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Commissioner Of Wealth-Tax v. Ahmed Tea Co. (Pvt.) Ltd.
Structured Summary of the Opinion — Reference under Section 27(1) of the Wealth Tax Act, 1957
Factual and Procedural Background
The Income Tax Appellate Tribunal, Calcutta Bench referred the following question of law to this Court under Section 27(1) of the Wealth Tax Act, 1957: whether provisions for taxation amounting to Rs. 2,25,000/-, Rs. 2,40,000/- and Rs. 2,90,933.84 N.P. for the assessment years 1957–1958, 1958–1959 and 1959–1960 respectively were proper deductions in the ascertainment of the net wealth of the company as on the respective valuation dates.
The assessee is a private limited company engaged in the tea business. On the relevant valuation dates (31 Dec 1956, 31 Dec 1957 and 31 Dec 1958) the company's balance-sheets showed provisions for taxation for calendar years 1956, 1957 and 1958 under "current liabilities and provisions" in the amounts stated above.
The Wealth Tax Officer did not exclude those amounts from the assessee's net wealth. That order was affirmed by the Appellate Assistant Commissioner. On appeal, the Tribunal held that the tax liabilities shown as provisions in the balance-sheet were deductible from assets in determining net wealth and relied on an earlier Full Bench decision of the Tribunal. The department, dissatisfied, applied for a reference to this Court.
Legal Issues Presented
- Whether provisions for taxation amounting to Rs. 2,25,000/-, Rs. 2,40,000/- and Rs. 2,90,933.84 N.P. for the assessment years 1957–1958, 1958–1959 and 1959–1960 respectively were proper deductions in the ascertainment of the net wealth of the company as on the respective valuation dates.
Arguments of the Parties
Assessee's Arguments (Mr. Lahiri)
- The amount set apart in the balance-sheet for the discharge of tax liability should be taken into account in determining the value of the assets when the Wealth-tax Officer uses the balance-sheet to determine net value under section 7(1).
- If the liability set out in the balance-sheet is a present debt (not a contingent liability), it is deductible from assets under the definition of "net wealth" (Section 2(m)), and thus the provision in the balance-sheet should be deductible.
- The Wealth-tax Officer may determine the net value of business assets having regard to the balance-sheet; therefore relevant liabilities appearing there that affect asset value ought to be considered.
Counsel for the Department's Arguments (referred to in the opinion as Mr. Choudhuri / Mr. Choudhury)
- The department contended that tax liability does not become a debt until an assessment order is passed and the liability is quantified; until then it remains a contingent liability and therefore not deductible.
- The department suggested that a liability should not be deductible unless the amount is actually paid (an extreme position noted and rejected by the Court).
- Reliance was placed on Doorga Prosad Chamaria v. Secretary of State (AIR 1945 PC 62) to argue that income-tax is not "due" in law until demand is made; the department drew support from that passage in relation to when a tax becomes due.
