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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

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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.

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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

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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

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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

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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