Full Judgment Text
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PETITIONER:
R.K. DEO
Vs.
RESPONDENT:
COMMISSIONER OF WEALTH-TAX, ORISSA.
DATE OF JUDGMENT12/05/1992
BENCH:
SAHAI, R.M. (J)
BENCH:
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.
HEADNOTE:
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
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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.
JUDGMENT:
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
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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
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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
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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
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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
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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.
213