These writ appeals arise from a common judgment of Issac J. dismissing Original Petitions Nos. 1511 and 1512 of 1969 (C.K. Babu Naidu v. Wealth-tax Officer). The petitioners (assessees) had, pursuant to section 68 of the Finance Act, 1965, made voluntary declarations of income for certain assessment years and distributed that income in a specified manner. The assessing authorities accepted those distributions for income-tax purposes and tax was levied accordingly.

The assessees had been previously assessed to wealth-tax (except for the year 1965-66 in one petition). Following the declarations under section 68 and consequent income-tax assessments, steps under section 17 of the Wealth-tax Act, 1957 were taken to reopen the earlier wealth-tax assessments. The Wealth-tax Officer added to the assessees' net wealth, for each relevant year, the entirety of the amounts declared under section 68. The assessees challenged this treatment by original petitions, which were dismissed; these writ appeals (Writ Appeal Nos. 279 and 280 of 1971) followed.

The assessment years in issue were 1962-63, 1963-64, 1964-65 (both petitions) and additionally 1965-66 (in O.P. No. 1512). Valuation dates relevant to these years were March 31 of 1962, 1963, 1964 and 1965 respectively.

Legal Issues Presented

Whether, in computing "net wealth" under section 2(m) of the Wealth-tax Act, 1957, the income-tax due on income declared under section 68 of the Finance Act, 1965 must be deducted from the amounts so declared.
Whether the income-tax liability arising from declarations under section 68 of the Finance Act, 1965 constituted a "debt owed" by the assessee on the valuation date (so as to be deductible under the definition of net wealth), or whether such liability only arises at the time of the declaration.

Arguments of the Parties

Appellants' Arguments

The entirety of the income declared under section 68 of the Finance Act, 1965 should not be added to net wealth without first deducting the income-tax due on that declared income; the tax liability must be subtracted to arrive at assessable net wealth.
The income-tax liability on the declared amounts was, on the relevant valuation dates, a debt owed by the assessees within the meaning of section 2(m) of the Wealth-tax Act, 1957, and therefore deductible.
Counsel for the assessees repeated the argument before the appellate bench that the procedure followed by the Wealth-tax Officer in adding back the entirety of the declared amounts was not justified by applicable legal principles.

Learned Single Judge / Respondent View (as described in the opinion)

The learned single judge had taken the view that the principle relied upon (that a liability payable in future but ascertainable is a "debt owed") applied to income-tax assessed under the Income-tax Act, 1961, but that liabilities arising from declarations under section 68 of the Finance Act, 1965 could only arise at the time of the declaration and not on the valuation dates.

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)	The word "owe" means "to be under an obligation to pay"; "debt owed" under section 2(m) may be defined as liability to pay in praesenti or in future an ascertainable sum of money.	The court relied on this decision to support the proposition that an income-tax liability which is payable in the future but is ascertainable qualifies as a "debt owed" on the valuation date for purposes of section 2(m) of the Wealth-tax Act.
H.H. Sethu Parvati Bayi v. Commissioner of Wealth-tax, [1968] 69 ITR 864 (Supreme Court)	Authority for the proposition that an income-tax liability may be regarded as arising on the valuation date.	The court cited this decision to reinforce the conclusion that the income-tax liability arising from the amounts in question existed on the valuation date and thus formed a deductible debt under section 2(m).
C.K. Babu Naidu v. Wealth-tax Officer, [1971] 82 ITR 410 (Ker) — judgment of Issac J.	This is the common judgment of the single judge dismissing the original petitions (procedural source rather than an abstract principle set out in the text).	The appellate court identified that these appeals arose from that judgment and ultimately set aside that judgment and specified exhibits as directed in the order.

Court's Reasoning and Analysis

The court framed the issue by reference to the statutory definition of "net wealth" in section 2(m) of the Wealth-tax Act, 1957 and the statutory definition of "valuation date" (as the last day of the previous year per section 3 of the Income-tax Act). The assessees contended that income-tax payable on amounts declared under section 68 of the Finance Act, 1965 should be treated as debts owed on the valuation date and deducted in computing net wealth.

The court examined section 68 of the Finance Act, 1965 (sub-sections (1) to (3)) and section 4 of the Income-tax Act, 1961. It observed that the Finance Act, 1965 (and specifically section 68) provided a machinery for voluntary disclosures and stipulated the rate at which income-tax would be charged in respect of amounts declared; but the underlying liability to income-tax stems from the charging provisions of the Income-tax Act (section 4). In other words, the Finance Act supplied the rate and procedural mechanism, but did not create an independent non-tax liability distinct from the income-tax liability under the Income-tax Act.

The court relied on the Supreme Court's interpretation in Kesoram Industries that "owe" connotes an obligation to pay and that a "debt owed" includes a liability to pay in the future so long as it is ascertainable. Reading that decision together with H.H. Sethu Parvati Bayi, the court concluded that an income-tax liability which is ascertainable and payable in future nonetheless constitutes a debt owed on the valuation date.

