l Appeal No 11 29 of 1965
Appeal from the judgment and order dated April 15 16 17 1963 of the Bombay High Court in Wealth Tax Reference No 2 of 1961
RJ Kolah N D Karkhanis and 0
C Mathur for the appellant
B Sen R Ganapathy Iyer and R N Sachthey for the res pondent
769 The Judgment of the Court was delivered by Shah J
For the assessment year 1957 58 the appellant Company claimed in proceedings for assessment of wealth tax that the following four amounts be deducted in the computation of its net wealth 1Rs
2944421 in respect of income tax liability relating to the assessment year 1957 58
This amount included Rs 295869 representing the last instalment of advance tax under section 18A in respect of which a notice of demand had been issued
2Rs
370083 in respect of business profits tax liability
3 Rs 2023500 in respect of proposed dividend
4 Rs 2502675 on account of accrued liability for gratuity to workmen and staff as per the award of Industrial Court and Labour Appellate Tribunal
 The claim was rejected by the Wealth tax Officer
The Appellate Assistant Commissioner accepted the claim of the appellant Company in respect of the last instalment of the advance tax for which a notice of demand had been issued and rejected the claim in respect of the rest
The Income tax Appellate Tribunal upheld the claim of the appellant Company in respect of the 1st 2nd and the 4th items and rejected the claim in respect of the 3rd item
At the instance of the Commissioner the following four questions were referred to the High Court of Judicature at Bombay under section 271 of the Wealth tax Act 27 of 1957 1 Whether on the facts and circumstances of this case the last instalment of advance tax in the sum of Rs 295869 paid by the assessee after the valuation date in accordance with the notice of demand dated 20 10 1956 is an admissible deduction under Sections 72 and 2m of the Wealth tax Act for the purpose of computation of the net wealth of the assessee for the assessment year 1957 58  2Whether on the facts and circumstances of the case in computing the net wealth of the assessee under Section 72 read with Section 2m of the Wealth tax Act the liability for income tax and business profits tax could be allowed as a deduction 3 Whether on the facts and circumstances of the case the liability in the sum of Rs 2502675 which arose as a result of the awards dated 28 10 1948 28 11 1956 and 17 10 1954 before the valuation date or any part thereof is allowable as a deduction in determining the net wealth of the assessee under Section 72 read with Section 2m of the Wealth tax Act  4Whether on the facts and circumstances of the case of the sum of Rs 2023500 being the provision made for dividends and shown as a liability in the balance sheet of the assessee company could be allowed as a deduction in computing the net wealth of the assessee company At the hearing before the High Court the fourth question was not pressed by the appellant Company
The High Court answered the first question in the affirmative the second question in the affirmative insofar as it related to the estimated liability of business profits tax subject to verification by the Wealth tax Officer and in the negative insofar as it related to the estimated liability of income tax
The third question was answered in the negative
In this appeal the Company challenges the correctness of the answers to the second part of the second question and the third question
The second question insofar as it relates to estimated liability for payment of income tax needs no detailed consideration for the answer thereto will be governed by the judgment of this Court in Kesoram Industries and Cotton Mills Ltd vs Commissioner of Wealth tax Central Calcutta 
It was held by this Court in that case that liability to pay income tax was a present liability though the tax became payable after it was quantified in accordance with ascertainable data there was therefore a perfected debt at any rate on the last day of the accounting year and not a contingent liability and the amount of the provision for payment of income tax in respect of the year of account was a debt owed within the meaning of section 2m on the valuation date and was as such deductible in computing the net wealth
The view expressed by the High Court on the second question insofar as it relates to provision for income tax cannot therefore be sustained and that part of the question should be answered in the affirmative
There remains the third question
Counsel for the Company had conceded before the High Court that the liability to pay gratuity to the employees whose services were not terminated in the relevant year of account was merely contingent since it arose on the happening of certain events such as death physical incapacity voluntary retirement or resignation and was on that account not a debt within the meaning of section 2m of the Act
But it was contended before the High Court that the present value of the liability for payment of gratuity was a permissible deduction in valuing the assets of the business of the assessee under section 72a of the Act
The 11966 2 SCR 688   772 2
On voluntary retirement or resignation of an employee After 15 years  continuous service in the company 15 months  salary
On termination of his service by the Company aAfter 10 years  continuous service but less than 15 years  service in the company 34th of one month s salary for each year of service
bAfter 15 years  continuous service in the company 5 months  salary
A gratuity will not be paid to any employee who is dismissed for dishonesty or misconduct
 The right to obtain gratuity under the awards arises only when there is determination of employment and not before
The liability does not exist hi praesenti it is contingent upon the determination of employment
This Court pointed out in Kesoram Industries  Cotton Mills  case  at p 703 debt is a sum of money which is now payable or will become payable in future by reason of a present obligation debitum in praesenti solvendum in futuro  The said decisions also accept the legal position that a liability depending upon a contingency is not a debt in praesenti or infuturo till the contingency happened
But if there is a debt the fact that the amount is to be ascertained does not make it any the less a debt if the liability is certain and what remains is only the quantification of the amount
