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TMI Blog1961 (4) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... r, made certain adjustments. The contentions raised by the assessee before the Wealth-tax Officer were two-fold. It first contended that provision had been made by it on an estimate basis to the extent of ₹ 33,14,504 to meet its tax liabilities in respect of the income-tax for the accounting year to the extent of ₹ 29,45,421 and in respect of the additional liability to pay business profits tax to the extent of ₹ 3,70,083 for the chargeable accounting periods between April 1, 1946, to 31st March, 1949. These amounts should be allowed as a deduction, they being debts owing by the assessee on the date of valuation. Its second contention was that provision had been made by it for the proposed dividends to be declared at the next annual general body meeting of the company to the extent of ₹ 20,23,500 and that amount should also be allowed as a deduction in the computation of the net wealth inasmuch as it was a debt owing by the assessee company on the valuation date. The Wealth-tax Officer did not allow the claim of the assessee for the sum of ₹ 3,70,083, which, according to the assessee, represented the taxes that would have been due on finalization of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dismissed. The assessee company also preferred an appeal against the rejection of its other claims and again reiterated before the Tribunal all its aforesaid contentions. As regards the assessee's appeal, the Tribunal held that the sum of ₹ 29,44,421 claimed as deduction in respect of the estimated income-tax liability relating to the assessment year 1957-58 should be allowed. Similarly, it held that the assessee's claim for deduction of ₹ 3,70,083 in respect of the estimated excess of the business profits tax liability could also be allowed. The Tribunal further allowed the claim of the assessee for deduction of a sum of ₹ 25,02,675, which, according to the assessee, represented the liability for payment of gratuity in accordance with the awards of the Industrial Court. The Tribunal rejected the assessee's claim for deduction of ₹ 20,23,500 representing the provision made by it for paying the proposed dividends to be declared in the next annual general body meeting of the assessee company. On an application made by the Commissioner of Wealth-tax under sub-section (1) of section 27 of the Act, the Tribunal has drawn up a statement of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mencing on and from the first day of April, 1957, a tax (hereinafter referred to as wealth-tax) in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule. Valuation date is defined in section 2(q) of the Act in the following terms: 2. ( q) 'Valuation date', in relation to any year for which an assessment is to be made under this Act, means the last day of the previous year as defined in clause (ii) of section 2 of the Income-tax Act if an assessment were to be made under that Act for that year. The proviso is not material for the purpose of this case. Net wealth has been defined in clause (m) of section 2 of the Act, which provides: 'net wealth' means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than,- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 7 provides : The value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date. (2) Notwithstanding anything contained in sub-section (1),- (a) where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth-tax 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 the business as a whole having regard to the balance-sheet of such businesses on the valuation date and making such adjustments therein as the circumstances of the case may require. It is not necessary to reproduce clause (b). It provides the mode for valuing the assets of an assessee company carrying on business where the assessee company is not resident in India and a computation in accordance with clause (a) cannot be made by reason of the absence of any separate balance-sheet drawn up for the affairs of such business. Reading these provisions together it becomes clear that wealth-tax is a tax impose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. He referred us to certain observations in Webb v. Stenton [1883] 11 QBD 518, O'Driscoll v. Manchester Insurance Committee [1915] 3 KB 499 and Dawson v. Preston [1955] 3 All ER 314; [1955] 1 WLR 1219. Having regard to these rival contentions, it may be noticed that Mr. Joshi as well as Mr. Palkhivala agree that on the valuation date there must be an existing obligation on the part of the assessee to pay money. The only difference between them is whether that obligation should be to pay an ascertained sum of money. The question, therefore, that arises for consideration is whether a debt within the meaning of section 2(m) is an obligation to pay an ascertained sum of money. Jowitt defines debt as : a sum of money due from one person to another. A debt exists when a certain sum of money is owing from one person (the debtor) to another (the creditor). Hence 'debt' is properly opposed to unliquidated damages; to liability, when used in the sense of an inchoate or contingent debt; and to certain obligations