The Commissioner of Wealth Tax vs Pierce Leslie and Co. Ltd.

Jagadisan, J.—Messrs. Pierce Leslie and Co., Ltd., which is a non-resident company was assessed to tax under the Wealth Tax Act, 1957

for the assessment year 1957-58. We shall refer to this company as the assesses in this judgment. It filed a return under the Act stating that its net

wealth was Rs. 59,51,073. In computing this net wealth the assessee claimed as deduction a sum of Rs. 33,24,609, as a debt due and owing

which ought to be taken into account in fixing the taxable value under the Act. The break up of this figure Rs. 33,24,609 was as follows :

the amount of Income Tax demanded as per order u/s 18-A of the Indian Income Tax Act and outstanding on the valuation date 30th June

1956 , Rs. 10,22,463

Amount of Income Tax due and payable on the valuation date as per notice of demand u/s 29, Indian Income Tax Act Rs.2,56,762

Estimated reserve for liability to pay Income Tax not assessed on the valuation date, but for which provision was made by the assessee in

anticipation of a future liability 20,45,384.

The Wealth Tax Officer, Madras disallowed the deduction claimed and computed the net wealth of the assessee at Rs. 92,95,104; The assesses

preferred an appeal to the Appellate Assistant Commissioner. The appellate authority held that the Income Tax demanded as due u/s 18-A

aggregating to Rs. 10,224,463 was not deductible as the assessee could repudiate It by submitting its own estimate of income u/s 18-A (2).

With regard to the claim for deduction of Rs. 2,56,762 demanded from the assessee u/s 29 of the Act, the appellate authority held that it was not a

debt owed by the assessee as the collection of the amount was postponed due to the claim made by the assessee for relief under ""double Income

Tax relief"". Regarding the sum of Rs. 20,45,384, the Assistant Commissioner''s view was that it was a mere provision in the accounts of the

assessee of anticipated tax liability, and that therefore it was not a real and present liability which can come in for deduction in computing the net

wealth under the Act. The appeal therefore failed. The assessee preferred a further appeal before the Income Tax Appellate Tribunal. The Judicial

member held that the assessee was entitled to deduct the sum of Rs. 10,22,463 and Rs. 2,56,762, the amounts due as per Section 18-A demand

and Section 29 demand under the Indian Income Tax Act, but that the claim for deduction of Rs. 20,45,384 was not permissible. The accountant

member however held that the assessee was entitled to detects the entire sum of Rs. 33,24,609. In this view of the matter his decision was the

appeal should be allowed fully. Due to the difference of opinion between the two members of the tribunal, the matter was placed before the

President. He agreed with the accountant member. He expressed his conclusion in these terms :

In order to arrive at the correct net value of the business as a whole all known liabilities have to be provided. A provision made in anticipation of a

liability is something very different than a provision made for a specific liability like that of Income Tax. In the first case, it is only a reserve, but in

the latter case it is a liability which has to be taken into account in ascertaining the net value of the business as a whole. I do not agree with the

departmental representatives that the payment for a tax is a contingent liability. If income accrues, the liability to tax also accrues with it.

The result was that the assessee obtained the benefit of deduction of Rs. 33,24,609, in the computation of its wealth. On an application

preferred by the Commissioner of Wealth Tax, Madras, the following question of law has been referred to us for consideration :

Whether on the facts and in the circumstances of the case and on a proper construction of Section 2(m) of the Wealth Tax Act, the sum of Rs.

10,22,463, Rs. 2,54,762 and Rs. 20,45,384, or any one or more of them are permissible deductions in the computation of the net wealth of the

assessee for the assessment year 1957-58 (valuation date 30th June 1956).

It is necessary to examine the provisions of the Wealth Tax Act, In so far as they are material for the present case, in order to determine

whether the claim of the assessee for deduction of the amount is well founded. The definition of ""net wealth"" (Section 2(m)) is the most important

provision and that reads :

''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 la the assessee on the valuation date, including assets required, to be included in this 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 u/s 6 are not to be taken into account; and (ii) debts which are secured on, or which have been incurred in relation to, any asset in

respect of which wealth tax is not payable under this Act.

This was the provision as it stood before its amendment in 1959. Act XII of 1959 amended the section. The amending Act states that the

amendment shall be made and shall be deemed always to have been made. By reason of the amendment the word ""and"" between Clause (i) and

Clause (ii) was omitted; the word ""and"" was added at the end of Clause (ii) and Clause (iii) was inserted. The inserted clause reads :

(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 (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.

