1963 (2) TMI 51 - HC - Income Tax

Summary

Issues Involved: Deductibility of tax provisions in the ascertainment of net wealth under the Wealth-tax Act, 1957.

Issue-wise Detailed Analysis:

1. Definition of Net Wealth:
The court examined the definition of "net wealth" under Section 2(m) of the Wealth-tax Act, 1957. The net wealth is determined by deducting the aggregate value of all debts owed by the assessee on the valuation date from the aggregate value of all the assets. The court noted that the relevant debts exclude those specified in Section 2(m)(i) and (ii).

2. Determination of Asset Value:
The court discussed Section 7 of the Act, which provides methods for determining the value of assets. Section 7(1) states that the value should be the price it would fetch if sold in the open market on the valuation date. Section 7(2)(a) allows the Wealth-tax Officer to consider the balance-sheet of a business for determining the net value of assets.

3. Deductibility of Provisions for Taxation:
The primary question was whether provisions for taxation shown in the balance-sheet could be deducted from the value of assets to determine the net wealth. The court emphasized that the liability to pay tax arises when the income is earned, not when the assessment order is passed. Thus, the tax liability is not a contingent liability but a debt in praesenti.

4. Contingent vs. Present Debt:
The court rejected the argument that tax liability is contingent until quantified by an assessment order. Citing Lord Dunedin in Whitney v. Inland Revenue Commissioners, the court clarified that liability is fixed by the statute when income is earned, and assessment merely quantifies the amount. Therefore, the tax liability is a present debt, not contingent.

5. Interpretation of Debt:
The court defined a debt as a certain sum due from one person to another, which can be ascertained by the assessee himself. The court held that the amount set apart for tax liability in the balance-sheet qualifies as a debt and should be deductible from the value of assets to determine net wealth.

6. Reference to Finance Act of 1959:
The court referred to the Finance Act of 1959, which amended Section 2 of the Wealth-tax Act to include certain tax liabilities as non-deductible if they are outstanding for more than twelve months or are disputed in appeal. However, this amendment did not apply to the present case as it dealt with assessed tax liabilities, not provisions for future liabilities.

7. Differentiation from Other Cases:
The court distinguished its stance from the Calcutta High Court's decision in Kesoram Cotton Mills Ltd. v. Commissioner of Wealth-tax, where it was held that tax liability becomes a debt only after assessment. The court respectfully disagreed, maintaining that tax liability arises when income is earned.

Conclusion:
The court concluded that the 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, respectively, were proper deductions in the ascertainment of the net wealth of the company. The reference was answered in the affirmative, with costs assessed at Rs. 100.

Separate Judgment:
DUTTA J. concurred with the judgment delivered by MEHROTRA C.J., agreeing with the reasoning and conclusion that the provisions for taxation should be deducted in determining the net wealth.

Final Pronouncement:
The question referred to the court was answered in the affirmative.