Commissioner Of Wealth Tax Petitioner v. Delhi Cloth & General Mills Co. Ltd.

H.R Khanna, C.J:— This judgment would dispose of Wealth Tax References No. 8 of 1968 and No. 1 of 1969. The assessee in these two references is the Delhi Cloth & General Mills Co. Ltd., Delhi. Wealth Tax Reference No. 8 of 1968 relates to assessment year 1957-58 for which the relevant valuation date is June 30, 1956, while Wealth Tax Reference No. 1 of 1969 pertains to the assessment year 1958-59 the relevant valuation date for which is June 30, 1957. The following two questions have been referred in Reference No. 8 of 1968 under Section 27(1) of the Wealth-tax Act, 1957 (27 of 1957) (hereinafter referred to as the Act) :—

“(i) Whether on the facts and circumstances of the case, the excise duty of Rs. 6,13,614/- claimed by the assessee in the assessment year 1957-58 is a ‘debt owed’, within the meaning of section 2(m) of the Wealth-tax Act, 1957, on the relevant valuation date ?

(ii) Whether on the facts and circumstances of the case, the investment of Rs. 2,000/- by the assessee company in Pakistan Savings Certificate is eligible for exemption within the meaning of section 5(1)(xvi) of the Wealth-tax Act, 1957 ?”.

Following question has been referred in case No. 1 of 1969 :—

“Whether on the facts and in the circumstances of the case the Excise Duty liability of Rs. 23,98,742/- for the assessment year 1958-59 was a debt owed within the meaning of section 2(m) of the Wealth-tax Act, 1957 ?”

The assessee is a Company incorporated under the Indian Companies Act. Its assets are located in India and Pakistan. It had income from interest on securities, properties held in Pakistan, business in India as well as in Pakistan, and from other sources.

For the assessment years 1957-58 and 1958-59 excise duty amounting to Rs. 6,13,614/- and Rs. 23,98,742/- respectively was levied on the assessee and demand for those amounts was made by the excise authorities. The assessee challenged the validity of the demand of the excise duty by means of a writ petition. The High Court by its judgment dated April 10, 1958 declared the demand made on the assessee to be illegal. The decision of the High Court was affirmed on appeal by the Supreme Court vide its judgment dated October 12, 1962 reported in (1963) 1 S.C.R 586 (Supplement).

In respect of the assessment of 1957-58 the Wealth-tax Officer as per his order dated February 28, 1958, refused to deduct the sum of Rs. 6,13,614/- in computing the assessee's net wealth on the ground that the assessee was denying the liability to pay that amount and as such it was a merely contingent liability. In appeal it was contended on behalf of the assessee that since the liability was ascertained and a notice of demand stood against the assessee it was a debt owed on the relevant valuation date notwithstanding the fact that the assessee had not accepted the demand. The Appellate Assistant Commissioner vide his order dated March 17, 1959, rejected this contention on the ground that the unpaid amount could not be held to be a debt owed by the Company on the valuation date. On second appeal to the Appellate Tribunal the claim for deduction of the aforesaid amount of Rs. 6,13,614/- in computation of the assessee's net wealth was allowed as per order dated January 5, 1967. The Tribunal observed that when the Government levied excise duty on the assessee that levy stood as a definite demand against it on the relevant valuation date. Such demand lost its force only when the High Court pronounced its judgment on April 10, 1958 absolving the assessee of the liability to pay the excise duty. The fact that subsequent to the valuation date the assessee was exonerated from the liability to pay the excise duty, in the opinion of the Tribunal, was not material inasmuch as the assessee's net wealth had to be computed by reference to the position as it prevailed on the relevant valuation date. Regarding the second question, referred in case No. 8 of 1968, the relevant facts are that the assessee claimed a deduction under Section 5(1)(xvi) of the Act of a sum of Rs. 2,000/- which had been invested in Pakistan Savings Certificate. Wealth-tax Officer did not allow that deduction inasmucn as it was not an investment in the Indian National Savings Certificate. The Appellate Assistant Commissioner affirmed this view. The Tribunal, however, accepted the assessee's plea on the ground that the expression National Savings Certificate had not been qualified by the word “Indian” and consequently the investment might refer to any National Savings Certificate. The claim for exemption was, accordingly, allowed.

