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TMI Blog1965 (11) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... on the original cost. In the balance-sheet of the relevant accounting year also, the said amount was shown as the value of the fixed assets. In the profit and loss account for the said year a sum of Rs. 15,29,855 was shown as the amount of dividend proposed to be distributed for that year. The said amount was declared as dividend at the general body meeting of the assessee held on November 27, 1957. The said balance-sheet as on March 31, 1957, also showed a provision for taxation amounting to Rs. 1,03,69,009 and as against the said amount a sum of Rs. 84,76,690 was shown as the taxes paid during the said accounting year. In computing the net wealth for the purposes of the Wealth-tax Act, 1957, the Wealth-tax Officer accepted the said valuation of the fixed assets under section 7(2) of the said Act, rejecting the plea of the assessee that each item of the assets should be valued at the market rate under section 7(1) thereof. He also disallowed the claim of the assessee in respect of the proposed dividend and estimated income-tax and super-tax on the ground that the said items were not debts on the valuation date, i.e., March 31, 1957, within the meaning of section 2(m) of the Weal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 business as on the valuation date and making such adjustments therein as the circumstances of the case may require . . ." Under this section in the case of an assessee carrying on business the Wealth-tax Officer may determine the net value of the assets of the business as a whole having regard to the balance-sheet of the business as on the valuation date. The balance-sheet, as indicated earlier, as on March 31, 1957, showed the appreciated value on revaluation of the assets at Rs. 2,60,52,357. As the value of the assets had increased, a corresponding balancing figure, viz., Rs. 1,45,87,000, was introduced in capital reserve surplus : that figure represented the increase in the value of the assets. It was argued that the revaluation was done for other purposes, that it did not represent the real value of the assets and that that fact was also reflected by the said amount representing the difference being shown as a capital surplus. Apart from the argument raised, there is nothing on the record to disclose why the said figure did not represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alia, the amount, if any, which it recommends to be paid by way of dividend. Till the company in its general body meeting accepts the recommendation and declares the dividend the report of the directors in that regard is only a recommendation which may be withdrawn or modified as the case may be. As on the valuation date nothing further happened than a mere recommendation by the directors as to the amount that might be distributed as dividend, it is not possible to hold that there was any debt owed by the assessee to the shareholders on the valuation date. The High Court rightly answered the second question in the negative. The third question raised a serious controversy between the parties. On this question the High Court held 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 after the passing of the Finance Act and determination made by the income-tax authorities and, therefore, no debt was owed by the assessee on the valuation date. In that view, it answered the third question in the negative. A few facts relevant to this question may be recapitulated. Under the Wealth-tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... last day of the previous year as defined in clause (11) of section 2 of the Income-tax Act if an assessment were to be made under that Act for that year.." INCOME-TAX ACT, 1922. "Section 2(11): 'previous year' means---- (i) in respect of any separate source of income, profits and gains---- (a) the twelve months ending on the 31st day of March next preceding the year for which the assessment is to be made, or, if the accounts of the assessee have been made up to a date within the said twelve months in respect of a year ending on any date other than the said 31st day of March, then, at the option of the assessee, the year ending on the date to which his accounts have been so made up. Section 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 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ending with March 31, 1957, at the rates prescribed under the Finance Bill or the previous Finance Act whichever was less, as the Finance Act of 1957 was passed only in September, 1957. On those facts, the question is whether the liability of the assessee to pay income-tax and super-tax arose on the valuation date, i.e., March 31, 1957, the last day of the accounting year, or subsequently during the assessment year, i.e., during the period April 1, 1957, to March 31, 1958. Looking at the problem from the standpoint of a businessman or looking at the question from a commonsense view, one will reasonably hold that the net wealth of an assessee during the accounting year is the income earned by him minus the tax payable by him in respect of that income. If a person earns Rs. 1,00,000 during the accounting year and has to pay Rs. 60,000 as tax in respect of that income, it will be incongruous to suggest that his wealth at the end of that