THE COMMJSSJONER OF WEALTH TAX,. OUJARAT, AHMEDABAD v. . · KANTILAL. MANILAL ETC. ETC. March.13, 198S

The Judgment of the Court was delivered by

PATHAK. J. These appeals are directed against the judgment·\ of the Gujarat High Court disposing of a wealth tax· reference . and answering the following question of law against" the l ReVC". nuet-- "Whether, on the facts and in the circumstances of the case, the Tribunal was right ·in holding that the provisions H. of s, 2 (m) (iii) (a) were not applicable in respect· of liabili·- '

300 SUPREME COURT RllPORTS [1985] 3 s.c.l\.

A~ ties arising under the wealth tax assessments of the asses. see for the assessment years 1960-61and1961-62 ?"

" . Foi the purpose of determining the assessee's net wealth in assessment.proceedings under the Wealth Tax Act in respect of the assessment. years 1961-62 and 1962-63, the correspo.nding valuation dates being March 31, 1961 and March 31, 1962, the assessee cl~imed a:iled,uction of certain sums representing the estimated liabilities on account of income tax and wealth tax. The claim was rejected by the Wealth Tax Officer in both assessments. On appeal by the assessee the Appellate Assistant Commissioner of Wealth Tax allowed a part of the claim. In the appeal pertaining to .the asses;. nlerit 'year 1961-62, he allowed a deduction of Rs. 22,679 on .ai;count of weaith tax relating to the assessment year 1960-61, Rs. 39,692 on account of wealth tax r.elating to the· assessment year 1961-62 and Rs. 2,25,Q53 on account of income tax for the assess- ment 'y'ear 196 l,62. In the appeal pertaining to the assessment year 1962-63, the Appellate Assistant Commissioner allowed the total claim of Rs. 9,02,377 comprising a deduction of Rs 39,692 on account of wealth tax relating lb the assessment year 1961-62, Rs. 77,716 on account of wealth tax for the asse,sment year 1962-63 and the balance on account of income tax for the assessment year I 9~2-63., The .Revenue appealed to the Appellate Tribunal. In E the appeal for the .assessment year 1961-62 in contended inter alia, th~t the "assessee was not entitled to a deduction of the wealth tax I

liability of Rs. 22,679 in respect of the assessment year 1960-61 b\'cause. he had .disputed the said liability in appeal and, therefore, the deduction was barred by reason of s. 2(m) (iii) (a) of the. Wealth Tax Act. Similarly, in the appeal for the essessment year 1962.63, the . J'lievenue urged th~t the assessee was not entitled to a dedu>tipn pf the wealth tax liability of Rs. 39,696 for the assessaierit year 1961·62 a• be bad disputed that liability in appeal and the deductioi\. was barred bys. 2(ml (Iii) (a) of the Act. The Appellate Tribunal did not accept the contention of the Revenue and held thats. 2(m) (ill) (a) was not attracted in respect of those· liabilties as Jhey had Mt ·become payable on .the relevant valuation dates. At the instance ofllle Revenue,' a reference, being Wealth Tax Reference No. 20 of 1970, was made to the Gujarat High Court for its opinion Qn ~he question of law set forth earlier. . . .. Fft:may be mentioned that another question was also framed in th~~f~ere11ce, 11nd. tl\a\ t)lis r~f~r~11~e ~!011~ with §~v~rl\\ 11th~f

c.w.T v. KANTILAL MANILAL (Pathak, J.) 301 '· A- references were dispo;ed of together by the Gujarat High Court by its judgment in Commissioner of Wealth Tax v. Kantilal Mani/al.' Against that judgment corresponding special leave petitions were filed by the Revenue in this Court, but all the special leave petitions, except Special Leave Petitions (Civil)Ncs. 505 and 506 of 1973, arising out of Wealth Tax Reference No. 20 of 1970, were dismissed on the merits, and in respect' of these two special leave petitions the grant of special leave was restricted to the consideration of the question set forth earlier.

While dealing with ·the question whether· the provisions of s. 2(m) (iii) (a) of the Wealth Tax Act barred the deduction of the wealth tax liabilities claimed by . the assessee the High Court held that as the liabilities were not outstanding on the respective valuation dates s. 2(m) (iii) (a) was not attracted even though the assessee had challenged in appeal that the liabilities were not payable by him.

