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PETITIONER: STANDARD MILLS CO.  LTD.

       Vs.

RESPONDENT: COMMISSIONER OF WEALTH-TAX, BOMBAY CITY

DATE OF JUDGMENT: 06/10/1966

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V. BHARGAVA, VISHISHTHA

CITATION:  1967 AIR  595            1967 SCR  (1) 768  CITATOR INFO :  R          1967 SC1559  (13)  R          1969 SC 612  (12)  F          1975 SC 756  (2,3,4)  RF         1979 SC 982  (7)  RF         1981 SC2105  (19)  D          1984 SC 940  (19)

ACT: Wealth  Tax  Act (27 of 1957), ss. 2(m) and  7(2)  (a)-Claim regarding  deductions of estimated income tax  and  gratuity payable to employees under award-If allowable.

HEADNOTE: In  the  computation  of the net wealth  of  the  appellant- company  under  s.  2(m) of the Wealth  Tax  Act  1957,  two deductions  were  claimed the company : (i)  the  amount  of estimated  income tax for the assessment year and  (ii)  the amount  of gratuity payable by the company to its  employees under certain industrial awards. HELD  :  The first claim was allowable but not  the  second. [776 D] Under s. 2(m) of the Act, the Wealth Tax Officer must  first determine the aggregate value of all the assets belonging to the  assessee on the valuation date, and then determine  the aggregate value of all the debts owed by the assessee on the valuation date.  Excess of the aggregate value of the assets over  the debts is the net wealth.  But on the terms of  the awards  the  liability  to pay gratuity  did  not  exist  in present  :  it  was contingent  upon  the  determination  of employment  by death, incapacity, retirement or  resignation of  the employee, and not before.  Therefore, it was  not  a debt owned by the assessee on the valuation date. [772  C-D; 775 H] Nor could the appellant-company claim the deduction under S. 7(2)(a) of the Act.  The aggregate, value of the assets must be  computed in accordance with the provisions of s. 7.  But in  the aggregation of the value of all the debts  owned  by the assessee on the valuation date, s. 7 has not  operation. Section  7 does not deal with the computation of net  wealth but  only  with the determination of the not  value  of  the -assets as a whole. [776 A-C]

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Kesoram Industries and Cotton Mills Lid. v. Commissioner  of Wealth  Tax  (Central)  (Calcutta),  [1966]  2  S.C.R.  688, followed. Observations  Contra in Commissioner of Wealth Tax,  Gujarat v. Ajit Mills Ltd. 55 I.T.R. 556 and Commissioner of  Wealth Tax Gujarat v. New Rajpur Mills 56 I.T.R. 544, disapproved. Southern Railway of Peru v. Owen (Inspector of Taxes) [1957] A.C. 334, explained.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION: Civil Appeal No.  11  29  of 1965. Appeal  from the judgment and order dated April 15, 16,  17, 1963 of the Bombay High Court in Wealth Tax Reference No.  2 of 1961. R.J.  Kolah,  N. D. Karkhanis and 0. C. Mathur,  for  the appellant. B.   Sen, R. Ganapathy Iyer and R. N. Sachthey, for the res- pondent. 769 The Judgment of the Court was delivered by Shah,  J.  For  the assessment year  1957-58  the  appellant Company claimed in proceedings for assessment of  wealth-tax that   the  following  four  amounts  be  deducted  in   the computation of its net wealth: (1)Rs.  29,44,421  in,  respect  of  income-tax  liability relating  to  the  assessment  year  1957-58.   This  amount included  Rs. 2,95,869 representing the last  instalment  of advance  tax  under s. 18A in respect of which a  notice  of demand had been issued. (2)Rs.  3,70,083  in  respect  of  business  profits   tax liability. (3)  Rs. 20,23,500 in respect of proposed dividend. (4)  Rs. 25,02,675 "on account of accrued liability for gratuity to workmen and staff as per the award of Industrial Court and Labour Appellate Tribunal." The  claim  was  rejected by the  Wealth-tax  Officer.   The Appellate  Assistant Commissioner accepted the claim of  the appellant  Company in respect of the last instalment of  the advance  tax for which a notice of demand had  been  issued, and rejected the claim in respect of the rest.  The  Income- tax  Appellate  Tribunal upheld the claim of  the  appellant Company  in  respect of the 1st, 2nd and the 4th  items  and rejected the claim in respect of the 3rd item. At  the  instance of the Commissioner,  the  following  four questions  were referred to the High Court of Judicature  at Bombay under s. 27(1) of the Wealth-tax Act 27 of 1957: "(1) Whether on the facts and circumstances of this case the last  instalment of advance tax in the sum of  Rs.  2,95,869 paid by the assessee after the valuation date in  accordance with the notice of demand dated 20-10-1956 is an  admissible deduction under Sections 7(2) and 2(m) of the Wealth-tax Act for  the  purpose of computation of the net  wealth  of  the assessee for the assessment year 1957-58 ? (2)Whether  on the facts and circumstances of the case  in computing the net wealth of the assessee under Section 7(2) read  with Section 2(m) of the Wealth-tax Act the  liability               for income-tax and business profits tax  could               be allowed as a deduction? (3)  Whether on the facts and circumstances of the case  the liability  in  the  sum of Rs. 25,02,675 which  arose  as  a result of the awards dated 28-10-1948, 28-11-1956 and 17-10- 1954 before the valuation date or any part thereof is

