A contingent debt has no present existence and is not a debt as understood in law unless the contingency happens. - Income Tax - 373/CBDT

INSTRUCTION NO. 373/CBDT Dated: January 24, 1972 Section(s) Referred: 2(c) Statute: Wealth Tax Act, 1957 Attention is invited to Board letter F. No. 328/67/70-WT dated the 3rd October, 1970 on the above subject and the report furnished to the Board about the procedure being followed by the W.T. Officers in different charges. The question as to whether fees outstanding on the valuation date, of professional persons maintaining accounts on cash basis, can be included in the net wealth for the purposes of wealth-tax assessment has been examined. 2. It is now well settled that in its ordinary as well as legal sense, a debt a sum of money payable under an existing obligation. If it is payable forthwith, solvendum in presenti, solvendum futuro, it is a debt "accruing". A contingent debt has no present existence and is not a debt as understood in law unless the contingency happens. [Shanti Prasad Jain v. Director of Enforcement (1963) 2 S.C.R. 297 at 326; see also Kesoram Industries Cotton Mills Ltd. v. C.W.T. (1966) 59 ITR 767 (S.C.) 7. It has been held that by virtue of sections 3 and 4 of the Legal Practitioners (Fees) Act, 1926 and the rules of the High Courts, fees due to advocates and other legal practitioners are recoverable by legal process (K. L. Gauba vs. J. Vasica, A.I.R. 1956 Bom. 34). If, therefore, a client has entered into an arrangement to pay an ascertained sum by way of fees to a person following a profession, the said sum would be a "debt" due to the latter and would be includible in his net wealth. The Andhra Pradesh High Court in the case of Vadrevu Venkapparao vs. C.W.T. (69 ITR 552), have also held that interest accrued on the valuation date on loans and advances was liable to be included in the net wealth even though the accounts of the assessee are maintained on cash basis. 3. It has to be noted that u/s 145 of the I.T. Act, 1961, income chargeable under the head "profits and gains of business or profession" or "income-from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee; whereas section 7(2) (a) of the W.T. Act, 1957 provides that where the assessee is carrying on business for which accounts are maintained by him regularly, the W.T. Officer may instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of business as a whole having regard to the balance-sheet of such business as on a valuation date and make such adjustments therein as may be prescribed. It would, therefore appear that, while under the income-tax Act the income chargeable shall be computed in accordance with the method of accounting regularly employed by the assessee the W.T Act only provides that the W.T. Officer may have regard to the balance-sheet of such business as on the valuation date. 4. In view of what is mentioned above, the Board are advised that the right of a chartered accountant, doctor, lawyer or any person following a profession to receive his fees is certainly a right to property and is, therefore, an asset within the meaning of section 2(e) of the W.T. Act and the fees outstanding on the valuation date would be liable to wealth-tax even the cash system of accounting is being followed by such a person. 5. This may please be brought to the notice of the W.T. Officers working in your charge. Pending cases may be dealt with in the light of what is stated above but closed cases need not be reopened.