In these appeals, Shri S.C. Manchanda, appearing for the Revenue, contends. that the High Court has erred insofar as it has held that the wealth. tax liabilities were not outstanding on the valuation dates. His case is that the bar imposed by s. '2(ni) (iii) (a) - operates against the claim to deduction made by the assessee. _Shri S.T. Desai, appearing for the assessee, urges that s. 2(m) (iii) (a) . .is not attracted because no amount of tax was outstanding on the respective valuation dates and in any event, he says, the appeals, ch~llenging those liabilities were not pending on the valuation dates; and . therefore the further requirement, according to him, of the.. §\atvte w~s not sati~fied. ·

$ection..2(m) of the W~aJtJi Tax.Act provides : - . ''(m) "net wealth" means the amount by which the aggre- gate value computed in accordance with the provisions: ·' of this Act .of all the assets, wherever located, belonging fo· the assessee on, the valuation date, including assets required to be included in his net wealth as on that date under · G this Act, is in excees of the aggregate value of all the debts owed· by the assessee on the valuation date other than~ (i) xx xx itll -_..,.;---......:------~· (ll (ln3), ~8 !.T,R, 1?4 1

302: SUPREME COURT REPORTS (1985] 3 s.c.R.

A. (ii) xx xx xx (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 (34 of 1953), B, the Expenditure Tax Act, 1957 (29 of 1957), or the Gift-tax Act, 1958 (18 of 1958),- + (a) which is outstandfog 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 c. being payable by !him. is nevertheless outstanding for a period of more than twelve months on the valuation date."

In the process of computing the net wealth, the statute D!'. requires the aggregation of the value of all the debts owed by the assessee on the valuation date, except those debts which are speci- fically described in sub-clauses (i), (ii) and (iii). We are concerned with sub-clause (iii) (a). A· debt which ordinarily falls within the scope of the substantive provision of s. 2(m) cannot be taken into account for the purpose of determining the net wealth if it falls within the term of sub-clause (iii) (a) of s. 2(m). Sub-clause (iii) (a) speaks the amount of the tax, penalty or interest payable in conse- quence of any order passed under or in pursuance of any of the tax laws mentioned therein, 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. F For the assessment years 1961-62 and 1962-63 under reference, the corresponding valuation dates, as we have mentioned earlier are March:31,1961 and March 31,1962 respectively. The claim to deduction in the wealth tax assessment for the assessment year 1961- 62 relates to Rs. 22,679 representing the wealth tax liability for the assessment year 1960-61. The assessment order for the assess- ment .year 1960-61 was made on March 24, 1961 but the notice of demand ~as served on the assessee on April 11, 1961. It is apparent that the notice of demand was served some days after the valuation date, March 31, 1961. In the wealth tax assessment of the assessment year 1962-63 the deduction claimed relates to the "ealth tax liability of Rs. 39,692 for the assessment year 1961-62. The assessment order

6w.f. v. r{Ai-it1LAL MANrLAL (Pathak,}) · !o~ on March 23 1962 but the notice of demand was served on April ll,1962 and, ~hat notice of demand was also served a few days after _the relevant valuation date, March 31,1962. Therefore, the notice-of demand in each case was served after the valuation date had _passed. ,There was no demand already subsisting on the respective valuation dates.

In order to invoke section 2 (m) (iii) (a) the Revenue, must establish that an amount of the tax was outstanding on the valuation date. An amount of tax is outstanding if it is payable and has' re- mained unpaid. In other words, if there is a debt due and there has been no payment of the debt; In a case under the Indian Income Tax Act, 1922, Doorga Prosad v. The Secretary of State, (1 ) the Privy .c Council laid down that an income tax liability becomes a debt due when payment Lof the tax is demanded by a notice issued under ,section 29 of the Act. There are three stages in respect of an income tax liability. - The tax liability comes into existence on the last day - of the previous year relevant to the assessment year. Thereafter _when the assessment proceedings take place, an assessment order is oD made quantifying the assessable income and determining the tax payable. Thereupon, a notice of demand is seryed for payment , of the tax, and the tax then becomes payable and a debt becomes due to the Revenue. That was the position under the Indian Inccillle Tax Act, 1922 and continues to be the position under the Income Tax Act, 1961. A survey of the provisions of the Wealth Tax Act will demonstrate that in all material respects the scheme of the., Wealth Tax Act is in this regard substantially the same as that incor- porated in the Income Tax Act. The provisions for the assessment are of an assessee are contained in sections 14 to 17A of the Wealth .Tax Act. The notice of demand requiring payment of the tax, jnterest or .F _penalty is issued pursuant to section 30 of the Act. If the amoµnt remains unpaid within the period specified in the notice the amount of the tax is said to be outstanding.