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allowable  as a deduction in determining the net  wealth  of the  assessee under Section 7(2) read with Section  2(m)  of the Wealth-tax Act ? (4)Whether  on the facts and circumstances of the case  of the  sum  of  Rs. 20,23,500 being  the  provision  made  for dividends  and shown as a liability in the balance sheet  of the  assessee  company could be allowed as  a  deduction  in computing the net wealth of the assessee company?" At  the hearing before the High Court, the  fourth  question was  not pressed by the appellant Company.  The  High  Court answered  the first question in the affirmative, the  second question  in  the affirmative insofar as it related  to  the estimated  liability  of  business profits  tax  subject  to verification by the Wealth-tax Officer, and in the  negative insofar as it related to the estimated liability of  income- tax.   The third question was answered in the negative.   In this  appeal the Company challenges the correctness  of  the answers  to the second part of the second question  and  the third question. The  second  question  insofar as it  relates  to  estimated liability  for  payment  of  income-tax  needs  no  detailed consideration,  for the answer thereto will be  governed  by the judgment of this Court in Kesoram Industries and  Cotton Mills   Ltd.   v.  Commissioner  of   Wealth-tax   (Central, Calcutta(’).   It was held by this Court in that  case  that liability  to pay income-tax was a present liability  though the tax became payable after it was quantified in accordance with  ascertainable  data: there was therefore  a  perfected debt at any rate on the last day of the accounting year  and not a contingent liability, and the amount of the  provision for payment of income-tax in respect of the year of  account was  a  "debt  owed" within the meaning of s.  2(m)  on  the valuation  date and was as such deductible in computing  the net  wealth.   The view expressed by the High Court  on  the second  question  insofar  as it relates  to  provision  for income-tax  cannot therefore be sustained and that  part  of the question should be answered in the affirmative. There  remains the third question.  Counsel for the  Company had conceded before the High Court that the liability to pay gratuity to the employees whose services were not terminated in the relevant year of account was merely contingent, since it  arose on the happening of certain events such as  death, physical  incapacity, voluntary retirement, or  resignation, and was on that account not a debt within the meaning of  s. 2(m) of the Act.  But it was contended before the High Court that  the  present  value of the liability  for  payment  of gratuity  was a permissible deduction in valuing the  assets of the business of the assessee under s. 7(2)(a) of the Act. The (1)[1966] 2 S.C.R. 688 : 59 I.T.R. 767. 772 2. On voluntary retirement or resignation of an employee- After 15 years’ continuous service in the company-15 months’ salary. 3.   On termination of his service by the Company- (a)After  10  years’ continuous service but less  than  15 years’  service in the company-3/4th of one  month’s  salary for each year of service. (b)After 15 years’  continuous service in the  company-  5               months’ salary. 4.   A  gratuity  will not be paid to any  employee  who  is dismissed for dishonesty or misconduct." The  right to obtain gratuity under the awards  arises  only when  there is determination of employment and  not  before. The liability does not exist hi praesenti: it is  contingent

