Wealth tax---

Deductions---Debt---Disallowance---Tax liability outstanding for more than one year---Tax payable on self-assessment outstanding for more than one year---Not deductible.

Income-tax which is a present liability and a perfected debt on the last date of the accounting year and which would become payable after it was quantified in accordance with the provisions of the Act, has now been made payable on furnishing of the return itself without waiting for the quantification in assessment proceedings. After the tax becomes payable, the relationship between the Government and the assessee is that of a creditor and a debtor. In this respect, there is no distinction between the tax payable under section 140-A of the Income Tax Act, 1961, and the tax payable under a demand notice made after a provisional assessment under section 141 of the Income Tax Act, 1961 or a regular assessment under section 143 or section 144 of the Act. The only difference is that no demand notice under section 156 could be issued in respect of the liability under section 140-A as section 156 requires that the tax shall be payable "in consequence of any order passed under the Act" before any notice of demand could be issued under that section. Section 140-A speaks of self-assessment and no order is made by any assessing authority under that section. The consequence of non-applicability of section 156 may result in the non-applicability of the tax recovery provisions under sections 220 and 221 of the Act. But section 232 saves the right of the' Government to recover the same under the provisions of any other law for the time being in force relating to the recovery of debts due to the Government or the right of the Government to institute a suit for recovery of arrears due from the assessee. Thus, the tax payable under section 140-A(1), if not voluntarily paid, is recoverable as any other debt due to the Government. Tax under section 140-A is payable not because of an order passed by the authorities concerned but by virtue of the statutory obligation contained in the taxing statute. Tax on self-assessment which remains outstanding for more than one year is covered by section 2(m)(iii) of the Wealth Tax Act, 1957, and is not deductible in computing the net wealth.

CWT v. Banarashi Prasad Kedia (1970) 77 ITR 159 (Cal.).; CWT v. J.K. Cotton Manufacturers Ltd. (1984) 146 ITR 552 (SC); C.W.T. v. Kantilal Manilal (1985) 152 ITR 447 (SC); CWT v. Padampat Singhania (1972) 84 ITR 799 (All.).; CWT v. Raghubar Narain Singh (1973) 91 ITR 238 (Pat.); CWT v. Raipur Manufacturing Co. Ltd. (1964) 52 ITR 482 (Guj.); CWT v. Standard Vacuum Oil Co. Ltd. (1966) 59 ITR 569 (SC); Kesoram Industries and Cotton Mills Ltd. v. CWT (1966) 59 ITR 767 (SC); Maharaj Kumar Kamal Singh v. CWT (1972) 84 ITR 240 (Pat.); Sali Maricar (A.M.) v. ITO (1973) 90 ITR 116 (Mad.); Setu Parvati Bayi (H.H.) . v. CWT (1968) 69 IM 864 (SC) and Swadeshi Cotton-Mills Ltd. v. CWT (1971) 81 ITR 482 (All.). ref.

P.P.S. Janarthana Raja for the Assessee.

N.V. Balasubramaniam for the Commissioner.

JUDGMENT

THANIKKACHALAM, J.---The Tribunal referred the following common question under section 27(1) of the Wealth Tax Act, 1957, at the instance of the assessee for our opinion:

"Whether, on the facts and circumstances of the case, the assessee is entitled to deduction of the tax liability under section 140-A of the Income Tax Act, 1961, from the total wealth under section 2(m)(iii)(b) of the Wealth Tax Act in the sums of Rs.87,622 (for 1967-68) and Rs.1,12,744 for each of the other (five) years in question which were outstanding for more than 12 months as on the relevant valuation dates?"

In the assessment years 1967-68 to 1972-73, the assessee claimed deduction under section 2(m) of the Wealth Tax Act. According to the assessee, the valuation date was March 31 of each financial year, preceding the assessment year. The claim of the assessee in these assessment years under consideration was that the following amounts should be deducted as tax liability in computing the net wealth on the various valuation dates.

The amounts represented the income-tax liabilities of the assessee for the assessment years under consideration. The assessee was a partner in a firm at Calcutta the income from which was assessable to tax and for which the liabilities remained undisputed. Returns had been filed and the assessments completed and subjected to a revision at a later stage. By the time of filing returns of wealth for the years under consideration, the income-tax liabilities had been ascertained, but had remained unpaid. The assessee had claimed deduction under section 2(m) of the Wealth Tax Act which the Wealth Tax Officer refuse ; to entertain on the ground that section 2(m)(iii) of the Wealth Tax Act provides that those taxes which are in dispute or remain unpaid for more than one year after the demand was raised are not eligible for deduction under the said section. The Wealth Tax Officer pointed out that the provisions of section 140-A being applicable in Calcutta with effect from April 1, 1964, the assessee was under statutory obligation to pay the taxes within a month of filing the returns. Since the taxes remained unpaid for a period of more than one year the Wealth Tax Officer held that deduction cannot be allowed in view of clause (iii) of section 2(m) of the Wealth Tax Act. He, therefore, disallowed the deduction claimed by the assessee. Aggrieved, the assessee filed an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the Wealth Tax Officer was correct in disallowing the deduction claimed by the assessee. Aggrieved, the assessee filed an appeal before the Tribunal and the Tribunal confirmed the order passed by the authorities below.

