9911796707
TMI Blog1961 (4) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... sheet of the assessee as on the valuation date. He, however, 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, represente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That was Wealth-tax Appeal No. 119 of 1958-59. It was 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 Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, there shall be charged for every financial year commencing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot necessary to refer to the items mentioned in the said section. Clause (1) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the essence of a debt is a present existing obligation and not a contingent liability, which may or may not materialise. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear the defendant wrote a letter in the following terms : "As my sons, Govindan and Ponnan, are not in the village to settle the accounts relating to the 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 consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e questions that arose for decision in Kesoram Cotton Mills Ltd.'s case (supra) and which also is one of the questions that arises before us, was whether in computing the net wealth of 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 intentiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulations made thereunder, entered into an agreement with the panel doctors of their district by which the whole amounts received by the committee from the National Insurance Commissioners were to be pooled and distributed 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consequence of a settlement of his action. The said sum was paid in July, 1954, to the Law Society for the Legal Aid Fund in accordance with the Legal Aid and Advice Act, 1949, and the Legal Aid (General) Regulations, 1950. Part of the sum 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the liability directed to be excluded from the aggregate value of the debt being for an ascertained sum, "the debts" from the aggregate value of which it is directed to be excluded, must be for ascertained sums. We find it difficult to accept the argument of Mr. Joshi. Clauses (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional assessment of the business profits tax made on it. The assessee's claim has been allowed by the Tribunal, but the Tribunal does not appear to have accepted that the estimated liability may amount to ₹ 3,70,083. On the other hand, the Tribunal has held that the assessee would be entitled to deduction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 ITR 240 (PC) and Chatturam v. Commissioner of Income-tax [1947] 15 ITR 302 (FC). Mr. Mehta, who also appears for the assessee, has also referred us to a decision of the Supreme Court reported in Chatturam Horilram Ltd. v. Commissioner of Income-tax [1955] 27 ITR 709 ; [1955] 2 SCR 290. Section 3 of the 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Income-tax v. Western India Turf Club Ltd. [1927] 2 ITC 490 (PC) were : The assessee, the Western India Turf Club Limited, originally was an unincorporated association and was converted into a limited company under the Indian Companies Act, 1913, on the 1st day of April, 1925. On an assessment to super-tax for the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arises by virtue of the charging section alone, and it arises not later than the close of the previous year, though quantification of the amount payable is postponed." The observations in Chatturam v. Commissioner of Income-tax [1947] 15 ITR 302, 308 (FC), on which reliance has been placed by Mr. Palkhivala, are the observations 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence to that machinery." After considering the various decisions and the provisions of section 3, at page 716, their Lordships observed: "Thus, under the scheme of the Income-tax Act, the income of an assessee attracts the quality of taxability with reference to the standing provisions of the Act but the payability and the quantification 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a debt under section 2(m) of the Act. We find it difficult to accept Mr. Palkhivala's contention that section 7(2)(a) is a complete code for ascertainment of the net wealth of the assessee. On the other hand, in our opinion, on a fair reading of sub-sections (i) and (2) of section 7 they provide only the mode of valuing the assets. The primary mode as will be seen from sub-section (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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cerned. We answer it accordingly. This brings us to the third question. Facts relevant to the third question may briefly be stated. Before the valuation date three awards have been made by the Industrial Court on October 28,1948, November 28, 1956, and October 17, 1954, one relating to the clerical staff of the assessee company, another relating to the employees excluding clerical staff and the third 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is a debt within the meaning of section 2(m) of the Act or a liability which has got a bearing on the question of valuation of the assets of the business as a whole when valued under section 7(2)(a) of the Act. We have also further observed that a contingent liability is not a debt within the meaning of the Act. Admittedly, it is not in dispute that the award allowing the claim of the employees for gratuity 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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