year is Rs. 1,00,000. A reasonable man will say that his income is only Rs. 40,000, which represents his wealth at the end of the year. But it is said that what is just is not always legal. This court has, on more than one occasion, emphasized the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the accounts are finally dealt with by the insurance committee. Therefore, there was a ' debt ' at the material date, though it was not presently payable and the amount was not ascertained." Phillimore L.J., dealing with the argument based on the fact that the sums were not ascertained at the time they were sought to be attached, observed: "No doubt these debts were not presently payable, and the amounts were not, on April 9, 1914, ascertained in the sense that no one could say what the result of the calculations would be, but it was certain on that date that a payment would become due from the committee to the doctors out of the balance of the moneys in the hands of the committee for 1913 ........" So also Bankes L.J. observed : "Dr. Sweeny fulfilled that condition, and a debt arose, though the amount of it was not ascertained on April 9, 1914, and was not then payable." This judgment in substance ruled that a present liability to pay an amount in future, though it was not ascertained but was ascertainable, was a debt liable to attachment. The word "debt" was again considered in Inland Revenue Commissioners v. Bagnall Ltd. in connection with the excess profits ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ascertainment of the amount of the charge in favour of the Law Society. Ormerod J., observed : ".....that is merely a question of ascertaining the debt which has to be paid over to the assisted person and does not prevent that debt from being an existing debt at the material date." This decision also recognized that, if there was a liability in praesenti, the fact that the amount was to be ascertained did not make it any the less a debt. In Dunlop & Ranken Ltd. v. Hendall Steel Structures Ltd. (Pitchers Ltd., Garnishees), it was held that the issuing of the architect's certificate was just as much a necessity for investing a cause of action in sub-contractors as it was in the main contracts, and the judgment-debtors had no right to be paid, and therefore, there was no debt, until the architect had certified the amount to be paid for the work ordered by the garnishees. On that reasoning it was held that no garnishee order should have been made. Strong reliance was placed on this decision in support of the contention of the revenue that there could not be a debt if the ascertainment of the debt depended upon a certificate to be issued by a third party. But a perusal of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebt. The decision of a Full Bench of the Calcutta High Court in Banchharam Majumdar v. Adyanath Bhattacharjee throws considerable light on the connotation of the word " debt ". Jenkins C.J. defined that word thus : "I take it to be well established that a debt is a sum of money which is now payable or will become payable in future by reason of a present obligation." Mookerjee J. quoted the following passage with approval from the judgment of the Supreme Court of California in People v. Arguello: " Standing alone, the word 'debt' is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due. In other words, debts are of two kinds: solvendum in praesenti and solvendum in futuro . . . A sum of money which is certainly and in all events payable is a debt, without regard to the fact whether it be payable now or at a future time. A sum payable upon a contingency, however, is not a debt, or does not become a debt, until the contingency has happened." This passage brings out with clarity the essential charac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of section 2(m) of the Wealth-tax Act. The first question is whether section 3 of the Indian Income-tax Act, 1922, or section 2 of the Finance (No. 2) Act, 1957, is the charging section. The revenue contends that the Finance Act is the charging section and that, therefore, the liability accrued only on the first day of April, 1957, while the assessee says that section 3 of the Income-tax Act is the charging section and that the Finance Act only prescribed the rate of tax payable. Uninfluenced by judicial decisions, let us at the outset look at the relevant provisions of the two Acts. Under section 3 of the Income-tax Act, 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, the said Act. The expression " charged " is used both in the case of the Central Act, i.e., the Finance Act, and the Income-tax Act. It could not have been the intention of the legislature to charge the income to income-tax under two Acts. Necessarily, therefore, they are used in two different senses. The tax is to be charged for that year in acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appear to be conflicting, do not in effect run counter to the said conclusion. The first decision is that of the Judicial Committee in Commissioner of Income-tax v. Western India Turf Club Ltd. Therein, the Judicial Committee held that the rate of super-tax payable by a company fixed by the Finance Act would apply, though an incorporated association was formed into a company only on April 1, 1925. In that connection the Board, adverting to the argument that the rate