A question was raised whether for the purposes of ~ttracting section 2(m) (iii) (a) it is not sufficient that the tax liability .h~s ~ accrued and it is necessary that a tax demand_should have Ileen made by the assessing authority. Jt seems to us that section 2(m} (iii) . (a) comes into play only after a demand for payment of tax has been made. The clause, read in its entirety, speaks of a debt owed by,the -----------------------------~ (1) (1945) 13 I.T.R. 285. . --- 'Htt

3o4 tr 9ssi 3s.c.it A ·asscssee represented by an amount of tax ·"payable in consequence of any o·rder" passed under the relevant ta~ statute "outstanding on the valuation date". 1he expression "debt owed" has been held by this Court in Kesoram lndustries & Cotton Mills Ltd v. Commissioner •ofWea/th Tax (Central), Calcutta, (1) to mean a debt which the asses- see is under an obligation to pay and, therefore, it includes both·a .B liability to pay in praesenti as well as a liability to pay in future an ascertainable sum of money. ·Both kinds of liabilities are included ·within 'the expression "debt owed". But when we refer to the clause under consideration, it narrows· the scope down to a liability which exists in present time. That is so because the clause speaks of tax ·outstanding in consequence of an order passed under the relevant taicing statute. As discussed earlier, tax becomes payable in conse- quence of such order when a notice of demand is served on the assessee.

In the present case, it is clear that as the notices of demand respecting the wealth tax liability of Rs 22,679 and Rs. 39,692 • were served on the assessee subsequent to the valuation dates, it can- not be said that on the respective valuation dates the amounts of ' taic were outstanding. In the result a material requirement of s. 2 (m) (iii) (a) is not satisfied and therefore that provision cannot be 'invoked by the Revenue.

We now propose to consider the other point in controversy. As • is apparent, if the Revenue desires to invoke section .2 (m) (iii) (a), 'it must establish not only that the amount of the tax, penalty or interest envisaged in that provision is outstanding on the valuation . date but it must also show that the amount is claimed by the assessee in appeal, revision or other proceeding as not being payable by him • . The question is wether it is a necessary requirement of the provision , that the appeal, revision or other proceeding should be pending on • the valuation date itself or it suffices that the appeal, revision or other proceeding is filed subsequent to the valuation date. In the present case the appeal against the wealth tax assessment order for ··.G· the assessment year 1960-6! was filed on May 9, 1961, and the appeal against the wealth tax assessment order for the assessment year.1961- , 62 was filed on May 9, 1962. Both the appeals were filed, therefore, · after the respective valuation dates, March 31, 1961 ·and March 31, • 1962 corresponding to the assessment years I 961-62 and 1962-63

(I) (1966) 59 I.T.R. 767.

t:i.w.f. v. KANTILAL MANILA!. (Pathak, }.) under reference •. ·But for section 2(m) (iii) an amount.of.a. tax out· standing on the v~luation date would consiitute 'a d.ebt. ~wed by the assessee on the valuation dat~, and the assessee "ould be entitled to claim its deduction in the procoss of computing his net wealth. Parliament, however, intended that if the amount of the tax was challenged by the assessee as not being payable.by him by recourse to any of.the statutory remedies prescribed in tlie televant Act," such claim to deduction would be barred. Plainly; in order to give full effect to that intent it is immaterial whether the ·statutory remedy is being availed of on the valuation date or has been taken thereafter. A challenge by the assessee that the amount outstanding is not pay- able by him is sufficient to bar his clail)l to deduction whether the challenge is subsisiin'g on 'the valuation d~te or is. fn.itiated afier the valuation date has passed. Accordingly, 'we are of opinion that the appeals in the present case, though filed subsequent to :the respective valuation dates, would nonetheless have sufficed to bring the second requirement of section 2(ni) (iii) (a) into operation. "The contrary view in respect of section 2 (m) (iii) (a) adopted by the .Madras High Court in Late P. Appavoo Pillai v. Commisiiolie"r of Wealth Tax, Madras(') appears to us to be incorrect.

• However, as in order to invoke the bar prescfibed. by section 2 (nl) (iii) (a), it is necessary ·for the Revenue tp establish tl)at bqth requirements are satisfied, that is to say, that an amount of the tax is outstanding on the valuation date and further thatthe amount is claimed by the assessee in an appeal as not being payable by him, and the Revenue has been unable to sh.ow that in the present case the sume of Rs . .22,679 and Rs. 39,692 representing the wealih ;.ia'x liabilities for the assessment years 196,0-61. and 1961,62.were out- standing on the respective valuation· dates corresponding to the assessment year under reference, the Revenue must fail. . - .. r ~ ..0 In the result, the appeals are dismissed. .. -' '

-:- .. ' -.· "t; • •: • ' • S,R .... Appeals .dismissed.· - .. - " ~. ' ., ,. ''"'; I.

(I) (1973) 91 I.T.R. 130. _·.,_·::,:-~