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R.K. Deo Vs. Commissioner of Wealth-Tax, Orissa [1992] INSC 151 (12 May 1992)

Sahai, R.M. (J) Sahai, R.M. (J) Anand, A.S. (J)

CITATION: 1994 AIR 600 1992 SCR (3) 203 1992 SCC Supl. (3) 124 JT 1992 (4) 430 1992 SCALE (1)1131

ACT:

Wealth Tax Act, 1957 :

Sections 2(m), 66 : Income Tax liability as a deduction from wealth tax-Outstanding on the valuation date for more than 12 months-Whether could be allowed-Relevant date for purpose of calculating the period of 12 months-What is- Pendency of reference/appeal before court-Effect of.

HEAD NOTE:

The appellant-assessee, in his wealth-tax assessments, claimed deduction towards tax liability which arose on account of his income from forest brought to tax and upheld by this Court. The Wealth-Tax Officer disallowed the claims as the tax payable ramained outstanding for more than twelve months on the valuation date. On appeal, the Appellate Assistant Commissioner held that the assessee was entitled to claim the said deduction in view of the fact that the liability was created by the judgment of the Court and discharged subsequently. However, on appeal the Tribunal set aside the order of the the appellate authority. The High Court affirmed the finding of the Tribunal.

The assessee has preferred the present appeals against the High Court's orders.

It was contended on behalf of the appellant that his liability crystallized on the last day of the previous year and it became a debt or might have become a debt with the passing of the order by this Court in 1958, but since it was quantified only in October, 1964 when a fresh demand notice was issued, the period of 12 months was liable to be counted from that date.

Dismissing the appeals, this Court,

HELD 1. The High Court was right in holding that the amount of Rs. 6,69,766 was not admissible as deduction while computing the net wealth of the appellant under the Wealth Tax Act for the assessment years 204 1962-63 to 1965-66. [212-B]

2. That an Income Tax liability is a debt within the meaning of section 2(m) of the Wealth Tax Act, 1957 is settled law. In the instant case, the amount payable by the appellant was, undoubtedly, a debt owed by him on the valuation dates. But the appellant could claim its deduction only if the revenue failed to show that it was not outstanding for more than 12 months on the valuation date. [210 G,H; 211-A]

Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth Tax (Central), Calcutta, (1966) 59 ITR 767 SC; Commissioner of Wealth Tax, Gujarat v. Kantilal Manilal, (1985) 145 ITR 447 SC and Doorga Prasad v. Secretery of State, (1945) 13 ITR 285, relied on.

3. The appellant was bound to pay the tax assessed irrespective of whether he had filed a reference or not.

This, admittedly, was not done by the assessee, and the amount remained outstanding throughout the period the reference was pending in the High Court. Effect of answering the reference in favour of assessee was that he could claim refund. But that occasion could arise only if order under section 66(5) was passed by the High Court. But before that the correctness of the order was challenged by the department by filing an appeal in this Court which was allowed and liability of the appellant to pay tax was upheld. The tax assessed thus remained unpaid during pendency of the reference in High Court, as also during pendency of the appeal in this Court and it was paid only in March 1965. Effect of non-payment of tax under sub- section (7) of section 66 was that the tax payable became outstanding by operation of law and it remained so on the valuation date. Therefore, the bar of sub-clause (b) of clause (iii) of sub-section 2(m) operated and the appellant could not claim the amount as deductible while computing his net wealth. It was outstanding on the valuation dates for more than 12 months whether the period is calculated from service of notice of demand in pursuance of assessment order or from the final determination of liability by the order passed by this Court in 1958 or because of operation of sub- section (7) of section 66 of the Act. However, on the facts of the instant case it could not be calculated from October 1964 when the notice of demand was served by the Income Tax Officer in pursuance of the order passed by the Tribunal. [211 E - H; 212-A]

Commissioner of Wealth Tax, Madras v. K.S.N. Bhatt, (1984) 145 ITR 1 SC, relied on.

205 Commissioner of Wealth Tax, Gujarat v. Vimlaben Vadilal Mehta, (1984) 145 ITR 11 SC; Commissioner of Wealth Tax v. Vadilal Lalubhai, (1984) 145 ITR 7 and Ahmed Ibrahim Sahigra Dhoraji v. Commissioner of Wealth Tax, Gujarat, [1981] 3 SCC 77,, Distinguished.

Vikram Deo Varma, Maharaja of Jeypore v. Commissioner of Income Tax, Bihar and Orissa, (1956) 29 ITR 77, refered to.

