Commissioner of Wealth Tax vs Makhanlal Agrawalla and Others

S.P. Sinha, J.—All these tax reference cases arise out of the same facts. They have been heard together and since the different cases concern the partners of the same firm this judgment will govern all the tax reference cases.

The Patna Bench of the Income Tax Appellate Tribunal has made these references u/s 27(1) of the W.T. Act, 1957. The common questions which have been referred for opinion of this court are:

"1, In the facts and circumstances of the case, whether the tax paid u/s 68 of the Finance Act, 1965, has been properly held to be Income Tax payable under the Income Tax and Finance Acts.

If the answer be in the affirmative, then, whether the Tribunal was correct in holding that the principle of Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Wealth Tax, (Central) Calcutta, applied. ..

If the answer to question No. 2 be in the affirmative, then, whether it can be said that there was a deductible liability on the respective valuation dates even though the liability itself was determined much later.

Learned standing counsel for the department has, however, urged that the questions framed by the Tribunal do not bring out the real controversy in issue between the parties and that they required to be reframed. He has suggested the question which I am presently going to state. Before, however, I do so it may be necessary to state the relevant facts.

The respondents of these reference applications are partners in a firm known by the firm name of M/s. Makhanlal Harnarain, Jharia, Dhanbad. Each of these respondents, whom I shall refer hereinafter as "the assessee", held a share in the said firm. The said firm was a registered firm. It appears that in terms of Section 68 of the Finance Act, 1965 (hereinafter referred to as "the Act"), the firm made a voluntary disclosure of secreted income amounting to Rs. 8,50,000. The said sum of Rs. 8,50,000 was "spread over" the assessment years 1957-58 to 1964-65. The firm also paid tax at the rate of 60% of the amount disclosed in terms of Sub-section (3) of Section 68 of the said Finance Act.

Now, since the assessees were partners of the firm which had made the said disclosure of secreted income, proceedings u/s 17 of the W.T. Act were started against each of them for taxing the escaped wealth for the relevant assessment years in accordance with the assessment years for which the secreted income had been spread over. The assessees objected to the inclusion of the said income in their net wealth and alternatively urged that if any part of the said income was being added to their net wealth, the tax liability on the same at the rate of 60% of the amount should be deducted in computing their net wealth. According to the assessee, he was entitled to such deduction in terms of Section 2(m) of the W.T. Act which defined the "net wealth" as being such amount as was ascertained after deducting the debts owed from the gross wealth. The claim of the assessee was, however, rejected by the WTO as also on appeal by the AAC. While dealing with the assessee''s claim for deduction the AAC observed that since the liability to pay tax in terms of Section 68(3) of the Finance Act, 1965, arose much later than the relevant valuation dates, such liability would not come within the ambit of Section 2(m) of the W.T. Act.

On further appeal to the Tribunal the assessee''s claim that he was entitled to the deduction of the tax liability on the secreted income out of his wealth was accepted. The Tribunal followed the decision of the Supreme Court in the case of Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Wealth Tax, (Central) Calcutta, and held that the tax liability on the amount added to the assessee''s wealth was deductible in terms of s, 2(m) of the W.T. Act. To the further question as to whether the tax liability should be governed by Sub-section (3) of Section 68 of the Finance Act, 1965, or the one which was prescribed under the Finance Acts for the relevant assessment years, the Tribunal refused to express any opinion on it. That question was left expressly open.

Learned counsel for the assessee informs us by reference to para. 20 of the Tribunal''s order that since the tax liability in accordance with the Finance Act for the relevant assessment years would have been much higher than the tax liability in terms of Sub-section (3) of Section 68 of the Finance Act, 1965, neither the department nor the assessee had advanced any argument on the question of the yardstick that should be adopted in determining the tax liability. Be that as it may, the question as to whether the tax liability should be in terms of Sub-section (3) of Section 68 of the Finance Act, 1965, or in terms of the Finance Acts for the relevant assessment years was not decided by the Tribunal.

Now, therefore, learned standing counsel for the department submits that the questions framed by the Tribunal which have been referred for this court''s opinion, besides being academic in nature, did not bring out the real controversy in dispute. According to the learned counsel for the department the real controversy was, to put in his own words;

"Whether the tax imposed on the firm u/s 68(3) of the Finance Act, 1965, was deductible as a debt owed in terms of Section 2(m) of the Wealth-tax Act in computing the net wealth of the petitioner-assessee ?"

