http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 7  

PETITIONER: THE COMMISSIONER OF WEALTH TAX GUJARAT, AHMEDABAD

       Vs.

RESPONDENT: KANTILAL MANILAL ETC. ETC.

DATE OF JUDGMENT13/03/1985

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. VENKATARAMIAH, E.S. (J)

CITATION:  1985 AIR  924            1985 SCR  (3) 297  1985 SCC  (2) 343        1985 SCALE  (1)446

ACT:        Wealth Tax Act, Section 2 (m) (iii) (a), scope of-New wealth, computation  of-Debt due-Ingredients  necessary  for invoking the  bar prescribed  by Section  2 (m)  (iii)  (a), explained-Admissibility  of   the  assessee’s  claim  for  a deduction  of   certain  sums   representing  the  estimated liabilities on account of Income Tax and Wealth Tax.

HEADNOTE:      For the  assessment  years  1961-62  and  1962-63,  the corresponding valuation  dates of  which were March 31, 1961 and March  31, 1962,  assessment orders  were made under the Wealth Tax  Act  on  March  24,  1961  and  March  23,  1962 respectively while  the notice of demands were served on the assessee on  April 11, 1961 and April 11, 1962 respectively. Against the  said notices  of demand  the assessee preferred appeals on May 9, 1961 and May 9, 1962 respectively. For the purpose  of  determining  the  assessee’s  net  wealth,  the assessee’s  claim   for  a   deduction   of   certain   sums representing the estimated liabilities on account O?’ income tax and  wealth tax  was rejected in both assessments by the Wealth Tax Officer. On appeal by the assessee, the Appellate Assistant Commissioner  of Wealth  Tax allowed a part of the claim. In  appeal before the Appellate Tribunal, the Revenue contended that  since the  assessee had  disputed the wealth tax liability  of Rs.  22,679/- in respect of the assessment year 1960-61  and the  sum of Rs. 39,692/- in respect of the assessment year  1961-62, he was not entitled to a deduction of the  same, being  barred by  reason of  the provisions of section 2(m)  (iii) (a)  of the Wealth Tax Act. The Tribunal rejected the  said contention and held that section 2 (m)(a) was not  attracted as  the tax had not become payable on the relevant valuation  dates. The Wealth Tax References made at the instance  of the  Revenue were  decided in  favor of the assessee  by  the  High  Court  of  Gujarat  by  its  common judgement in  Commissioner of Wealth Tax v. Kantilal Manilal reported in  (1973) 88  I.T.R 125.  The  present  appeal  by special leave arises therefrom.      Dismissing the appeal, the Court ^      HELD: 1.1  In order  to invoke  the bar  prescribed- by Section 2(m) (iii) (a) of the Wealth Tax Act it is necessary

