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Matter No. 178 of 1960, decided on 14th May 1962.
Value of assets‑Balance‑sheet‑Assets re‑valued at higher figure Adjustment whether necessary --Net‑wealth-- Deductions‑Proposed dividends Provision for taxation‑Whether allowable deductions‑Wealth‑tax Act, 1957, Ss. 2 (m) & 7.
In 1950 the assessee had revalued its fixed assets and had added, without reservation or qualification, a sum of Rs. 1,45,87,000 to the value at cost, a corresponding balancing figure being shown under "Reserve and Surplus". The assets as so revalued were shown in its balance‑sheet on March 31, 1957, at Rs. 2,60,52,357. For the purposes of wealth‑tax the department took the value of the fixed assets as given by the assessee in its balance‑sheet whereas the assessee contended that the sum of Rs. 1,45,87,000 ought to be deducted from that value. On a reference:
Held, that in the absence of any grounds to show that the assessee's valuation of the assets was not correct the wealth‑tax authorities were entitled to accept the valuation made by the assessee itself as the net value. The sum of Rs. 1,45,87,000 was not to be deducted.
The assessee had shown in its balance‑sheet for the year ending March 31, 1957, certain amounts against proposed dividends and provision for payment of income‑tax and super tax. The question was whether those amounts were deductible in ascertain ing its net wealth on March 31,1957, which was the valuation date, for the purposes of wealth‑tax :
Held, (i) that a dividend proposed by the directors did not become a debt until it was declared by the company in a general meeting. The amount shown by the assessee against the proposed dividends in its balance‑sheet was not a "debt owed" on the valuation date and was not deductible from the total assets in computing the net wealth of the assessee.
(ii) That although the assessee was liable to pay income‑tax on the valuation date the actual amount of the liability was not ascertained until some time thereafter by the passing of the Finance Act and the determination made by the income‑tax authorities. No debt towards income‑tax and super tax was owed by the assessee on the valuation date. Provision for payment of income‑tax and super tax made in the assessee's balance‑sheet was not a debt owed on the valuation date within the meaning of section 2 (m) of the Wealth‑tax Act, 1957, and was not deductible in computing the net wealth.
All liabilities are not debts and for the purposes of section 2 (m) it is only liabilities which have ripened into "debts owing" that can be taken into account. To merit deduction under section 2 (m) the liability must not only be a debt but one solvendum in praesenti. A debt accruing is not within the section:
[Case‑law referred]
By this application presented on 28th March 1960, the assessee requires the Appellate Tribunal to refer to the High Court certain, questions of law which are said to arise out of the order of the Appellate Tribunal in W. T. A. No. 31 of 1958‑59 dated 23rd September 1959/5th February 1960. Inasmuch as, in our opinion, questions of law do arise out of the aforesaid order, we hereby draw up an agreed statement of the case and refer it to the High Court under section 27 of the Wealth‑tax Act.
2. The assessee is a company incorporated under the Indian Companies Act. The subscribed capital of the company at the end of the relevant accounting year was Rs. 2,29,99,125. It disclosed in the balance‑sheet under the head 'of fixed assets as per Schedule "D" annexed to the balance‑sheet, the value of the fixed assets, being Rs. 2,60,52,357. In the said Schedule "D" it was disclosed that the original cost of these assets was Rs. 2,30,32,833. There was a revaluation of the assets during the year ending upon 31st March 1950. On revaluation, an amount of Rs. 1,45,87,000 was added to the value at cost and after certain adjustments, the total amount of Rs.‑2,60,52,357 was arrived at. The balance‑sheet along with the schedules annexed to the same as on 31st March 1957, is made a part of this case as Annexure "A". The assessee undertakes to produce the printed copy of the balance‑sheet before the High Court at the time of hearing. In computing the net wealth of the assessee, the Wealth‑tax Officer took the balance‑sheet figures. It was contended that the value of the fixed assets was increased for balance‑sheet purposes and it should be adjusted to the value at cost and thereby eliminated by the amount of Rs. 1,45,87,000. The Appellate Tribunal held that according to section 7 (1) of the Wealth‑tax Act, the value of any asset, other than cash, for the purposes of this Act, should 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. But, according to section 7 (2), notwithstanding anything contained in sub section (1) (a), where the assessee was carrying on a business for which accounts were maintained by him regularly, the Wealth‑tax Officer might, instead of determining separately the value of such 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 adjustment therein as the circumstances of the case might require. The contention of the assessee was that the Wealth -tax Officer should have to make an adjustment even though he based his valuation of the net assets upon the balance‑sheet of the assessee and in making assessment he should consider that the assets should be taken at cost less depreciation. The Appellate Tribunal held that in the year ending upon 31st March. 1950, the assessee found as a fact that the value of the assets as per account books being the cost price of the assets was not the actual price of those assets and, therefore, it valued these properly and increased the value of the assets by Rs. 1,45,87,000 and as a result of revaluation, there was a surplus, which surplus, was transferred to the account under the head of "reserve and surplus". This state of affairs of the company was placed before the shareholders and passed as such. It continued to be so for years till the assessment year under review and the shareholders knew that the assets as per accounts were valued at the revised figure. The adjustment under section 7 (2) did not contemplate an adjustment of ignoring the revaluation of the assets according to the company itself.