The appellate court rejected the learned single judge's narrower view that liabilities arising from section 68 declarations only arise at the time of declaration and not on valuation dates. The court reasoned that liabilities arising from declarations under section 68 are, in substance, liabilities under the Income-tax Act whose existence is governed by the charging provision (section 4). Therefore the income-tax liability in respect of amounts declared under section 68 existed on the relevant valuation dates and should have been deducted from wealth when computing net wealth.

On that basis the court found that the Wealth-tax Officer erred in adding the entirety of the declared amounts to the assessees' net wealth without deducting the income-tax liability attributable to those amounts on the valuation dates.

Holding and Implications

Core Ruling: The writ appeals are allowed; the appellate court set aside the judgment of Issac J. (which had dismissed the original petitions) and set aside specified exhibits in both original petitions.

More specifically:

The court held that income-tax liabilities arising in respect of amounts declared under section 68 of the Finance Act, 1965 are liabilities under the Income-tax Act and, if ascertainable, constitute "debts owed" by the assessee on the valuation date for purposes of section 2(m) of the Wealth-tax Act, 1957.
Consequently, the Wealth-tax Officer was in error in failing to deduct the income-tax liability on the declared amounts when computing net wealth for the relevant valuation dates; the appeals were therefore allowed and the earlier orders/exhibits (listed in the opinion) were set aside.
The assessees were awarded costs, including counsel fee fixed at Rs. 250 in each case.

Implications: The direct effect is that the assessees prevail and the wealth-tax assessments must reflect deduction of applicable income-tax liabilities on the valuation dates. The opinion applies and relies on existing Supreme Court precedents (as cited) to reach its conclusion; the judgment resolves the controversy in these appeals but does not, within the text of the opinion, purport to lay down a novel doctrine beyond the application of cited authorities.

Show all summary ...

Govindan Nair, A.C.J:— These appeals arise from a common judgment of Issac J. dismissing O.P Nos. 1511 and 1512 of 1969 [C.K Babu Naidu v. Wealth-lax Officer, [1971] 82 ITR 410 (Ker)]. The two petitioners contended that in ascertaining the taxable wealth of the petitioners the entirety of the income declared by the petitioners for the purpose of section 68 of the Finance Act, 1965, is not liable to be taxed. According to them, the income-tax due on the income declared according to the provisions in section 68 of the Finance Act, 1965, must be deducted from the income declared and the net wealth arrived at. The contention is based on the definition of “net wealth” in section 2(m) of the Wealth-tax Act, 1957, which is in these terms:

“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-… … … …”

2. Valuation date is defined thus:

“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 section 3 of the Income-tax Act, if an assessment were to be made under that Act for that year………”

3. The years with which we are concerned in the two original petitions and in these writ appeals are 1962-63, 1963-64, 1964-65, in O.P No. 1511 of 1969, from which Writ Appeal No. 279 of 1971 is taken and the four years 1962-63, 1963-64, 1964-65 and 1965-66 in O.P No. 1512 of 1969, which gave rise to Writ Appeal No. 280 of 1971.

4. As provided by section 68 of the Finance Act, 1965, the two petitioners declared their income and distributed them in a certain manner for the years concerned.

5. This distribution has been accepted by the assessing authorities and it is admitted that tax has been levied on the basis of such distribution. It is unnecessary to refer to the figures as it is sufficient to state, as we have already stated, that the contention was that out of the income attributable to each of the assessment years, the tax leviable under section 68 of the Finance Act, 1965, must be deducted for the purpose of arriving at the net wealth assessable to wealth-tax. The assessees, the appellants, had already been assessed to wealth-tax before the declaration under section 68 of the Finance Act, 1965, was made by them excepting for the year 1965-66 in Writ Appeal No. 280 of 1971. Consequent on the declaration under section 68 of the Finance Act, 1965, and the assessment to income-tax steps were taken under section 17 of the Wealth-tax Act, 1957, to reopen the wealth-tax assessments and what has been done is to add to the net wealth of the assessees for each of the years what we have mentioned, the entirety of the income declared for that year under section 68 of the Finance Act, 1965. Counsel for the assessee has repeated the argument that was advanced by him before the learned single judge that the procedure adopted is not justified by the principles that are applicable to the case.

6. There is no dispute that the valuation date for the four years with which we are concerned are March 31, 1962, March 31, 1963, March 31, 1964 and March 31, 1965. On these dates, it is submitted, it must be taken that the assessees owed debts to the extent of the income-tax liabilities on the amount declared as the income from the assessment years, namely, 1962-63, 1963-64, 1964-65 and 1965-66. This contention is sought to be supported by the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax, [1966] 59 ITR 767. It is clearly ruled therein that the word “owe” meant “to be under an obligation to pay” and that it did not really add to the meaning of the word “debt” and further 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 future an ascertainable sum of money.