not enforceable by ordinary process. ' Debt' denotes not only the obligation of the debtor to pay, but also the right of the creditor to receive and en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade carried on by me and Sinan, I shall bring and produce the said two persons at Vilandidasamudram before tomorrow 10 o'clock, and I shall settle the said accounts. In default I shall pay the amount due as per account together with interest thereon at the rate of 3 pies per rupee per day. It appears that the defendant did not keep up his promise. The arbitrator also died in the year 1910 and the suit was instituted by the plaintiff against the defendants in the year 1911. The plea raised was that the suit was barred by time. The plaintiff countered the defendant's plea of bar of limitation by saying that the aforesaid letter given by the defendants in 1910 was a promise made in writing by the defendant to pay a debt within the meaning of section 25 of the Contract Act. The courts below upheld the plea of the defendants and dismissed the suit. The question Whether the letter constituted an acknowledgment and a promise to pay the debt was referred to the Full Bench. It was held that the letter did not constitute a promise to pay a debt within the meaning of section 25 of the Contract Act. Following the decision in Sabju Sahib v. Noordin Sahib [1899] ILR 22 Mad. 139, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee the amount for the payment of income-tax and super-tax in respect of the income of the year of account was a debt owed within the meaning of section 2(m) of the Wealth-tax Act and as such deductible in computing the net wealth of the assessee. It was held that the assessee was not entitled to claim deduction of the amount. At page 39, Mitter J. observed : There is no room for doubt that a debt must be for a liquidated sum of money and it can be either owed or accruing. At page 44, he further observed: The result, therefore, is that although the assessee was liable to pay income-tax on the valuation date the actual amount of the liability was not, ascertained until some time thereafter by the passing of the Finance Act and the determination made by the income-tax authorities. In any case no debt was owed by the assessee on the valuation date. At page 49, Laik J. observed: In the instant case when the words 'debt owed' have been intentionally used by the legislature they mean ascertained or certain amount which is opposed to inchoate, contingent, future, unascertained, uncertain or imperfect obligations. Mr. Joshi also has placed r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted among the panel doctors in accordance with a scale of fees; the total amount available for medical benefit so received by the committee was to be the limit of their liability to the panel doctors; and if the total pool was insufficient to meet all the proper charges of the panel doctors in accordance with the scale there was to be a pro rata reduction for each doctor, and on the other hand if it should be in excess of the amount required the balance was to be distributed among the panel doctors. Dr. Sweeny was one of the medical practitioners in the panel of doctors of that particular district. He had done work and an amount which would be found due to him under the scheme was payable to him. The judgment creditor of Dr. Sweeny attached the sum in the hands of the National Insurance Committee, which would be found payable to Dr. Sweeny. Question that arose for consideration was whether, in the circumstances, there was any debt owed by the insurance committee to Dr. Sweeny, which could be attached in the hands of the insurance committee in execution of a decree obtained by the judgment creditors against Dr. Sweeny. It was contended that there was no debt owing by the insurance c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m was paid to the plaintiff leaving a balance in the legal aid fund subject to any charge conferred on the Law Society by the Act to cover the prescribed deductions, which remained to be quantified, i.e., the deduction for taxed costs of the action. In November, 1954, the judgment creditor, who had previously obtained a decree against the plaintiff, obtained a garnishee order nisi on the Law Society as administrators of the Legal Aid Fund., Objection was raised on behalf of the plaintiff on the ground that at the date of the garnishee order, there was not a debt owing to him from the Law Society, inasmuch as there was no ascertained amount payable to him by the Law Society and, therefore, there was not an existing debt which could be attached. This contention raised by the plaintiff was not accepted. At page 317 of the report, the learned Chief Justice Lord Goddard observed : A garnishee order on the Law Society will act as an attachment of the money in the hands of the Law Society, but it will only attach the money which is payable by the Law Society to the legally aided person. The fact that the amount which they have to pay over has not been ascertained at the date of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uses (i ) to (iii) of section 2(m) enumerate certain debts owed by the assessee which are excluded from the aggregate value of all the