- It was also urged that the recently introduced Finance Act (1959) amendment to section 2(m) should prevent deduction in the present case (an argument addressed by the Court).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Whitney v. Inland Revenue Commrs., 1926 AC 37 | Statement that (i) statute declares liability, (ii) assessment particularises the sum, and (iii) methods of recovery follow; "liability does not depend on assessment". | The Court cited this passage to support the proposition that liability to pay tax arises when income is earned and does not depend on assessment; assessment only particularises the amount. |
| Chatturam v. Commissioner of Income-tax, Bihar, AIR 1947 FC 32 | The quotation of Whitney was approved in this case; used to interpret charging provisions of Income Tax law. | The Court noted that this case approved the Whitney passage and relied on Section 3 of the Income Tax Act to show that liability arises as and when income is made. |
| Doorga Prosad Chamaria v. Secretary of State, AIR 1945 PC 62 | Held that income-tax is not "in law due" for a given year until demand is made under specific sections; the debt becomes due to the Crown when demand is made. | The Court considered this authority but held it did not support the department's contention that tax liability does not come into existence until demand; the Court distinguished the case and found it inapplicable to the present point. |
| Kesoram Cotton Mills Ltd. v. Commissioner of Wealth Tax, Calcutta, (1963) 48 ITR 31 : AIR 1963 Cal 392 | Calcutta High Court opinion that tax unless determined by Income Tax authorities is not a debt deductible from assets. | The Court expressly stated its respectful disagreement with the Calcutta High Court's view in that case and declined to follow it for the present reference. |
| Earlier Full Bench decision of the Income Tax Appellate Tribunal (unnamed) | Held that liabilities for taxation shown in balance-sheet are deductible from assets in determining net wealth (as relied upon by the Tribunal below). | The Tribunal relied on this Full Bench decision to reach its conclusion that the provisions for taxation were deductible; the Court's ultimate answer aligns with the Tribunal's view. |
Court's Reasoning and Analysis
The Court proceeded by construing the statutory scheme and the definitions in the Wealth Tax Act. The essential statutory framework considered was:
- Section 2(m) defines "net wealth" as assets (valued in accordance with the Act) minus aggregate debts owed by the assessee on the valuation date, subject to specified exceptions.
- Section 3 charges wealth-tax in respect of net wealth on the corresponding valuation date.
- Section 7 governs valuation of assets; section 7(1) permits the Wealth-tax Officer, where accounts are regularly maintained, to consider the balance-sheet and determine the net value of the business assets as a whole.
From this statutory structure the Court observed that net wealth is computed by first determining the value of assets under section 7 and then deducting debts as defined in section 2(m). The principal question was whether amounts set apart in the balance-sheet for tax liabilities constituted debts deductible from the value of assets for calculating net wealth.
The Court analyzed two related contentions:
- Whether the tax liability is contingent until assessment and therefore not a debt: The Court rejected this contention, holding that the liability to pay income-tax arises as and when the income is earned. Assessment merely particularises the exact amount; it does not create the liability. The Court relied on the principle stated in Whitney v. Inland Revenue Commrs. and its approval in Chatturam to support this point.
- Whether the tax liability becomes a "debt" only when quantified by assessment: The Court rejected the narrow notion that a debt exists only when assessed. It noted that a debt may be a sum presently due (by contract, record, or other means) and held that where the assessee has ascertained the probable amount and set it aside in the balance-sheet, that amount is sufficiently ascertained to be treated as a debt for the purpose of deduction in computing net wealth.
The Court considered but distinguished Doorga Prosad Chamaria (Privy Council), which stated that tax is not "in law due" for a year until demand is made; the Court observed that that decision does not mean the tax liability does not come into existence until demand, and therefore it did not support the department's position here.
The Court also examined the Finance Act 1959 amendment to section 2 of the Wealth Tax Act (inserting clause (iii) to sub-clause (m)), noting that the amendment (retrospective in effect) restricts deduction of certain outstanding taxes payable "in consequence of any order passed" under taxation laws if they are under appeal or have been outstanding for more than twelve months. The Court observed that this amendment does not deal with taxes not yet assessed; the present question concerned unassessed tax amounts set apart by the assessee, and therefore the issue depended on the interpretation of "debt" rather than the amended sub-clause.
Finally, the Court emphasized the policy behind the amendment — preventing an assessee from simultaneously claiming a deduction for an assessed tax while disputing liability — but noted that the amendment did not prevent deduction where assessment had not yet been made and there had been no default on the part of the assessee.
Holding and Implications
HOLDING: The question referred to the Court is answered in the affirmative: the amounts set apart in the balance-sheet for the discharge of the tax liability were proper deductions in the ascertainment of the net wealth of the company for the valuation dates in question. The reference was answered in the affirmative with costs assessed at Rs. 100/-. (Per Mehrotra, C.J.; S.K. Dutta, J. concurred.)