3. In the profit and loss account, a pro4ision was made for proposed dividend although the same had not actually been declared up to the valuation date. The assessee contended that the provision for the dividend should be deducted from the aggregate value of the assets in arriving at the net wealth of the assessee for the purpose of the Wealth‑tax Act. The Appellate Tribunal held that, unless a debt was created by the assessee at the valuation date, the Act did not permit a deduction for such an amount and a provision for a proposed dividend was not a debt owned by the assessee.
4. In the accounts, provision was made for the estimated amount of income‑tax and super tax in respect of the year of account. It was contended on behalf of the assessee‑company that the amount so provided should .be deducted from the aggregate value of the assets in determining the net wealth of the assessee for purposes of wealth‑tax. For the reasons given by the Appellate Tribunal in its order, it held that such a provision was not a debt owed by the assessee on the valuation date and, therefore, the claim could not be accepted. The order of the Tribunal is made' a part of this case and is Annexure "B".
5. From the above facts and circumstances, the following questions of law arise:
"(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 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 "
S. Mitra, Dr. D. Pal and R. K. Chaudhury for the Assessee.
E. R. Meyer with B. L. Pal for the Commissioner.
‑‑This is a reference under section 27 (1) of the Wealth‑tax Act of 1957 for determination of the following:
"(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 the total assets
(3) Whether, on the facts and 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 facts are as follows:
The assessee is a company incorporated under the Indian Companies Act. Its subscribed capital at the end of the relevant accounting year was Rs. 2,29,99,125. In Schedule "D" annexed to the balance‑sheet its fixed assets were shown as being worth Rs. 2,60,52,357, the original cost of the same being Rs. 2,30,32,833. The assets had been revalued during the year ending on March 31, 1950, when a sum of Rs. 1,45,87,000 was added to the value at cost. On the valuation date the figure of Rs. 2,60,52,357 was arrived at after making certain adjustments. The first question relates to this revaluation. The contention of the assessee is that the increase of Rs. 1,45,87,000 ought to be ignored altogether in computation of the net wealth under the Act. This amount has been shown in Schedule "E" to the balance‑sheet as capital reserve not available for dividend. In the profit and loss account a sum of Rs. 15,29,855 has been shown as the amount of dividend proposed to be distributed for the year ending of March 31, 1957. This dividend was declared by the company at the general meeting held on November 27, 1957. As the declaration was made after the accounting year the wealth-tax authorities rejected the assessee's contention that‑ the amount of the net wealth should be computed after giving a deduction for the above. Provision was also made in the balance‑sheet for income‑tax and super tax payable by the company for the year' of account and a claim for deduction of the same in computation of the net wealth was raised. This too was not accepted by the wealth‑tax authorities on the ground that there was no debt owed by the assessee on the valuation date:
Before going into the merits of the case it is necessary to note the ‑relevant provision of the Wealth‑tax Act. Section 2 (m) of the Act defines "net wealth" as 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 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 certain debts not relevant for the purpose of this reference. Under section 2 (q) "valuation date" in relation to any year for which an assessment is to be made under the Act, means the last date of the previous year as defined in clause (ii) of section 2 of the Income‑tax Act if an assessment were to be made under that Act for that year. Section 3, the charging section, provides that a tax in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company shall be charged for every financial year commencing on and from the first day of April 1957, at the rate or rates specified in the schedule. Section 7 lays down how the value of the assets are to be determined for the purpose of the Wealth‑tax Act. The relevant provision thereof is as follows:
(1) The value of any assets, 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 subsection (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.
