Ramaswami, J.:— The assessee filed returns under the Wealth-tax Act for the five assessment years 1962–63 to 1966–67. As per these returns the liabilities exceeded the value of the assets as on the relevant valuation dates, except in the assessment year 1962–63. The Wealth-tax Officer proposed to revalue the assets as per section 7 of the Wealth-tax Act. The assessee contended that, if the assets have to be revalued at the price which it would fetch if sold in the open market on the valuation date as provided in section 7, the capital gains tax payable on such valuation should be reduced from the total value in ascertaining the net wealth. This contention was rejected by the Wealth-tax Officer and he ascertained the aggregate value of the assets with reference to the price which they would fetch if sold in the open market on the valuation date as provided under section 7. On appeal, the Appellate Assistant Commissioner was also of the view that the question of deducting capital gains tax would arise only if it became payable and that it would become payable only when the property was sold and that, therefore, the valuation of the assets did not call for deduction on account of the liability to capital gains tax. The Tribunal, on a further appeal, confirming the view of the Wealth-tax Officer and the Appellate Assistant Commissioner, held that the liability to capital gains tax is not embedded in the market price of the assets which is the criterion for determining the valuation for the assessment to wealth-tax. After the appeal was disposed of by the Tribunal, the assessee died and his legal representatives filed the application for reference. At their instance, the following question has been referred in all the five assessment years:

“Whether, on the facts and circumstances of the case, the capital gains tax which may be payable by the assessee in the event of the assets being sold in the open market on the valuation date is an allowable deduction in arriving at the net wealth of the assessee liable to wealth-tax?” The three relevant provisions in the Wealth-tax Act which are material for the purpose of this case may be set out now. “Assets” are defined in section 2(e) as including property of every description, movable or immovable, except certain specified items which are mentioned therein. “Net wealth” is defined in section 2(m) as follows:

“‘net wealth’ means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, where-ever 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—

(i) debts which under section 6 are not to be taken into account;

(ii) debts which are secured on, or which have been incurred in relation to, any property in respect of which wealth-tax is not chargeable under this Act; and

(iii) the amount of the tax, penalty or interest payable in consequence of any order passed under or in pursuance of this Act or any law relating to taxation of income or profits, or the Estate Duty Act, 1953, the Expenditure-tax Act, 1957, or the Gift-tax Act, 1958,—

(a) which is outstanding on the valuation date and is claimed by the assessee in appeal, revision or other proceeding as not being payable by him, or

(b) which, although not claimed by the assessee as not being payable by him, is nevertheless outstanding for a period of more than twelve months on the valuation date.”

2. Section 3 imposes a tax in respect of net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule. Section 7 which was invoked by the authorities in valuing certain of the assets reads as follows:

“7. (1) Subject to any rules made in this behalf, 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.”

3. The contention of the learned counsel for the assessee was that section 7 enables the Wealth-tax Officer to estimate the value of any asset at the price it would fetch if sold in the open market on the valuation date. Thus, though there is no actual sale, the Wealth-tax Officer is enabled to imagine a sale and fix the price of the asset at such sale. This fiction created, according to the learned counsel, a reality of sale though there is actually no sale. It was then contended by the learned counsel that if that was so the logical consequence of payment of a capital gains tax, if any, should also be deemed to have been created as a fiction and that would amount to a “debt owed” within section 2(m). Relying on certain passages of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax [1966] 59 ITR 767, 775 SC., he further submitted that even for purposes of finding out the net wealth for the purpose of the Wealth-tax Act, what is relevant is the amount which ultimately would remain with the assessee in case there was a sale. The passage relied on from the above decision at page 775 reads as follows:

“Looking at the problem from the standpoint of a businessman or looking at the question from a common sense 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 fact that the real income of an assessee has to be ascertained on commercial principles subject to the provisions of the Income-tax Act. Is there any provision in the Wealth-tax Act which compels us to come to a conclusion which is unjust on the face of it?”

4. We are unable to agree with the learned counsel in his contention. As may be seen from the definition, “net wealth” is the amount which is in excess of the aggregate value of all the assets over the aggregate value of all the “debts owed” by the assessee on the valuation date. The Supreme Court in the decision in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax was concerned with the question of the meaning of the words “debts owed”. In particular, the Supreme Court held that income-tax payable by the assessee is a debt owed on the valuation date which is the 31st-March of every year, though that liability had not been quantified and assessed. The Supreme Court further held that the liability to pay income-tax was a present liability though the tax became payable after it was quantified in accordance with ascertainable data, that it was a perfected debt at any rate on the last date of the accounting year and not a contingent liability and that, therefore, it is a debt owing on the valuation date. The same view was expressed in the later decisions in Assam Oil Company Ltd. v. Commissioner of Wealth-tax [1966] 60 ITR 267 SC. and Standard Mills Co. Ltd. v. Commissioner of Wealth-tax [1967] 63 ITR 470 SC.. It may be mentioned that in these cases it was the provisions in the Income-tax Act that were relied on to determine whether the income-tax became a liability on the valuation date. The principle was later extended in respect of wealth-tax payment also in H. II. Setu Parvati Bayi v. Commissioner of Wealth-tax [1968] 69 ITR 864 SC..