CIVIL APPELLATE JURISDICTION ; Civil Appeal Nos. 788- 791 (NT) of 1977.

From the Judgment and Order dated 25.11.1975 of the Orissa High Court in S,J. Cs Nos. 164 to 167 of 1975.

T.S. Krishnamoorthy Iyer, V.B. Saharya and S. Prasad for the Appellant.

J. Ramamurthi, Ranbir Chandra and Ms. A. Subhashini for the Respondent.

The Judgment of the Court was delivered by R.M. SAHAI, J. These appeals are directed against order of the Orissa High Court which decided the Wealth Tax Reference under Section 27(1) of the Wealth Tax Act, 1957 in favour of the department. The assessment years in dispute are 1962-63, 1963-64, 1964-65 and 1965-66. The question of law referred to the High Court was :

"Whether on the facts and in the circumstances of the case, the claim of the assessee for deduction of the tax liability amounting to Rs. 6,69,766 in computing the net wealth in four wealth-tax assessments is admissible under the provisions of the Wealth Tax Act." According to the statement of case the appellant erstwhile Raja of Jeypore, owner of extensive forests, prior to abolition of estate in 1953, was assessed to income-tax, on forest income, for assessment years 1942-43 to 1946-47 to an aggregate of Rs. 6,69,766. Validity of the levy, was decided ultimately, by the High Court in reference under Section 66 of the Income-Tax Act 1922 (in brief 'the Act') in Vikram Deo Varma, Maharaja of Jeypore v. Commissioner of Income Tax, Bihar and Orissa,, (1956) 29 ITR 77, and 206 it was held that the income being from agriculture was not exigible to tax. On further appeal to this Court, at the instance of the department, the order of the High Court was set aside on 14th October 1958 and the assessee was held liable to pay tax on the forest income. In conformity with the order, passed by this Court, the tribunal passed the order under Section 66(5) read with Section 66A(4) of the Act after 30th June 1964. In pursuance of this order the Income Tax Officer issued fresh notice of demand on 4th October 1964 and the amount was paid on 25th March 1965. In wealth tax assessments for the years 1962-63 to 1965-66 the assessee disputed his liability in view of the judgment given by this Court in 1958 and claimed that it being a debt within meaning of sub-section (m) of Section 2 of the Wealth Tax Act the amount was liable to be deducted while computing his net wealth. The Wealth Tax Officer did not allow the claim as the tax payable remained outstanding fore more than twelve months on the valuation date. The Appellate Assistant Commissioner allowed the appeals as the liabity was created by the judgment of this Court which was discharged in 1965, therefore, the assessee was held entitled to claim its deduction for determination of the net wealth in the assessment years in dispute. On further appeal, at the instance of the department, the order of the appellate authority was set aside by th tribunal and it was held, "The decision of the Supreme Court was only to declare the correct state of law, applicable to the income disputed by the assessee in appeal and not to create, for the first time, a liability to tax on such income. The demands in respect of the amounts in question were admittedly created as a result of assessment of such income and the assessee has been claiming in appeal and further in reference proceedings that the same was not payable by him. The demands were also admittedly outstanding for more than 12 months if the period is computed from the date of original demand notice pertaining to assessments made." The finding was affirmed by the High Court and it was held that the amount was not deductible while computing the net wealth of the assessee.

That an income tax liability is a debt within meaning of Section 2(m) of the Act is settled by series of decisions of this Court beginning from Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth Tax 207 (Central), Calcutta, (1966) 59 ITR 767 SC. In Commissioner of Wealth Tax, Gujarat v. Kantilal Manilal, (1985) 145 ITR 447 SC this Court approved the decisions of Privy Council in Doorga Prasad v. Secretary of State, (1945) 13 ITR 285 that an income tax liability becomes a debt when payment of the tax is demanded by a notice issued under Section 29 of the Act. The question, therefore, that requires consideration is if the High Court was right in its conclusion that even though the amount was debt it could not be deducted while determining the net wealth as either the payability of tax was in dispute on the valuation date or the demand had remained unpaid for more than 12 months on the valuation date. To examine the correctness of it Section 2(m) of the Wealth Tax Act is extracted below :

" '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 (34 of 1953), the Expenditure-tax Act, 1957 (29 of 1957), or the Gift-tax Act, 1958 (18 of 1958),- (a) which is outstandng 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 asset as not being payable by him, is nevertheless outstanding for a period of more than twelve months on the valuation date." 208 The net wealth according to sub-section (m) of Section 2 is aggregate value computed in accordance with the provisions of the Act less the value of all debts owed by the assessee. Since income-tax liability is a debt, the assessee was entitled to claim its deduction from the aggregate value to arrive at the net wealth. But the deduction of debt was permissible, only, if it did not fall in one of the sub-clauses mentioned in clause (iii).

