The assessee conducted business (manufacture and sale of Ayurvedic medicines) and had other income sources. On 28 May 1965 he made a voluntary disclosure under Section 68 of the Finance Act, 1965, of concealed income amounting to Rs. 5,00,000. The disclosure was accepted and the assessee paid Rs. 3,00,000 as income-tax under that scheme.

The assessee had, in wealth‑tax returns for 1960-61 and 1961-62, included amounts of Rs. 2,25,000 and Rs. 2,80,000 respectively as part of his net wealth (these amounts were drawn from the concealed income), and the Wealth-tax Officer accepted their inclusion in assets. The assessee did not claim deduction for income-tax payable on those specific amounts in his original wealth‑tax return; he raised that claim before the Appellate Assistant Commissioner.

The Appellate Assistant Commissioner allowed the assessee to raise the additional ground but on merits denied the deduction, holding that on the valuation dates there was no outstanding liability in the sense of a "debt owed" under section 2(m) of the Wealth‑tax Act. On second appeal the Income‑tax Appellate Tribunal allowed the claim, holding that proportionate parts of the Rs. 3,00,000 were debts due on the valuation dates. The Commissioner (department) was aggrieved and referred the following question under section 27(3) of the Wealth‑tax Act to the court.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Income‑tax liability under Section 68 of the Finance Act, 1965, would be allowed in computing the assessee's wealth on the relevant valuation dates (i.e., whether the tax levied under Section 68 is a legitimate deduction from net wealth as a "debt owed").

Arguments of the Parties

Commissioner / Department's Arguments

The department contended that any income declared under Section 68 becomes liable to tax only when the declaration is made; consequently, payment under Section 68 is not in satisfaction of any liability under the charging provisions (section 3 of the Indian Income‑tax Act, 1922, or section 4 of the Income‑tax Act, 1961) and therefore does not constitute a debt owed on the earlier valuation dates.

Assessee's Arguments

The assessee's position (as reflected by the Appellate Tribunal's allowance and the court's recounting) was that the income in question was earned in earlier previous years, giving rise to an income‑tax liability at the end of those previous years; concealment did not negate that liability, and therefore the income‑tax attributable to those earlier years (even if quantified later under Section 68) was a debt owed on the valuation dates and deductible in computing net wealth.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth‑tax, [1966] 59 ITR 767 (Supreme Court)	(i) "Owe" means to be under an obligation to pay; (ii) "debt owed" under section 2(m) can be defined as liability to pay in praesenti or in futuro an ascertainable sum; (iii) the charging provision for income‑tax is section 3 of the Indian Income‑tax Act (1922) and Finance Acts merely supply the rate; (iv) liability to pay income‑tax is a present liability on the last day of the accounting year if ascertainable.	The court applied this ratio to hold that the liability to pay income‑tax arises at the end of the relevant previous year and is an ascertainable present liability for wealth‑tax purposes; the fact that tax was later quantified under Section 68 did not alter that legal position.
Commissioner of Wealth‑tax v. Ahmed Ibrahim Sahigara, [1974] 93 ITR 288 (Gujarat High Court)	(As summarized in the opinion) Held that payment of income‑tax under Section 68 of the Finance Act, 1965 is not in satisfaction of any liability under section 3 of the Indian Income‑tax Act, 1922, or under section 4 of the Income‑tax Act, 1961 (i.e., took a contrary view that Section 68 creates a separate scheme not equating to the ordinary charging provision liability).	The court noted this contrary High Court decision and expressly disagreed with it, holding that Section 68 only prescribes procedure and rate and does not alter the underlying liability to income‑tax under the charging provisions.
C.K. Sundara Raja Naidu v. Wealth‑tax Officer, [1971] 82 ITR 410 (Kerala High Court)	(As summarized in the opinion) Held that Section 68 of the Finance Act, 1965 is a special provision to compound the income‑tax liability; by disclosure an assessee does not incur a liability under that section for wealth‑tax valuation purposes and hence the amount is not a debt owed on the valuation date.	The court recorded this decision and expressly rejected its reasoning, stating that Section 68 does not compound a separate kind of liability but merely prescribes the rate at which income that was already chargeable under the Income‑tax Act is to be taxed when disclosed.

Court's Reasoning and Analysis

The court anchored its analysis on the statutory definition of "net wealth" in section 2(m) of the Wealth‑tax Act, which subtracts "debts owed" on the valuation date from the aggregate assets. The central legal question was whether income‑tax liability attributable to income earned in prior years (but disclosed and quantified under Section 68 only in 1965) constituted a "debt owed" on the respective earlier valuation dates.

