Commissioner of Wealth Tax, Madras Vs.
K. S. N. Bhatt [1983] INSC 157 (21 October 1983)
PATHAK, R.S.
PATHAK, R.S.
VENKATARAMIAH, E.S. (J)
CITATION: 1984 AIR 495 1984 SCR (1) 490 1984
SCC (1) 20 1983 SCALE (2)674
ACT:
Wealth Tax Act, 1957 (27 of 1957)-Sections
2(m), 2(g) and 3-Wealth tax-Liability of-Crystallieses on the valuation date
for the relevant assessment year-Computing net wealth- Tax liability on
valuation date-Whether deductible as 'debt owed'.
Gift Tax Act, 1958 (18 of 1958)-Sections 2,3,
13 and 15-Gift tax-Liability of-Crystallises on the last date of the previous
year.
Income Tax Act, 1961 (43 of 1961) Section
80B.-Income tax-Liability of-Crystallises on the last date relevant to the
assessment year.
HEADNOTE:
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 Officer allowed only part of the deductions claimed
The appeal of the assessee was dismissed by the Appellate 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]
had been cancelled by the Appellate Assistant Commissioner in appeals against
the assessment orders and those appellate orders of the Appellate Assistant
Commissioner having become final in view of the dismissal of the Revenue's
appeals by the Appellate Tribunal, there was no outstanding demand on account
of income tax and gift 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 Appellate Tribunal
following two judgments of this Court [Commissioner of Income Tax v. Keshoram
Industries Pvt. Ltd. (1966) 59 I.T.R. 767 and H.H. Setu Parvati Bayi v.
Commissioner of Wealth Tax Kerala (1969) 69 I.T.R. 864], held that so long as
the liability to pay the tax had arisen before the relevant valuation 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 must be
examined with reference to the position obtaining on the valuation date and
that nothing happening subsequently could be considered in computing the net
wealth.
491 The High Court having refused to call for
a reference from the Appellate Tribunal under section 27(3) of the Act the
Revenue appealed to this Court.
Allowing the appeals in part.
HELD: 1. Whether a debt was owed by the
assessee on the valuation date would depend on the fact that a liability had
already crystallised under the relevant taxing statute on the valuation date.
[494 D]
2. An income tax liability crystallises on
the last day of the previous year relevant to the assessment year under the
Income Tax Act, a wealth tax liability crystallises on the valuation date for
the relevant assessment year under the Wealth Tax Act and a gift tax liability
crystallises on the last day of the previous year for the relevant assessment
year under the Gift Tax Act.
[494 E]
3. 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 made after the valuation date
relevant to the wealth tax assessment in which the claim to deduction is made,
there is a debt owed by the assessee on the valuation date. It is the
quantification of the tax liability by the ultimate judicial authority which
will determine the amount of the debt owed by the assessee on the valuation
date. So long as such ultimate determination indicates 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 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 could be envisaged there was a debt
owed by the assessee. [495 B-E]
4. Section 2(m) (iii) (a) denies deduction of
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 assessee
has challenged its validity. It refers to the initial stage only where an
appeal, revision or other proceeding is pending merely. It does not proceed
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. Once it is
determined that the tax liability is nil, it cannot be said that any amount of
tax is outstanding. Such a situation does not bring section 2(m) (iii) (a) into
operation at all.
If upon the ultimate determination it is
found that the amount of tax is nil, the assessee is denied 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
assessment year 1965-66 subsequently set aside on appeal after the valuation
dates, cannot be regarded as debts owed by the assessee on the relevant
valuation dates. [495 G] 492 Commissioner of Income Tax v. Keshoram Industries
Pvt Ltd. (1966) 59 I.T.R. 767; H.H. Setu Parvati Bayi v. Commissioner of Wealth
Tax, Kerala (1969) 69 I.T.R. 864 referred to.
Late P. Appavoo Pillai v. Commissioner of
Wealth Tax Madras (1973) 91 I.T.R. 138 reversed.
CIVIL 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.
S.C. Manchanda and Miss A. Subhashini for the
Appellant.
Gopala 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 of 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:
"1 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 allowed 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 to requisition a reference
from the Appellate Tribunal to enable 493 the High Court to decide the two
questions of law. But we refrain from doing so as the points have already been
considered on the merits by us in judgments delivered today in the appeals
listed and heard along with these cases, and therefore we shall express our
opinion directly on the two questions.