There is therefore a specific provision in the Act excluding the amount of tax levied under the Indian Income Tax Act which is outstanding on the

valuation date, and which is claimed by the assessee in proceedings under the Act as not being payable by him, and which though not claimed by

the assessee as not being payable, nevertheless remained outstanding for a period of more than 12 months on the valuation date. ""Valuation date

is defined in Section 2, clause (c), as meaning.

''valuation date'' in relation to any year for which an assessment is to be made under this Act, means the last day of the previous year as defined in

Clause (21) of Section 2 of the Income Tax Act if an assessment were to be made under that Act for that year .....

In the present case there is no dispute that the valuation date is 30th June 1956. The charging section under the Act is Section 3 and that reads :

Subject to the other provisions contained in this Act, there shall be charged for every financial year commencing on and from the first day of April

1957, a tax (hereinafter referred to as wealth tax) in respect of 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.

It is the net wealth of the assessee which is charged to tax, Section 4 of the Act provides that in computing the net wealth of an individual, there

shall be included, as belonging to him the value of assets which on the valuation date are held by his wife to whom such assets have been

transferred otherwise than for adequate consideration or in connection with an agreement to live separately, those held by a minor child (not being

a married daughter) to whom such assets have been transferred by the individual otherwise than for adequate consideration and other assets

specified as enumerated in that section. Section 4 lays down what assets have to be included in the net wealth of an individual. Section 5 is the

exemption provision and that states what assets shall not be included in the net wealth. u/s 6 of the Act, assets and debts outside India, under

certain circumstances, shall not be taken into account. The mode of valuation of the assets is prescribed u/s 7 of the Act. That reads,

''''(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 Sub-section (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 ;

(b) where the assessee carrying on the business, is a company and not resident in India and a computation in accordance with Clause (a) cannot be

made by reason of the absence of any separate balance sheet drawn up for the affairs of such business in India, the Wealth Tax Officer may take

the net value of the assets of the business in India to be that proportion of the net value of the assets of the business as a whole wherever carried on

determined as aforesaid as the income arising from the business in India during the year ending with the valuation date bears to the aggregate

income from the business wherever arising during that year.

The assessee in the present case was a non-resident company. The net value has therefore to be ascertained under Clause (b).

In the instant case, there is no difficulty, and we must say there is no dispute also, regarding the valuation of the assets of the assessee company.

The point mooted is whether the amount of Rs. 33,24,609 which consists partly of a quantified tax liability in respect of which a demand for

collection has actually been made by the Income Tax department and partly of an anticipated or expected liability to pay Income Tax, can be

called ""a debt owed"" within the meaning of Section 2(m) of the Wealth Tax Act to enable the assessee to claim it as a deduction in the computation

of its net wealth.

Debt is a common expression and it is difficult to believe that it can give rise to any controversy in interpreting it. Broadly stated it is a liquidated

money obligation for the recovery of which an action will lie. It is an ascertained liquidated quantified obligation enforceable ''in praesenti'' or ''in

futuro''. A debt must be a ""debitum"" that is due. The fact that the time for payment will arise in future does not make it any the less a debt.

''Debitum in praesenti, solvendum in future''--this is not repugnant to the conception if a debt, because the obligation is crystallised and it is only the

payability that is in abeyance, but a debt has to be distinguished from what can only be described as something which will probably or partly ripen

into a debt. A future contingent liability is not a debt due and owing. It is not only not due but being contingent never may become due. An inchoate

liability with a fair prospect of maturity into a debt in future and still in its embryo stage would not answer the description of a debt. Till it is born it

is not a debt. Every kind of liability, immature, formative and in the course of evolution to become a debt, cannot be called a debt, in anticipation of

the ultimate.

The normal conception of a debt is that what it is held to be in Sabju Sahib v. Noordin Sahib, ILR 22 Mad 139. This was a case where a son of

a deceased partner of a firm sued the surviving partners for an account of the profits and assets of the partnership, and for payment to him of the

amount which might be found due to the share, of the deceased father. The plaintiff'' had neither letters of administration nor a succession

certificate. The point in issue was whether the plaintiff was entitled to maintain the suit without letters of administration or succession certificate. It

was held by a Bench of three learned Judges that the claim in the suit being for an unliquidated amount was not a debt within the meaning of the

Succession Certificate Act of 1889. At page 143, Subramania Aiyar, J. observed as follows :

The liability arising from this obligation cannot be held to be a debt in the accepted ordinary legal sense of the term, for the obvious reason that the

liability is not in respect of a liquidated sum. If authority were required for this conclusion, I would refer to Johnson v. Diamond, (1855) 11 Ex 73,

where Parke, Platt and Martin BB. held that the liability arising from a contract by C to pay D such costs as the latter should become answerable

to J in an action carried on by D at the request of C was not a liability to pay a liquidated sum and therefore not a ''debt''

This decision was followed with approval by a Full Bench of this Court in Doraisami Padayachi and Another Vs. Vaidyalinga Padayachi (dead)

and Others, . The Calcutta High Court, also followed the case in ILR 22 Mad 139 in Bancharam Majumdar v. Adyanath Bhattacharja, ILR 36

Cal 936 (FB). Jenkins C. J. quoted with approval the following observations in Webb v. Stenton, (1883) 11 QBD 518,

A debt is a sum of money which Is now payable or will become payable in future by reason of a present obligation.

