Standard Mills Co. Ltd. Vs.
Commissioner Of Wealth-Tax, Bombay City [1966] INSC 206 (6 October 1966)
06/10/1966 SHAH, J.C.
SHAH, J.C.
RAMASWAMI, V.
BHARGAVA, VISHISHTHA
CITATION: 1967 AIR 595 1967 SCR (1) 768
CITATOR INFO:
R 1967 SC1559 (13) R 1969 SC 612 (12) F 1975
SC 756 (2,3,4) RF 1979 SC 982 (7) RF 1981 SC2105 (19) D 1984 SC 940 (19)
ACT:
Wealth Tax Act (27 of 1957), ss. 2(m) and
7(2) (a)-Claim regarding deductions of estimated income tax and gratuity
payable to employees under award-If allowable.
HEADNOTE:
In the computation of the net wealth of the
appellantcompany under s. 2(m) of the Wealth Tax Act 1957, two deductions were
claimed the company : (i) the amount of estimated income tax for the assessment
year and (ii) the amount of gratuity payable by the company to its employees
under certain industrial awards.
HELD : The first claim was allowable but not
the second.
[776 D] Under s. 2(m) of the Act, the Wealth
Tax Officer must first determine the aggregate value of all the assets belonging
to the assessee on the valuation date, and then determine the aggregate value
of all the debts owed by the assessee on the valuation date. Excess of the
aggregate value of the assets over the debts is the net wealth. But on the
terms of the awards the liability to pay gratuity did not exist in present : it
was contingent upon the determination of employment by death, incapacity,
retirement or resignation of the employee, and not before. Therefore, it was
not a debt owned by the assessee on the valuation date. [772 C-D; 775 H] Nor
could the appellant-company claim the deduction under S. 7(2)(a) of the Act.
The aggregate, value of the assets must be computed in accordance with the
provisions of s. 7. But in the aggregation of the value of all the debts owned
by the assessee on the valuation date, s. 7 has not operation.
Section 7 does not deal with the computation
of net wealth but only with the determination of the not value of the -assets
as a whole. [776 A-C] Kesoram Industries and Cotton Mills Lid. v. Commissioner
of Wealth Tax (Central) (Calcutta), [1966] 2 S.C.R. 688, followed.
Observations Contra in Commissioner of Wealth
Tax, Gujarat v. Ajit Mills Ltd. 55 I.T.R. 556 and Commissioner of Wealth Tax
Gujarat v. New Rajpur Mills 56 I.T.R. 544, disapproved.
Southern Railway of Peru v. Owen (Inspector
of Taxes) [1957] A.C. 334, explained.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 11 29 of 1965.
Appeal from the judgment and order dated
April 15, 16, 17, 1963 of the Bombay High Court in Wealth Tax Reference No. 2
of 1961.
R.J. Kolah, N. D. Karkhanis and 0. C. Mathur,
for the appellant.
B. Sen, R. Ganapathy Iyer and R. N. Sachthey,
for the respondent.
769 The Judgment of the Court was delivered
by Shah, J. For the assessment year 1957-58 the appellant Company claimed in
proceedings for assessment of wealth-tax that the following four amounts be
deducted in the computation of its net wealth:
(1)Rs. 29,44,421 in, respect of income-tax
liability relating to the assessment year 1957-58. This amount included Rs.
2,95,869 representing the last installment of advance tax under s. 18A in
respect of which a notice of demand had been issued.
(2)Rs. 3,70,083 in respect of business
profits tax liability.
(3) Rs. 20,23,500 in respect of proposed
dividend.
(4) Rs. 25,02,675 "on account of accrued
liability for gratuity to workmen and staff as per the award of Industrial
Court and Labour Appellate Tribunal." The claim was rejected by the
Wealth-tax Officer. The Appellate Assistant Commissioner accepted the claim of
the appellant Company in respect of the last installment of the advance tax for
which a notice of demand had been issued, and rejected the claim in respect of
the rest. The Income tax Appellate Tribunal upheld the claim of the appellant
Company in respect of the 1st, 2nd and the 4th items and rejected the claim in
respect of the 3rd item.