In short a debt owed within the meaning of section 2m of the Wealth tax Act can be defined as a liability to pay in praesenti or in futuro an ascertainable sum of money
 Observations made by the High Court of Gujarat in Commis sioner of Wealth tax Gujarat vs Ajit Mills Ltd2 that deduction for an amount claimed on account of liability for gratuity for workers and employees based on awards of the labour courts and agreements will be admissible deductions in the computation of the net wealth are plainly obiter and in our judgment are not correct
The decision of the House of Lords in Southern Railway of Peru Ltd vs Owen Inspector of Taxes 3 that the assessee company 1  3   2 771 High Court rejected that contention
Counsel for the Company has in this appeal contended that no such concession as is recorded in the judgment of the High Court was made and in any event the concession being on a question of law was not binding upon the appellant Company
Section 2m at the material time provided lm15  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 idebts which under Section 6 are not to be taken into account iidebts which are secured on or which have been incurred in relation to any property in respect of which wealth tax is not chargeable under this Act  By section 3 the wealth tax is charged for every financial year commencing on and from the first day of April 1957 on 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
Broadly speaking net wealth is the difference on the valuation date between the aggregate value computed in accordance with the provisions of the Act of the assets belonging to the assessee and the aggregate value of all the debts owed by the assessee
If there is no debt owed on the valuation date it can obviously not be deducted in determining the net wealth which is liable to tax under the Wealth tax Act
Apart from the concession made by counsel for the Company there is little doubt on the plain terms of the awards that the liability to pay gratuity to the employees of the appellant Company on determination of employment is a mere contingent liability which arises only when the employment of the employee is determined by death incapacity retirement or resignation
The relevant terms of the awards dated October 28 1948 November 28 1956 and October 17 1954 are as follows Gratuity should be paid  on the following scale 1On the death of an employee while in service of the company or on his becoming physically or mentally incapacitated for further service one month s salary for each year of service    773 was entitled to charge against each year s receipts the cost of making provision for the retirement payments which would ultimately be payable as it had the benefit of the employees  services during that year provided the present value of the future payments could be fairly estimated were a permissible deduction in the computation of income tax have in our judgment no relevance in this case
In Southern Railway of Peru Ltd s case  under the legislation of Peru a Company operating a railway was bound to pay its employees compensation on the termination of their services
The right to receive compensation arose on dismissal or on termination of the employment by the employer by proper notice or on such termination by the death of the employee or on the expiry of the term of  the employment
The compensation was an amount equivalent to one month s salary at the rate in force at the date of determination for every year of service
The company claimed in the computation of taxable income under the Income tax Act 1918 to be entitled to charge against each year s receipts the cost of making provision for the retirement payments which would ultimately be thrown on it calculating what sum would be required to be paid to each employee if he retired without forfeiture at the close of the year and setting aside the aggregate of what was required in so far is the year had contributed to the aggregate
It was held that the company was not entitled to make the deductions but the company was entitled to charge against each year s receipts the cost of making provision for the retirement payments which would ultimately be payable as it had the benefit of the employees  services during that year provided the present value of the future payments could be fairly estimated
The question arose under the English Income tax Act of 1918
Lord MacDermott observed at p 345 say that in computing his taxable profits for a particular year a trader who is under a definite obligation to pay his employees for their services in that year ail immediate payment and also a future payment in some subsequent year may properly deduct not only the immediate payment but the present value of the future payment provided such present value can be satisfactorily determined or fairly estimated
 Similar observations were made in the judgment of Lord Radcliff
But the House in that case was concerned to determine the deductibility of the present value of a liability which may arise in future in the computation of taxable profits for the relevant year under the Income tax Act
The same considerations cannot however apply to a case under the Wealth tax Act where the liability to pay wealth tax is charged upon the net wealth of an assessee
 774 In Commissioner of wealth tax Gujarat vs New Rajpur Mills Ltd  the assessee company claimed to deduct gratuity payable to employees under an agreement entered into with the labour associations before the valuation date
The Court in that case observed that the liability was not a debt owed by the assessee on the valuation date since the gratuity was not payable on the valuation date but was payable only on fulfilment of the contingencies set out in those agreements
But the Court proceeded to observe that since contingent liabilities can be taken into account while computing the net wealth of the asseessee under section 72a the liability for payment of gratuity under such agreements would have to be estimated and the estimated value of the contingent liability would be a permissible deduction in computing the net wealth of the assessee
In our view the first observation of the Court is correct but the second is not
We will presently set out the reasons for that view
The alternative plea that under section 72a of the Act the appellant Company is entitled to claim deduction even if it cannot do so under section 2m has in our judgment no force