Normally, this court is required to give its opinion on the question as framed and referred to it by the Tribunal unless of course the question referred did not require to be answered either by reason of the fact that it was merely academic in nature or by reason of the fact that it did not arise out of the Tribunal''s order. In some cases, however, the question referred for opinion may require to be reframed.

In the instant cases I find that the questions which have been framed appear to be more or less academic in nature. The real controversy is not whether the tax paid u/s 68(3) of the Finance Act, 1965, was Income Tax, but as to whether the assessee was entitled to deduction of the tax liability on the amount of income added to his wealth, as a debt owed, in terms of Section 2(m) of the Act. I, therefore, think that the question as suggested by the learned counsel for the department is a proper question. It is this question which requires to be answered. The questions referred by the Tribunal are accordingly reframed in the following manner :

"Whether the tax imposed on the firm u/s 68(3) of the Finance Act, 1965, was deductible as a ''debt owed'' in terms of Section 2(m) of the Wealth-tax Act, 1957, in computing the net wealth of the assessee ? "

Mr. Rajgarhia, learned counsel for the department, assailed the deductibility of the tax liability from the assessee''s net wealth on two grounds : Firstly, he contended that the amount charged u/s 68(3) of the Finance Act, 1965, is not Income Tax as understood in terms of Section 3 of the Indian I.T. Act, 1922, or Section 4 of the I.T. Act, 1961. According to him it was a special type of levy which can more appropriately be described as a levy by way of compounding of the offence of concealment of income. Secondly, his argument is that since the disclosure has been made by the firm and tax has also been paid by it, nobody else except the firm can claim the benefit of deduction of the tax liability. The firm in such an assessment is treated as an unregistered firm and is assessed as such under the provisions of Section 68 of the Finance Act, 1965. Such being the position, it was submitted that if any part of the said income of the firm was tagged on to the partners'' wealth, if at all, the liability for the tax could not be claimed by the partners.

I think, neither of the two contentions have any merit. Regarding the first contention I need only say that a decision on it will necessarily lead me into deciding whether the tax liability which has to be treated as a debt owed was the one which arose under Sub-section (3) of sec. 68 of the Finance Act, 1965, or was the one which would arise under the relevant Finance Acts. Since this question has not been decided by the Tribunal, it does not fall to be answered by this court. The first contention has, therefore, to be rejected as such.

Coming to the next contention, it is an illegal proposition. It amounts to saying that although an addition can be made to the assessee''s wealth, he is debarred from claiming even such deductions on it as may be legally due to him. May be that the secreted income was disclosed in the assessment of the firm and may be that it was the firm which has paid the tax on such income, but once the department treats the income as arising to the assessee and includes the secreted income in his wealth, the partners become legally entitled to claim deduction of the tax liability on the said addition as a debt owed. It cannot be gainsaid that it is the individual partners who constitute the firm. The liability for the tax on the income of the firm in effect falls on the partners. It is the partners who have to bear the burden of tax, irrespective of the fact whether the firm is assessed as an unregistered firm or a registered firm. Now, therefore, when in the instant case the department sought to assess the aforesaid disclosed income in the hands of the partners, obviously it meant, that the said income was being treated as arising to the partners on the relevant valuation dates. Each of the partners will then be entitled to claim deduction of the tax liability on such addition as a debt owed on the relevant valuation dates. The deductibility of the tax liability as a debt owed within the meaning of Section 2(m) of the Act is clearly enunciated in the decision of the Supreme Court in the case of Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Wealth Tax, (Central) Calcutta, . The second contention must also be, therefore, rejected.

Several decisions of various High Courts were cited, some of which have taken the view that the tax liability would be the one as had been determined in terms of Section 68(3) of the Finance Act, 1965. Since we express no opinion on the question relating to the yardstick which has to be applied for determining the amount of tax liability, it is not necessary to refer to these decisions.

In the result, the question as refrained is answered in the affirmative and in favour of the assessee. The assessee will be entitled to costs. Hearing fee, Rs. 250.

Sarwar Ali, J.

I agree.