Before us learned counsel appearing for the assessee submitted that section 2(m) of the Wealth Tax Act grants a deduction of all the debts owed by the assessee and taxes are debts owed by the assessee. Learned counsel submitted that out of the debts so allowed to be deducted certain exceptions are made and these items are not deductible. One such exception is contained in clause (iii) to section 2(m). Learned counsel then read out the subsection to say that the bar for allowance would be the amount of tax in respect of which an order has been passed by the concerned tax authority and in this case no such order has been passed. According to learned counsel, the liability referred to by the Wealth-tax Officer is the liability under section 140-A of the Income Tax Act, 1961, which does not require any order. Therefore, learned counsel submitted that, in the abovesaid view the bar does not operate and these debts should have been allowed as a deduction.

On the other hand, learned standing counsel for the Department submitted that these amounts have been rightly disallowed as they fall under section 2(m)(iii) of the Act. According to learned standing counsel, the sub?clause should be read as "an amount of tax, penalty or interest payable in consequence of any law relating to taxation of income." If so, the liability which has been imposed statutorily by section 140-A would be the amount of tax' payable in pursuance of the Income Tax Act. A statutory liability to pay the tax under section 140-A is a sum payable and it is not merely a debt which may become payable. Therefore, it was submitted that the assessee is not entitled to the deduction as claimed by him.

However, learned counsel for the assessee, by way of reply, contended that the words "in pursuance 'of this Act", should also govern the previous words "any order passed". The order passed would be in pursuance of the Income-tax Act and in this case no such order was passed. Learned counsel further submitted that any amount payable under section 220 may come under this situation. Learned counsel appearing for the assessee as well as learned standing counsel appearing for the Department cited several decisions in order to support their respective contentions.

We have heard the rival submissions.

?

The point for consideration in this reference is whether the assesee is entitled to deduction, under section 2(m) of the Wealth Tax Act as debt owed, of the self-assessment tax payable under section 140-A of the Income Tax Act, 1961, even if it remained outstanding for a period of more than one year on the valuation date.

The fact remains that the assessee is liable to pay self-assessment tax under section 140-A of the Income Tax Act, 1961, for the assessment years under consideration. Income-tax returns were filed, assessments were completed and subjected to a revision at a later stage. However, at the time when the wealth tax returns were filed for the assessment years under consideration, the income-tax liabilities had been ascertained but had remained unpaid. The assessee claimed deduction of income-tax as debt owed under section 2(m) of the Wealth Tax Act, The Department refused to entertain this plea of deduction on the ground that section 2(m), clause (iii) of the Wealth Tax Act provides that these taxes which are in dispute or remain unpaid for more than one year after the demand was raised are not eligible for deduction under the said provisions. According to the Department, the assessee was under statutory obligation to pay the taxes under section 140-A within a month of filing the return and, therefore, the income-tax liabilities remaining unpaid for a period of more than one year after this one month period would be ineligible for deduction even if the said assessment had remained incomplete or subject to revision. For the payment of tax under section 140-A of the Income-tax Act, no order need be passed by the concerned authority, and in this case no such order has been passed. Therefore, according to the Department, the bar as contemplated under clause (iii) of section 2(m) does operate and hence the assessee is not entitled to ask for deduction of self?-assessment tax payable for these assessment years under section 140-A. On the other hand, the case of the assessee is that for payment of self-assessment tax under section 140-A. no order need be passed by any concerned authority and in this case no such order has been passed. According to the assessee, if there is no order passed under the Income-tax Act for payment of the tax, then the bar as contemplated under clause (iii) to section 2(m) of the. Wealth Tax Act would not operate. Therefore, the assessee is entitled to the deductions as claimed.

In order to support his contention, learned counsel appearing for the assessee relied upon a decision in the case of H.H. Setu Parvati Bayi v. CWT (1968) 69 ITR 864 (SC). In this decision, the question whether a debt owed is hit by clause (iii) of section 2(m) of the Wealth Tax Act was not the subject ?matter in issue. Therefore, this decision will not be applicable to the facts of this case. Another decision relied on by learned counsel for the assessee was that in the case of CWT v. Standard Vacuum Oil Co. Ltd. (1966) 59 ITR 569 wherein the Supreme Court held as under (headnote):

"There is no substantial difference between the advance tax paid under the provisions of section 18-A and tax due and paid under a demand notice passed after an assessment the only difference being that, if the facts so warrant, the assessee is enabled to pay less than the amount demanded by the Income-tax Officer. But till a new estimate is made by the assessee, the amount is ascertained and there is a statutory liability on the assessee to pay the amount mentioned in the order under section 18-A. A condition subsequent, the fulfilment of which may result in the reduction or even extinction of liability, would not have the effect of converting the liability which attaches under a notice under section 18-A into a contingent liability. A debt is owed when an order under section 18-A(1) is passed and a notice of demand sent. The Amount mentioned in the notice is owed till a new figure is substituted by the action of the assessee.