The court proceeded in these logical steps:

Establish factual premise: the assessee possessed sums on the relevant valuation dates originating from income that the income‑tax authorities accepted as earned in the relevant earlier years.
Legal principle (statutory and doctrinal): under the Income‑tax Act tax becomes payable on the expiry of the previous year in which the income is earned; assessment later only quantifies the liability. Therefore the liability to pay income‑tax arises when the income is earned, not when it is assessed or later disclosed.
Apply the Supreme Court precedent in Kesoram: that case defines "debt owed" to include a present or future liability to pay an ascertainable sum and holds that an income‑tax liability is a present liability ascertainable on accounting/valuation dates. The court applied that ratio directly to conclude the liability existed on the earlier valuation dates.
Address concealment and the disclosure scheme: the court reasoned that mere concealment (and consequent later quantification under Section 68) does not extinguish or negate the underlying liability. Section 68 of the Finance Act, 1965, is not a charging section that creates a new kind of liability; rather it prescribes a mode of assessment and a flat rate for tax on disclosed concealed income. Thus payment under Section 68 is payment of income‑tax in lieu of the liability already arising under the Income‑tax charging provisions.
Respond to contrary authorities: the court considered and rejected the contrary views of the Gujarat and Kerala High Courts (which had held payment under Section 68 did not discharge a liability chargeable under the Income‑tax Act or that Section 68 compounds liability). The court interpreted the phrase "notwithstanding anything contained in the Income‑tax Act" in Section 68 as qualifying the rate of tax only, not the existence or timing of the underlying income‑tax obligation.

On this analysis the court concluded that tax paid under Section 68(3) was payment in respect of an income‑tax liability that existed on the relevant valuation dates and therefore constituted a "debt owed" for the purpose of computing net wealth.

Holding and Implications

Holding: The court answered the referred question in the affirmative, ruling in favour of the assessee and against the department. The court held that the income‑tax liability attributable to the amounts (even though quantified and paid under Section 68 of the Finance Act, 1965) was a debt owed on the relevant valuation dates and thus deductible in computing net wealth. The court also awarded the assessee costs of Rs. 200.

Direct effect on the parties: The assessee is entitled to deduct proportionate parts of the income‑tax paid under Section 68 from his net wealth for the relevant valuation dates; the department's challenge was rejected and costs were awarded to the assessee.

The opinion explains and applies existing legal principles and engages with contrary High Court decisions, but it does not, on its face, elaborate broader policy consequences beyond this case. The decision is confined to the legal question referred and its application to the facts before the court.

Show all summary ...

R.L Gulati, J.:— This reference under section 27(3) of the Wealth-tax Act, 1957, raises an interesting question of law. The question in short is whether the tax levied upon a person under Section 68 of the Finance Act, 1965, is a legitimate deduction in the computation of his net wealth upon which tax is to be levied.

2. The assessee was carrying on the business of manufacture and sale of Ayurvedic medicines at Datia and had other sources of income also. On 28th May, 1965, he made a voluntary disclosure of his concealed income of Rs. 5 lakhs. This disclosure was made under Section 68 of the Finance Act, 1965. The disclosure was accepted and the assessee paid a sum of Rs. 3 lakhs as income-tax on the disclosed income of Rs. 5 lakhs. It was the assessee's case that he had earned this income during a number of years in the past. In the wealth-tax returns for the years 1960-61 and 1961-62, he included in his net wealth a sum of Rs. 2,25,000 in the first year and a sum of Rs. 2,80,000 in the next year out of the concealed income. This was accepted by the Wealth-tax Officer. The assessee, however, appears not to have claimed any deduction on account of income-tax payable on the two amounts of Rs. 2,25,000 and Rs. 2,80,000. Before the Appellate Assistant Commissioner of Income-tax he put forward this claim. The appellate authority allowed him to raise this additional ground but on merits held that the assessee was not entitled to deduct any portion of the sum of Rs. 3 lakhs paid by him as tax in the year 1965, as, in his opinion, on the relevant valuation dates for the two assessment years in question there was no outstanding liability on account of income-tax. In other words, he held that there was no debt owed by him within the meaning of section 2(m) of the Act. On second appeal, however, the claim of the assessee was allowed by the Income-tax Appellate Tribunal. The Tribunal held that the assessee was entitled to deduct proportionate amount of Rs. 3 lakhs in the two assessment years in question as they represented debts due on the valuation dates. The Commissioner is aggrieved and, at his instance, the following question of law has been referred for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was legally correct in holding that the income-tax liability under section 68 of the Indian Finance Act, 1965, would be allowed in computing the assessee's wealth on the relevant valuation dates?”