At the instance of the Commissioner, the
following four questions were referred to the High Court of Judicature at
Bombay under s. 27(1) of the Wealth-tax Act 27 of 1957:
"(1) Whether on the facts and
circumstances of this case the last installment of advance tax in the sum of
Rs. 2,95,869 paid by the assessee after the valuation date in accordance with
the notice of demand dated 20-10-1956 is an admissible deduction under Sections
7(2) and 2(m) of the Wealth-tax Act for the purpose of computation of the net
wealth of the assessee for the assessment year 1957-58 ? (2)Whether on the
facts and circumstances of the case in computing the net wealth of the assessee
under Section 7(2) read with Section 2(m) of the Wealth-tax Act the liability
for income-tax and business profits tax could be allowed as a deduction? (3)
Whether on the facts and circumstances of the case the liability in the sum of
Rs. 25,02,675 which arose as a result of the awards dated 28-10-1948,
28-11-1956 and 17-101954 before the valuation date or any part thereof is
allowable as a deduction in determining the net wealth of the assessee under
Section 7(2) read with Section 2(m) of the Wealth-tax Act ? (4)Whether on the
facts and circumstances of the case of the sum of Rs. 20,23,500 being the
provision made for dividends and shown as a liability in the balance sheet of
the assessee company could be allowed as a deduction in computing the net
wealth of the assessee company?" At the hearing before the High Court, the
fourth question was not pressed by the appellant Company. The High Court
answered the first question in the affirmative, the second question in the
affirmative insofar as it related to the estimated liability of business
profits tax subject to verification by the Wealth-tax Officer, and in the
negative insofar as it related to the estimated liability of income tax. The
third question was answered in the negative. In this appeal the Company challenges
the correctness of the answers to the second part of the second question and
the third question.
The second question insofar as it relates to
estimated liability for payment of income-tax needs no detailed consideration,
for the answer thereto will be governed by the judgment of this Court in
Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax
(Central, Calcutta('). It was held by this Court in that case that liability to
pay income-tax was a present liability though the tax became payable after it
was quantified in accordance with ascertainable data: there was therefore a
perfected debt at any rate on the last day of the accounting year and not a
contingent liability, and the amount of the provision for payment of income-tax
in respect of the year of account was a "debt owed" within the
meaning of s. 2(m) on the valuation date and was as such deductible in
computing the net wealth. The view expressed by the High Court on the second
question insofar as it relates to provision for income-tax cannot therefore be
sustained and that part of the question should be answered in the affirmative.
There remains the third question. Counsel for
the Company had conceded before the High Court that the liability to pay
gratuity to the employees whose services were not terminated in the relevant
year of account was merely contingent, since it arose on the happening of
certain events such as death, physical incapacity, voluntary retirement, or
resignation, and was on that account not a debt within the meaning of s. 2(m)
of the Act. But it was contended before the High Court that the present value
of the liability for payment of gratuity was a permissible deduction in valuing
the assets of the business of the assessee under s. 7(2)(a) of the Act.
The (1)[1966] 2 S.C.R. 688 : 59 I.T.R. 767.
772
2. On voluntary retirement or resignation of
an employee After 15 years' continuous service in the company-15 months'
salary.
3. On termination of his service by the
Company(a)After 10 years' continuous service but less than 15 years' service in
the company-3/4th of one month's salary for each year of service.
(b)After 15 years' continuous service in the
company5 months' salary.
4. A gratuity will not be paid to any
employee who is dismissed for dishonesty or misconduct." The right to
obtain gratuity under the awards arises only when there is determination of
employment and not before.
The liability does not exist hi praesenti: it
is contingent upon the determination of employment. This Court pointed out in
Kesoram Industries & Cotton Mills' case(') at p. 703:
'debt is a sum of money which is now payable
or will become payable in future by reason of a present obligation: debitum in
praesenti, solvendum in futuro.' The said decisions also accept the legal
position that :a liability depending upon a contingency is not a debt in
praesenti or infuturo till the contingency happened. But if there is a debt the
fact that the amount is to be ascertained does not make it any the less a debt
if the liability is certain and what remains is only the quantification of the
amount. In short, a debt owed within the meaning of section 2(m) of the
Wealth-tax Act can be defined as a liability to pay in praesenti or in futuro
an ascertainable sum of money." Observations made by the High Court of
Gujarat in Commissioner of Wealth-tax, Gujarat v. Ajit Mills Ltd.,(2) that
deduction for an amount claimed on account of liability for gratuity for
workers and employees based on awards of the labour courts and agreements will
be admissible deductions in the computation of the net wealth are plainly
obiter, and in our judgment are not correct.