Another decision relied on by learned counsel for the assessee was that in the case of Kesoram Industries and Cotton Mills Ltd. v. CWT (1966) 59 ITR 767 (SC). The Supreme Court summarised that decision in Setu Parvati Bayi's case (1968) 69 ITR 864 at 867 as under:

"The question at issue was whether that amount was a `debt owed' within the meaning of section 2(m) of the Act, as on March 31, 1957, which was the valuation date, and as such deductible in computing the net wealth of the appellant company. It was held by the majority judgment of this Court that the debt was a present obligation to pay an ascertainable sum of money, whether the amount was payable in praesenti or in futuro; debitum in praesenti, solvendum in futuro. A liability to pay income-tax was, therefore, a present liability though it became payable after it was quantified in accordance with ascertainable data. There is a perfected debt at any rate on the first day of the accounting year and not a contingent liability. The rate is always easily ascertainable. If the Finance Act is passed, it is the rate fixed by that Act; if the Finance Act is not passed, it is the rate proposed in the Finance Bill pending before Parliament or the rate in force in the preceding year, whichever is more favourable to the, assessee. All the ingredients of a debt arc present and, therefore, it is a present liability of an ascertainable amount. It was further held that the amount of provision for payment of income-tax and super-tax in respect of the year of account ending March 31, 1957, was a debt owed within the meaning of section 2(m) of the Act on the valuation date, viz., March 31, 1957, and was as such deductible in computing the net wealth of the company as on the valuation date."

Our attention was also drawn to a decision in the case of CWT v. Raghubar Narain Singh (1973) 91 ITR 238 (Patna). The question that arose for consideration in that decision was as under (headnote):

"The arrears of agricultural income-tax which the assessee is liable to pay to the State Government must be taken into account in estimating the value of compensation he is entitled to get under the Land Reforms Act."

While answering this question, the Patna High Court held that (at page 244):

"The dues of agricultural income-tax which the assessee was liable to pay to the State Government are certainly, therefore, to be taken into account in estimating the value of his compensation as an asset."

Yet another decision relied upon by learned counsel for the assessee was that in the case of Maharaj Kumar Kamal Singh v. CWT (1972) 84 ITR 240 (Patna), wherein it was held as under (headnote):

"The expression `any law relating to taxation of income or profits' in section 2(m) of the Wealth Tax Act includes the Bihar Agricultural Income-tax Act. Therefore, amounts of agricultural income-tax which are outstanding from the assessee for a period of more than twelve months as on the valuation date are not deductible as a debt owed by the assessee in computing his net wealth. But the agricultural income?:~ tax remaining unpaid for more than twelve months has to be taken into consideration under section 4(c) of the Bihar Land Reforms Act in determining the value of the ad interim compensation receivable under that Act."

In all these decisions clause (iii) of section 2(m) was not the subject? matter in issue. Therefore, these decisions will not render any assistance in deciding the issue arising in the present case.

However, learned standing counsel appearing for the Department, relied upon a decision in the case of CWT v. J.K. Cotton Manufacturers Ltd. (1984) 146 ITR 552, 561, wherein the Supreme Court held as under:

"Sub-clause (iii) requires that the tax liability must be one which is payable in consequence of any order passed under any law relating to taxation on income or profits, etc., such liability so payable under .an order passed must remain outstanding for a period of more than 12 months on the valuation date. The alternative submission that the tax liabilities in the instant case must be taken to have become payable in 1952 under the Investigation Commission's order and must be regarded as having remained outstanding since 1952 is equally of no avail, for the payability of the dues must depend upon the terms of the Commission's order and admittedly a scheme for payment of the dues by instalments was provided in the order and each instalment would become payable on the date on which it is directed to be paid. In our view, the expression `outstanding' in section 2(m)(iii)(a) and (b) will have to be construed in the background of the phrase `amount of tax .... payable in consequence of an order' and in that context it must mean remaining unpaid after the obligation to pay is incurred. We are informed that similar construction has been placed on the expression outstanding' occurring in section 2(m)(iii) of the Act by the Calcutta High Court in CWT v. Banarashi Prasad Kedia (1970) 77 ITR 159 and by the Allahabad High Court in CWT v. Padampat Singhania (1972) 84 ITR 799 and we affirm the same."