3. Under section 3 of the Wealth-tax Act, wealth-tax is payable by a person for every financial year on his net wealth on the corresponding valuation date. “Net wealth” has been defined in section 2(m) to mean the amount by which the aggregate value computed in accordauce with the provisions of the Act of all the assets belonging to the assessee on the valuation date is in excess of the aggregate value of the debts owed by him on the valuation date except those which are enumerated in clauses (i) and (ii) of section 2(m). In other words, wealth-tax is payable on the value of the total assets of a person minus the debts owed by him. The question which has to be decided is as to whether the assessee owed any debt by way of income-tax liability on the corresponding valuation dates of the financial years 1960-61 and 1961-62, for the purposes of the Wealth-tax Act.

4. Now, admittedly, the assessee was in possession of the two sums of Rs. 2,25,000 and Rs. 2,80,000 on the respective valuation dates of the two assessment years in question on which the assessee was liable to pay the wealth-tax. Admittedly, again, these two amounts came out of the concealed income of Rs. 5 lakhs which the assessee ultimately declared in the year 1965. Assuming that these two amounts were earned in the previous years relevant to the assessment years 1960-61 and 1961-62, which fact has been accepted by the income-tax authorities, the assessee was clearly liable to income-tax on these two amounts. If the assessee had not concealed the income and had offered it for assessment at the appropriate time and if the tax had remained unpaid on the valuation dates the arrears of tax would constitute a debt liable to be deducted in the computation of total income. This position again is unexceptionable. Now, the mere fact that the amounts had not been offered for assessment and no tax was levied thereon, will not, in our opinion, alter the position so far as the computation of wealth-tax is concerned. It must be remembered that under the Income-tax Act tax becomes payable immediately on the expiry of the previous year in which the income is earned. The assessment may take place later but the assessment merely quantifies the tax. The liability to pay tax arises much earlier, namely, on the close of the previous year in which the income is earned. It follows that if the assessee has offered these two amounts for assessment in the relevant assessment years but the assessments had not been made on the valuation dates, even then the assessee would be entitled to deduct the income-tax payable by him and such liability would amount to a debt owed by him. The fact that he did not disclose this income at the appropriate time and evaded the tax does not mean that he was not liable to pay the tax. As stated earlier, the liability to pay income-tax arises when the income is earned and not when it is disclosed or discovered. The quantification and determination of tax may be delayed because of the attempt of the assessee to conceal it from the department but his liability remains.

5. A question then arises whether this position has changed as a result of the disclosure scheme contained in Section 68 of the Finance Act of 1965. The disclosure scheme, in our opinion, does not change the position except that there would be a difference in the amount of tax payable by the assessee. Income covered by the disclosure scheme is liable to be taxed at a flat rate of 60 per cent. whereas the income assessed in the normal course, under the provisions of the Income-tax Act, would be liable to tax at the rates specified in the relevant Finance Act. In either case, what is taxed is taxable income though rates are different. It is not disputed that if the assessee had been assessed to tax under the Income-tax Act in respect of the two amounts in question in the relevant assessment years and if the tax liability was outstanding he would be entitled to a deduction of the tax liability in the computation of his net wealth. There is no reason why the tax payable under the disclosure scheme should also not be allowed to him as a deduction in computing his net wealth. We wish to emphasise it once again that what is paid by an assessee under the disclosure scheme is nothing else but income-tax. Section 68 of the Finance Act is not a charging section in the sense that it brings under charge something which is not income under the Income-tax Act. This is clear from the provisions of Section 68 of the Finance Act itself. The scheme contained in that provision is to bring to tax an income which was chargeable to income-tax but which had, for some reason, escaped the charge because of the attempt of the assessee to conceal it. An assessee, therefore, can offer for assessment under the disclosure scheme a part of his income which was liable to income-tax. If the income disclosed by him is not liable to tax under the Income-tax Act, it would not be liable to tax under the disclosure scheme either.

6. In Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax, [1966] 59 ITR 767, the assessee-company had, in its balance-sheet for the year ending on 31st March, 1957, shown certain amount as provision for payment of income-tax and super-tax in respect of that year. The question was whether that amount was a “debt owed” within the meaning of section 2(m) of the Wealth-tax Act, 1957, as on March 31, 1957, which was the valuation date, and, as such, deductible in computing the net wealth of the assessee-company. It was held by the Supreme Court:

“(i) that the word ‘owe’ meant to be ‘under an obligation to pay’; it did not really add to the meaning of the word ‘debt’;

(ii) that ‘debt owed’ within the meaning of section 2(m) of the Wealth-tax Act, 1957, could be defined as the liability to pay in praesenti or in futuro an ascertainable sum of money;

(iii) that the charging section for the purposes of income-tax was section 3 of the. Indian Income-tax Act, 1922, and the annual Finance Acts only gave the rate for quantification of the tax;

(iv) that a liability to pay income-tax was a present liability though the tax became payable after it was quantified in accordance with ascertainable data. There was a perfected debt at any rate on the last day of the accounting year and not a contingent liability. The rate was always easily ascertainable. If the Finance Act was passed, it was the rate fixed by that Act; if the Finance Act was not yet passed, it was the rate proposed in the Finance Bill pending before Parliament or the rate in force in the preceding year, whichever was more favourable to the assessee. AH the ingredients of a ‘debt’ were present: it was a present liability of an ascertainable amount.”