debts. Clause (iii) is one of such debts. The fact that certain amounts due in consequence of an order made are excluded in certain circumstances from the aggregate amount of the value of the debts cannot lead to an inference that for an existing obligation to be a debt, it must be for an ascertained sum. No doubt, an obligation to pay an ascertained sum of money is a debt, but that does not mean that an existing obligation to pay later a sum of money to be ascertained is not a debt. In our opinion, therefore, on an examination of the aforesaid decisions, a debt in its wider import means an existing obligation to pay a sum of money either ascertained or unascertained whether payable in praesenti or in futuro, but not a contingent obligation to pay a sum of money or an obligation to pay damages, though in its restricted sense it means an existing obligation to pay an ascertained or liquidated sum of money either payable in praesenti or in futuro. For reasons stated above, in our opinion, the word debt has been used in section 2(m) in its wider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of the estimated sum found due on verification by the department towards the business profits tax. He has left the verification of the figures to the Wealth-tax Officer. Now, it is not in dispute that the Business Profits Tax Act was in force only during the period from April 1, 1946; to March 31, 1949. The period is much before the valuation date. There can hardly be any doubt that the liability, if any, of the assessee to pay any further sum towards business profits tax would be an obligation existing much prior to the valuation date and would be a subsisting obligation on the valuation date. On the view taken by us, therefore, the assessee would be entitled to claim a deduction in respect of the estimated liability towards the business profits tax as would be verified by the department in computation of its net wealth under section 2(m) of the Act. This brings us to the alleged claim by the assessee for a deduction of ₹ 29,44,421 which, according to the assessee, would be payable by it as income-tax for the assessment year 1957-58 according to their estimation. The said sum was, according to the assessee, an estimated liability on 31st December, 1956, and it inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act provides: 3. Where any Central Act enacts that income-tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or the members of the association individually. Section 6 enumerates the different heads of income chargeable to income-tax. Now, it is true that income-tax at the rate provided in the Central Act is charged on the assessee in respect of his total income of the previous year by virtue of the provisions of section 3, but the clause where any Central Act enacts that income-tax shall be charged for any year at the rate or rates clearly indicates that the passing of the Central Act referred to in section 3 is a condition precedent to the imposition of the income-tax under section 3. In effect, therefore, it is the passing of the Central Act, known as the Finance Act, which virtually imposes income-tax on an assessee and not th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year 1925-26 on the income of the club in the previous year at the scale of rates prescribed under Schedule III of Part II(b) of the Finance Act, 1925, the assessee company contended that the assessment must be made at the flat rate of one anna applicable to a company. On the other hand, the department contended that the tax must be levied at the rate applicable to corporations, individuals or associations not being companies, which was more advantageous to the revenue than the rate applicable to companies. The contention of the department had not been accepted and an appeal was taken to the Privy Council by the Commissioner of Income-tax. One of the contentions raised on behalf of the Commissioner was that because under section 55 of the Indian Income-tax Act, 1922, the super-tax is to be charged on an unincorporated club in respect of the total income of the previous year and the rate of tax applicable is the rate applicable to that company and not the rate applicable to an incorporated company. As already stated, the unincorporated association was converted into a limited company on 1st April, 1925. If the tax was imposed at the close of the accounting year, the imposition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by Lord Dunedin in Whitney v. Commissioners of Inland Revenue [1925] 10 Tax Cas., 88; [1926] AC 37. They are in the following terms: Now, there are three stages in the imposition of a tax. There is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment. That, ex hypothesi, has already been fixed. But assessment particularises the exact sum which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay. In our view neither of these observations relate to the point of time at which the tax gets attached to the total income of the assessee. Nor do they run counter to the rule laid down by their Lordships of the Privy Council in the two decisions on which Mr. Joshi has placed reliance. All these decisions read together indicate that the income earned by the close of the