It would therefore appear that under subsection (1) of section 7 the Wealth‑tax Officer is called upon to value the assets on the estimate of what the same would fetch if sold in the open market on the valuation date. Where the assessee carries on business for which accounts are regularly maintained, the Wealth‑tax Officer may, instead of valuing each asset separately, determine the net value of the assets of the business as a whole having regard to the balance‑sheet of such business making necessary adjustments therein. In this case we are not concerned with the question as to whether the word "may" in clause (a) of subsection (2) means "shall". The wealth‑tax authorities have proceeded on the valuation of the assets given in the balance‑sheet and the question is whether they were justified in ignoring the claim for deductions made by the assessee. Under section 211 of the Companies Act of 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 and the same must be in the form set out in Part I of Schedule VI or as near there to as possible. Column 3 of Part I of Schedule VI is headed "fixed assets". There under, distinction has to be made as far as possible between expenditure upon goodwill, land, buildings, leaseholds, railway siding, plant and machinery, furniture and fittings, development of property, patent, trade mark and dealings, livestock and vehicle, etc. Under column 4 it is obligatory on a company to show under each head the original cost and the additions thereto and deduction therefrom made during the year and the total depreciation written off or provided up to the end of the year. Further, where sums have been written off on a reduction of capital or revaluation of assets every balance‑sheet (after the first balance‑sheet) subsequent to the reduction or revaluation, shall show the reduced figures along with the date of the reduction, in place of the original cost. Similarly, where sums have been added by writing up the assets, every balance- sheet subsequent to such writing‑up shall show the increased figures with the date of the increase in place of the original cost. Each balance‑sheet for the first five years subsequent to the date of writing‑up shall also show the amount of the increase made.
So far as the first question is concerned, there is little room for controversy. Under section 7(1) of the Act the Wealth‑tax Officer is to estimate the market value of the property but in the case of an assessee carrying on business the net value of the assets nay .be determined as a whole having regard to the balance‑sheet of the business with proper adjustments. If the balance‑sheet of the assessee shows the value of the assets to be X there is no reason why X should not be taken to be the net value for the purpose of the Wealth‑tax Act unless there is any compelling reason for any deduction. When the company revalu ed its fixed assets in 1950, at a figure exceeding the book value thereof by Rs. 1,45,87,000, it must be because it was felt that the book value did not represent the correct value of the assets. The increase in valuation was subject to no reservation or qualifi cation. As the value of the assets was increased a corresponding balancing figure had to be introduced under "reserve and surplus". This was done by showing a capital surplus of Rs. 1,45,87,000, i.e., the exact figure which represented the increase in the value of the assets. This, however, does not mean that if the value of the assets of the company had to be determined on a date subsequent to the revaluation the figure of Rs. 1,45,87,000 should be deducted from the revalued assets. This would result in the value of the assets being taken on the basis of the cost thereof less depreciation. This method ought not to be adopted in a case where the company itself felt that its assets were worth much more than the actual cost thereof. It is not necessary to speculate as to what would have happened if there had been no revaluation of the assets in 1950 and whether the wealth‑tax authorities would be justified in making a valuation of the assets themselves if they felt that the balance‑sheet did not give a true and correct‑figure of the value of the assets. It was argued on behalf of the assessee that section 7(2) of the Act shows that the entire balance‑sheet of the company must be taken into consideration to find out the net value of the assets of the business and in this case, where a capital reserve of Rs. 1,45,87,000 had been created against the in crease in, the value of the assets, the same should be deducted from the increased value, as an adjustment to be made under clause (a) of subsection (2) of section 7. I find myself unable to accept this. The value of the assets was not properly represented by the book value borne in the books of the company in the year 1950 and that is why the company found it necessary to revalue the same. A reserve or, surplus had to be shown as against this increase; otherwise the figures on the right hand side and the left hand side would not have tallied but this does not mean that in determining the net value of the assets the increase ought to be ignored. If for any reason the value of the plant and ‑machinery of the company had gone down between the years 1950 and 1957 by reason of a general fall in the market value thereof, or by reason of damage caused by fire or accident, it would be obligatory on the company to revalue the fixed assets but in the absence of such revaluation arid in. the absence of any ground to show that the company's valuation of the assets was not correct the wealth‑tax authorities are entitled to accept the valuation made by the assessees themselves.