should have been only that applicable to an unincorporated association, observed : " The argument which has been used in favour of the appeal seems to involve the fallacy that liability to tax attached to the income in the previous year. That is not so. No liability to tax attached to the income of this company until the passing of the Act of 1925, and it was then to be taxed at the rate appropriate to a company." The observations appear to be rather wide. Be that as it may, the subsequent decisions of the Judicial Committee made it abundantly clear that the liability to tax arises during the accounting year, though its quantification is postponed to a later date. In Maharaja of Pithapuram v. Commissioner of Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifies what the Judicial Committee meant in Maharaja of Pithapuram v. Commissioner of Income-tax when it said that the Income-tax Act would come into operation after the Finance Act was passed. It was referring not to the liability but to the quantification of the amount under that Act. This court in Chatturam Horilram Ltd. v. Commissioner of Income-tax reviewed the legal position vis-a-vis the question of charge to income-tax under the Income-tax Act. The facts in that case were, the assessee-company carrying on business in Chota Nagpur was assessed to tax for the year 1939-40, but the assessment was set aside by the Income-tax Appellate Tribunal on March 28, 1942, on the ground that the Indian Finance Act, 1939, was not in force during the assessment year 1939-40, in Chota Nagpur which was a partially excluded area. On June 30, 1942, a Regulation was promulgated by which the Indian Finance Act of 1939 was brought into force in Chota Nagpur retrospectively as from March 30, 1939. Thereupon the Income-tax Officer made an order holding that the income of the assessee for the year 1939-40 had escaped assessment and issued to the assessee a notice under section 34 of the Income-tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nable. If the Finance Act is passed, it is the rate fixed by that Act ; if the Finance Act has not yet been passed, it is the rate proposed in the Finance Bill pending before Parliament or the rate in force in the preceding year, whichever is more favourable to the assessee. All the ingredients of a " debt " are present. It is a present liability of an ascertainable amount. Looking from a practical standpoint also, there cannot possibly be any difficulty in ascertaining the liability. As the actual assessment will invariably be made subsequent to the close of the accounting year, the rate would certainly be available to the authorities concerned for the purpose of quantification. The High Courts of Bombay, Gujarat and Kerala have expressed cenficting views on this question. The Bombay High Court in Commissioner of Wealth-tax v. Standard Mills Co. Ltd. came to the conclusion that the point of time at which the tax got attached to the income and the tax was imposed on the person would be the passing of the Finance Act. A Division Bench of the Gujarat High Court in Commissioner Wealth-tax v. Raipur Manufacturing Company Limited held that the liability to income-tax arose under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found in section 2(m) of the Wealth-tax Act, it is not necessary to express our opinion on the alternative contention raised on behalf of the assessee. In the result, we answer the first question in the affirmative; the second question, in the negative ; and the third question, in the affirmative. We accordingly modify the order of the High Court. As the parties succeeded in part and failed in part, they will bear their own costs here and in the High Court. SHAH J.----I am unable to agree with the answer propounded by Subba Rao J. on the third question referred to the High Court. In the balance-sheet of the company for the year of account ending on March 31, 1957, provision was made for income-tax liability estimated at Rs. 1,03,69,009 and against this amount credit for Rs. 84,76,690 paid as advance tax was taken. The company claimed in proceedings for assessment of wealth-tax for the assessment year 1957-58 that in the computation of net wealth the balance of Rs. 18,92,319 was liable to be deducted from the net value of the total assets as a debt owed by the company on the valuation date. This claim was disallowed by the tax authorities, and by the High Court in a reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in Webb v. Stenton observed that " a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation ". That definition for the purpose of the Wealth-tax Act correctly describes the concept of debt. A debt, therefore, involves a present obligation incurred by the debtor and a liability to pay a sum of money in present or in future. The liability must, however, be to pay a sum of money, i.e., to pay an amount which is determined or determinable in the light of factors existing at the date when the nature of the liability has to be ascertained. In resolving the problem whether an amount estimated by the company in its balance-sheet on the valuation date as payable to satisfy income-tax liability in the year of assessment, the nature of the charge imposed by the Indian Income-tax Act, 1922, upon income earned by an assessee in the previous year must first be considered. Section 3 of the