Another decision relied on by learned standing counsel was that in the case of CWT v. Kantilal Manilal (1985) 152 ITR 447, 451, wherein the Supreme Court held as under:

"A question was raised whether for the purpose of attracting section 2(m)(iii)(a) it is not sufficient that the tax liability has 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 assessee represented by an amount of tax payable in consequence of any order, passed under the relevant taxing statute outstanding on the valuation date. The expression `debt owed' has been held by this Court in Kesoram Industries and Cotton Mills Ltd. v. CWT (1966) 59 ITR 767, 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 futuro 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 down the scope to a liability which exists in the 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."

Another decision relied on by learned standing counsel was that in the case of Swadeshi Cotton Mills Ltd. v. CWT (1971) 81 ITR 482, 485, wherein the Allahabad High Court held as under:

"In the next place, it is clear, on a plain reading of the statute, that only such amount of tax, penalty or interest is liable to be excluded from the aggregate value of the debts owed by the assessee on the valuation date as is payable in consequence of an order passed under or it pursuance of the enactments mentioned in section 2(m)(iii) and is outstanding for a period of more than twelve months on the valuation date. Section 2(m)(iii) treats of an amount which is `payable'. It does not contemplate a liability which has merely arisen in the sense considered in Kesoram Industries and Cotton Mills Ltd. (1966) 59 ITR 767 and becomes payable subsequently upon assessment and demand. It refers to a liability which is of the nature of a present debt, an amount which is payable: in consequence of an order passed under or in pursuance of any of the enactments mentioned. It refers to the stage of payability. The sense of section 2(m)(iii) is clearly apparent when its sub-clauses (a) and (b) are read with it."

It is also significant to note that this Court summarised the legal position on this aspect before and after the introduction of section 140-A of the Income Tax Act, 1961, in the case of A.M. Sali Maricar v. ITO (1973) 90 ITR, 116, 121 (Mad'.) in the following manner:

"With reference to the legal position prior to the introduction of section 140-A, the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT (1966) 59 ITR 767 held that a liability to pay income-tax was a present liability, though the tax became payable after it was quantified in accordance with the ascertainable data and that there was a perfected debt at any rate on the last date of the accounting year and not a contingent liability. Again in CWT v. Standard Vacuum Oil Co. Ltd. (1966) 59 ITR 569, approving the decision of the Gujarat High Court in CWT v. Raipur Manufacturing Co. Ltd. (1964) 52 ITR 482, the Supreme Court observed that a condition subsequent, the fulfilment of which may result in the reduction or even extinction of liability, would not have the effect of converting the liability which attaches into a contingent liability. This tax which was a present liability and a perfected `debt' on the last date of the accounting year and which would become payable after it was quantified in accordance with the provisions of the Act, has now been made payable on furnishing of the return itself without waiting for the quantification in the assessment proceedings. After the tax became payable the relationship between the Government and the assessee is that of a creditor and debtor. In this respect there is no distinction between the tax payable under section 140-A and one payable under a demand notice made after a provisional assessment under section 141 or a regular assessment under section 143 or 144 of the Act. The only difference is that no demand notice under section 156 could be issued in respect of the liability under section 140-A as section 156 requires that the tax shall be payable `in consequence of any order passed under the Act' before any notice of demand could be issued under that section. Section 140-A speaks of self-assessment and no order is made by any assessing authority under that section. The consequences of non-applicability of section 156 may result in the non? applicability of the tax recovery provisions under sections 220 and 221 of the Act. But section 232 saves the right of the Government to recover the same under the provisions of any other law for the time being in force relating to the recovery of debts due to the Government or the right of the Government to institute a suit for recovery of arrears due from the assessee. Thus, the tax payable under section 140-A(1), if not voluntarily paid, is recoverable as any other debt due to the Government."

We have carefully considered all the decisions cited before us. The fact remains that in the present case, the self-assessment tax payable under section 140-A remained as an outstanding for a period of more than one year. Tax under section 140-A is payable not because of an order passed by the authorities concerned, but by virtue of the statutory obligation contained in the taxing statute. Therefore, the contentions put forward by the assessee that even though the self-assessment tax payable under section 140-A of the Income-tax Act, 1961, remained as an outstanding for more than one year, since there was no order passed demanding the same, the bar contemplated under section 2(m)(iii) will not be applicable, cannot be accepted in view of the abovesaid legal position on this point. In that view of the matter, we are of the opinion that the order passed by the Tribunal in confirming the order passed by the Appellate Assistant Commissioner on this point is in order.

Thus, we answer the question referred to us in the negative and against the assessee. The Department is entitled to its costs. Counsel's fee is fixed at Rs.500 (one set).

M.B.A./1529/T??????????????????????????????????????????????????????????? Reference answered in negative.