Implications:
- Direct effect: The assessee is entitled to deduct the amounts set apart in its balance-sheet for taxation from the value of its assets in determining net wealth for the valuation dates concerned; the Court's answer aligns with the Tribunal's view and reverses the department's contention in this reference.
- Costs: The Court awarded costs in the amount of Rs. 100 (the opinion states "with costs which we assess at Rs. 100/-").
- Broader precedent: The Court expressly disagreed with the Calcutta High Court decision in Kesoram Cotton Mills Ltd. to the extent that that decision held tax not to be a debt unless determined by the Income Tax authorities. The opinion did not articulate any further novel rule beyond applying established principles about when tax liability arises and when a liability may be regarded as a debt for wealth-tax computation.
This summary is based exclusively on the contents of the provided opinion; no information beyond the opinion has been added.
Mehrotra, C.J:— The following question of law has been referred under Section 27(1) of the Wealth Tax Act, 1957 (hereinafter called ‘the Act’) for opinion by the Income Tax Appellate Tribunal, Calcutta Bench:—
“Whether on the facts and in the ??? of the case, provisions for taxation amouning to Rs. 2,25,000/-, Rs. 2,40,000/- and Rs. 2,90,933.84 N.P for the assessment years 1957–1958, 1958–1959 and 1959–1960 were proper deductions in the ascertainment of the net wealth of the company as on the respective valuation dates?”
2. The assessee which is a private limited company is doing business in tea. The assessment years in question are 1957–1958, 1958–1959 and 1959–1960 and the corresponding valuation dates under the Act are 31st December 1956, 31st December 1957 and 31st December 1958. In the balance sheet the assessee company has made provisions for taxation amounting to Rs. 2,25,000/-, Rs. 2,40,000/- and Rs. 2,90,933.84 N.P in respect of the calendar years 1956, 1957 and 1958 respectively. These amounts are shown in the balance sheet as provisions for taxation under the head ‘current liabilities and provisions’.
3. The Wealth Tax Officer did not exclude ??? amounts from the net wealth of the company. The order of the Wealth Tax Officer was affirmed by the Appellante Assistant Commissioner. On appeal the Tribunal took the view that the liabilities for taxation were deductible from the assets of the company for determination of its net wealth and relied upon an earlier decision of the Full Bench of the Tribunal. Dissatisfied with the order of the Tribunal an application was made by the department for reference to this court. The relevant provisions of the Act are set out below. Section 2(m) defines the ‘net wealth’ 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, wherever located, belonging to the assets 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 owned by the assessee on the valuation date other than,—
(i) debts which under section 6 are not to be taken into account; and
(ii) debts which are secured on, or which have been incurred in relation to, any asset in respect of which wealth-tax is not payable under this Act.”
4. Section 3 which is the charging section, provides:
“Subject to the other provisions contained in this Act, there shall be charged for every financial year commencing on and from the first day of April, 1957, a tax (hereinafter referred to as 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.”
5. Section 7 of the Act provides for the determination of the value of the assets. It runs as follows:—
“7.(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) Nowithstanding 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 circumstances of the case may require…….”
6. Only the relevant portions of the section have been quoted above. Reading of these sections shows that the wealth-tax is charged on the net wealth of an assessee. The net wealth is arrived at by deducting certain debts from the value of the assets determined in accordance with the provisions of section 7. Before the net wealth can be determined the value of the assets has thus to be determined under section 7.
7. The question for consideration before us is whether the amount kept apart from the company in the balance sheet for the discharge of the tax liability is deductible from the value Page: 65of the assets for the purposes of determining the net value or not.
8. Mr. Lahiri for the assessee contends that apart from the question whether the tax liability can be regarded as a debt within the meaning of Section 2(m) of the Act in finding out the value of the assets, the amount of tax set apart in the balance sheet should be taken into consideration and as no net wealth can be determined without ascertaining the value of the assets, this court can within the scope of the question referred decide whether for the purposes of determining the value of the assets the amount set apart in the balance sheet for the payment of the tax liable should or should not be taken into consideration.