The second question too is a simple one. No doubt the dir ectors of the company had proposed to declare a dividend for the year ending on March 31, 1957, but in order that the amount of the proposed dividend should be deducted from the value of the assets it is necessary that the same should be a "debt owed" by the assessee on the valuation date. A dividend proposed, by the directors does not become a debt until it is declared by the com pany in a general meeting. It would be open to the company to override the suggestions of the directors and determine that the dividend ought not to be declared in view of the financial position of the company or it may be that in between the proposal by the directors and the date of the general meeting the company's posi tion may have altered to such an extent as to necessitate the preservation of the liquid cash for meeting the expenses of the company. These are contingencies which normally do not happen. In any event, it was not open to any shareholder to say that the company was indebted to him in a certain amount as dividend before the declaration of the same at the general meeting. No shareholder can sue a company for payment of a dividend unless it is sanctioned at a general meeting.
The third question is one of some nicety and depends upon the proper construction of various sections of the Income‑tax Act. It was argued on behalf of the assessee that the liability to pay income‑tax arose as soon as anybody engaged in business and although it might be quantified by the income‑tax authorities after the valuation date the liability continued in existence throughout the accounting year including the said date and as such there was a debt which ought to be taken into account in computing the net wealth of the assessee. This argument is attractive but not entirely sound. Until the close of the year, i.e., the valua tion date which in this case was March 31, 1957, it was not possible to say whether as a result of the whole year's working the assessee would incur any liability to income‑tax for the accounting year. It is not difficult to imagine a case where an assessee goes on making profits from the beginning of the year of account to, say, the 15th March of the next year and in between March 15 and March 31 he suffers losses which not only wipe out his profits but make him a loser in respect of the business on the whole year's working. Even in a case where an assessee suffers no loss during the accounting year and it is possible to compute his income on the valuation date the exact amount of the liability to tax cannot be ascertained on that date because the rate of income‑tax is fixed every year by the Finance Act on a date after April 1. There is no room for doubt that a debt must be for a liquidated sum of money and it can be either owed or accruing. In Sabju Sahib v. Noordin Sahib ((1898) I L R 22 Mad. 139) it was held that unless there was a liability to pay, a liquidated sum of money there was no debt, following the English decision in Johnson v. Diamond ((1855) 11 Exch. 73). In that case it was further held that, where it was not possible to say before the taking of accounts as to what the exact amount of liability would be, there was no debt. This judgment was ap proved of by a Full Bench of the Madras High Court in Doraisami Padayachi v. Vaithilinga Padayachi ((1916) I L R 40 Mad. 31). There it was held that the word "debt" ordinarily meant a sum payable in respect of a money demand recoverable by action. Sabju Sahib's case was relied on by a Bench of this court in Bisseswar Roy v. Durgadas Mehara ((1905) I L R 32 Cal. 418). The question was more elaborately dealt with in the Full Bench case of Banchharam Majumdar v. Adyanath Bhattacharjee ((1909) I L R 36 Cal. 936). There, Jenkins C. J. relied on the definition of debt given by Lord Lindly L. J. in Webb v. Stenton ((1883) 11 Q B D 518) and said that "a debt is a sum of money which is now payable or will become payable in future by reason of present obligation." Mookherjee, J. referred to the case of People v. Arguello ((1869) 37 Calif 529), where the Supreme Court a debt of California had pointed out the difference between which was due and payable and one which was promised be to paid at a future date. To quote the words of the judgment in that case "debts are of two kinds : solvendum in praesenti and solvendum in futuro . . . . A sum of money which is certainly and in all events payable is a debt, without regard to the fact whether it be payable now or at a future time." Mookherjee, J. also relied on Sabju Sahib's case.
In Webb v. Stenten the question was whether the income of a judgment‑debtor arising from a fund vested in trustees payable half yearly in February and August could be attached in their hands when it appeared that the last half yearly payment had been made and there was no money in their hands at the time of attach ment. Lindley L. J. observed there (page 527) : "I should say, apart from any authority, that a debt legal or equitable can be attached whether it be a debt owing or accruing ; but it must be a debt, and a 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. An accruing debt, therefore, is a debt not yet actually payable, but a debt which is represented by an existing obligation."
To merit deduction in the computation of net wealth the liability must not only be a debt but one solvendum in praesenti.