The decision of the House of Lords in
Southern Railway of Peru Ltd. v. Owen (Inspector of Taxes) (3) that the
assessee company (1) [1966] 2 S.C.R. 688.
(3) [1957] A.C. 334 : 32 I.T.R. 737.
(2) 55 I.T.R. 556.
771 High Court rejected that contention.
Counsel for the Company has in this appeal contended that no such concession as
is recorded in the judgment of the High Court was made, and in any event, the
concession being on a question of law was not binding upon the appellant
Company.
Section 2(m) at the material time provided:
.lm15 " 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; " By s. 3 the wealth-tax is charged for every
financial year commencing on and from the first day of April, 1957 on 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.
Broadly speaking net wealth is the difference on the valuation date between the
aggregate value computed in accordance with the provisions of the Act of the
assets belonging to the assessee and the aggregate value of all the debts owed
by the assessee. If there is no debt owed on the valuation date, it can
obviously not be deducted in determining the net wealth which is liable to tax
under the Wealth-tax Act.
Apart from the concession made by counsel for
the Company there is little doubt on the plain terms of the awards that the
liability to pay gratuity to the employees of the appellant Company on
determination of employment is a mere contingent liability which arises only
when the employment of the employee is determined by death, incapacity,
retirement or resignation. The relevant terms of the awards dated October 28,
1948, November 28, 1956 and October 17, 1954 are as follows:
"Gratuity should be paid............ on
the following, scale:1.On the death of an employee, while in service of the
company or on his becoming physically or mentally incapacitated for further
service-one month's salary for each year of service ..............
773 was entitled to charge against each
year's receipts the cost of making provision for the retirement payments which
would ultimately be payable as it had the benefit of the employees' services
during that year, provided the present value of the future payments could be
fairly estimated, were a permissible deduction in the computation of
income-tax, have in our judgment no relevance in this case. In Southern Railway
of Peru Ltd's case(') under the legislation of Peru a Company operating a
railway was bound to pay its employees compensation on the termination of their
services. The right to receive compensation arose on dismissal or on
termination of the employment by the employer by proper notice, or on such
termination by the death of the employee or on the expiry of the term of' the
employment. The compensation was an amount equivalent to one month's salary at
the rate in force at the date of determination for every year of service. The
company claimed in the computation of taxable income, under the Income-tax Act,
1918, to be entitled to charge against each year's receipts the cost of making
provision for the retirement payments which would ultimately 'be thrown on it,
calculating what sum would be required to be paid to each employee if he
retired without forfeiture at the close of the year and setting aside the
aggregate of what was required in so far -is the year had contributed to the
aggregate. It was held that the company was not entitled to make the
deductions, but the company was entitled to charge against each year's receipts
the cost of making provision for the retirement payments which would ultimately
be payable as it had the benefit of the employees' services during that year,
provided the present value of the future payments could be fairly estimated.
The question arose under the English Income-tax Act of 1918.
Lord MacDermott observed at p. 345:
say that, in computing his taxable profits
for a particular year, a trader, who is under a definite obligation to pay his
employees for their services in that year ail immediate payment and also a
future payment in some subsequent year, may properly deduct, not only the
immediate payment, but the present value of the future payment, provided such
present value can be satisfactorily determined or fairly estimated."
Similar observations were made in the judgment of Lord Radcliff.. But the House
in that case was concerned to determine the deductibility of the present value
of a liability which may arise in future in the computation of taxable profits
for the relevant year under the Income-tax Act. The same considerations cannot,
however, apply to a case under the Wealth-tax Act, where the liability to pay
wealth-tax is charged upon the net wealth of an assessee.
[1957] A.C. 334 32 I.T.R. 737.
774 In Commissioner of wealth-tax, Gujarat v.
New Rajpur Mills Ltd.(') the assessee company claimed to deduct gratuity
payable to employees under an agreement entered into with the labour
associations before the valuation date. The Court in that case observed that
the liability was not a debt owed by the assessee on the valuation date since
the gratuity was not payable on the valuation date, but was payable only on fulfillment
of the ,contingencies set out in those agreements. But the Court proceeded to
observe that since contingent liabilities can be taken into account while
computing the net wealth of the asseessee under s. 7(2)(a) ,the liability for
payment of gratuity under such agreements would 'have to be estimated and the
estimated value of the contingent liability would be a permissible deduction in
computing the net wealth of the assessee. In our view the first observation of
the Court is correct, but the second is not. We will presently set out the
reasons for that view.