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 7  

for the Revenue to establish that both 298 requirements therein  are satisfied, that is to say, that an amount of  the tax  is outstanding on the valuation date and further that  the amount  is claimed  by the  assessee in an appeal as not being payable by him. [302E-F]      1.2 An  amount of  tax is  outstanding if it is payable and has  remained unpaid. In other words, if there is a debt due and  there has  been no  payment of  the debt. There are three stages  in respect of an income tax liability. The tax liability comes  into existence  on the  last day  o  f  the previous year  relevant to  the assessment  year. Thereafter when the  assessment proceedings  take place  an  assessment order  is   made  quantifying   the  assessable  income  and determining the  tax payable.  Thereupon, a notice of demand is served  for payment  of the tax, and the tax then becomes payable and  a debt  becomes due  to the Revenue.A survey of the provisions  of the  Wealth Tax Act contained in Sections 14 to  17 and Section 30 makes it clear that in all material respects the  scheme of the Wealth Tax Act is in this regard substantially, the  same as  that incorporated in the Income Tax Act.  The notice of demand requiring payment of the tax, interest or  penalty is issued pursuant to Section 30 of the Act.  If  the  amount  remains  unpaid  within  the  periods specified in  the notice the amount of the tax is said to be outstanding [303D-F]      1.3 Section  2(m)(iii)(a) of  the Wealth  Tax Act comes into play  only after  a demand  for payment of tax has been made. The  clause, read  in its  entirety, speaks  of a debt owed by  the  assessee  represented  by  an  amount  of  tax "payable in  consequence of  any  order"  passed  under  the relevant tax  statute  and  "outstanding  on  the  valuation dates." [303H; 304A]      1.4 The  expression "debt  owed" is  a debt  which  the assessee is  under an  obligation to  pay and, therefore, it includes both  a liability  to pay  in present  as well as a liability to  pay in  future an  ascertainable sum of money. Both kinds of liabilities are included within the expression "debt owed". But Section 2(m)(iii)(a) narrows the scope down to a  liability which  exists in  present time  because  the clause speaks  of tax outstanding in consequence of an order passed under the relevant taxing statute. [304B-C]      1.5 In  the present  case, the notice of demand in each case was  served after  the valuation  date had been passed. There was  no demand  already subsisting  on the  respective valuation dates.  As the  notices of  demand respecting  the wealth tax  liability of  Rs. 22,679  and  Rs.  39,692  were served on the assessee subsequent to the valuation dates, if cannot be  said that  on the  respective valuation dates the amount of  tax were  outstanding. In  the result  a material requirement of  Section 2(m)  (iii) (a) is not satisfied and therefore, it cannot be invoked by the Revenue. [304D-E]      Commissioner of  Wealth Tax v. Kantilal Manilal, (1973) 88 I.T.R. 125, approved.      Doorga Prasad  v. The  Secretary of  State,  (1945)  13 I.T.R. 285, quoted with approval 299      Kesoram Industries  & Cotton Mills Ltd. v. Commissioner of Wealth  Tax (Central),  Calcutta, (1966)  59 I.T.R.  767, followed.      1.6 The  appeals in  the  present  case,  though  filed subsequent to  the respective  valuation dates,  would none- the-less have  sufficed to  bring the  second requirement of section 2  (m) (iii)  (a) into  operation. But for Section 2 (m) (iii)  (a)  an  amount  of  a  tax  outstanding  on  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 7  

valuation date  would constitute a debt owed by the assessee on the valuation date, and the assessee would be entitled to claim its  deduction in  the process  of computing  his  net wealth. Parliament,  however, intended that if the amount of the tax  was challenged by the assessee as not being payable by  him  by  recourse  to  any  of  the  statutory  remedies prescribed in  the relevant  Act, such  claim  to  deduction would be  barred. Plainly,  in order  to give full effect to that intent it is immaterial whether the statutory remedy is being availed  of on  the valuation  date or  has been taken thereafter.A challenge  by  the  assessee  that  the  amount outstanding is  not payable  by him is sufficient to bar his claim to  deduction whether  the challenge  is subsisting on the valuation  date or is initiated after the valuation date has passed. [305 D; A-C]      Late P.  Appauoo Pillai  v. Commissioner of Wealth Tax, Madras, (1973) 91 I.T.R. 138 overtuled.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeals NOS. 1311 and, 1312 of 1973.      From the  Judgment and  Order dated 26/27.6.1972 of the Gujarat High Court at Ahmedabad in Wealth Tax Reference Nos. 3, 4, 20, 25, 29, 32, 32 & 36 of 1970 and 1 of 1971.      S G.  Manchanda, B.B.  Ahuja, R.N.  Poddar and  Miss A. Shubhashini for the Appellant.      S.T. Desai  Mrs. A.K.  Verma  and  K.J.  John  for  the Respondents.      The Judgment of the Court was delivered by      PATHAK. J.  These  appeals  are  directed  against  the      judgment of  the Gujarat  High  Court  disposing  of  a      wealth  tax   reference  and  answering  the  following      question of law against the Revenue     -      "Whether, on  the facts and in the circumstances of the      case, the  Tribunal  was  right  in  holding  that  the      provisions of S. 2 (m) (iii) (a) were not applicable in      respect of liabili- 300      ties arising  under the  wealth tax  assessments of the      asses see  for the assessment years 1960-61 and 1961-62      ?"      For the  purpose  of  determining  the  assessee’s  net wealth in assessment proceedings under the Wealth Tax Act in respect of  the assessment  years 1961-62  and 1962-63,  the corresponding valuation dates being March 31, 1961 and March 31, 1962,  the assessee  claimed a deduction of certain sums representing the  estimated liabilities on account of income tax and wealth tax. The claim was rejected by the Wealth Tax Officer in  both assessments.  On appeal by the assessee the Appellate Assistant  Commissioner of  Wealth Tax  allowed  a part  of   the  claim.  In  the  appeal  pertaining  to  the assessment year  1961-62, he  allowed  a  deduction  of  Rs. 22,679 on  account of  wealth tax relating to the assessment year 1960-61, Rs.39,692 on account of wealth tax relating to the assessment  year 1961-62  and Rs. 2,25,053 on account of income tax  for the  assessment year 1961 -62. In the appeal pertaining to  the assessment  year 1962-63,  the  Appellate Assistant  Commissioner  allowed  the  total  claim  of  Rs. 9,02,377 comprising  a deduction  of Rs 39,692 on account of wealth tax  relating to  the assessment  year  1961-62,  Rs. 77,716 on  account of  wealth tax  for the  assessment  year 1962-63 and  the balance  on account  of income  tax for the assessment  year   1962-63.  The  Revenue  appealed  to  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 7  