Section 7 deals with the manner of valuation of assets
It provides insofar as it is material 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
2Notwithstanding anything contained in subsection 1 awhere 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 Section 7 falls in Ch
II which deals with the charge of wealth tax and assets subject to such charge it is intended to provide machinery for determination of the value of assets
It was observed in the minority judgment in Kesoram Industries  Cotton Mills  case2 at p717  By the first sub section the Wealth tax Officer is authorised to estimate for the purpose of determining the 1 2    775 value of any asset the price which it would fetch if sold in the open market on the valuation date
But this rule in the case of a running business may often be inconvenient and may not yield a true estimate of the net value of the total assets of the business
The legislature has therefore pro vided in sub section 2a that where the assessee is carrying on a business for which accounts are maintained by him regularly the Wealth tax Officer may determine the net value of the assets of the business as a whole having re gard to the balance sheet of such business as on the valua tion date and make such adjustments therein as the circum stances of the case may require
But the power conferred upon the tax officer by section72 is to arrive at a valuation of the assets and not to arrive at the net wealth of the assessee
Section 72 merely provides machinery in certain special cases for valuation of assets and it is from the aggregate valuation of assets that the net wealth chargeable to tax may be ascertained
The power conferred upon the tax officer to make adjustments as the circumstances of the case may require is also for the purpose of arriving at the true valueof the assets of the business
Sub section 2a of section 7 contemplates the determination of the net value of the assets having regard to the balance sheet and after making such adjustment as the circumstances of the case may require
It does not contemplate determination of the net wealth because net wealth can only be determined from the net value of the assets by making appropriate deductions for debts owed by the assessee
The argument raised by counsel for the assessee is that substantially section 72 is a definition section which extends for the purposes of the Act the definition of the net wealth  of assessees carrying on business
There is no warrant for this argument in the language used in section 72
Counsel was unable to suggest any rational explana tion why if what he contends was the intention Parliament should have adopted this somewhat roundabout way of incorporating a definition of net wealth in a section dealing with valuation of assets
 The majority of the Court did not express any opinion on this question
From the terms of section 2m it appears clear that the tax officer must first determine the aggregate value of all the assets belonging to the assessee on the valuation date and then determine the aggregate value of all the debts owed by the assessee on the valuation date
Excess of the aggregate value of the assets over the debts is the net wealth
The aggregate value of the assets must be 776 computed in accordance with the provisions of section 7
But in the aggregation of the value of all the debts owed by the assessee on the valuation date section 7 has no operation
In holding in New Rajpur Mills  case that a contingent liability can be taken into account while computing the net wealth of the assessee under section 72 a in our judgment the true function of section 72a of the Wealth tax Act was not appreciated
Section 7 does not deal with the computation of net wealth
It deals with the computation of the aggregate value of the assets
Under section 7 the Wealth tax Officer is competent where the assessee is carrying on business of which accounts are maintained regularly to determine the net value of the assets of the business as a whole
But in doing so he determines the value of the assets of the business as a whole and not the net wealth of the business
The appeal therefore is partially allowed
Insofar as the claim relates to deduction of estimated income tax for the assessment year the answer wilt be in favour of the appellant company and in so far as the claim relates to deduction of gratuity payable to the employees of the company the answer will be in the negative
There will be no order as to costs in this appeal
VPS Appeal allowed in part


Summary:
In the computation of the net wealth of the appellant company under section 2m of the Wealth Tax Act 1957 two deductions were claimed the company  i the amount of estimated income tax for the assessment year and ii the amount of gratuity payable by the company to its employees under certain industrial awards
HELD  The first claim was allowable but not the second
776 D Under section 2m of the Act the Wealth Tax Officer must first determine the aggregate value of all the assets belonging to the assessee on the valuation date and then determine the aggregate value of all the debts owed by the assessee on the valuation date
Excess of the aggregate value of the assets over the debts is the net wealth
But on the terms of the awards the liability to pay gratuity did not exist in present  it was contingent upon the determination of employment by death incapacity retirement or resignation of the employee and not before
Therefore it was not a debt owned by the assessee on the valuation date
772 C D 775 H Nor could the appellant company claim the deduction under section 72a of the Act
The aggregate value of the assets must be computed in accordance with the provisions of section 7
But in the aggregation of the value of all the debts owned by the assessee on the valuation date section 7 has not operation
Section 7 does not deal with the computation of net wealth but only with the determination of the not value of the assets as a whole
776 A C Kesoram Industries and Cotton Mills Lid
vs Commissioner of Wealth Tax Central Calcutta   followed
Observations Contra in Commissioner of Wealth Tax Gujarat vs Ajit Mills Ltd and Commissioner of Wealth Tax Gujarat vs New Rajpur Mills  disapproved
Southern Railway of Peru vs Owen Inspector of Taxes   explained