1970 (12) TMI 4 - HC - Wealth-tax

Concealed income found in income tax - whether it is deductible for wealth-tax purposes - Held, yes - undoubtedly the tax liability is a debt. It has to be deducted from the wealth of the assessee in order to arrive at the net wealth

Summary

Issues:
- Whether the tax payable on concealed income can be included in the total wealth of the assessee for the assessment year 1960-61?
- Whether the assessee is entitled to deduction of income-tax payable on the concealed income included in his wealth for the assessment year under consideration?

Analysis:
The judgment pertains to Wealth-tax References where the assessees, partners in the same firms, were found to have undervalued their stocks and concealed income by introducing fictitious hundi loans. The key issue was whether the tax payable on concealed income should be included in the total wealth of the assessee for the assessment year 1960-61. The Wealth-tax Officer initially disallowed the deduction of tax payable on concealed income, considering it not a debt owed by the assessee. The Appellate Assistant Commissioner upheld this decision. However, the Income-tax Appellate Tribunal allowed the deduction based on the Supreme Court's decision in Kesoram Industries case, emphasizing that the liability to pay tax arises on true income, whether disclosed or undisclosed.

In the Kesoram Industries case, the Supreme Court had held that the liability to pay income tax is a present liability, even if it becomes payable after quantification, and is deductible in computing the net wealth. The Tribunal in the present case followed this precedent, stating that the principles apply irrespective of the intention of the assessee on the relevant valuation date. The liability to pay tax is based on the earning of income, not on the intention to disclose or conceal it. Therefore, the assessee was entitled to deduction of tax payable on concealed income assessed for the relevant year.

The Commissioner of Wealth-tax challenged the Tribunal's decision, arguing that the liability to tax on undisclosed income differs from disclosed income. However, the court disagreed, citing the Supreme Court's decisions in Kesoram Industries and H. H. Setu Parvati Bayi cases. These cases established that wealth-tax liability crystallizes on the valuation date and should be deducted from the estimated value of assets. The court reiterated that the tax liability arises on the last day of the accounting year and should be treated as a debt owed by the assessee.

The court further analyzed Section 2(m) of the Wealth-tax Act, which defines 'net wealth' and includes tax liability as a debt to be deducted from the assessee's wealth. The tax liability in this case did not fall under the exceptions provided in Section 2(m), reinforcing the assessee's entitlement to the deduction. Consequently, the court answered the referred question in favor of the assessee, emphasizing the importance of deducting tax liabilities to arrive at the net wealth.