To consider the question from the point of view of the Income‑tax Act : Under section 3 tax is to be charged for any year at the rate or rates prescribed for that year in accordance with and subject to the provisions of the, Income‑tax Act. Sec tions 6 to 12 lay down how computation of different income is to be made. A return of income has to be furnished under section 22. Assessment is then made under section 23. Under subsection (1) of section 23 it can be done on the basis of the return if the Income‑tax Officer is satisfied there with ; otherwise the Officer has to call upon the assessee for production of evidence to show that the return made is correct and complete: After hearing the evidence the Income‑tax Officer has to assess the total income of the assessed and determine the sum payable by him on the basis of such assessment under subsection (3). Of necessity, such determination and assessment will be after the year of account. Section 29 lays down that the Income‑tax Officer must serve upon the assessee a notice of demand in the prescribed form specifying the sum payable by him. Under sec tion 45 an assessee is to be deemed to be in default in payment of tax unless he pays within the time limit fixed by the section. The mode and time of recovery of tax are laid down in section 46. No doubt there are provisions in the Act for deduction of tax at source under section 18, for advance payment under sec tion 18‑A and provisional assessment under section 23‑B, but these sections to my mind do not affect the present case. Sections 18 and 18‑A only provide for the collection of income‑tax on "pay as you earn" basis on the hypothesis that the assessed will be found liable to pay the taxes deducted or paid in advance. An assessment under section 23‑B will create a debt beyond doubt. The position under the Income‑tax Act was thus summed up by the Judicial Committee in the case of Doorga Prosad Chamaria v. Secretary of State ((1945) 13 I T R 285): " . . . .. . 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."
Learned counsel for the assessed referred to the case of O'Driscoll v. Manchester Insurance Committee ((1915) 3 K B 499), in support of his argument that there may be a debt even though the amount does not become certain before the taking of accounts. The facts there were as follows: An insurance committee acting under the National Insurance Acts, 1911 and 1913, and the regulations made thereunder, entered into an agreement with the panel doctors of their districts by which the whole amounts received by the committee from the National Insurance Commissioners were to be pooled and distributed among the panel doctors in accordance with a scale of fees ; the total amount available for medical benefit so received by the committee was to be the limit of their liability to the panel doctors and, if the total pool was insufficient to meet all the proper charges of the panel doctors in accordance with the scale, there was to be a pro rata reduction for each doctor, and on the other hand, if it should be in excess of the amount required the balance was to be distributed among the panel doctors. It was held that where a panel doctor had done work under his agreement with the insurance committee, and the committee had received funds in respect of medical benefit from the National. Insurance Commissioners, there was debt owing or accruing from the insurance committee to the panel doctor which could be attached under Order XLV, rule 1; notwithstanding that as a matter of calculation the exact share payable to him may not have been then ascertained. Under Order XLV, rule 1, not only a debt owed but a debt accruing could be attached. Swinfen Eady L. J observed (page 512) : "By article 37 of the National Health Insurance (Medical Benefit) Regulations. (England), 1913, which are applicable to Mr. Sweeny's contract of January 1914. As soon as may be after the expiration of each quarter the committee shall pay to each practitioner such sum as may be agreed between the committee and the panel committee in advance of the amount due to him. There is therefore a statutory obligation on the committee to pay to the panel doctors a quarterly sum on account, the amount of which is to be determined as therein provided . . . That being so, Dr. Sweeny had on April 9, 1914, become entitled to a pay ment on account for work done, and that right was not subject to be divested by any contingency . . . Here there is a debt, uncertain in amount, which will become certain when the accounts are finally dealt with by the insurance committee. Therefore there was a 'debt' at the material date, though it was not presently payable and the amount was not ascertained. It is not like a case where there is a mere probability of a debt as, for instance, where a person has to serve for a fixed period before being entitled to any salary, and he has served part of that period at the time the garnishee order nisi is served." The words in Order XLV are "debts owing or accruing" and it was pointed out by Bankes L. J. that "debts owing or accruing include debts dehita in praesenti solvenda in futuro."
In our case a debt accruing will not be within the section ; it must be debt owed.
The observations of Lord Dunedin in Whitney v. Commissioners of Inland Revenue (1926 A C 37) with regard to the scheme of the English Income‑tax Act have often been relied on in India. His Lordship said (page 52): "Now, 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‑hypothesis, has already been fixed. But assessment particularizes the exact sum which a person liable has to pay". In Chatturam v. Commissioner of Income‑tax ((1947) 15 I T R 302), Kania, J., delivering the judgment of the Federal Court, observed : "The income‑tax assessment proceedings com mence with the issue of a notice. The issue or receipt of a notice is not, however; the foundation of the jurisdiction of the Income-tax Officer to, make the assessment or of the liability of the assessees to pay the tax . . . . . The liability to pay the tax is founded on sections 3 and 4 of the Income‑tax Act, which are the charging sections. Section 22, etc., are the machinery sections to determine the amount of tax." Referring to the above pronounce ments of Lord Dunedin, his Lordship said: "In India these well considered pronouncements are accepted without reservation as laying down the true principles of taxation under the Income‑tax Act."
