1966 (10) TMI 40 - SC - Income Tax

Whether, on the facts and circumstances of the case, in computing the net wealth of the assessee under section 7(2) read with section 2(m) of the Wealth-tax Act, the liability for income-tax and business profits tax could be allowed as a deduction ? Whether the liability in the sum of ₹ 25,02,675 which arose as a result of the awards dated 28th October, 1948, 28th November, 1956, and 17th October, 1954, before the valuation date or any part thereof is allowable as a deduction in determining the net wealth of the assessee under section 7(2) read with section 2(m) of the Wealth-tax Act ? Held that - Liability to pay income-tax was a present liability though the tax became payable after it was quantified in accordance with ascertainable data there was therefore a perfected debt at any rate on the last day of the accounting year and not a contingent liability, and the amount of the provision for payment of income-tax in respect of the year of account was a debt owed within the meaning of section 2(m) on the valuation date and was as such deductible in computing the net wealth. The view expressed by the High Court on the second question, in so, far as it relates to provision for income-tax, cannot therefore be sustained and that part of the question should be answered in the affirmative. The true function of section 7(2)(a) of the Wealth-tax Act was not appreciated. Section 7 does not deal with the computation of net wealth. It deals with the computation of the aggregate value of the assets. Under section 7 the Wealth-tax Officer is competent, where the assessee is carrying on business of which accounts are maintained regularly, to determine the net value of the assets of the business as a whole. But in doing so he determines the value of the assets of the business as a whole, and not the net wealth of the business. Appeal partly allowed.

Issues Involved:

1. Deduction of the last installment of advance tax in the computation of net wealth.
2. Deduction of liability for income tax and business profits tax in the computation of net wealth.
3. Deduction of accrued liability for gratuity to workmen and staff in the computation of net wealth.
4. Deduction of proposed dividend in the computation of net wealth (not pressed by the appellant-company).

Detailed Analysis:

1. Deduction of the Last Installment of Advance Tax:

The appellant-company claimed Rs. 2,95,869 paid as the last installment of advance tax after the valuation date as a deduction. The High Court answered this question in the affirmative. The Supreme Court upheld this decision, referencing the precedent set in Kesoram Industries & Cotton Mills Ltd. v. Commissioner of Wealth-tax, which established that liability to pay income tax was a present liability, making the provision for payment of income tax a "debt owed" within the meaning of section 2(m) of the Wealth-tax Act. Therefore, this amount was deductible in computing the net wealth.

2. Deduction of Liability for Income Tax and Business Profits Tax:

The appellant-company sought to deduct liabilities for income tax and business profits tax. The High Court answered affirmatively for business profits tax, subject to verification, but negatively for income tax. The Supreme Court reversed the High Court's decision regarding income tax, again referring to the Kesoram Industries case, which determined that income tax liability was a present liability and thus deductible. Therefore, the estimated liability for income tax was also deemed deductible.

3. Deduction of Accrued Liability for Gratuity:

The appellant-company claimed Rs. 25,02,675 as an accrued liability for gratuity based on awards from the Industrial Court and Labour Appellate Tribunal. The High Court answered negatively, stating that the liability to pay gratuity was contingent and not a debt owed on the valuation date. The Supreme Court upheld this view, emphasizing that the liability for gratuity arises only upon the termination of employment due to specific events (death, incapacity, retirement, or resignation), making it a contingent liability and not deductible under section 2(m). The court also dismissed the alternative plea that such liability could be deducted under section 7(2)(a), clarifying that section 7 deals with asset valuation and not net wealth computation.

4. Deduction of Proposed Dividend:

The appellant-company did not press this issue before the High Court, and thus it was not considered in the judgment.

Conclusion:

The appeal was partially allowed. The Supreme Court affirmed the deductibility of the last installment of advance tax and the estimated liability for income tax but rejected the claim for the deduction of accrued liability for gratuity. There was no order as to costs in this appeal. The judgment underscores the distinction between present and contingent liabilities in the context of wealth tax computation.

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