1972 (12) TMI 20 - HC - Wealth-tax

This reference raises a short but interesting question of law relating to the construction of section 68 of the Finance Act, 1965. - Whether liability to pay tax on concealed income under s. 68 of the Finance Act, 1965 is deductible in the computation of the net wealth

Issues Involved:
1. Interpretation of Section 68 of the Finance Act, 1965.
2. Whether the tax paid on disclosed concealed income under Section 68 can be deducted as a "debt owed" in computing net wealth.

Issue-wise Detailed Analysis:

1. Interpretation of Section 68 of the Finance Act, 1965:
The primary issue in this case is the interpretation of Section 68 of the Finance Act, 1965, which aims to encourage voluntary disclosures of concealed income. The section provides a mechanism for individuals to declare unaccounted income and pay tax at a specified rate, thereby avoiding penalties and further scrutiny.

Section 68(1) states that if a person makes a declaration in respect of undisclosed income, they shall be charged income-tax at the rate specified in sub-section (3), provided certain conditions are met. The key phrase here is "charged income-tax," which indicates the imposition of a tax charge on the disclosed income, separate from the usual income-tax provisions under the Indian Income-tax Act, 1922, and the Income-tax Act, 1961.

The Tribunal had earlier interpreted that the liability to pay income-tax on the concealed income arose under Section 3 of the Indian Income-tax Act, 1922, or Section 4 of the Income-tax Act, 1961, and that Section 68 merely provided a concessional rate for quantification of this existing liability. However, the court disagreed, stating that Section 68 imposes a new charge to tax on the disclosed income, independent of the usual income-tax assessment process.

2. Whether the tax paid on disclosed concealed income under Section 68 can be deducted as a "debt owed" in computing net wealth:
The second issue revolves around whether the tax paid on the disclosed income under Section 68 can be considered a "debt owed" by the assessee on the relevant valuation date for the purpose of computing net wealth.

The court examined the language of Section 68 and concluded that it does not provide for the quantification of liability under the Indian Income-tax Act or the Income-tax Act. Instead, it creates a new charge to tax on the disclosed income, irrespective of the assessment year in which it was earned. The disclosed income, once subjected to tax under Section 68, is withdrawn from assessability under the Income-tax Act.

Sub-section (6) of Section 68 ensures that the disclosed income, once taxed, is not included in the total income for any assessment under the Income-tax Act, provided the assessee credits the disclosed income (minus the tax paid) in their books of account. This mechanism ensures that the disclosed income is brought to the surface and becomes identifiable, thereby preventing it from being taxed again under the Income-tax Act.

The court emphasized that the tax paid under Section 68 is not in satisfaction of any liability under Section 3 of the Indian Income-tax Act, 1922, or Section 4 of the Income-tax Act, 1961. Instead, it satisfies a new liability arising under Section 68. Consequently, for the purpose of computing net wealth, the tax paid under Section 68 cannot be deducted as a "debt owed" by the assessee on the last day of the relevant account year in which the concealed income was earned.

Conclusion:
The court concluded that Section 68 of the Finance Act, 1965, imposes a new charge to tax on disclosed concealed income, independent of the usual income-tax provisions. The tax paid under this section cannot be considered a "debt owed" for the purpose of computing net wealth. Both questions referred to the court were answered in the negative, and the assessee was ordered to pay the costs of the reference to the Commissioner.

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