The above statement of law was amplified by the Supreme Court in Chatturam Horilram Ltd. v. Commissioner of Income-tax ((1955) 27 I T R 709) : Under the scheme of the Income‑tax Act the income of an assessee attracts the quality of taxability with reference to the standing provisions of the Act but the playability and the quantification of the tax depend on the passing and application' of the annual Finance Act. Thus, income is chargeable to tax independent of the passing of the Finance Act but until the Finance Act is passed no tax can be actually levied."
It was argued however that the rules framed under the Wealth-tax Act and the forms prescribed thereunder go to show that the liabilities of an assessee are to be disclosed and taken into account in the computation of the net wealth. The power to make rules is given by section 46 of the Act. Reference was made to Forms A and B which are prescribed under the rules. Form A is the form of return of net wealth under subsection (1) or subsection (2) of section 14 of the Act and is to be used by individuals and Hindu undivided families only. Form B is a similar form for use by companies only. Annexure XII, to Form A is headed "statement of debts located outside India owing by the assessee other than those included in Annexure XI". There is a note at the foot of this annexure which reads "debts which are purely in the nature of contingent liabilities should not be included in Annexure XI or XII". From 'this it was sought to be argued that all liabilites unless they were contingent were meant to be included. A similar contention was raised with regard to Annexure III of Form B under which there is a heading of "current liabilities". Annexure III is to contain a statement of debts located in India owing by the company. Annexure VI to Form B is for statement of debts located outside India owing by the company. Under this annexure there are four heading, the third heading being for "current liabilities" and the fourth for "ascertained liabilities treated as contingent‑liabilites". Counsel for the assessee argued that all this went to show that the liabilities mentioned in. these forms were received by the expression "debts owed" in clause (m) of section 2 to the Act. Counsel also referred to the form of balance‑sheet prescribed under the Companies Act under which "current liabilities" have to be shown. In my view, the use of the expression "liabilities" and 'current liabilities" in the form cannot control the meaning of the expression "debts owed" in clause (m) of section 2 to the Act. As has been pointed out in numerous cases all debts are liabilities but all liabilities are not debts and to merit deduction under section 2(m) it is only liabilities which have ripened into "debts owed" that can be' taken into account.
The result therefore is that although the assessee was liable to pay income‑tax on the valuation date the actual amount of the liability was not ascertained until sometime thereafter by the pass ing of the Finance Act and the determination made by the Income-tax authorities. In any case no debt was owed by the assessee on the valuation date. It is unfortunate that an assessee who cannot retain a portion of his wealth because he is under a liabi lity to the State to pay it by way of income‑tax and super tax should yet be called upon to pay wealth‑tax without such deduction. But in the absence of the liability ripening into a debt owed I do not see my way to accept the assessee's contention that 'the liability should be taken into account in computing the net wealth.
The answers to the questions put therefore are as follows:
Question No. 1 in the affirmative.
Question No. 2 in the negative.
Question No: 3 in the negative.
The assessee must pay the costs of this reference.
I agree with the conclusions arrived at and the answers given by my Lord, but I intend to add a few words on Question No. 3 only, which runs as follows :
"(3) Whether, on the facts and 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 "
In other words, the answer to the said question would really depend on the meaning of the words "debt owed" in section 2(m) of the Wealth‑tax Act, 1957 (hereinafter called the Act).
If we look into the provisions of the Act itself, the Legislature, apart from the said words "debt owed", has mentioned the words "debt secured" and "debt incurred" in the said section 2(m) itself and the words "debt owing" in sections 4(3) and 7(ii) of the Act. The words "debt owed" have not been used anywhere else in the Act. Neither do they appear in the Wealth-tax Rules, 1957 (hereinafter called the Rules) nor in the forms prescribed thereunder.
Debts might be of various kinds, viz., absolute and condi tional, which are payable at once or in future. Debts might also be "owing and accruing", accruing due" or "growing due" etc., and the expressions were used as such at different places.