In assessment proceedings under the Wealth
Tax Act for the assessment years 1964-65, 1965-66, 1966-67 and 1967-68, the
corresponding 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 allowed only part of the deductions
claimed, and an appeal by the assessee 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, wealth tax and
gift tax liabilities in respect of the different assessment years.
The Appellate Tribunal found that so far as
the assessment year 1964-65 was concerned all the demands were raised only
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
subsequent to the relevant valuation date, that in respect of the assessment
year 1966- 67 all the demands, except items 1 to 3 and 8 to 10, were raised
subsequent to the relevant valuation date and that so far as the 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 Tax v. Keshoram Industries Pvt. Ltd.(1) and H.H. Setu
Parvati Bayi v. Commissioner of Wealth Tax, Kerala,(2) that so long as the
liability to pay the tax had arisen before the relevant valuation dates it was
immaterial that the assessments were quantified after the relevant valuation
dates. It was pointed out by the Revenue before the Appellate Tribunal that the
income tax liability for the assessment year 1965-66 of Rs. 72,399 and the gift
tax liability for the assessment year 1965-66 of Rs. 1,13,650 had been
cancelled by the Appellate Assistant Commissioner in appeals against the
assessment orders, and those appellate orders of the Appellate Assistant
Commissioner had become final in view of the dismissal of the Revenue's appeals
by the Appellate 494 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, would not qualify for deduction under s. 2(m) of the
Wealth Tax Act. The Appellate 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 nothing
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 Authority
would have no relevance for determining whether a debt was owed on the relevant
valuation date. Reference was made to the decision of the Madras High Court in
Late P. Appavoo Pillai v. Commissioner of Wealth Tax, Madras (1) We are unable
to agree with the view taken by the Appellate Tribunal. Whether a debt was owed
by the assessee on the valuation date would depend, as was observed by this
Court in Keshoram Industries Pvt. Ltd. (supra) and H.H. Setu Parvati Bayi
(supra), on the fact that a liability had already crystalized under the
relevant taxing statute on the valuation date. An income tax liability
crystallises on the last day of the previous year relevant to the assessment
year under the Income Tax Act, a wealth tax liability crystallises on the
valuation date for the relevant assessment year under the Wealth Tax Act and a
gift tax liability crystallises on the last day of the previous year for the
relevant assessment year under the Gift Tax Act. En passant, we may explain why
we say that a gift tax liability crystallises on 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 previous year. Section 15 requires the Gift
Tax Officer to assess the value of the taxable gifts made during the previous
year 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 495 to the assessed aggregate value
of the gifts made during the previous year. In other words, a gift tax
liability crystallises on the last day of the previous 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 made after the valuation date relevant to the wealth tax assessment in
which the claim to deduction is made, there is a debt owed by the assessee on
the valuation date. The quantification effected by an assessment order may be
varied as the income tax, wealth tax and gift tax case is carried in appeal to
the Appellate Assistant Commissioner, or thereafter to the Appellate Tribunal,
and indeed even in reference later to the High Court or subsequent appeal to
this Court. It is the quantification of the tax liability by the ultimate
judicial authority which will determine the amount of the debt owed by the
assessee on the valuation date. So long as such ultimate determination
indicates 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 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 stood 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 date, directly relates to the question whether on the valuation date
there was a debt owed by the assessee. 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 contrary 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 liability 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 prohibition of s.
2(m) (iii) (a) and had to be taken into account as debts 496 owed by the
assessee on the valuation dates. It seems to us that the Appellate 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 assessee has challenged its validity. It refers to the initial
stage only where an appeal, revision or other proceeding is pending merely. It
does not proceed beyond that stage to the point where, in consequence of such
appeal, revision or other proceedings, the tax 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 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 found that the amount of tax is nil, the
assessee is denied the deduction claimed by him not on the ground of s. 2(m)
(iii) (a) but because the superior authority has found that there is no tax
liability whatever. It must be taken that in law there never was any tax
liability.
So far as the remaining tax liabilities are
concerned, the Tribunal is right in allowing the income tax, wealth tax and
gift tax liabilities to be deducted in computing the net wealth of the assessee
for the respective assessment years, even though, the assessment orders were
finalised after the respective 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 Rs. 1,13,650 for the assessment years
1965-66 referred to earlier.
The questions of which reference was sought
by the Revenue are answered accordingly.
The appeals are allowed in part in the terms
already set out. There is no order as to costs.
N.V.K. Appeals partly allowed.
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