9. He relies upon section 7(1) which has already been set out, and argues that the Wealth Tax Officer instead of determining separately the value of each asset held by the assessee when the assessee is a business company can take the balance sheet into consideration in determining the net value of the assets of the business. But this sub-section does not lay down that all items of the liability set out in the balance sheet are bound to be deducted by the Wealth Tax Officer in determining the assets of the company. The liabilities which are likely to affect the value of the assets may be taken into consideration. But every amount which is set apart in the balance sheet for discharging some liability which may be a contingent liability cannot be relevant for determining the value of the assets.
10. If the liability which is set out in the balance sheet is a debt in present and not a contingent liability, in that event such an amount will be deductible from the value of the assets under the definition of the net wealth itself and not under section 7(1). In the present case the matter proceeded before the Tribunal and the department on the assumption that the value of the assets has been rightly ascertained under section 7 and the only question was whether in arriving at the net wealth the amount set apart to discharge a tax liability was to be deducted from such value of the assets or not and the point urged by the counsel for the assessee does not arise out of the order of the Tribunal.
11. The next question, however, is whether this amount could be deducted from the value of the assets for determining the net wealth of the assessee. The contention of the counsel for the department is that the tax liability does not become a debt till the assessment order is passed and the liability is quantified. Till the assessment order is passed, it remains a contingent liability. The liability in our opinion to pay the tax arises as and when the income is earned. The liability may be quantified after the assessment order has been passed but the liability cannot be said to be contingent arising only after the determination of the amount by the assessment order.
12. As observed by Lord Dunedin in the case of Whitney v. Inland Revenue Commrs., 1926 AC 37—
“There are three states in the imposition of a tax. There is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next there is the assessment Liability does not depend on assessment, that ex hypothesi has already been fixed. But assessment farticularizes the exact sum which a person able has to pay. Lastly come the methods of recovery if the person taxed does not voluntarily pay.”
13. This passage was quoted with approval in the case of ‘Chatturam v. Commr. of Income-tax, Bihar’ reported in AIR 1947 FC 32 at p. 35 by Kama J. Section 3 of the Income Tax Act which is the charging section, makes it clear that the liability to pay the tax a rises as and when the income is made. The liability as said by Lord Dunedin has been ex hypothesi fixed by Section 3 of the Income Tax Act. The counsel for the department even went so far as to suggest that the liability cannot be deducted unless the amount of liability is actually paid. If the amount is actually paid the question of deducting the amount would not arise. By actual payment the value of the assets has already been reduced and thus the question will only arise where the liability exists and it has not been discharged, but the amount has been set apart for the discharge of the liability.
14. It cannot, therefore, be said that the liability to pay the income-tax is a contingent liability depending upon the assessment order being made. The contingent liability will be one which will arise on the happening of a certain event. If the liability to pay tax arises when the income is made and does not depend upon the passing of an order of assessment, it cannot be said to be a contingent liability. When the money was set apart for the discharge of the tax liability the liability was in existence and it could not be argued that it will come into existence only after the assessment order has been passed.
15. The next contention is that even though the liability may have arisen, the liability is not a debt till the amount is particularized. A debt may be defined to be a certain sum due from one person by another either by record, under a specialty or deed or under simple con tract by writing or oral. It cannot be said that the taxed amount becomes a debt only if it is quantified by an order of the assessing authority. The amount has been ascertained by the assessee himself. As the liability was there, the assessee sets apart certain amount which he thinks will be necessary for discharging the tax liability and thus the amount of the liability has been ascertained and it cannot be said that the amount is not a debt which can be deducted to find out the net wealth of the assessee. Reliance was placed by the counsel for the department on the case of Doorga Prosad Chamaria v. Secy. of State reported in AIR 1945 PC 62. Particular reference is made to the following passage at page 64:—
“The last objection to the certificate is that in col. 4 no period for which the demand is due was stated as required by the heading to that column. In their Lordships' opinion, Page: 66although income-tax may be popularly described as due for a certain year, it is not in law 10 due. It is calculated and assessed by reference to the income of the assessee for a given ear, but it is due when demand is made under section 29 and Section 45. It then becomes a debt due to the Crown, but not for any particular period.”