5. It may be seen from section 45 of the Income-tax Act that the liability for payment of capital gains tax arises from the transfer of a capital asset. That means that an actual transfer and not a notional transfer attracts the liability for capital gains tax. In fact in one of the decisions in Alapati Venkataramiah v. Commissioner Of Income Tax, Hyderabad [1965] 57 ITR 185 SC., even when there was a pucca agreement to sell, the Supreme Court held that no liability to tax had arisen unless a document was executed and registered. Till there is such actual transfer, therefore, no liability to capital gains tax would arise.

6. Section 7 of the Wealth-tax Act only deals with the method of valuation of assets. It only enables the Wealth-tax Officer to estimate the value at the price which it would fetch if sold in the open market on the valuation date. If at all, it creates a hypothetical sale for the purposes of determining the value of the assets. It might be seen that under section 3, wealth-tax is imposed on the net wealth and under the definition of “net wealth” it is an amount. So the tax is levied on the amount which is determined as net wealth and necessarily, therefore, each one of the movable and immovable properties had to be valued and section 7 is one of the provisions which is intended for the determination of the value. On a reading of the provision, therefore, there is absolutely no warrant for the contention that a fictional liability to pay capital gains tax had been created or has arisen necessitating the deduction of the same in determining the value of the assets under section 7.

7. Further, only where there is an actual transfer there would be a liability in praesenti or a definite liability though the quantum of which may be determined in future. The Supreme Court in Ahmed G.H Ariff v. Commissioner Of Wealth-Tax, Calcutta., construing the words “if sold in the open market” in section 7(1), held that it did not contemplate actual sale or the actual state of the market, but only enjoined that it should be assumed that there is an open market and, on that basis, the value has to be found out and it is a hypothetical case which is contemplated and the tax officer must assume that there is an open market in which the asset can be sold. Thus, the section does not create any fiction of a real sale so as to warrant even an argument of a fictional liability to capital gains tax. The words “the price which…… it would fetch if sold in the open market on the valuation date” also have been construed in some of the decided ceases as the price which is payable by the purchaser to the seller and not what the seller actually receives in his hands. In Pandit Lakshmi Kant Jha v. Commissioner of Wealth-tax the question for consideration was whether certain commission which was necessarily to be paid to the brokers on sale of shares had to be deducted in determining the price at which the shares could be sold in open market. The Supreme Court held:

“There is nothing in the language of section 7(1) of the Act which permits any deduction on account of the expenses of sale which may be borne by the assessee if he were to sell the asset in question in the open market. The value according to section 7(1) has to be the price which the asset would fetch if sold in the open market. In a good many cases, the amount which the vendor would receive would be less than the price fetched by the asset. The vendor may, for example, have to pay for the brokerage commission or may have to incur other expenses for effectuating the sale. It is not, however, the amount which the vendor would receive after deduction of those expenses but the price which the asset would fetch when sold in the open market as would constitute the value of the asset for the purpose of section 7(1) of the Act. To accede to the contention advanced on behalf of the appellant would be reading in section 7(1) the words ‘to the assessee’ after the words ‘it would fetch’, although the legislature has not inserted those words in the statute. Such a course would not be permissible unless there is anything in the relevant provisions which may show that the intention of the legislature was that the value of an asset would be the price fetched after deducting the sale expenses.”

8. In construing a similar provision contained in section 7(5) of the Finance Act, 1894, Lord Denning M.R in Duke of Buccleuch v. Inland Revenue Commissioners held at page 460:

“You are to estimate on his hypothetical sale the price which the properties ‘would fetch’. That means the price which a purchaser would pay and not the amount which the seller would receive. When I say, ‘This property would fetch £ 10,000 if sold in the open market’, I mean that is the gross price which a purchaser would pay: and not the net amount which the seller would receive after deducting the agent's commission and so forth.”

9. This view was affirmed by the House of Lords in Duke of Buccleuch v. Inland Revenue Commissioners:

“The words ‘price such property would fetch’ in section 7(5) mean that it is not the price which the vendor would have received but is what the purchaser would have paid to be put into the shoes of the deceased. This means that the costs of realisation do not form a legitimate deduction in arriving at the valuation.” (Per Lord Guest).

“The wording of the Finance Act, 1894, section 7(5), adequate perhaps when it was passed, but with the great increase of rates of duty now severe and even unjust, requires the gross open market price, i.e, what the purchaser pays, and not what the vendor ultimately receives, to be taken as the valuation figures.” (Per Lord Wilberforce)

10. Therefore, we have to understand section 7 as referring to the gross price which the purchaser would have paid if the asset is sold in the open market and not even the hypothetical expenditures in relation to that sale are deductible. In any view of the matter, therefore, no capital gains tax is deductible in determining the value of the assets under section 7. We, accordingly, answer the reference in the negative and against the assessee and the revenue will be entitled to costs. Counsel's fee Rs. 250.

11. Question answered in the negative.