Commissioner of Wealth Tax vs Keshav Mills Co. Ltd.

Divan, J.—In this reference u/s 27(1) of the Wealth-tax Act, 1957 (hereinafter referred to as the Act), the following question has been referred to us: Whether, on the facts and in the circumstances of the case and in view of the provisions of section 2(m)(iii)(a) of the Wealth-tax Act, 1957, the income tax liability of Rs. 5,53,370 is a debt which could be allowed as a deduction in the computation of the assessee''s net wealth on the valuation date in question, i.e. December 31, 1956?

The facts giving rise to this reference are as follows:

The assessee is a public limited company. The assessment year is 1957-58 and the relevant valuation date is December 31, 1956. In the present reference we are concerned with the item of Rs. 5,53,370 which was claimed as a debt deductible in computation of the net wealth of the assessee. The assessee had claimed in the year of assessment a deduction of a total item of Rs. 12,89,784, being the aggregate of the tax assessed for the assessment years 1943-44 to 1948-49. The assessments for these years had been completed and the tax liability of the assessee had been determined before the relevant valuation date. Out of this aggregate amount of Rs. 12,89,784, the assessee had paid Rs. 7,36,414 under protest and regarding the balance of Rs. 5,53,370, the tax liability was being challenged. The assessee did not accept this assessment and had preferred appeals against the said assessment and the appeals were pending on the valuation date, i.e. December 31, 1956. The Wealth-tax Officer disallowed this item of deduction in the sum of Rs. 5,53,370 on the ground that the assessee-company was contesting its liability to pay this amount even after the assessment had been completed. It is clear from the materials on record that the assessee-company had taken the matter in appeal and was challenging its liability as to the amount of Rs. 5,53,370 in the appeal proceedings. The Appellate Assistant Commissioner held that, as the income tax liability had matured into a valid and binding debt, no amount of protest against the same by the assessee could have the effect of rendering the assessment a nullity and, therefore, the item of Rs. 5,53,370 can be deducted as a debt from the net wealth of the assessee. The income tax Tribunal agreed with the reasoning and the decision of the Appellate Assistant Commissioner and dismissed the appeal filed by the revenue commissioner; and the Tribunal held that the assessment having been completed and the demand notice having been issued, the liability remained binding on the company notwithstanding the fact that it had taken up the matter in appeal.

Section 2(m)(iii)(a) of the Act provided as follows:

In this Act, unless the context otherwise requires-

(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 this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than-...

(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, the Expenditure-tax Act, 1957, or the Gift-tax Act, 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

It may be pointed out that clause (iii) to section 2(m) was inserted in the Wealth-tax Act, by the Finance Act, 1959, being Act No. XII of 1959; and section 20 of that Act provided that in section 2(m), clause (iii) should be inserted. It is important to note that section 20 of the Finance Act, 1959, in its opening words mentioned as follows:

In section 2 of the Wealth-tax Act, 1957 (hereinafter referred to as the Wealth-tax Act) in clause (m), the following amendments shall be made and shall be deemed always to have been made, viz.,....

Then the provision is made for insertion of clause (iii), in section 2(m) of the Act. It is clear that this amendment introduced by section 20 of the Finance Act, 1959, gives retrospective effect to clause (iii) and it gives effect to this clause from the date from which the Wealth-tax Act, 1957, came into force, viz., from April 1, 1957, because, by virtue of the language used in section 20 of the Finance Act, 1959, this amendment in the shape of clause (iii) to section 2(m) of the Act must always be deemed to have been present in the Wealth-tax Act, 1957.

It is obvious that when the Appellate Assistant Commissioner and the Tribunal decided the respective appeals before them, they overlooked the retrospective nature of the amendment made by section 20 of the Finance Act, 1959. In view of that retrospective effect, it is clear that, from the very commencement of the Wealth-tax Act, 1957, i.e., with effect from April 1, 1957, section 2(m)(iii)(a) must be read in the Act by operation of section 20 of the Finance Act, 1959.

The result, therefore, is that the amount of Rs. 5,53,370, having been taken in appeal and claimed by the assessee as not being payable by it so far as the appeal proceedings were concerned, was not a debt deductible in computation of the net wealth of the assessee. It is clear that if this retrospective nature of the amendment had not been overlooked, the Tribunal would have held, as it was bound to hold, that this amount of Rs. 5,53,370, being the subject-matter of the appeal by the assessee, was not deductible as a debt. This debt is, therefore, not a debt which can be allowed as a deduction in computation of the assessee''s net wealth as of the valuation date in question. We, therefore, answer the question referred to us in the negative. Since the question has become necessary because the retrospective nature of the amendment had not been brought to the notice of the Tribunal, the proper order for costs is that there will be no order as to costs of this reference.