Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6
PETITIONER:
COMMISSIONER OF WEALTH TAX, MADRAS
Vs.
RESPONDENT:
K. S. N. BHATT
DATE OF JUDGMENT21/10/1983
BENCH:
PATHAK, R.S.
BENCH:
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
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6
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 te 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.
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6
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.
JUDGMENT:
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
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6
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
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6
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
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6
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.
497