Mr. Mitter appearing on behalf of the applicant argues' that according to the Concise Oxford Dictionary, debts is defined as a sum payable and therefore provision for payment of income‑tax in the instant case is a "debt owed" in the same sense. But the word "debt" has been defined by Dr. Murray in his New English Oxford Dictionary (1897 edition) "that which is owed or due'". It originates fro the Latin word "debitum" which was sometimes artificially spelt "debts" from lath to 16th century, after which the word "debt" became the English spelling. To quote Shakespeare in Hamlet as stating "to pay ourselves what to ourselves is debt". Shakespeare also said in Merchant of Venice. "He would rather have Antonio's flesh than twenty times the value of the sum that he did owe him". Milton also said at different places in his works "He owed his wealth to his father"; "He owed his victory to his Lieutenants". According to Webster, debt is also defined as "thing owed". The same thing is said in one form or the other by Burrows on Words and Phrases, by Stroud in Judicial Dictionary, in Byrne's Law Dictionary and Jowitt's Law Dictionary of England and I need not repeat them here.
The word "owing" has also been defined in the said dictionary of Murray to mean "that is yet to be paid or rendered", that is, "being owed". In Webster's and Shorter Oxford Dictionaries, the word "owing" has also been stated to mean debt.'
In my view, the words "debt owed" in, section 2(m) of the Act denote that the obligation to pay the debt must be one in praesenti and not in, future. The said view gets support from the decision of S. Chettiar v. A. Chattiar ((1902) I L R 25 Mad. 603).
In case of Inland Revenue Commissioners v. Bagnall Ltd. ((1941) 1 All E R 204) the fact was that the respondent was incorporated as a private company limited by shares under the Companies Act, 1862 (repealed), so long ago as the year 1887. It selected the years 1935 and 1937 as its standard period. for the purpose of the excess profits tax. The excess profits tax was imposed by the Finance Act, 1939, and Part II of the seventh Schedule to that Act contains the rules for computing the capital employed in a trade or business the profits whereof are subject to that tux. The section of those rules provides that in the computation of capital "debts" are to be deducted from the capital employed in the trade or business during both the standard period and in any chargeable accounting period. In the said case, a point was raised by the Attorney‑General that assuming that there was a liability, that liability did not become a debt within the meaning of that word as used in the Finance. Act, 1939, Schedule VII, until the liability was quantified Macnaghten, J. held by concluding, "it is true that the word debt' may in certain matters 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". In my view the said observation applies with equal force in the instant case.
In the case of Commissioner of Excess Profits, Tax v. Ruby General Insurance Co. Ltd. ((1957) 32 I T R 82) their Lordships of the Supreme Court held that however liberal the expression "accruing liabilities" might be considered, it cannot be interpreted so as to take any "liabilities which do not bear the character of debts.
The position might be viewed from another aspect. The language used in the Act is debt "owed" and not debt "accrued". A debt might have accrued in the sense that the relationship of creditor and debtor might have become finally established at the relevant point of time as laid down in E. D. Sassoon & Co. Ltd. v. Commissioner of Income‑tax ((1954) 26 I T R 27) but it would not have become "owed" unless, further; it has been quantified and ascertained in a definite sum. Take for example, instalment of rent or of an annuity or of maintenance which has not yet fallen due or a salary or a donation which has not yet become payable on the valuation date. In my view, they are not "debts owed" and could not be deducted by the assessee for computation of his net wealth under the Act. Similarly, a tax due to the municipality by a property owner in respect of future instalments cannot be deducted. Bills of exchange, payable not at sight and which have not matured on the valuation date, should have to be left out of account for the year. So also, guarantee debts, unless they have ripened into an obligation to pay immediately on or before the valuation date, cannot be deducted. A provision, for payment of income‑tax, in the present case, is only a measure taken beforehand to meet a need in future. It is stipulated in advance, or in other words, seeing to things beforehand and nothing more.
Now if we look to the provisions of the other Acts, viz., the Bengal Agricultural Debtors Act, 1935, it has been held by B. K. Mukherjee, J. (as his Lordship then was), delivering the judgment on behalf of the court, in the case of Jabed v. Taher ((1941) 45 C W N 519), that a debt must be a specified and ascertained sum. Under the said Act in another case, viz., Nur Mia v. Noakhali Nath Bank ((1939) 43 C W N 322), the words "debt owing." and "liabilities" were explained by this court in some detail:
My Lord has just now referred to the Full Bench decision in Doraisami Padayachi v. Vaithilinga Padapachi ((1916) I L R 40 Mad. 31) arising out of section 25 of the Indian Contract Act and I refrain from repeating the reasonings. The decision in Banchharam Majumdar v. Adyanath Bhattacharjee also discussed by my Lord, has been approved by their Lordships in the Supreme Court in Mukti Lal v. Trustees of the Provident Fund, etc. ((1956) S C R 100).