That contingent liability is not a debt is now well settled. If a liability is to arise in future on the happening of a contingency which may or may

not happen it is not a liability at all, till it actually fructifies. A contingent liability or a contingency debt, as it is sometimes called, is therefore neither

a liability nor a debt. It would be a contradiction in terms to describe the future accrual of a debt however possible or imminent it may be, as a

debt, the essence of which is an existing obligation. There Is another class of liability, we do not wish to call it a debt, which is spoken of as an

accruing debt thereby implying that it is in the stage of forming into debt, and may culminate into a debt at sometime in the future. The question

whether such accruing debts are attachable in garnishee proceedings at the instance of judgment creditors has often arisen in English Courts. In

(1883) 11 QBD 513, the debt sought to be attached was one alleged to be payable by a trustee to the beneficiaries in future. It was held that it

was not a ""debt owing or accruing"". Lindley L. J. observed thus ;

I should say, apart from any authority, that debts legal or equitable can be attached whether it be a debt owing or accruing, but it must be a debt,

and a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation, ''debitum in praesenti,

solvendum in futuro''. An accruing debt, therefore, is a debt not yet actually payable but a debt which is represented by an existing obligation .......

The result seems to me to be this you may attach all debts, whether equitably or legal, but only debts can be attached, and moneys which may or

may not become payable from trustao to his ''cestui que trust'' are not debts.

The Supreme Court dealt with the true nature of a contingent debt in Shanti Prasad Jain Vs. The Director of Enforcement, . Venkatarama Aiyar J.

delivering the judgment, of the Court stated the position thus :

The law is thus well settled that a contingent debt is not a debt until the contingency happens, and as the right of the appellant to the amount in

deposit in his name in the Doutsche bank arises only on the happening of the contingency already mentioned, it follows that there is no debt due to

him ''in praesenti'' and there could be no loan thereof within Section 4(1) of the Act.

The Act referred to in that case is the Foreign Exchange Regulation Act, VII of 1947. The section provides as follows :

Except with the previous general or special permission of the Reserve Bank, no person resident in India shall buy or borrow from, or sell or lend

to, or exchange with, any person not being an authorised dealer, any foreign exchange.

The essential requisites of a debt are therefore (1) an ascertained or readily calculable amount ; (2) an absolute unqualified and present liability in

regard to that amount with the obligation to pay forthwith or in future within a time certain; (3) the obligation must have accrued and subsisting and

should not be that which"" is merely accruing.

Mr. Ramamani, learned counsel for the--assesses relied upon the decision in O''Driscoll v. Manchester Insurance Committee, 1915 3 KB 499

in support of the proposition that a debt owing or accruing need not be a liquidated amount but may also consist of an unascertained amount. In

that case an insurance committee constituted under the National Insurance Act, 1911, and 1913, entered into agreements with the panel doctors of

that district by which the whole amounts received by the Committee from the National Insurance Commissioners were to be pooled and

distributed among the panel doctors in accordance with the scale of fees. The total amount available for medical benefit so received by the

committee was to be the limit of their liability to the panel doctors; and if the total pool was insufficient to meet all the proper charges of the panel

doctors in accordant with the scale there was to be a ''pro rata'' reduction for each doctor, and on the other hand if it should be in excess of the

amount required the balance was to be distributed among the panel doctors. It was held that when a panel doctor has done work under his

agreement with the Insurance Committee and the Committee have received funds in respect of the medical benefit from the National Insurance

Commissioners, there is a debt owing or accruing from the Insurance Committee to the panel doctor which may be attached under Order XLV,

Rule 1 notwithstanding that as a matter of calculation the exact share payable to him may not yet have been ascertained. At page 512 Swinton

Eady L. J. stated thus :

It is contended, however, that there cannot be a ""debt"" until the amount has been ascertained, and in respect of this contention cases have been

cited to us where it was attempted to attack unliquidated damages. But in such cases there is no debt at all until the verdict of the jury is

pronounced assessing the damages and judgment is given. Here there is a debt, uncertain in amount, which will become certain when the accounts

are finally dealt with by the Insurance Committee. Therefore there was a ""debt"" at the material date, though it was not presently payable and the

amount was not ascertained. It is not like a case where there is a mere probability of a debt, as, for instance, where a person has to serve for a

fixed period before being entitled to any salary, and he has served part of that period at the time the garnishee order nisi is served. In such a case

there is no ""debt"" until he has served the whole period.

