1994 (2) TMI 3 - SC - Wealth-tax

Assessee-company claimed that the balance of the demand that had remained unpaid was a debt owed by it and should be allowed as a deduction while computing its net wealth - held that deductions claimed were allowable in computing the net wealth of the assessee-companies because deductions do not fall within the exclusionary part contained in section 2(m)(iii)

Issues Involved:
1. Whether the unpaid tax liabilities determined under the Taxation on Income (Investigation Commission) Act, 1947, are deductible as debts owed in determining the net wealth of the companies.
2. Whether the exclusionary provision under Section 2(m)(iii) of the Wealth-tax Act applies to the unpaid tax liabilities, making them non-deductible.

Detailed Analysis:

Issue 1: Deductibility of Unpaid Tax Liabilities as Debts Owed

The primary issue was whether the amounts of Rs. 5,49,041 (for J.K. Cotton Ltd.) and Rs. 21,61,788 (for J.K. Jute Ltd.), which were unpaid tax liabilities determined under settlements made in 1952 under the Taxation on Income (Investigation Commission) Act, 1947, could be considered as debts owed by the companies and thus deductible in computing their net wealth for the assessment year 1957-58.

The Wealth Tax Officer (WTO) disallowed the deductions, reasoning that the liabilities were outstanding for more than 12 months on the valuation dates. The Appellate Assistant Commissioner (AAC) supported the disallowance but on different grounds, stating that the tax liabilities were unrelated to the declared assets of the companies. The Tribunal upheld the disallowances, agreeing with the AAC that the debts were related to secret profits not included in the declared assets.

The High Court, however, took a different view, opining that the deductions were allowable. It rejected the Tribunal's conclusion that only debts related to declared assets could be deducted, stating that the relevant provisions did not suggest such a restrictive scheme.

In the Supreme Court, the Revenue argued that the scheme of the Wealth-tax Act indicated that only debts related to declared assets could be deducted. They cited sections 2(m)(i) and (ii), 4(3), 5, and 6 to support this view. The Revenue also contended that the companies should have explained the use of the secret profits, and in the absence of such an explanation, the secret profits should be presumed to be with the companies on the valuation dates.

The Supreme Court analyzed the provisions and concluded that the key provisions were the charging section (Section 3) and the definition of "net wealth" (Section 2(m)). The Court held that the scheme of the Act required all debts, barring those in the exclusionary part of Section 2(m), to be deducted from the aggregate value of assets. The Court found no provision suggesting that debts must be related to declared assets to qualify for deduction. The Court also rejected the Revenue's presumption argument, stating that such a presumption could not be drawn after a lapse of eight years.

Issue 2: Applicability of Section 2(m)(iii)

The second issue was whether the unpaid tax liabilities fell within the exclusionary provision of Section 2(m)(iii) of the Wealth-tax Act, which disallows deductions for tax liabilities outstanding for more than 12 months on the valuation date.

The Revenue argued that the liabilities were outstanding since 1948 or, at the latest, since 1952, when the Investigation Commission's order was passed. They contended that the instalment scheme did not affect the payability of the dues in 1952.

The Supreme Court disagreed, stating that the expression "outstanding" must be construed in the context of "amount of tax payable in consequence of an order." The Court held that the liabilities would be considered outstanding only after the obligation to pay was incurred, which, under the instalment scheme, meant the dates on which the instalments were due. Since the instalments had not become due before the valuation dates, the liabilities were not outstanding for more than 12 months and did not fall within the exclusionary provision.

Separate Judgment:

Sabyasachi Mukharji J. agreed with the views expressed on the second issue and confirmed that the deductions did not fall within the exclusionary part of Section 2(m)(iii). On the first issue, he concurred with the conclusion that the deductibility of the tax liabilities did not depend on whether the assets related to the liabilities were available on the valuation dates.

Conclusion:

The Supreme Court confirmed the High Court's view, allowing the deductions for the unpaid tax liabilities in computing the net wealth of the companies. The appeals were dismissed with no order as to costs.

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