Appellate Tribunal.  In the  appeal for  the assessment year 1961-62 in  contended inter  alia, that the assessee was not entitled to  a deduction  of the wealth tax liability of Rs. 22,679 in  respect of the assessment year 1960-61 because he had disputed  the said  liability in  appeal and, therefore, the deduction  was barred  by reason of s. 2(m) (iii) (a) of the Wealth  Tax  Act.  Similarly,  in  the  appeal  for  the assessment year 1962-63, the Revenue urged that the assessee was not  entitled to a deduction of the wealth tax liability of Rs.  39,692 for  the assessment  year 1961-62  as he  had disputed that  liability in  appeal and  the  deduction  was barred by  s. 2(m)  (iii) (a)  of  the  Act.  The  Appellate Tribunal did  not accept  the contention  of the Revenue and held that  s.2(m) (iii)  (a) was not attracted in respect of those liabilities  as they  had ‘G not become payable on the relevant valuation  dates. At the instance of the Revenue, a reference, being  Wealth Tax  Reference No.  20 of 1970, was made to  the Gujarat  High Court  for  its  opinion  on  the question of law set forth earlier.      It may  be mentioned  that another  question  was  also framed in that reference, and that this reference along with several other 301 references were  disposed of  together by  the  Gujrat  High Court by,  its judgment  in Commissioner  of Wealth  Tax  v. Kantilal  Manilal.1   Against  that  judgment  corresponding special leave  petitions were  filed by  the Revenue in this Court, but  all the  special leave petitions, except Special Leave Petitions (Civil) Nos 505 and 506 of 1973, arising out of Wealth  Tax Reference  No. 20  of 1970, were dismissed on the merits,  and in  respect  of  these  two  special  leave petitions the  grant of  special leave was restricted to the consideration of the question set forth earlier.      While dealing  with the question whether the provisions of s.  2(m) (iii)  (a) of  the Wealth  Tax  Act  barred  the deduction of  the wealth  tax  liabilities  claimed  by  the assessee the  High Court  held that  as the liabilities were not outstanding  on the  respective valuation  dates s. 2(m) (iii) (a)  was not  attracted even  though the  assessee had challenged in  appeal that  the liabilities were not payable by him.      In these  appeals, Shri  S.C. Manchanda,  appearing for the Revenue,  contends that the High Court has erred insofar as it  has held  that the  wealth tax  liabilities were  not outstanding on the valuation dates. His case is that the bar imposed by  s. 2(m)  (iii) (a) operates against the claim to deduction made  by the  assessee. Shri S.T. Desai, appearing for the  assessee, urges  that s.  2(m)  (iii)  (a)  is  not attracted because  no amount  of tax  was outstanding on the respective valuation  dates and  in any  event, he says, the appeals challenging  those liabilities  were not  pending on the valuation  dates, and therefore the further requirement, according to him, of the statute was not satisfied.      Section 2(m) of the Wealth Tax Act provides:-      "(m)  "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 (z  this Act, is in      excess of the aggregate value of all the debts owed by-      the assessee on the valuation date other than-      (i)  xx             xx                  xx (1) (1973). 88 I.T.R. 124, z z 302