16. The point which came up for consideration in that case was whether the certificate was defective inasmuch as in col. No. 4 no period for which the demand was due was stated. Their Lordships pointed out that though the income-tax is calculated with reference to income of an assessee for a particular period, it cannot be said to be due for that year. The tax can be technically called to be due for the year to the Crown when a demand is made the case does not lay down that the tax liability does not come into existence till the demand is made. As observed by their Lordships of the Privy Council the debt becomes due to the Crown but not for any particular period. This case has no application to the point for consideration before us.
17. Reference may be made to the provisions of the Finance Act of 1959 by which section 2 of the Wealth Tax Act has been amended. Section 20 of the Finance Act provides that in section 2 of the Wealth Tax Act, 1957 in clause (m) after sub-clause (ii) the following sub-clause shall be inserted, namely—
“(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, or the Expenditrue-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;”
18. In our opinion this sub-clause which has been given retrospective effect only lays down that certain outstanding tax payable in consequence of any order passed under or in pursuance of the Income-tax Act will not be deductible if the assessee has in appeal, revision or otherwise claimed that he is not liable to pay that tax. Secondly even if he has not claimed in appeal or revision, the amount will not be deductible if it has remained unpaid for a period of more than twelve months.
19. This sub-clause does not deal with the case where the assessment order has not been passed and thus whether an amount set apart for discharge of the tax liability without an order of assessment is deductible or not will depend upon the interpretation of the word ‘debt’ and not of the amended sub-clause. The purpose underlying this amendment is very clear. If an assessee has challenged the amount of tax assessed in appeal, he cannot on the one hand take advantage of the wealth tax and claim a deduction from the value of his assets and at the same time deny his liability to pay the said amount to the department. Furher, if a tax has been assessed, the assessee cannot go on setting apart the amount in the balance sheet for the discharge of the tax liability and thus claiming a deduction and not paying the amount of the tax.
20. The purpose of the amendment is only to force the assessee after the assessment to pay up the tax within a year. In cases where the tax has not been assessed, there is no default on the part of the assessee if he does not actually pay the tax. If, however, he sets apart the amount of the tax and has not been given benefit to deduct this amount from the value of the assets, the result will be that on account of the delay in assessment made by the department the assessee would suffer. Moreover if the tax liability becomes a debt only after an assessment order has been passed, there is no reason why such debt should be permitted to be deducted only if it has been outstanding for less than a year.
21. It was then contended by Mr. Choudhuri that clause (b) (sic) of the newly added sub-clause (iii) to section 2 of the Wealth Tax Act is attracted and the assessee is not entitled to deduct this amount. The opening sentence of sub-clause (iii) makes it clear that it applies only to the amount of tax payable in consequence of any order passed under the Act and not to any other tax liability.
22. Before pronouncing the judgment Mr. Choudhury drew our attention to the case of Kesoram Cotton Mills Ltd.… v. Commissioner Of Wealth Tax, Calcutta…., Calcutta, reported in (1963) 48 ITR 31 : (AIR 1963 Cal 392). We respectfully differ from the opinion expressed by the learned Judges of the Calcutta High Court that the tax unless it is determined by the Income Tax authorities is not a debt which can be deducted from the assets in determining the net wealth.
23. The question referred to us is answered in the affirmative. The reference is answered in thei affirmative with costs which we assess at Rs. 100/-.
24. S.K Dutta, J.:— I agree.
FK/JRM/G.G.M
25. Reference answered.
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