1972 (7) TMI 29 - HC - Wealth-tax

Whether bonus paid by an assessee to its workmen out of the profits of the previous year after the relevant valuation date is debt owed by the assessee so as to be deductible in computing the net wealth of the assessee - in the present case it is apparent from the record that the claim of the workmen was settled and the amount of bonus determined subsequent to the relevant valuation date. This factual position was indeed not disputed on behalf of the assessee. If that be so it must follow as a necessary consequence that liability for payment of bonus did not become a debt owed by the assessee until after the relevant valuation date and it was accordingly not deductible in computing the net wealth of the assessee

Issues Involved:
1. Whether bonus paid by an assessee to its workmen out of the profits of the previous year after the relevant valuation date is a debt owed by the assessee so as to be deductible in computing the net wealth of the assessee under the Wealth-tax Act, 1957.

Issue-wise Detailed Analysis:

1. Definition of "Debt Owed" under Section 2(m) of the Wealth-tax Act, 1957:
The court examined the definition of "debt owed" under Section 2(m) of the Wealth-tax Act, 1957, as elucidated by the Supreme Court in Kesoram Industries & Cotton Mills Ltd. v. Commissioner of Wealth-tax. The Supreme Court defined a debt as "a sum of money which is now payable or will become payable in future by reason of a present obligation: debitum in praesenti, solvendum in futuro." It clarified that a liability depending on a contingency is not a debt until the contingency occurs. A debt must be a present obligation to pay an ascertainable sum of money, whether payable immediately or in the future.

2. Nature of Liability for Bonus:
The court analyzed the nature of the liability for bonus and when it becomes a "debt owed." The liability for bonus, prior to the enactment of the Payment of Bonus Act, 1965, was recognized primarily through industrial adjudication. The court referred to the historical development of industrial law concerning bonus payments, noting that bonus was initially a voluntary payment but later acquired the character of a right to share in surplus profits, enforceable through industrial adjudication.

3. Supreme Court's Decision in Commissioner of Income-tax v. Swadeshi Cotton & Flour Mills Pvt. Ltd.:
The court discussed the Supreme Court's decision in Commissioner of Income-tax v. Swadeshi Cotton & Flour Mills Pvt. Ltd., where it was held that liability for bonus arises only when a claim for bonus is made by the workmen and settled amicably or by industrial adjudication. The court noted that this decision was limited to the question of when liability for bonus is incurred according to the mercantile system of accounting and did not address the broader question of when liability for bonus becomes a "debt owed."

4. Determination of Bonus as a "Debt Owed":
The court concluded that liability to pay bonus does not become a "debt owed" by the employer until a claim is made by the workmen and settled by mutual agreement or industrial adjudication. The liability for bonus is not a liquidated sum of money but becomes ascertainable only when the claim is settled. Until then, it remains uncertain and indefinite, akin to a liability for unliquidated damages.

5. Dissent from Calcutta High Court's Decision:
The court expressed dissent from the Calcutta High Court's decision in Textile Machinery Corporation v. Commissioner of Wealth-tax, which held that the liability to pay bonus under industrial law constitutes a "debt owed." The court emphasized that every liability to pay does not necessarily constitute a debt; it must be for a liquidated amount to be considered a debt.

Conclusion:
The court concluded that since the claim for bonus was settled and the amount determined after the relevant valuation date, the liability for payment of bonus did not become a "debt owed" by the assessee on the relevant valuation date. Therefore, it was not deductible in computing the net wealth of the assessee. The question referred to the court was answered in the negative, and the assessee was directed to pay the cost of the reference to the Commissioner.

Question answered in the negative.

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