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 7  

    (ii)      XX        XX XX      (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 Or 1957),      or the Gift-tax Act, 1958 (18 of 1958),-           (a)  which is  outstanding 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 assessee                as not  being payable by him, is nevertheless                outstanding for  a period of more than twelve                months on the valuation date "      In the process of computing the net wealth, the statute requires the  aggregation of the value of all the debts owed by the  assessee on  the valuation  date, except those debts which are  specifically described  in sub-clauses  (i), (ii) and (iii). We are concerned with sub-clause (iii) (a).A debt which ordinarily  falls within  the scope of the substantive provision of  s. 2(m)  cannot be  taken into account for the purpose of determining the net wealth if it falls within the term of  sub-clause (iii)  (a) of  s. 2(m). Sub-clause (iii) (a) speaks  the amount  of  the  tax,  penalty  or  interest payable in  consequence of  any order  passed  under  or  in pursuance of any of the tax laws mentioned therein, which is outstanding on  the valuation  date and  is claimed  by  the assessee in  appeal, revision  or other  proceeding  as  not being payable by him.      For the  assessment years  1961-62  and  1962-63  under reference, the  corresponding valuation  dates, as  we  have mentioned earlier  are March  31,1961  and  March  31,  1962 respectively The  claim  to  deduction  in  the  wealth  tax liability for  the assessment  year 1961-62  relates to  Rs. 22,679  representing   the  wealth  tax  liability  for  the assessment  year  1960-61.  The  assessment  order  for  the assessment year  1960-61 was  made on March 24, 1961 but the notice of  demand was  served on  the assessee  on April 11, 1961. It  is apparent  that the  notice of demand was served some days  after the  valuation date, March 31, 1961. In the wealth tax  assessment of  the assessment  year 1962-63  the deduction claimed relates to the wealth tax liability of Rs. 39,692 for the assessment year 1961-62. The assessment order 303 on March  23, 1962  but the  notice of  demand was served on April   11, 1962 and that notice of demand was also served a few days  after the  relevant valuation date, March 31,1962. Therefore, the  notice of  demand in  each case  was  served after the  valuation date  had passed.  There was  no demand already subsisting on the respective valuation dates.      In order  to invoke section 2 (m) (iii) (a) the Revenue must establish  that an amount of the tax was outstanding on the valuation date. An amount of tax is outstanding if it is payable and has remained unpaid. In other words, if there is a debt  due and  there has been no payment of the debt. In a case under the Indian Income Tax Act, 1922, Doorga Prasad v. The Secretary of State, (1) the Privy Council laid down that an income  tax liability  becomes a debt due when payment of the tax  is demanded  by a notice issued under section 29 of the Act.  There are three stages in respect of an income tax liability. The  tax liability  comes into  existence on  the last day  of the  previous year  relevant to  the assessment year. Thereafter when the assessment proceedings take place, an assessment  order  is  made  quantifying  the  assessable