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upon  the determination of employment.  This  Court  pointed out in Kesoram Industries & Cotton Mills’ case(’) at p. 703: ’debt is a sum of money which is now payable or will  become payable in future by reason of a present obligation: debitum in praesenti, solvendum in futuro.’ The  said decisions also accept the legal position  that  :a liability  depending  upon a contingency is not  a  debt  in praesenti or infuturo till the contingency happened.  But if there  is  a  debt  the  fact  that  the  amount  is  to  be ascertained  does  not make it any the less a  debt  if  the liability   is  certain  and  what  remains  is   only   the quantification of the amount.  In short, a debt owed  within the  meaning  of section 2(m) of the Wealth-tax Act  can  be defined  as a liability to pay in praesenti or in futuro  an ascertainable sum of money." Observations  made by the High Court of Gujarat  in  Commis- sioner  of Wealth-tax, Gujarat v. Ajit Mills  Ltd.,(2)  that deduction for an amount claimed on account of liability  for gratuity  for workers and employees based on awards  of  the labour  courts and agreements will be admissible  deductions in the computation of the net wealth are plainly obiter, and in our judgment are not correct. The  decision of the House of Lords in Southern  Railway  of Peru Ltd. v. Owen (Inspector of Taxes) (3) that the assessee company (1)  [1966] 2 S.C.R. 688. (3) [1957] A.C. 334 : 32 I.T.R. 737. (2) 55 I.T.R. 556. 771 High  Court  rejected  that  contention.   Counsel  for  the Company has in this appeal contended that no such concession as  is recorded in the judgment of the High Court was  made, and in any event, the concession being on a question of  law was not binding upon the appellant Company. Section 2(m) at the material time provided: .lm15 "  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; " By  s. 3 the wealth-tax is charged for every financial  year commencing  on and from the first day of April, 1957 on  the net  wealth  on the, corresponding valuation date  of  every individual,  Hindu undivided family and company at the  rate or  rates specified in the Schedule.  Broadly  speaking  net wealth  is the difference on the valuation date between  the aggregate  value computed in accordance with the  provisions of  the Act of the assets belonging to the assessee and  the aggregate  value of all the debts owed by the assessee.   If there  is  no  debt  owed on  the  valuation  date,  it  can obviously  not  be deducted in determining  the  net  wealth which is liable to tax under the Wealth-tax Act. Apart  from the concession made by counsel for  the  Company there is little doubt on the plain terms of the awards  that the  liability  to  pay gratuity to  the  employees  of  the appellant  Company on determination of employment is a  mere contingent  liability which arises only when the  employment