Relevant date for operation of either clause was the valuation date. Clause (a) was construed in Commissioner of Wealth Tax v. Kantilal Manilal (supra) and it was held that in order to invoke the bar prescribed by Section 2(m) 3(a) it was necessary for the department to establish that both the requirements were satisfied, that is, the amount of tax was outstanding on the valuation date and further that it was claimed by the assessee in appeal, revision or any other proceedings as not being payable by him. The valuation dates for the assessment years in dispute were 30th June 1961, 1962, 1963, 1964 respectively. Since the amount had not been paid by the assessee it was outstanding on the valuation date but on these dates no appeal, revision or any other proceeding was pending in which the assessee had claimed that the amount was not payable by him. On plain reading of the provisions it is doubtful if the appellant could be precluded from claiming deduction of the income-tax dues under sub-clause (a). To this extent the order of the High Court and the tribunal do not appear to be well founded. To support the order of the High Court the learned counsel for the department urged that the proceedings which had been started by the appellant by way of reference before the High Court did not come to an end in 1958 by the order passed by this Court in appeal filed by the department as the order passed in advisory jurisdiction either by the High Court or in appeal by this Court could become final only when the tribunal passed the order in conformity with the order passed by this Court. Since admittedly the order under Section 66(5) of the Act was passed in October 1964, the proceedings initiated at the instance of appellant shall be deemed to have been pending till then. In our opinion it appears unnecessary to express any opinion on the nature of reference proceedings and whether the appeal filed by the department should be deemed to be continuation of the claim that the tax was not payable by the appelant for purposes of sub-clause (a) as once the question of law, was decided against the appellant by this Court in 1958, may be in appeal filed by the department, the appellant's claim that the amount was not payable by him stood finally adjudicated.

Nothing more remained to be decided. The order of the tribunal, in conformity with the 209 order passed by this Court, could be relevant for the department, only, to enable it to proceed to realise the amount. It could not stand as bar to the claim of the appellant under Section 2(m) by operation of sub-clause (a) of clause (iii).

For operation of sub-clause (b) the revenue had to establish that the amount remained outstanding for a period of more than 12 months on the valuation date. In Commissioner of Wealth Tax v. Kantilal Manilal (supra) it was held than an amount becomes outstanding after it had been quantified. The liability under the Income Tax Act arises in the previous year corresponding to the assessment year and it becomes due as held in Kesoram's case after it had been, 'quantified in accordance with ascertainable data'. The liability of the assessee was determined by the Income tax Officer and a demand notice was also served on him. The amount thus became due and payable and if the period of 12 months is calculated from this date the amount, obviously, remained outstanding for a period of more than 12 months on the valuation date. But the learned counsel for the appellant urged that on facts of this case the department cannot succeed on this ground. He urged that the High Court having answered the reference in favour of the appellant, the quantification stood set aside and the period could be counted from the date fresh notice of demand was served by the Income Tax Officer in 1964. The submission ignores that once proceedings became final and the law was declared by this Court and it was held that forest income was taxable then the liability to pay the amount shall be deemed to have existed from the date the demand was created by the Income Tax Officer. Therefore, the tax payable for which a notice of demand had been served on the assessee but it had not been paid because of pendency of appeal, revision or other proceeding, became payable and since it remained outstanding for a period of more than 12 months on the valuation date bar under clause (b), in out opinion, applied squarely. Reliance was placed by the learned counsel for appellant on Commissioner of Wealth Tax, Gujarat v. Vimlaben Vadilal Mehta, (1984) 145 ITR 11 SC and it was urged that the liability of the appellant crystallised on the last day of the previous year and it became a debt but it having been quantified in October 1964 when Income Tax Officer issued fresh notice of demand the period of 12 months was liable to be counted from this date. We do not think that this decision can be applied in the manner as argued by learned counsel for appellant. The jurisdiction exercised by the High Court under Section 66 or by the Supreme Court in an appeal against that order 210 was only advisory. There would have been some substance in the submission of the learned counsel if the tribunal would have passed the order under Section 66 in conformity with the opinion given by the High Court that the assessee was not liable to pay any tax on the forest income. That may have resulted in wiping off the demand created initially by the Income Tax Officer. But the High Court found and it was not disputed that no order was passed by it before the law was declard by this Court in 1958. The original demand thus remained outstanding and became operative after the decision of this Court. Reliance was also placed on Commissioner of Wealth Tax v. Vadilal Lalubhai, (1984) 145 ITR 7 and it was urged that in computing the net wealth of assessee the deductions admissible must be calculated on the basis of the tax as finally quantified even though the assessment may have been made subsequent to the valuation date. It was urged that even assuming that the liability arose from the order passed by this Court in 1958 it having been finally quantified after the order was passed by the tribunal the period of 12 months should be calculated from that date.