In a case decided by this court, in Secretary of State for India v. Sm. Parijat Debi ((1933) I L R 60 Cal 1135), dealing with section 214 of the Indian Succession Act, it has been held that a sum of money payable in future is not a debt. The said case was affirmed by their Lordships of the Judicial Committee in Secretary of State v. Sm. Parijat Debi ((1936) 40 C W N 185 (P C)) and their Lordships quoted Lord Atkinson in the case of Barnardo's Homes v. Income‑tax Special. Commissioners ((1921) 2 A C 1, 11) as having said that . . . . . "until the claims against the testator's estate for debts, legacies . . . . etc., have been satisfied, the residue does not come into actual existence. It is a non‑existent thing until that event has occurred. The probability that there will be a residue is not enough. It must be actually accertained." Their Lordships, therefore, held that as the relationship of creditor and debtor did not exist, the terms of section 214 are not applicable.
If we then look into section 546(b)(iii) of the Companies Act, 1956, the Legislature itself made a distinction between a "debt" and a "liability capable of resulting in a debt".
Then again under the provisions of section 60 of the Code of Civil Procedure, this court held in Haridas v. Baroda Kishore ((1899) I L R 27 Cal. 38) that a sum of money which might or might not, become due, or the payment of which depends upon contingencies which may or may not happen, is not a debt. Their Lordships of the Judicial Committee in dealing with a case, Syud Tuffuzzool v. Rughoonath ((1871) 14 M I A 41) regarding attachment of debts held that the debt must be an "existing debt".
From the provisions of the Transfer of Property Act, specially sections 8, 130 and 134 thereof, I do not get much assistance in this regard.
Though their Lordships of the Supreme Court in State of U. P. v. Deoman Upadhyaya ((1961) 1 S C R 14) observed that reference to American decisions is not proper, the reason being that of a slippery ground of apparent similarity of expressions or concepts in an alien jurisprudence, but in my view when the approach by a foreign country in a similar case does not differ from our country, I may refer to two Supreme Court decisions of the United States of America, viz., Hopner v. United States' ((1961) 1 S C R 14) and United States v. Ragan (232 U S 37), where their Lordships hold that a debt lies wherever a sum certain is due to the plaintiff or a sum which can readily be reduced to a certainty, requiring no future valuation, to settle its amount.
Mr. Mitter further contended that in the Form annexed to rule 3 of the Rules, debt has been equated not only with liabilities but even with contingent liabilities and he drew our attention to the notes at the footnote under Annexure XII to the said Form. He developed his argument by saying that when it is provided that debts which are purely in the nature of contingent liabilities should not be included in Annexure XI or XII, the Legislature thereby meant that the provisions of income‑tax, though it might not be a "debt owed" in the strict sense of the term, must come in any event within the category of liability or at least in the category of contingent liability and therefore the said sum is not a "purely" contingent liability.
Mr. Mitter s argument suffers from, at least two defects : the first one, that Form A does not apply in the case of companies which is the case here, and secondly the Forms cannot prevail over the section of the Act (vide.: In the Matter of Recols (India) Ltd. ((1953) 23 Comp. Cas. 380).
I am also unable to accept the argument of Mr. Mitter that the income‑tax is "owed", the moment the money is earned, though it might not be due and payable and that is the meaning sought to be conveyed in section 2(m) of the Act. I am not quarrelling with the proposition that liability to tax' does not depend on assessment but there is a great deal of difference in the meaning of the two expressions "liability to tax" and "debt owed" Under the provisions of section 10(4) of the Income‑tax Act, income‑tax is generally not deductible as a business expense but taxes which are payable irrespective of any profits being earned, are admissible allowances under clause (xv) and subsection (4) does not apply to them. 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 and when demand is made under sections 29 and 45, it then becomes a debt due to the Government.
The amount of the provision for payment of income‑tax and super tax, in the instant case, is in my view akin to a debt "growing due" and the same is an apt expression to cover the said contingency. It seem to intend something that in course of time it may ripen into a debt, that is, it is only in an inchoate state at the commencement. In 'the‑instant case when the words "debt owed" have been intentionally used by the Legislature, they mean ascertained or certain amount which is opposed to inchoate, contingent, future, unascertained, uncertain or imperfect obligations.
Reference answered accordingly.
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