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 7  

income and  determining the tax payable. Thereupon, a notice of demand is served for payment of the tax, and the tax then becomes payable  and a debt becomes due to the Revenue. That was the  position under  the Indian Income Tax Act, 1922 and continues to  be the  position under  the  Income  Tax  Act, 1961.A survey  of the  provisions of the Wealth Tax Act will demonstrate that  in all material respects the scheme of the Wealth Tax  Act is  in this regard substantially the same as that incorporated  in the Income Tax Act. The provisions for the assessment  are of an assessee are contained in sections 14 to  17A of  the Wealth  Tax Act.  The  notice  of  demand requiring payment  of the tax, interest or penalty is issued pursuant to  section 30  of the  Act. If  the amount remains unpaid within  the period specified in the notice the amount of the tax is said to be outstanding.      A question  was raised  whether  for  the  purposes  of attracting section  2(m) (iii) (a) it is not sufficient that the tax  liability has  6 accrued and it is necessary that a tax demand should have been made by the assessing authority. It seems  to us  that section 2(m) (iii) (a) comes into play only after  a demand  for payment  of tax has been made. The clause, read in its entirety, speaks of a debt owed by the (1) (1945) 13 I.T.R. 285. 304 assessee  represented  by  an  amount  of  tax  "payable  in consequence of  any order"  passed under  the  relevant  tax statute "outstanding  on the valuation date". The expression "debt  owed"   has  been  held  by  this  Court  in  Kesoram Industries & Cotton Mills Ltd. v. Commissioner of Wealth Tax (Central), Calcutta,  (1) to  mean a debt which the assessee is under  an obligation  to pay  and, therefore, it includes both a  liability to pay in praesenti as well as a liability to pay  in future  an ascertainable sum of money. Both kinds of liabilities  are included  within  the  expression  "debt owed". But  when we refer to the clause under consideration, it narrows  the scope  down to  a liability  which exists in present time.  That is  so because  the clause speaks of tax outstanding in  consequence of  an order  passed  under  the relevant   taxing statute. As discussed earlier, tax becomes payable in consequence of such order when a notice of demand is served on the assessee.      In the present case, it is clear that as the notices of demand respecting  the wealth tax liability of Rs 22,679 and Rs. 39,692  were served  on the  assessee subsequent  to the valuation dates,  it can  not be said that on the respective valuation dates  the amounts of tax were outstanding. In the result a  material requirement  of s. 2 (m) (iii) (a) is not satisfied and  therefore that provision cannot be invoked by the Revenue.      We  now   propose  to   consider  the  other  point  in controversy. As  is apparent.  if  the  Revenue  desires  to invoke section  2 (m)  (iii) (a), it must establish not only that the amount of the tax, penalty or interest envisaged in that provision  is outstanding  on the valuation date but it must also show that the amount is claimed by the assessee in appeal, revision or other proceeding as not being payable by him. The  question is  whether it is a necessary requirement of  the   provision  that  the  appeal,  revision  or  other proceeding should be pending on the valuation date itself or it suffices that the appeal, revision or other proceeding is filed subsequent  to the valuation date. In the present case the appeal  against the  wealth tax assessment order for the assessment year  1960-61 was  filed on  May 9, 1961, and the appeal against  the wealth  tax  assessment  order  for  the assessment year  1961 62  was filed on May 9, 1962. Both the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 7  

appeals  were   filed,  therefore,   after  the   respective valuation  dates,   March  31,   1961  and  March  31,  1962 corresponding to the assessment years 1961-62 and 1962-63 (1) (1966) 59 I.T.R. 767. 305 under reference.  But for  section 2(m) (iii) an amount of a tax outstanding  on the  valuation date  would constitute  a debt owed  by the  assessee on  the valuation  date, and the assessee would  be entitled  to claim  its deduction  in the process of  computing his  net wealth.  Parliament, however, intended that if the amount of the tax was challenged by the assessee as  not being  payable by him by recourse to any of the statutory  remedies prescribed in the relevant Act, such 1 claim  to deduction  would be barred. Plainly, in order to give full effect to that intent it is immaterial whether the statutory remedy  is being  availed of on the valuation date or has  been taken  thereafter.A challenge  by the  assessee that the  amount  outstanding  is  not  payable  by  him  is sufficient  to  bar  his  claim  to  deduction  whether  the challenge  is   subsisting  on  the  valuation  date  or  is initiated after  the valuation date has passed. Accordingly, we are  of opinion  that the  appeals in  the present  case, though filed  subsequent to  the respective valuation dates, would  nonetheless   have  sufficed   to  bring  the  second requirement of  section 2(m)‘  (iii) (a) into operation. The contrary view  in respect of section 2 (m) (iii) (a) adopted by the  Madras High  Court in  Late  P.  Appavoo  Pillai  v. Commissioner of  Wealth Tax,  Madras(4) appears  to us to be incorrect.      However, as  in order  to invoke  the bar prescribed by section 2  (m) (iii) (a), it is necessary for the Revenue to establish that  both requirements  are satisfied, that is to say, that  an amount  of  the  tax  is  outstanding  on  the valuation date and further that the amount is claimed by the assessee in  an appeal  as not being payable by him, and the Revenue has been unable to show that in the present case the sum of Rs. 22,679 and Rs. 39,692 representing the wealth tax liabilities for  the assessment  years 1960-61  and  1961-62 were  outstanding   on  the   respective   valuation   dates corresponding to  the assessment  year under  reference, the Revenue must fail.      In the result, the appeals are dismissed. S.R.                                      Appeals dismissed. (1) (1973) 91 I.T.R. 130. 306