1962 (5) TMI 54 - HC - Income Tax

Summary

Issues Involved:

1. Justification of the Wealth Tax Officer in taking the value of the assets as shown in the balance sheet.
2. Deductibility of the proposed dividend from the total assets in computing the net wealth.
3. Deductibility of the provision for payment of Income Tax and super-tax as a debt owed within the meaning of Section 2(m) of the Wealth Tax Act, 1957.

Issue-wise Detailed Analysis:

Issue 1: Justification of the Wealth Tax Officer in Taking the Value of the Assets as Shown in the Balance Sheet

The court examined whether the Wealth Tax Officer was justified in taking the value of the assets as shown in the balance sheet on the relevant valuation date. The assessee argued that the revaluation increase of Rs. 1,45,87,000 should be ignored in the computation of net wealth. However, the court noted that under Section 7 of the Wealth Tax Act, the Wealth Tax Officer is required to estimate the market value of the property, and in the case of a business, the net value of the assets may be determined as a whole, considering the balance sheet with necessary adjustments. The court found that the revaluation was done because the book value did not represent the correct value of the assets. Therefore, the Wealth Tax Officer was justified in taking the revalued figure as shown in the balance sheet. The court concluded that there was no compelling reason for any deduction from the revalued assets.

Issue 2: Deductibility of the Proposed Dividend from the Total Assets in Computing the Net Wealth

The court addressed whether the proposed dividend was deductible in computing the net wealth. It was noted that a dividend proposed by the directors does not become a debt until it is declared by the company in a general meeting. The court held that until the declaration of the dividend at the general meeting, it was not a debt owed by the assessee on the valuation date. Therefore, the proposed dividend could not be deducted from the value of the assets.

Issue 3: Deductibility of the Provision for Payment of Income Tax and Super-tax as a Debt Owed

The court examined whether the provision for payment of Income Tax and super-tax constituted a debt owed within the meaning of Section 2(m) of the Wealth Tax Act, 1957. The assessee argued that the liability to pay Income Tax arose as soon as the business was engaged and should be considered a debt. However, the court noted that until the close of the year and the passing of the Finance Act, the exact amount of liability to tax could not be ascertained. The court referred to various legal precedents and concluded that a debt must be a liquidated sum of money, and in this case, the liability for Income Tax was not a debt owed on the valuation date. The court emphasized that the liability must be a debt solvendum in praesenti to merit deduction in the computation of net wealth.

Conclusion:

The court answered the questions as follows:
1. The Wealth Tax Officer was justified in taking the value of the assets as shown in the balance sheet (Question No. 1 in the affirmative).
2. The proposed dividend was not deductible from the total assets (Question No. 2 in the negative).
3. The provision for payment of Income Tax and super-tax was not a debt owed and, therefore, not deductible in computing the net wealth (Question No. 3 in the negative).

The assessee was ordered to pay the costs of the reference.