Against this view of the learned Lord Justice it is interesting to note the view of Haliett J. in Seabrook Estate Co. v. Ford, (1949) 2 All ER 94.

The facts in that case were as follows. A debenture holder of a limited company appointed a Receiver and manager of the premises charged by the

debentures. The receiver filed returns of receipts and payments for two periods of six months ending 30th June 1948 and 31st December 1948

respectively showing a balance in his hands of � 89/- Sh. 1 d-4 out of which he expected to have to pay � 425 to debenture holders, the costs

and legal charges of the receivership and a preferential claim for Income Tax. Before the receivership was terminated a judgment-creditor of the

company served on the Receiver an order nisi for the attachment of � 559, sh. 13 or part of that sum out of the amount in the hands of the

receiver as a debt due by the receiver to the company. It was held that on the date of the service of attachment order there was no debt ''in

praesenti'' and therefore there was no debt owing or accruing to the company from the receiver within the meaning of Order 14, Rule 1 of the rules

of the R. S. C. The order nisi was discharged. The case in 1915-3 KB 499 was referred to by Haliett J. and treated as a binding authority for the

proposition that where a debt is established ''in praesenti'' it is not sufficient objection to say that the exact amount of the debt will be the subject of

a calculation which has not yet been made and, it may be, cannot yet be made. The following observation of Bankes L. J. in 1915 3 KB 499 is

adapted by Hallett J. as laying down the correct position in law :

But the distinction must be borne in mind between the case where there is an existing debt, payment whereof is deferred, and the case where both

the debt and its payment rest in the future. In the former case there is an attachable debt, in the latter case there is not. If for instance, a sum of

money is payable on the happening of a contingency, there is no debt owing or accruing. But the mere fact that the amount is not ascertained does

not show that there is no debt.

In our opinion, the decision in 1915 3 KB 499 is authority only for the limited position that there can be an attachable debt within the meaning

of the said expression under Order XLV, Rule 1 of R. S. C., where the liability is present and accrued but where the quantification of that liability

is readily ascertainable but not ascertained. We must point out however that we are concerned in this case with the language of the Wealth Tax Act

which uses the definition ""debt owed"". The words of the Act must be given their ordinary and material signification and decisions and opinions of

Judges upon the language of other Acts are in unsafe guide.

Now we have to turn to the provisions of the Indian Income Tax Act to ascertain when a tax liability emerges into a debt due to the revenue.

Under this Act, it is perfectly clear that the tax liability becomes a debt due only after a notice of demand u/s 29 is served on the assessee. This

section requires the Income Tax Officer to serve upon the assessee or other person liable to pay the tax a notice of demand in the prescribed form

specifying the sum payable. If the assesses fails to pay the amount demanded within the time and the place and to the person mentioned in the

notice he shall be deemed to be in default. It is however open to the Income Tax Officer to treat the assessee as not being in default when he has

presented an appeal against the order of assessment, When an assessee is in default in paying the tax levied the Income Tax Officer may direct the

recovery of that amount by forwarding to the Collector a certificate under his signature specifying the amount of arrears due from the assessee; the

Collector on receipt of such certificate shall proceed to recover from the assessee the amount specified as if it were an arrear of land revenue. The

basic requirement for payability of the tax and for the exercise of the right of the department to collect the tax is therefore conditioned on the issue

of a notice of demand.

The scheme of the Act is that the Income of ""previous year"" is assessed to tax in the ""assessment year"". The total world income of the assessee in

the whole of ""the previous year"" is computed and brought to tax. The Finance Act of each year fixes the rate of taxation in regard to each

assessment year which is always the financial year. It is true that the liability to tax arises only by virtue of the charging sections, Section 3 or

Section 6 at the close of the previous year and earlier than the commencement of the assessment year. It is that liability which is assessed and

quantified in the assessment proceedings. A) pointed out by the Federal Court in Chatturam v. Commr. of Income Tax, Bihar, (1947) 15 ITR 302

at D. 308 AIR 1947 FC 32 , following the observation in Whitney v. Commr. of Inland Revenue (1926) 10 Tax Cas 88, the liability does not

depend on assessment, that ''ex hypothesi'' has already been fixed clearly by Act. The incidence of liability is statutory and is ''de hors'' the

assessment. But when does the tax liability assume the character of a debt is the real question in this case. At the close of the previous year it is an

unascertained liability. After the order of assessment it is specified, being quantified. Even at that stage the assessee is not a debtor having regard to

the provisions of the Act. It is only the service of the notice of demand by the department calling upon the assessee to pay the tax levied that marks

the emergence of a debt.

