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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