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of   the  employee  is  determined  by  death,   incapacity, retirement or resignation.  The relevant terms of the awards dated  October 28, 1948, November 28, 1956 and  October  17, 1954 are as follows: "Gratuity  should  be  paid............  on  the  following, scale:- 1.On  the death of an employee, while in service  of  the company   or   on  his  becoming  physically   or   mentally incapacitated  for  further service-one month’s  salary  for each year of service .............. 773 was entitled to charge against each year’s receipts the cost of making provision for the retirement payments which  would ultimately  be  payable  as  it  had  the  benefit  of   the employees’  services during that year, provided the  present value of the future payments could be fairly estimated, were a  permissible deduction in the computation  of  income-tax, have in our judgment no relevance in this case.  In Southern Railway of Peru Ltd’s case(’) under the legislation of  Peru a Company operating a railway was bound to pay its employees compensation  on  the termination of  their  services.   The right  to  receive  compensation arose on  dismissal  or  on termination  of  the employment by the  employer  by  proper notice, or on such termination by the death of the  employee or  on  the  expiry of the term  of’  the  employment.   The compensation was an amount equivalent to one month’s  salary at the rate in force at the date of determination for  every year of service.  The company claimed in the computation  of taxable  income,  under  the Income-tax  Act,  1918,  to  be entitled to charge against each year’s receipts the cost  of making  provision  for the retirement payments  which  would ultimately  ’be thrown on it, calculating what sum would  be required  to be paid to each employee if he retired  without forfeiture  at the close of the year and setting  aside  the aggregate  of what was required in so far -is the  year  had contributed to the aggregate.  It was held that the  company was not entitled to make the deductions, but the company was entitled to charge against each year’s receipts the cost  of making  provision  for the retirement payments  which  would ultimately  be  payable  as  it  had  the  benefit  of   the employees’  services during that year, provided the  present value of the future payments could be fairly estimated.  The question  arose  under the English Income-tax Act  of  1918. Lord MacDermott observed at p. 345: say that, in computing his taxable profits for a  particular year,  a trader, who is under a definite obligation  to  pay his employees for their services in that year ail  immediate payment  and also a future payment in some subsequent  year, may properly deduct, not only the immediate payment, but the present  value of the future payment, provided such  present value can be satisfactorily determined or fairly estimated." Similar  observations  were  made in the  judgment  of  Lord Radcliff..  But  the  House in that case  was  concerned  to determine  the  deductibility  of the  present  value  of  a liability  which may arise in future in the  computation  of taxable  profits for the relevant year under the  Income-tax Act.   The same considerations cannot, however, apply  to  a case  under the Wealth-tax Act, where the liability  to  pay wealth-tax is charged upon the net wealth of an assessee. [1957] A.C. 334 - 32 I.T.R. 737. 774 In  Commissioner of wealth-tax, Gujarat v. New Rajpur  Mills Ltd.(’)  the  assessee company claimed  to  deduct  gratuity payable  to employees under an agreement entered  into  with the  labour  associations before the  valuation  date.   The

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Court  in  that case observed that the liability was  not  a debt  owed by the assessee on the valuation date  since  the gratuity  was  not payable on the valuation  date,  but  was payable only on fulfilment of the ,contingencies set out  in those  agreements.  But the Court proceeded to observe  that since contingent liabilities can be taken into account while computing  the net wealth of the asseessee under s.  7(2)(a) ,the liability for payment of gratuity under such agreements would  ’have to be estimated and the estimated value of  the contingent  liability  would be a permissible  deduction  in computing  the net wealth of the assessee.  In our view  the first  observation of the Court :is correct, but the  second is  not.   We will presently set out the  reasons  for  that view. The  alternative plea that under s. 7(2)(a) of the  Act  the appellant Company is entitled to claim deduction even if  it cannot do so ,under s. 2(m) has, in our judgment, no  force. Section 7 deals with the manner of valuation of assets.   It provides insofar as it is material: "(1)  The  value  of any asset, other  than  cash,  for  the purposes  of  this Act, shall be estimated to be  the  price which  in  the opinion of the Wealth-tax  Officer  it  would fetch if sold in the open market on the valuation date. (2)Notwithstanding anything contained in subsection (1),- (a)where the assessee is carrying on a business for  which accounts  are  maintained by him  regularly  the  Wealth-tax Officer may, instead of determining separately the value  of each asset held by the assessee in such business,  determine the  net  value  of the assets of the business  as  a  whole having  regard to the balance-sheet of such business  as  on the  valuation date and making such adjustments  therein  as the circumstances of the case may require;" Section  7 falls in Ch.  II which deals with the  charge  of wealth-tax and assets subject to such charge: it is intended to  provide  machinery  for determination of  the  value  of assets.  It was observed in the minority judgment in Kesoram Industries & Cotton Mills’ case(2) -at p.717 : "By the first sub-section the Wealth-tax Officer is authorised to estimate, for the purpose of determining the (1) 56 I.T.R. 544. (2) [1966] 2 S. C. R. 688 : 59 I.T. R. 767. 775 value of any asset, the price which it would fetch, if  sold in the open market on the valuation date.  But this rule  in the case of a running business may often be inconvenient and may not yield a true estimate of the net value of the  total assets of the business.  The legislature has therefore  pro- vided  in  sub-section  (2)(a) that where  the  assessee  is carrying on a business for which accounts are maintained  by him regularly, the Wealth-tax Officer may determine the  net value  of the assets of the business as a whole, having  re- gard to the balance-sheet of such business as on the  valua- tion  date and make such adjustments therein as the  circum- stances  of the case may require.  But the  power  conferred upon  the  tax  officer by section7(2) is  to  arrive  at  a valuation of the assets, and not to arrive at the net wealth of the assessee.  Section 7(2) merely provides machinery  in certain  special  cases for valuation of assets, and  it  is from  the aggregate valuation of assets that the net  wealth chargeable  to tax may be ascertained.  The power  conferred upon   the   tax  officer  to  make   adjustments   as   the circumstances  of  the  case may require  is  also  for  the purpose of arriving at the true valueof the assets of the business.  Sub-section (2)(a) of section 7 contemplates  the determination  of the net value of the assets having  regard