In respect of the assessment for the assessment year 1958-59 the Wealth-tax Officer as per his order dated November 29, 1958, disallowed the assessee's claim for deduction of a sum of Rs. 23,98,742/- on the ground that the assessee-company was denying its liability to pay the same and had obtained an order from the High Court to prevent collection of the amount in question and as such the amount could not be treated as ascertained liability of the Company. On appeal the Appellate Assistant Commissioner as per his order dated November 27, 1961 accepted the contention advanced on behalf of the assessee that although the assessee-company was denying its liability to pay the excise duty and although the High Court had declared the demand for excise duty to be illegal by judgment dated April 10, 1958, there was a demand standing against the assessee on the relevant valuation date. The claim of the assessee was accordingly allowed. Second appeals in respect of the assessments made for assessment years 1957-58 and 1958-59 along with some other appeals were disposed of by the Appellate Tribunal by its order dated January 5, 1967. The Tribunal held that the assessee's net wealth had to be determined by reference to the respective valuation dates and it was only the position prevalent on those dates which had to be taken into consideration. In accordance with that finding, the Tribunal allowed the appeal of the assessee in respect of the claim for excise duty for the assessment year 1957-58 but somehow failed to pass an order in favour of the assessee in respect of the claim for excise duty for the year 1958-59. Subsequently an application under Section 35 of the Act was filed before the Tribunal on behalf of the assessee. The Tribunal on September 30, 1967, rectified its previous order and held that so far as the excise duty payable on the valuation date relevant for the assessment year 1958-59 was concerned, it had to be allowed as a deduction.

The two references have been made by the Appellate Tribunal on the application of the Commissioner of Wealth Tax in the above circumstances.

Section 3 of the Act is the charging section. According to that section, subject to the other provisions contained in the Act, there shall be charged for every assessment year commencing on and from the first day of April, 1957, a 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 has been defined in Section 2(q) of the Act in relation to any year for which an assessment is to be made under the Act, as the last date of the previous year as defined in Section 3 of the Income-tax Act if the assessment were to be made under that Act for that year. There follows a proviso but we are not concerned with that. Net wealth has been defined in section 2(m) of the Act as under :—

“ ‘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,—

(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 : ”

In order to determine whether the amounts of Rs. 6,13,614/- and Rs. 23,98,742/- constitute “debt owed” within the meaning of section 2(m) of the Act, we may state that a debt, as observed by Lindley L.J in Webb v. Stenton, (1883) Q.B.D 518(1), “is a sum of money which is now payable or will become payable in the future by reason of a present obligation, debitum in Praesenti, solvandum in futuro.” The word “owe” means to be under an obligation to pay. It does not add to the meaning of the word “debt”. See in this connection Kesoram Industries and Cotton Mills Ltd. v Commissioner of Wealth-tax (Central), Calcutta, (1966) 59 I.T.R 767(2). It was held by the majority in that case that a debt owed within the meaning of section 2(m) of the Wealth-tax Act can be defined as a liability to pay in praesenti or in futuro an ascertainable sum of money. The assessee-company in that case had shown for the year ending March 31, 1957 a certain amount as provision for the payment of income-tax and super-tax in respect of that year of account. One of the questions, which arose for determination in that case, was whether that amount was a debt owed within the meaning of section 2(m) of the Act 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 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 quantifying the tax. The liability to pay income-tax was held to be a present liability though the tax became payable after it was quantified in accordance with ascertainable data. The amount provided for payment of income-tax and super-tax in respect of the accounting year ending March 31, 1957, was accordingly held to be debt owed within the meaning of section 2(m) on the valuation date, viz., March 31, 1957, and was as such deductible in computing the net wealth.

Excise duty, which is payable by an assessee on the valuation date, would therefore be a “debt owed”. The fact that the assessee challenges the levy of the excise duty would not result in its ceasing to be a “debt owed” or take it out of the ambit of those words. The Parliament amended clause (m) of section 2 of the Act by Act 46 of 1964. As a result of that amendment, the present sub-clause (iii) of clause (m) was enacted. One of the results flowing from the enactment of that sub-clause is that if the liability to pay income-tax, estate duty, expenditure-tax or gift-tax, which is outstanding on the valuation date, is disputed by the assessee in appeal, revision or other proceedings on the ground that it is not payable by him, the same cannot be deducted as a debt owed. Excise duty is not mentioned in sub-clause (iii) and as such it would follow that even if the liability to pay excise duty, which is outstanding on the valuation date, is disputed, it would not prevent the assessee from claiming it as a debt owed.

