COMMISSIONER OF WEALTH TAX, MADRAS v. K. S. N. BHATT

COMMISSIONER OF WEALTH TAX, MADRAS A v.

K. S. N. BHATT ~ October 21, 1983 B • Wealth Tax Act, 1957 (27 of 1957)-Sections '2(m). 2(g) and 3-Wealth tax-Liability of-Crystallieses on the valuation date/or the relevant assessment year-Computing net weaiJh-Tax liability' on valuation date-Whether ded~ctib!e c .. as 'debt owed' •

Gift Tax Act, 1958(/Bof1958)-Sections 2,3, 13 and 15-Gift tax-L/iabi- lity of-Crystallises on the last date of the previous year.

0 , Income Tax' Act, 1961 (43 of 1961) Section 80B.-lncbme tax-Liability . . of-Crystallises on.the last date relevant to the assessment year. • In assessment proceedings under the Wealth Tax Act for four assessment years the assessee claimed a deduction in the computation of his net wealth on account of income tax, wealth tax and ·gift tax liabilities. The Wealth Tax E .Officer allowed only part of the deducti.ons claimed The appeal of the assessee was disniissed by the Appe!Jate Assistant Commissioner of Wealth Tax. In the second appeal before the· Appellate Tribunal, the assessee filed statements showing particulars of the income tax, wealth tax and gift tax liabilities in respect of the different assessment years. The Revenue contended that the income tax liability and the gift tax liability for one of the assessment yearS [1965'66] liad been cancelled by the Appellate Assistant Commissioner .in (l appeals against the assessment orders and those appellate orders of the Appel~ late Assistant Commissioner having becoine finill in ·view of the dismissal of . the Reverfue's appeals by the Appellate Tribunal, there was no outstanding demand on acCount of income tax and girt tax for that year and that therefore these two items do not constitute ''debts owed' by ·the asSessee and so would not qualify for deduction under section 2(m) of the_ Wealth- Tax Act. The Apppllate Tribunal fOllo\ving two jud"gments of this Court {CommiS.tioner of Income Tax v. Keshoram Industries Pvt. Ltd. (1966} 59 I.T.R. 767 and H.H. Setu Parvati Bayiv. Commissioner of Wealth Tax Kera/a (1969) 69 I.T.R. 864J, held that so long as the liability to pay the tax had arisen before the r!'levant valua· tion dates it was immaterial that the assessments were quantified. after the valuation of dates, that the question whether a debt was owed by the assessee H must: be examined with-reference to the position obtaining on the valuation dat~ and that nothing happebing subsequently could be consislcred in computing the net wealth.

· C. W. T. V. K. S. N. BHATT • 491

.. The High Court having refused te call for a reference from the Appellate Tribunal under section . 27(3) of. the Act the . Revenue appealed ' to this .~ourt.

Allowing the appeals in part ..

3Copy pinpoint3. The quantification of the income tax, wealth tax or gift tax liability is determined bY a cofrespbnding.assessment order, and even ift~e assessment- ·order is made after the vaiuatioD. date relevant to the wealth tax assessment in which the claim to 4eduCtion is made, there is a debt owed ~y the assessee on· - ihe valuation date. It is the quantification of the tax liability by the ultimate judicial authority which will determine the amount of the tlebt owed b)' the assessee on the valuation date. SO long as such ultimate determination indi~ cates the existence of a positive tax liability, it must be held that there is a debt owed by the assessee on the valuation date even though ~uch determination may be subsequent in point of time to the valuation date. If, however, it is found on such ultimate determination that there is no tax liability it cannot be said that merely because originally a tax liability could· be envisaged there E. was a debt owed by the assessee.. (495 B-E] •

4Copy pinpoint4. Section 2(m) (iii) (a) denies deduction of ap amount of tax which is outstanding on the valuation date if the assessee contends in appeal, revision or other proceeding that he is not liable to pay the tax. .It presuppo~es that there is a subsisting tax demand and the ass~ssee has challenged its validit)r. It refers to t!"ie initial stage only where an appeal, revision or other proceeding is pending merely. "It does not proc.eed beyond that stage to the point where,