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to the balance-sheet and after making such adjustment as the circumstances  of  the  case  may  require.   It  does   not contemplate  determination  of the net wealth,  because  net wealth  can  only be determined from the net  value  of  the assets  by making appropriate deductions for debts  owed  by the assessee. The  argument  raised by counsel for the  assessee  is  that substantially  section 7(2) is a definition  section,  which extends, for the purposes of the Act, the definition of  the ’net wealth’ of assessees carrying on business.  There is no warrant  for this argument in the language used  in  section 7(2).   Counsel was unable to suggest any rational  explana- tion why, if what he contends was the intention,  Parliament should   have  adopted  this  somewhat  roundabout  way   of incorporating  a  definition  of net  wealth  in  a  section dealing with valuation of assets." The  majority  of the Court did not express any  opinion  on this  question.  From the terms of s. 2(m) it appears  clear that  the  tax officer must first  determine  the  aggregate value  of  all the assets belonging to the assessee  on  the valuation  date, and then determine the aggregate  value  of all  the debts owed by the assessee on the  valuation  date. Excess  of the aggregate value of the assets over the  debts is  the net wealth.  The aggregate value of the assets  must be 776 computed  in accordance with the provisions of s. 7. But  in the  aggregation of the value of all the debts owed  by  the assessee on the valuation date, s. 7 has no operation. In  holding  in New Rajpur Mills’ case() that  a  contingent liability can be taken into account while computing the  net wealth  of the assessee under s. 7(2) (a), in our  judgment, the  true function of s. 7(2)(a) of the Wealth-tax  Act  was not   appreciated.   Section  7  does  not  deal  with   the computation of net wealth.  It deals with the computation of the  aggregate value of the assets.  Under s. 7 the  Wealth- tax Officer is competent, where the assessee is carrying  on business  of  which accounts are  maintained  regularly,  to determine  the net value of the assets of the business as  a whole.   But  in  doing so he determines the  value  of  the assets of the business as a whole, and not the net wealth of the business. The  appeal therefore is partially allowed.  Insofar as  the claim  relates to deduction of estimated income-tax for  the assessment  year,  the  answer  wilt be  in  favour  of  the appellant-company,  and  in so far as the claim  relates  to deduction  of  gratuity  payable to  the  employees  of  the company, the answer will be in the negative.  There will  be no order as to costs in this appeal. V.P.S.                                                Appeal allowed in part. (1) 56 I.T.R. 544. 777