It is open to an assessee to challenge a levy of Excise duty. The challenge may be about the quantum, propriety or legality of the excise duty. In case the assessee is unsuccessful in his challenge, his liability to pay the excise duty would remain unaffected in spite of his challenge. The fact that he has challenged the liability would not minimise it or impair its effectiveness. If the liability is outstanding on the valuation date it would be a per missible deduction. In the case of Pope The King Match Factory v. Commissioner of Income-tax, Madras, (1963) 50 I.T.R 495 (3), a demand for excise duty was served on the assessee by the Collector of Excise on December 9, 1954. The assessee objected to the demand but his objections were dismissed. His appeal to the Central Board of Revenue was rejected. He approached the Central Government but there too he was unsuccessful. The assessee debited the amount in his account and claimed this amount as a deductible allowance in computing his income for the assessment year 1955-56. It was held that the endeavour made by the assessee to get out of the liability of excise duty by prefering appeals to the statutory body could not detract from the efficency of the liability imposed upon him and that the assessee was entitled to debit the amount as an accrued liability. Jagadisan J., who gave the judgment of the Division Bench, observed :—

“The liability to pay excise duty on the part of the assessee arose out of the levy of the duty and the demand made against him for payment of such duty. Any dissatisfaction on his part regarding the quantum or propriety of the assessment and levy of the duty cannot minimise the liability or impair its effectiveness. He may raise a dispute over it and strain every nerve to avoid that liability. He may file appeals to the proper authorities questioning the imposition of the liability and praying for relief by way of cancellation of the duty. These are only constitutional modes in which a subject reacts to the levy of taxes and, indeed, there is nothing improper in them. A protest or opposition by a subject to the levy of tax or other duties payable to the Government cannot carry with it the implication that there is no proper levy legally recoverable till such protest or opposition ceases or is silenced.”

In the case of Devi Das Madho Prasad v. Commissioner of Income-Tax, U.P (1967) 63 I.T.R 356(4), the assessee, who followed the cercantile system of accounting debited his profit and loss account with the sum of Rs. 27,167/- being the liability to sales-tax and claimed this as a deduction. The Income-tax Officer held that the amount was not an ascertainable liability as the validity of the levy of the sales-tax had been challenged and the matter was before the Supreme Court. The Supreme Court upheld the validity of the provision under which the levy of sales-tax had been made. It was held by a Division Bench of Allahabad High Court (Manchanda and Beg JJ.) that the amount was deductible as an ascertained liability.

In the present case, however, we find that there was not mere challenge to the levy of excise duty by the assessee, the assessee-company actually succeeded in its challenge. The levy of the excise duty was held to be illegal by the High Court by its judgment dated April 10, 1958 and the decision of the High Court was affirmed on appeal by their Lordships of the Supreme Court vide judgment dated October 12, 1962. The effect of the judgments of the High Court and the Supreme Court was that there ceased to be any liability for the payment of excise duty and it became for all intents and purposes to be non-existent. The judgments of the High Court and the Supreme Court operated not only in respect of levy of future excise duty, they also resulted in striking down the excise duty which had been levied in the past. As the excise duty was declared to be illegal and as this declaration also applied to the excise duty which had already been levied by the excise authorities, it would, in our opinion, be not correct to hold that the excise duty was a debt owed within the meaning of those words on the valuation date. The fact that the judgments of the High Court and the Supreme Court were delivered subsequent to the valuation date would not make any material difference because they also covered the liability to pay excise duty for the past period. What is important in the present case is not the date of the decision of the High Court or that of the Supreme Court but whether in view of those decisions there existed a liability to pay the excise duty on the valuation date. If the effect of those decisions was that there existed no valid demand for excise duty on the valuation date, despite the fact that those decisions were given subsequently, the conclusion must necessarily be that the excise duty was not a debt owed on the valuation date. We, therefore, hold that the excise duty of Rs. 6,13,614/- and Rs. 23,98,742/- was not a debt owed within the meaning of section 2(m) on the relevant valuation dates.

So far as the second question in Refence No. 8 of 1968 is concerned, we find that according to clause (xvi) of sub-section (1) of section 5 of the Act wealth tax shall not be payable by an assessee in respect of National Savings Certificates. The assessee-company which is carrying on business in Pakistan, invested Rs. 2,000/- in Pakistan Savings Certificates. There is nothing in clause (xvi) which grants the exemption only in respect of Indian National Savings Certificates. In the circumstances, the assessee was entitled to claim exemption in respect of the investment of Rs. 2,000/- in Pakistan Savings Certificates.

As a result of the above, we answer the first question in Reference No. 8 of 1968 as also the question in Reference No. 1 of 1969 in the negative. The second question in Refence No. 8 of 1968 is answered in the affirmative. Keeping in view all the circumstances, we leave the parties to bear their own costs.

A.N.K References answered accordingly.