7. Applying the ratio of this case to the facts of the present case, it can be stated that the liability to pay income-tax was an obligation in praesenti which arose on the close of the relevant previous years. It was an ascertainable liability. The fact that it was quantified not in the relevant assessment years but in 1965 did not make any difference. The fact that the tax was paid by the assessee at the rate specified in sub-section (3) of Section 68 of the Finance Act, 1965, instead of the rates specified in the Finance Acts for 1960-61 and 1961-62 also did not change the legal position. Of course, in the case before the Supreme Court the assessee-company had made a provision in its balance-sheet for income-tax and super-tax and no such provision had been made by the assessee in the instant case. That again is a circumstance which is not material. The liability of the assessee for payment of income-tax does not depend upon his making a provision for it in the account books.

8. The contention of the department that any income declared under section 68 becomes liable to tax only when the declaration is made is not correct. Section 68 of the Finance Act is not a charging section. It merely prescribes a procedure for the assessment of concealed income and the rate of tax. The income so declared was chargeable to income-tax under section 4 of the Income-tax Act, 196.1, which is the charging section. In other words, the assessee was liable for the payment of income-tax from the very inception under section 4 of the Income-tax Act and the liability arose at the end of each previous year. The liability was merely assessed and quantified in 1965 in the manner provided under Section 68 of the Finance Act of 1965. Beyond that the Finance Act made no difference. The Gujarat High Court in Commissioner of Wealth-tax v. Ahmed Ibrahim Sahigara, [1974] 93 ITR 288 (Guj) has taken a contrary view. In the opinion of the learned judges payment of income-tax under Section 68 of the Finance Act, 1965, is not in satisfaction of any liability under section 3 of the Indian Income-tax Act, 1922, or under section 4 of the Income-tax Act, 1961. Reliance has been placed upon sub-section (1) of section 68 which provides that where any person makes a declaration in respect of any concealed income he shall, notwithstanding anything contained in the said Acts, be charged income-tax at the rate specified in sub-section (3) in respect of the concealed income so declared. Now, the expression “notwithstanding anything contained in the Income-tax Act”, in our opinion, qualifies the words “rate of tax”. It only means that whatever might be the rate of tax prescribed in the Income-tax Act read with the relevant Finance Act, in respect of the concealed income declared under section 68 the tax shall be charged at a flat rate of 60 per cent. as provided in subsection (3) of section 68. The change in the rate of tax does not affect the liability of the assessee to the income-tax under the Indian Income-tax Act. We are of the opinion that the income-tax paid by the assessee in accordance with section 68(3) of the Finance Act, 1965, is in lieu of his liability under the charging section of the Income-tax Act read with the relevant Finance Act. It is not a new liability arising for the first time on the disclosure being made by the assessee. For the same reason, we are unable to agree with the decision of the Kerala High Court in C.K Sundara Raja Naidu v. Wealth-tax Officer, [1971] 82 ITR 410 (Ker). The Kerala High Court has held that Section 68 of the Finance Act, 1965, is a special provision to compound the income-tax liability in respect of an income which an assessee may choose to disclose under the scheme envisaged by the said provision. By such a disclosure an assessee does not incur a liability to pay any tax under this section, and, therefore, the amount of tax is not a debt owed by him on the valuation date for the purposes of determining net wealth under the Wealth-tax Act. With respect it is pointed out that section 68 does not provide for the compounding of the income-tax liability. It merely provides for a different rate of tax. The liability imposed upon an assessee under section 68(3) of the Finance Act, 1965, is a liability on account of income-tax and not a liability of any other kind. This is clear from section 68(3) itself which says that the rate of income-tax chargeable in respect of the amount referred to in sub-section (1) shall be sixty per cent. of such amount. This provision, therefore, merely specifies the rate of income-tax in place of the rate prescribed under the relevant Finance Act. What is charged is income-tax and nothing else. Only the rate is different.

9. We accordingly answer the question in the affirmative, in favour of the assessee and against the department. The assessee is entitled to costs which we assess at Rs. 200.