considered as debitum in praesenti which are payable either in praesenti or in future cannot be allowed.

[Cases referred to.]

C. T. Peter for the Commissioner.

P. K. Kurian, K. A. Nayar, V. Desikan and K. Sukumaran for the Assessee.

-This is a reference by the Income-tax Appellate Tribunal, Madras Bench, under section 27 (1) of the Wealth-tax Act, 1957. The reference was at the instance of the Commissioner of Wealth-tax, Ernakulam.

The assessee is the Fertilisers and Chemicals, Travancore, Limited, Alwaye. The assessment years concerned are 1957-58, 1958-59 and 1959-60; and the relevant valuation dates are December 31, 1956, December 31, 1957 and December 31, 1958, respectively.

The question referred is worded as follows:

"Whether in the computation of wealth under section 2 (m) of the Wealth-tax, Act the assessee is entitled to claim the deduction from the wealth of the following two items:

(i) Reserve for gratuity to employees ; and

(ii) Reserve for leave salary to employees "

The facts necessary to answer the question properly are not available either in the order of the Tribunal in respect of the assessment year 1957-58 or in its consolidated order in respect of the assessment years 1958-59 and 1959-60. The statement of the case is equally nebulous, and in these circumstances all that we can say is that if the two reserves represent debts owed by the assessee on the valuation dates concerned, the assessee is entitled to a deduction, and if they do not, the assessee is not so entitled.

Section 3 of the Wealth-tax Act, 1957, is the charging section; and the wealth liable to taxation under that section is the net wealth of the assessee as on the valuation date. The definition of the expression "net wealth" in section 2 (m) of the Act makes it quite clear that the expression means 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 which are required to be included in his 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 those specified in that definition.

In other words, the net wealth assessable under the Act is the aggregate value of the assets, belonging to the assessee minus the aggregate value of the debts owed by him. As stated by us in Commissioner of Wealth-tax v. Travancore Rayons Ltd. ((1964) 54 I T R 332), though all debts are liabilities, all liabilities are not debts. We also pointed out in that decision-following the judgment of the Madras High Court in Commissioner of Wealth-tax v. Pierce Leslie & Co. Ltd. ((1963) 48 I T R 1005) that one of the essentials of a debt is "an ascertained or readily calculable amount"; that there should be a debitum in praesenti payable either in praesenti or in futuro.

In paragraph 2 of the order of the Tribunal for the assessment year 1957-58, it is stated that the gratuity payable to the employees of the assessee is in accordance with an agreement between the assessee and its employees. That agreement is not before us.

The following is an extract from paragraphs 2 and 3 of the order mentioned above:

"The assessee has calculated these two liabilities as mentioned above and we are of the opinion he is entitled to have them deducted from his net wealth due on a valuation date. In arriving at this decision, we are following the decision of the Bombay Bench A' of the Tribunal in W. T. A. No. 171 of 1958-59. The Departmental Representative has pointed out that the Bombay decision has allowed the liability on the basis of a liability and not as a debt. He also contends that section 2 (m) of the Wealth-tax Act applies.

We do not think sub-clause (3) of section 2 (m) any way changes the position. It only adds certain debts which are not to be treated as debts owed, i.e., those where an order has been passed and the payment thereof is outstanding or appealed against. It does not affect the original clause in any other way. We see no merit in this objection of the Departmental Representative."

The Tribunal is apparently labouring under some misapprehension. The decision of the Bombay Bench referred to by the Tribunal has not been made available to us. Perhaps a perusal of that decision may have afforded us an idea as to the nature and extent of the misapprehension.

Section 7 of the Wealth-tax Act, 1957, provides for the determination of the value of the assets. It says that the value of any asset, other than cash, for the purposes of the 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.

We can state the propositions we have in mind in the form of questions and answers:

(1) How is the value of the assets to be determined As provided in section 7.

(2) Should there be any deduction for liabilities in ascertaining the value of the assets under section 7 No.

(3) When do liabilities enter the picture Under section 2 (m) in calculating the net wealth which alone is accessable under section 3.

(4) Are all liabilities deductible under section 2 (m) No; only those liabilities which have matured into debts, that is, only those liabilities which can be considered as a debitum in praesenti which is payable either in praesenti or in futuro.

In the light of the paucity of data and the necessary paper we can only clarify the position as above; and require the Appellate Tribunal under subsection (5) of section 27 of the Wealth-tax Act, 1957, to make the necessary modifications in the case as stated by them in order to enable us to determine the question of law raised thereby. We do so.

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