../ in consequence of such appeal, revision or other proceeding, the tax liability has been found to be nil.. ollce it is determin~d that the tax liability is. nil, it cannot be said that any amount of tax is 9utstanding. Such a situation does not bring section 2(m) (iii) (a) into operation at all. If upon the ultimate r determination it is found that the amount of tax is nil, the assessee is denied ~ G· the deduction ·claimed by him not _on the ground of section 2(m) (iii) (a) but because the superior:, authority has found that there is no tax liability whatever. (496 A·D] •·

In the instant case, the income tax and the gift tax liabilities for the H-~ assessment year 1965-66 Subsequently set aside on appeal after the valuation dates, cannot be regaided as debts owed by the. assessee on the rel.evant valua- tion qates. [495 Gj · ·

492 • SUPREME COURT REPORTS • (1984) I S.C.R, - Commissioner of ./rklime Tax v. Keshoram Industries Pvt. Ltd. (1966) 59 J.T.R: 767; H.B. Setu Parvati Bayi v. Commissioner of Wealth Tax, Ktrala (1969)'69 I.T.R. 864 referred to. ·

Late P. Appavoo ·Pillai v. Commissioner of Wealth Tax Madras (1973) 91 J.T.R. 138 reversed.

B CtVIL APPELLATE JURISDICTION : Civil Appeals Nos. 384 to 387 of 1978. · · · '

From the Judgment and Order dated the .18th January, 1977 of the High Court at Madras in T.C. Petitions. Nos. 409 to 412 of 1976~ a .S._C. Manchanda and Miss A. Subhashlni for the Appellant. ' Gopa/a Subramanium and Mrs. S. Gopalakrishnan for , the Respondent.

• The Judgment of the Court was delivered by

PATHAK, J. These appeals are directed against the judgment or' the Madras High Court refusing to .call for a reference from the' . Appellate Tribunal under s.. 27 (3) of the Wealth Tax Act on the following two questions :- ,

' "I. Whether on the facts and in the circumstances of the case, the. Tribunal was right in holding that -the liabilities claimed by the assessee, though existence of the very liability was questioned ·by ·the· assessee, . should be aliowed as a 'debt owed' in computing' the net wealth of the assessee ? -

2. · Whether on the facts and in the_ circumstances of the case, the Tribunal was right in holding that the tax . liabilities as allowed by the Wealth Tax Officer was not in accordance with law?"

we think that the questions are indeed questions of law and the High Court should have called for a statement of the case from the Appellate Tribunal and rendered its opinion. on the said questions. Ordinarily, we would have allowed the appeal and directed the , High Court . ' . referenc~ from[.the Appellate . . . to- requisition[a ' ~ . Tribunal . to enable . •• ·~ '

c. w. r. v. K. s.. N. BHATT (Pathak, J) 493

the High Court to decide the two questions of law. But we refrain · from doing so as th~ points have already been considered on the merits by .us in judgments delivered today in tl).e appeals listed and heard along With these cases, and therefore we shall express our opinion directly on the two questions.

In assessment proceedings under th1; Wealth Tax A~t for the B assessment years 1964-65, 1965-66, 1966-67 and J967-68, the corres· ponding valuation dates being March 31, 1964, March 31, 1965, March 31, 1966 and March.31, 1967, the assessee claimed a deduction in the computation of the assessee's net wealth on account of income· ·tax, wealth-tax and gift-tax liabilities. The Wealth Tax officer alJowed oipy part of the deductions claimed, an4.an appeal by the assessee c was dismissed by the Appellate Assistant Commissioner of Wealth Tax. In second appeal before the Appellate Tribunal, the assessee filed statements showing particulars of the income tax, w~alth t•x and gift tax !iabililties in respect of the diffe'rent assessment years. The Appellate Tribunal found that so far as the assessment year D 1964-65 was concerned all the demands were raised on)y after the relevant valuation date, that in respect of the assessment.year 1965-66, the demands; except for items Nos. 1 to 5 and 12, were raised: subse- quent to the relevant valuation date, that in respect of the assessment y~ar 1966:67 all the demands, except iterns I. to 3 and 8 to· 10, were raised subsequent to tb.e relevant valuation date and that so far as the E