7. As we understand this decision, it is unnecessary that the amount of income-tax should have been ascertained or that it was owed in praesenti; what was payable in future and was ascertainable as payable will be a debt that is owed by the assessee on the valuation date is clear from the decision. In the judgment under appeal, the learned judge has taken the view that the principle of the decision will be applicable only to income-tax assessed under the Income-tax Act, 1961, that what has been done in the cases is to assess tax on the declarations made by the assessees under section 68 of the Finance Act, 1965, that the liabilities arising from such declarations under section 68 of the Finance Act, 1965, can only arise at the time of the declaration and not on the valuation dates. With great respect, we are unable to agree with this view. The liability for tax arising out of the declaration under section 68 of the Finance Act, 1965, is nothing other than the liability under the Income-tax Act, 1961, which was the Act that was applicable. It is the charging section, section 4 of that Act, which has imposed the liability. This is so, notwithstanding the fact that enabling provisions have been made in the Finance Act, 1965, by permitting the assessees, if so minded, to make a declaration under section 68(2) of the Finance Act, 1965, and providing that the amount so declared will be taken as the income of the assessee. A further concession has been granted by section 68(3) of the Finance Act, 1965, that the rate of tax that is applicable in such cases will be a uniform rate of tax of 60 per cent, on the amounts so declared. We shall now read the relevant part of the section, sub-sections (1) to (3) of section 68 of the Finance Act, 1965:

“68. Voluntary disclosure of income —(1) Where any person makes a declaration in accordance with sub-section (2) in respect of the amount representing income—

(a) which he has failed to disclose in a return of income for any assessment year filed by him before the 1st day of March, 1965, under the Indian Income-tax Act, 1922, or the Income-tax Act, 1961, or

(b) which has escaped assessment for any assessment year for which an assessment has been made before the 1st day of March, 1965, under either of the said Acts, or

(c) for the assessment of which no proceeding under either of the said Acts has been taken before the 1st day of March 1965, 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 amount so declared if he,—

(i) pays the amount of income-tax as computed at the said rate, or

(ii) furnishes adequate security for the payment thereof in accordance with sub-section (4) and undertakes to pay such income-tax within a period, not exceeding six months, from the date of the declaration as may be specified by him therein, or

(iii) on or before the 31st day of May, 1965, pays such amount as is not less than one-half of the amount of income-tax as computed at the said rate or furnishes adequate security for the payment thereof in accordance with sub-section (4), and in either case assigns any shares in or debentures of, a joint stock company or mortgages any immovable property, in favour of the President of India by way of security for the payment of the balance, and undertakes to pay such balance within the period referred to in clause (ii).

(2) The declaration shall be made to the Commissioner, and shall specify the period required to be specified under clause (ii) of sub-section (1), contain the name, address and signature of the person making the declaration and also full information in respect of the following matters, namely:—

(a) Whether he was assessed to income-tax or not and, if assessed, the name of the income-tax circle in which he was assessed.

(b) The amount of income declared, giving where available, details of the financial year or years in which the income was earned and the amount pertaining to each such year.

(c) Whether the amount declared is represented by cash (including bank deposits), bullion, investments in shares, debts due from other persons, commodities, or any other assets, and the name in which it is held and location thereof:

Provided that the declaration shall be of no effect unless it is made after the 28th day of February, 1965, and before the 1st day of June, 1965.

(3) 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:

Provided that if before the 1st day of April, 1965, the tax on the amount declared is paid by the declarant at the rate of fifty seven per cent, of such amount, he shall not be liable to pay any further tax on such amount.”

8. When we read the provisions in the above section with section 4 of the Income-tax Act, 1961, we have irresistibly to come to the conclusion that the Finance Act, 1965, only provided the rate of tax that is to be imposed and also provided that it should be imposed on the income declared by the assessee. The latter part is only a machinery provision and the earlier provision provides what is envisaged by section 4 of the Income-tax Act, 1961, that the Finance Act, 1965, shall declare the rates applicable. Neither of these things can alter the liability, a liability that arises and stems from the existence of the Income-tax Act containing the charging section, section 4. We have no doubt that the liability is a liability that arose on the valuation date (vide the Supreme Court decision in H.H Sethu Parvati Bayi v. Commissioner of Wealth-tax, [1968] 69 ITR 864) and that that liability was a debt owed by the assessees on the valuation dates falling under section 2(m) of the Wealth-tax Act, 1957. The Wealth-tax Officer was, therefore, in error in not having deducted the income-tax liability on the various valuation dates for the four years in question on the amounts declared by the assessees under section 68(2) of the Finance Act, 1965. We, therefore, allow these writ appeals, set aside the judgment in the original petitions and further set aside exhibits P-1, P-2, P-3, P-4 and P-7 in O.P No. 1511 of 1969, and exhibits P-1, P-2, P-3, P-4 and P-9 in O.P No. 1512 of 1969. The assessees in the two petitions are entitled to their costs including counsel fee which we fix at Rs. 250 in each of the cases.