accounting year is liable to attract tax and a person earning the income renders himself liable to be taxed at that point of time, but the point of time at which the tax gets attached to the income and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the tax depend on the passing and the application of the annual Finance Act. Thus, income is chargeable to tax independent of the passing of the Finance Act, but until the Finance Act is passed no tax can be actually levied. A comparison of sections 3 and 6 of the Act shows that the Act recognises the distinction between chargeability and the actual operation of the charge. It is thus clear that it is the passing of the Finance Act that brings into operation the imposition of income-tax. In our judgment, therefore, there was no imposition of income-tax on 31st December, 1956, on the assessee, the Finance Act not having been passed by that time. Thus, there being no existing liability to pay tax on that date, which was the valuation date, there was on that date no debt owed within the meaning of section 2(m) of the Act. The deduction claimed by the assessee for the estimated income-tax liability on the ground that it was a debt owed by the assessee on the valuation date cannot, therefore, be allowed. Mr. Palkhivala in the alternative contends that even assuming that the estimated tax liability was not a debt within the meaning of section 2(m) of the Act, it is still ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (1) of section 7 is to make an estimate as to the price at which the asset would be sold and that would be the value of the asset. Sub-section (2), however, gives an option to the Wealth-tax Officer not to follow this method of valuing each asset by estimating its market price in case where the assessee is carrying on a business and the Wealth-tax Officer has to value the assets of the business belonging to the assessee. It provides that instead of valuing each asset separately, he may value the assets of the business as a whole in a bulk and ascertainment of that value should be having regard to the balance-sheet of the business. There would naturally be items in the balance-sheet which would show the assets as well as the liabilities. The Wealth-tax Officer has been given power to make necessary adjustments in the balance-sheet as the circumstances of the case may require. It is difficult to read any restriction on this power of the Wealth-tax Officer as is contended by Mr. Palkhivala. The expression net value also does, not carry the matter any further. The word net means clear of all-charges and deductions, but what kind of deductions again is a question. As we have said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for technical and supervisory staff. These awards, inter alia provide that gratuity should be paid at the rate of one month's salary for each year of service subject to the maximum of 15 months' salary on the death of an employee while in service or become physically or mentally incapacitated from further service, on voluntary retirement or resignation after 15 years' continuous service, on termination of service after ten years or more of continuous service. It further provides that gratuity will not be paid to any employee who is dismissed for dishonesty or misconduct. The assessee did not show any amount in its balance-sheet as a liability on the said account of gratuity. On the other hand, the balance-sheet mentions that gratuity amount, which, according to the assessee, is a contingent liability, is not shown as it was indeterminate. Even though no amount is shown as a liability on account of gratuity, the note at the foot of the balance-sheet is in the following terms : In the opinion of the board, the current assets are approximately of the values stated, if realised, in the ordinary course of business. The provision for depreciation and for all known liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not an existing liability, but would be a contingent liability on the happening of certain events, viz., death of an employee or incapacitation of the employee or retirement of an employee or resignation of an employee. The liability in respect of any particular employee may not even arise if his services are dispensed with on the ground of dishonesty or misconduct. Mr. Palkhivala conceded before us that a liability in respect of the claim of the employees for gratuity awarded by the Industrial Court is not a debt within the meaning of section 2(m) of the Act. He, however, has contended that it should be allowed as a deduction in valuing the assets of the business of the assessee under section 7(2)(a) of the Act. In the first instance, assuming that there is any liability, it has no bearing and could not have any bearing on the valuation of the assets. Apart from it, to sustain a claim for deduction under section 7(2)(a), it must, in the first instance, be shown that it is a liability shown in the balance-sheet. We have already stated that the balance-sheet for the relevant period does not show the liability in respect of gratuity as a liability. On the contrary, even without s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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