- assessment· year 1967-68 was concerned, except the ,first item, the demands in respect of the rest of the items were raised subsequent to the relevant valuation 'date. The Appellate Tribunal held, following the judgment of this court in Commissioner of Income TO?C v. Keshoram Industries Pvt. Ltd.(1) and H.H. Setu Parv~ti Bayi v. Commissioner of F ·-, .>-- . Wealth Tax, Kera/a,(') that so long as the liability to pay the tax had arisen before the.relevant valuation dates it w~s immaterial that the asse,sments were quantified after the relevant. valuation dates. It was J r pointed out by the Revenue before the Appellate Tribunal that .the income tax liability for the assessm~nt year 1965-66 of .Rs. 72,399 and the gift tax liability' for the assessment year 1965-66 •of G Rs. 1,13,650 had been cancelled by the Appellate Assisstant Commis- sione.r in appeals against the assessment orders, and ·those appellate orders of the Appellate Assisstant Commissioner had become final in view of·the dismissal of the Revenu~'s, appeals by tbe Appellat<i H (I) (1966) S9J.T.R. 767. (2) (1969) 69 I.T,R. 864,

SUPREME COURT REPORTS · {1984) I s.c.k. Tribunal, with the result that there· was no outstanding demand on account.of income tax.and gift tax for that. year. It was urged that ·. the two sums of income tax liability and gift tax liability would not constitute 'debts. owed' by the assessee and, therefore: w~uld not qualify for deduction under s. 2(m) of the Wealth Tax Act. Th~ AppeUate 'tribunal rejected the contention, holding that the question whether a debt was owed by. the assessee must be examined with reference to the position obtaining in the valuation date, and that not)ling happening subsequently could be considered in computing the net wealth. It observed that the fact that the assessee had· filed appeals subsequent to the valuation dates and that relief had been granted by the Appellate Anthority would have no relevance for c determining'whether a debt. was owed on the releyant valuation datl!, Reference was made to the decision of the Madras High Court ·hi Late P: Appavoo Pillai v. Commissioner of Wealth Tax, Madras.(') We are unab!O to agree with the view taken by the Appellate a Tribunal. Whether debt was owed by the assessee on the valuation < date would depend, as was observed by this Court .in Keshor~m Industries Pvt.. Ltd. (supra) and H.H. Setu Parvati Bayi (supra), on the fact that a liability had already crystallised under the relevant taxing statute on the valuation date. An income tax liability crystal- lises on the last day of the previous year relevant to ·the assessment year under the Income Tax Act, a wealth tax liability cry'stallises on E the valuation date for the relevant assessment year under the Wealth

F Tax Act.and a gift tax liability crystallises on the last day of the pre- vious year for the relevant assessment year under the Gift Tax Act. En passant, we may explain why we say that'a gift tax liability crys- tallises oil the last day of the pertinent previous year under the Gift Tax Act. Section 3 of the Gift Tax Act levies gift tax in respect of the gifts made by a· person during the previous year at the rates - specified in the Schedule. Section 13 provides for . the filing of a return of the gifts made during the previom year. Section 15 requires. the Gift Tax· Officer to assess the value of the, taxable. gifts made during the . previous yea~ and determine the amount of gift tax payable. The gift tax so payable ·is envisaged as a single sum in respect of the totality of the gifts made by the assessee during the previous year. Moreover, the Schedule prescribes graduated scales . of rates of gift tax in ascending order. All these considerations point to the conclusion. that the liability to gift tax crystallises, not in relation to each gift individually, but in relation