Income-tax Act provides: " 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avourable to the assessee applies. The existence on the statute book of section 67B does not, in my judgment, convert what is an inchoate liability on the valuation date, i.e., on the last day of the previous year, into a completed or effective liability to pay tax. Decisions of courts on the nature of the charge created by section 3 of the Income-tax Act are unanimous. In Commissioner of Income-tax v. Western India Turf Club Ltd. the Western India Turf Club, which was originally an unincorporated association, was registered on April 1, 1925, as a company limited by guarantee. The company was sought to be assessed to super-tax on the income in the assessment year commencing on April 1, 1925, at the rate applicable to an unincorporated association. The Judicial Committee held that, for the purpose of super-tax, the total income not of the company but of its predecessor-in-title had to be taken, but the taxpayer being a company falling within Part II of the Third Schedule of the Finance Act, 1925 (13 of 1925), it had to pay tax at the rate applicable to a registered company and not to an unincorporated association. In dealing with the contention of the Commissioner of Income-tax th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t) that the actual levy of the tax and the rates at which the tax has to be computed is determined each year by the annual Finance Acts. 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 actully levied. " In that case, the assessee-company was assessed to tax for the assessment year 1939-40, but the assessment was discharged because the Finance Act of 1939 had not been extended to the Chhota Nagpur area in the year of assessment. Bihar Regulation 4 of 1942 was thereafter promulgated, by which the Finance Act was brought into force as from March 30, 1939. The Income-tax Officer then issued a notice under section 34 of the Income-tax Act, 1922, for bringing to tax escaped income, and the assessee-company challenged the validity of the notice. This court held that the income of the company was chargeable to tax by the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection. In considering the question whether Parliament had power to enact the impugned sections, the Judicial Committee explained the scheme of the Income-tax Act as stated earlier. In Kalwa Devadattam's case this court was dealing with a case in which properties of a joint Hindu family consisting of a father and his three minor sons were sold by public auction to satisfy liability to pay income-tax which was assessed by appropriate proceedings under the Act. The sons thereafter sued the Union of India and others for a declaration that the orders of assestment were unenforceable, and that the sale was without jurisdiction and illegal in that the properties sold at the auction in pursuance of the assessments did not belong to the joint family, and that in any event because there has been before the assessments were completed intimation to the Income-tax Officer that there had been severance of the undivided family. This court rejected the claim to set aside the sale. It is clear that in Kalwa Devadattam's case, assessment proceedings were held by the Income-tax Officer to assess the income of the Hindu undivided family in the relevant years of assessment and the sale was chal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its balance-sheet it could make an estimate but that estimate had no relevance in ascertaining whether tax payable in the assessment year would be regarded as a debt owed on the valuation date. Liability to pay tax arose not from the estimate, but from the Finance Act: it arose when the Finance Act became operative and not earlier than that. The alternative argument raised by counsel for the company from section 7(2) has, in my judgment, no force. Section 7 of the Act provides : " (1) 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 business as on the valuation date and making such adjustments therein as the circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assesses. Clause (b) of sub-section (2) of section 7 also does not support the contention of the assessee that for the purposes of the Act, the net value of the assets of an assessee carrying on business is the same as his net wealth. Clause (b) of sub-section (2) contemplates cases where a company not resident in India is carrying on business and it is not possible to make a computation in accordance with clause (a), because of the absence of a separate balance-sheet of the company. The Wealth-tax Officer is then entitled to take the net value of the assets of the business as a whole and to find the net value of the assets in India by multiplying the total value of the business with that fraction which the income arising from the business in India during the year ending on the valuation date bears to the aggregate income from the business wherever arising during the year. This is an artificial rule adopted with a view to avoid investigation of a mass of evidence which it would be difficult to secure or, if secured, may require prolonged investigation. The adoption of an artificial rule in clause (b) of section 7(2) is also for determination of the net value of assets and not fo ..... 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