The above position has now been settled by a catena of decisions. In AIR 1945 62 (Privy Council) , Sir John Beaumont delivering the

judgment of the Judicial Committee observed.

.... . although Income Tax may be popularly described as due for a certain year, it is not in law so due. It is calculated and assessed by reference

to the income of the assessee for a given year, but it is due when demand fs made u/s 29 and Section 45. It then becomes a bebt due to the

Crown, but not for any particular period.

Dealing with a case of a levy of sales-tax under the Bengal Finance (Sales-tax) Act, 1941, Chakravarti C. J. of the Calcutta High Court stated

in Recols (India) Ltd. in re, 4 STC 271,

A tax is due only when it has been ascertained, quantified and notified to the assessee with a demand for payment and that seems to me to be the

effect of the Sales-tax Act itself, as much as of the Income Tax Act.

in Joint Official Liquidators of the Peerdan Juharmal Bank Ltd. Vs. Commr. of Income Tax, Madras, , the question arose whether the advance

Income Tax demanded from a company u/s 18-A of the Indian Income Tax Act, is a tax falling within Section 230(1)(a) of the Indian Companies

Act in respect of which State has got a right of priority over other debts. A Division Bench of this Court, Rajamannar C. J. and Venkatarama

Aiyar J. held that it was a tax. In that case it was common ground that there was a demand of the advance tax within the prescribed period. At

page 147 (of ITR) : (at p. 860 of AIR), the learned Chief Justice observed thus ;

That question is whether the amount for which at demand has been issued and which we have already held is in the nature of a tax is due from the

company at the date of the winding up order and became due and payable? within 12 months next before that order ....... As observed by the

Privy Council in AIR 1945 62 (Privy Council) , the tax becomes due when demand is made u/s 29 or u/s 45 of the Act.

In the present case it is common ground that there-was a demand of the tax within the prescribed period. The tax, therefore, became due and

payable on such demand. It would therefore fall within the category mentioned in Section 230(1)(a) of the Indian Companies Act. In our opinion a

levy of Income Tax does not by itself constitute a debt; the essential thing that creates a debt in consequence of the levy is the issue and service of

a demand u/s 29 of the Act.

The definition of ""net wealth"" u/s 2(m) as amended in 1959, which is clearly retrospective in operation, tends to support the view that

assessment to tax would not bring into existence an owing debt. The section provides that if the tax is objected to in appeal or revision or remains

unpaid for twelve months prior to the valuation date it is not a debt owed. Even after demand is made if the assessee questions the levy in

appropriate proceedings or neglects to comply with the demand for more than twelve months prior to the valuation date the character of debt is

lost for the purpose of computation of the net wealth.

In K.R. Ramachandra Rao Vs. The Commissioner of Wealth Tax, , we held that estate duty payable by the assessee is not a debt owed by

the assessee on the valuation date. Referring: to the expression ""debt owed"" we observed,

This expression came in for consideration in Kothari Textiles Ltd. and Others Vs. Commissioner of Wealth Tax, , where we held that a claim

against an estate of an unascertained nature cannot be regarded as a debt owed by the assessee on the valuation date. It is not disputed that in the

present case the assessment to estate duty was, made long subsequent to the valuation date. There was no doubt the liability under the Estate Duty

Act, but that liability was not ascertained or quantified.

We are'' of opinion that the definitive word of Section 2(m) of the Wealth Tax Act, permitting deduction of ""debt owed"" cannot be stretched

without doing violence to the language to cover an amount reserved for a tax liability, in anticipation of assessment or future demand if assessment

has been made. In this view of the matter it follows that the assessee is entitled to claim the two sums of Rs. 10,22,463 and Rs. 2,56,092 relating

to advance tax u/s 18-A and the final assessment to tax respectively as deduction in the computation of net wealth as they were debts by reason of

the demand for payment issued by the department. The other sum of Rs. 20,45,384 is not a debt owed within the meaning of Section 2(m) as it is

common ground that the department had not even assessed the income and levied the tax.

We agree with the conclusion of the Judicial Member of the Tribunal. The question is thus answered partly in favour of the assessee and partly

in favour of the department. There will be no order as to costs.