(1) (1973) 911.T.R. 138. I·

c. w; T. v. Ki. s. N. BHATT (Pathak, J) 4§5 io the assessed aggregate. value of the gifts made during the previous year. In other words, a gift tax liabiliiy crystallises on the last day of the prevlt>us year.. Now the quantification of · } the income tax, wealth tax or gift tax liability is determined by a corresponding assessment order, and even if the assessment order is m.ade after the valuation date relevant to the wealth tax assessment in which the claim to deducti.on is made, there is a debt owed by the assessee on the valuation date. The quantification effected by an assessment order may ·oo varied as the im;ome tax, wealth tax and gift tax case is carried in appeal to the Appellate Assisstant Commissioner, or thereafter to the Appellate Tribunal, and indeed even in ~eference later to the High Court or subsequent appeal to this Court. It is the quantification of the tax liability by the ultimate Cf judicial authority whioh will determine the amount of the debt owed by the assesste on the valuation date. So long as such ultimate 0

• determinatio n indicates the existence of a posith<e ._tax liability, it must be held that there is a dobt owed by the assessee on the valu- ation date even though such determination may be subsequent in point of time to the valuation date. If, however, it is found on such 'ultimate determination that.there is no tax liability, it cannot be said that merely because originally a tax liability had been determined and ~toad existing on the valuation date there was a debt owed by the assessee. The fact cannot be ignored that when the case was carried in appeal or reference it was found by the superior authority that in fact there was no tax liability at all. That final determination, even though rendered after the valuation dat~, directly relates to the question whether on the valuation date there was a debt owed by the asses see. If the finding is that there was no tax liability, it must be held that there was no debt owed by the assessee on the valuation date. In this regard, we do not agree with what has been said by the Madras High Court to the contrar.y in P.A. Appavoo Pillai (supra). We are of opinion that the income tax liability for ·the· assessment year 1965-66 of.Rs. 72,399 and the gift tax libility for the ·assessment year 1965-66 of Rs. 1,13,650, subsequently set aside on appeal after the valuation dates, cannot be regarded as debts owed by the assessee on the relevant valuation dates. ·

Towards the close of its order the Appellate Tribunal pointed to the fact that the different demands of tax were served on the assessee subsequent to the respective valuation dates and, on that ground, observed that the tax liabilities did not fall within the prohi- bition of s. 2{m) (iii) (a) and had to be taken into account as debts

496 l!UPREMB COURT REPORTS [ 19841 1 s.c. R owed by. the assessee on the v11luaiion dates. It seems to us that the i\ppellate Tribunal has not correctly appreciated the scope of s. 2(m) (iii) (a). Section 2(m) (iii) (a) denies deduction to an amount of tax which 'is outstanding on the valuation date if the assessee. contends in appeal, revision or other proceeding that he is not liable to. pay the tax. It presupposes that there is a subsisting tax demand and the B assessee has challenged its validity. It refers to the initial stage only where an appeal, revision Of other proceeding is pending merely. It does not proceed beyond that stage to the point where, in conse· qµence of such appeal, revision or other proceedings, the. iax liability · has been found to be nil. Once it is determined that the tax liability is nil,. it cannot be said that any amount of tax is outstanding.' Such c a situation does not bring s. 2(m) (iii) (a) into operation at all, as is clear indeed ·from its very terms. If upon the ultimate determination it is f~und that the amount of tax is nil, the .asscssee is denied the deduction claimed by him not on the ground of 8. 2(m) (iii) (a) but because the superior authority has found that there is no tax liabilty D whatever. 'It must be taken that in law there never was any tax liability.

So far as the remaining tax Ii~bilities are concerned, the Tribunal ' is right in allowing theincome tax, wealth tax and gift tax liabilities to be deducted in computing the net wealth of the asse'ssee for the \., E· respective assessment years, even though, the assessment orders were finalised after the resp~ctive valuation dates. We may point out that it has not been shown to us that the assessee filed appeals questioning the income· tax, wealth tax and gift tax Liabilities other than the income tax liability of Rs. 72,399 and the gift tax liability of F . ·.Rs. 1,13,650 fur the assessment years 1965-~6 refer,red to earlier.· The questions of which reference was sought by the Reyemie -\' are answered accordingly.

G The appeals are allowed in part in the terms already set out. .There is no order as to costs. ··t- N.V.K. Appeals partly at/owed.