The facts of the case were entirely different. In Vadilal's case, the question was whether deduction could be claimed on basis of estimated liabilities mentioned in the return or the amount which is finally determined at the final assessment. It was held that it was not possible to accept the claim of the department that the net wealth for purposes of Section 2(m) was the tax liability disclosed by an assessee in his return. What could be deducted was the liability ultimately determined as payable. In the case of appellant, quantification had already been done. If the order of this Court would have necessitated variation in it, as happened in Commissioner of Wealth Tax v. Vimlaben Vadial Mehta (supra) something could be said in favour of appelant.

From the decision in Commissioner of Wealth Tax, Madras, v. K.S.N. Bhatt, (1984) 145 ITR 1 SC, it is clear that payability of tax for purposes of clauses (a) and (b) is dependent on liability to pay. If the liability goes then the amount ceases to be debt even if the determination of liability takes place after the valuation date. In appellant's case liability stood determined finally in 1958.

Therefore the payability of tax started operating from this date and the period of 12 months could be calculated form this date and not from October 1964. The decision in Ahmed Ibrahim Sahigra Dhoraji v. Commissioner of Wealth Tax, Gujarat, [1981] 3 SCC 77 is also not of any help, to the appellant, as the amount payable by the appellant was, undoubtedly, a debt owed by him on the valuation dates. But the appellant could claim its deduction only if the 211 revenue failed to show that it was not outstanding for more than 12 months on the valuation date.

There is yet another reason why the claim of the department that the bar of sub-clause (b) operated appears to be well founded. Sub-section (7) of Section 66 of the Act reads as under :- "(7) Notwithstanding that a reference has been made under this section to the High Court, income-tax shall be payable in accordance with the assessment made in the case :

Provided that, if the amount of an assessment is reduced as a result of such reference, the amount overpaid shall be refunded with such interest as the Commissioner may allow unless the High Court, on intimation given by the Commissioner within thirty days of the receipt of the result of such reference that he intends to ask for leave to appeal to the Supreme Court makes an order authorising the Commissioner to postpone payment of such refund until the disposal of the appeal to the Supreme Court." The appellant was, therefore, bound to pay the tax assessed irrespective of whether he had filed a reference or not.

This, admittedly, was not done by the assessee, and the amount remained outstanding throughout the period the reference was pending in the High Court. Effect of answering the reference in favour of assessee was that he could claim refund. But that occasion could arise only if order under Section 66(5) was passed by the High Court. But before that the correctness of the order was challenged by the department by filing an appeal in this Court which was allowed and liability of the appellant to pay tax was upheld. The tax assessed thus remained unpaid during pendency of the reference in High Court, and during pendencey of the appeal in this Court and it was paid only in March 1965. Effect of non-payment of tax under sub- section (7) of Section 66 was that the tax payable became outstanding by operation of law and it remained so on the valuation date. Therefore, the bar of sub-clause (b) of clause (iii) of sub-section 2(m) operated and the appellant could not claim the amount as deductible while computing his net wealth. It was outstanding on the valuation dates for more than 12 months whether the period is calculated from service of notice of demand in pursuance of assessment order or from the final determination of liability by the order 212 passed by this Court in 1958 or because of operation of sub- section (7) of Section 66 of the Act. On the facts of this case it could not be calculated from October 1964 when the notice of demand was served by the Income Tax Officer in pursuance of the order passed by the tribunal.

For these reasons the High Court rightly held that the amount of Rs. 6,69,766 was not admissible as deduction while computing the net wealth of the appellant under the Wealth Tax Act in assessment years 1962-63 to 1965-66. The appeals, accordingly, fail and are dismissed with costs.

G.N. Appeals dismissed.

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