The alternative plea that under s. 7(2)(a) of
the Act the appellant Company is entitled to claim deduction even if it cannot
do so ,under s. 2(m) has, in our judgment, no force.
Section 7 deals with the manner of valuation
of assets. It provides insofar as it is material:
"(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)Notwithstanding anything contained in
subsection (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;" Section 7 falls in Ch. II which deals with the charge of
wealth-tax and assets subject to such charge: it is intended to provide
machinery for determination of the value of assets. It was observed in the
minority judgment in Kesoram Industries & Cotton Mills' case(2) -at p.717 :
"By the first sub-section the Wealth-tax
Officer is authorised to estimate, for the purpose of determining the (1) 56
I.T.R. 544.
(2) [1966] 2 S. C. R. 688 : 59 I.T. R. 767.
775 value of any asset, the price which it
would fetch, if sold in the open market on the valuation date. But this rule in
the case of a running business may often be inconvenient and may not yield a
true estimate of the net value of the total assets of the business. The
legislature has therefore provided in sub-section (2)(a) that where the
assessee is carrying on a business for which accounts are maintained by him
regularly, the Wealth-tax Officer may 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 make such adjustments therein as the circumstances of
the case may require. But the power conferred upon the tax officer by
section7(2) is to arrive at a valuation of the assets, and not to arrive at the
net wealth of the assessee. Section 7(2) merely provides machinery in certain
special cases for valuation of assets, and it is from the aggregate valuation
of assets that the net wealth chargeable to tax may be ascertained. The power
conferred upon the tax officer to make adjustments as the circumstances of the
case may require is also for the purpose of arriving at the true valueof the
assets of the business. Sub-section (2)(a) of section 7 contemplates the
determination of the net value of the assets having regard to the balance-sheet
and after making such adjustment as the circumstances of the case may require.
It does not contemplate determination of the net wealth, because net wealth can
only be determined from the net value of the assets by making appropriate
deductions for debts owed by the assessee.
The argument raised by counsel for the
assessee is that substantially section 7(2) is a definition section, which extends,
for the purposes of the Act, the definition of the 'net wealth' of assessees
carrying on business. There is no warrant for this argument in the language
used in section 7(2). Counsel was unable to suggest any rational explanation
why, if what he contends was the intention, Parliament should have adopted this
somewhat roundabout way of incorporating a definition of net wealth in a
section dealing with valuation of assets." The majority of the Court did
not express any opinion on this question. From the terms of s. 2(m) it appears
clear that the tax officer must first determine the aggregate value of all the
assets belonging to the assessee on the valuation date, and then determine the
aggregate value of all the debts owed by the assessee on the valuation date.
Excess of the aggregate value of the assets
over the debts is the net wealth. The aggregate value of the assets must be 776
computed in accordance with the provisions of s. 7. But in the aggregation of
the value of all the debts owed by the assessee on the valuation date, s. 7 has
no operation.
In holding in New Rajpur Mills' case() that a
contingent liability can be taken into account while computing the net wealth
of the assessee under s. 7(2) (a), in our judgment, the true function of s. 7(2)(a)
of the Wealth-tax Act was not appreciated. Section 7 does not deal with the
computation of net wealth. It deals with the computation of the aggregate value
of the assets. Under s. 7 the Wealthtax Officer is competent, where the
assessee is carrying on business of which accounts are maintained regularly, to
determine the net value of the assets of the business as a whole. But in doing
so he determines the value of the assets of the business as a whole, and not
the net wealth of the business.
The appeal therefore is partially allowed.
Insofar as the claim relates to deduction of estimated income-tax for the
assessment year, the answer wilt be in favour of the appellant-company, and in
so far as the claim relates to deduction of gratuity payable to the employees
of the company, the answer will be in the negative. There will be no order as
to costs in this appeal.
V.P.S. Appeal allowed in part.
(1) 56 I.T.R. 544.
Back
