Civil Appeals NOS
1311 and 1312 of 1973
From the Judgment and Order dated 262761972 of the Gujarat High Court at Ahmedabad in Wealth Tax Reference Nos 3 4 20 25 29 32 32  36 of 1970 and 1 of 1971
S G Manchanda BB Ahuja RN Poddar and Miss A Shubhashini for the Appellant
ST Desai Mrs AK Verma and KJ John for the Respondents
These appeals are directed against the judgment of the Gujarat High Court disposing of a wealth tax reference and answering the following question of law against the Revenue Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the provisions of section 2 m iii a were not applicable in respect of liabili 300 ties arising under the wealth tax assessments of the asses see for the assessment years 1960 61 and 1961 62  For the purpose of determining the assessee s net wealth in assessment proceedings under the Wealth Tax Act in respect of the assessment years 1961 62 and 1962 63 the corresponding valuation dates being March 31 1961 and March 31 1962 the assessee claimed a deduction of certain sums representing the estimated liabilities on account of income tax and wealth tax
The claim was rejected by the Wealth Tax Officer in both assessments
On appeal by the assessee the Appellate Assistant Commissioner of Wealth Tax allowed a part of the claim
In the appeal pertaining to the assessment year 1961 62 he allowed a deduction of Rs 22679 on account of wealth tax relating to the assessment year 1960 61 Rs39692 on account of wealth tax relating to the assessment year 1961 62 and Rs 225053 on account of income tax for the assessment year 1961 62
In the appeal pertaining to the assessment year 1962 63 the Appellate Assistant Commissioner allowed the total claim of Rs 902377 comprising a deduction of Rs 39692 on account of wealth tax relating to the assessment year 1961 62 Rs 77716 on account of wealth tax for the assessment year 1962 63 and the balance on account of income tax for the assessment year 1962 63
The Revenue appealed to the Appellate Tribunal
In the appeal for the assessment year 1961 62 in contended inter alia that the assessee was not entitled to a deduction of the wealth tax liability of Rs 22679 in respect of the assessment year 1960 61 because he had disputed the said liability in appeal and therefore the deduction was barred by reason of section 2m iii a of the Wealth Tax Act
Similarly in the appeal for the assessment year 1962 63 the Revenue urged that the assessee was not entitled to a deduction of the wealth tax liability of Rs 39692 for the assessment year 1961 62 as he had disputed that liability in appeal and the deduction was barred by section 2m iii a of the Act
The Appellate Tribunal did not accept the contention of the Revenue and held that s2m iii a was not attracted in respect of those liabilities as they had G not become payable on the relevant valuation dates
At the instance of the Revenue a reference being Wealth Tax Reference No 20 of 1970 was made to the Gujarat High Court for its opinion on the question of law set forth earlier
It may be mentioned that another question was also framed in that reference and that this reference along with several other 301 references were disposed of together by the Gujrat High Court by its judgment in Commissioner of Wealth Tax vs Kantilal Manilal1 Against that judgment corresponding special leave petitions were filed by the Revenue in this Court but all the special leave petitions except Special Leave Petitions Civil Nos 505 and 506 of 1973 arising out of Wealth Tax Reference No 20 of 1970 were dismissed on the merits and in respect of these two special leave petitions the grant of special leave was restricted to the consideration of the question set forth earlier
While dealing with the question whether the provisions of section 2m iii a of the Wealth Tax Act barred the deduction of the wealth tax liabilities claimed by the assessee the High Court held that as the liabilities were not outstanding on the respective valuation dates section 2m iii a was not attracted even though the assessee had challenged in appeal that the liabilities were not payable by him
In these appeals Shri SC Manchanda appearing for the Revenue contends that the High Court has erred insofar as it has held that the wealth tax liabilities were not outstanding on the valuation dates
His case is that the bar imposed by section 2m iii a operates against the claim to deduction made by the assessee
Shri ST Desai appearing for the assessee urges that section 2m iii a is not attracted because no amount of tax was outstanding on the respective valuation dates and in any event he says the appeals challenging those liabilities were not pending on the valuation dates and therefore the further requirement according to him of the statute was not satisfied
Section 2m of the Wealth Tax Act provides 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 z this Act is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than i xx xx xx 1 1973
 z z 302 ii XX XX XX 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 34 of 1953 the Expenditure Tax Act  or the 18 of 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  In the process of computing the net wealth the statute requires the aggregation of the value of all the debts owed by the assessee on the valuation date except those debts which are specifically described in sub clauses i ii and iii
We are concerned with sub clause iii aA debt which ordinarily falls within the scope of the substantive provision of section 2m cannot be taken into account for the purpose of determining the net wealth if it falls within the term of sub clause iii a of section 2m
Sub clause iii a speaks the amount of the tax penalty or interest payable in consequence of any order passed under or in pursuance of any of the tax laws mentioned therein 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
For the assessment years 1961 62 and 1962 63 under reference the corresponding valuation dates as we have mentioned earlier are March 311961 and March 31 1962 respectively The claim to deduction in the wealth tax liability for the assessment year 1961 62 relates to Rs 22679 representing the wealth tax liability for the assessment year 1960 61
The assessment order for the assessment year 1960 61 was made on March 24 1961 but the notice of demand was served on the assessee on April 11 1961
It is apparent that the notice of demand was served some days after the valuation date March 31 1961
In the wealth tax assessment of the assessment year 1962 63 the deduction claimed relates to the wealth tax liability of Rs 39692 for the assessment year 1961 62
The assessment order 303 on March 23 1962 but the notice of demand was served on April 11 1962 and that notice of demand was also served a few days after the relevant valuation date March 311962
Therefore the notice of demand in each case was served after the valuation date had passed
There was no demand already subsisting on the respective valuation dates
In order to invoke section 2 m iii a the Revenue must establish that an amount of the tax was outstanding on the valuation date
An amount of tax is outstanding if it is payable and has remained unpaid
In other words if there is a debt due and there has been no payment of the debt
In a case under the Indian Income Tax Act 1922 Doorga Prasad vs The Secretary of State 1 the Privy Council laid down that an income tax liability becomes a debt due when payment of the tax is demanded by a notice issued under section 29 of the Act
There are three stages in respect of an income tax liability
The tax liability comes into existence on the last day of the previous year relevant to the assessment year
Thereafter when the assessment proceedings take place an assessment order is made quantifying the assessable income and determining the tax payable
Thereupon a notice of demand is served for payment of the tax and the tax then becomes payable and a debt becomes due to the Revenue
That was the position under the Indian Income Tax Act 1922 and continues to be the position under the Income Tax Act 1961A survey of the provisions of the Wealth Tax Act will demonstrate that in all material respects the scheme of the Wealth Tax Act is in this regard substantially the same as that incorporated in the Income Tax Act
The provisions for the assessment are of an assessee are contained in sections 14 to 17A of the Wealth Tax Act
The notice of demand requiring payment of the tax interest or penalty is issued pursuant to section 30 of the Act
If the amount remains unpaid within the period specified in the notice the amount of the tax is said to be outstanding
A question was raised whether for the purposes of attracting section 2m iii a it is not sufficient that the tax liability has 6 accrued and it is necessary that a tax demand should have been made by the assessing authority
It seems to us that section 2m 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 1 304 assessee represented by an amount of tax payable in consequence of any order passed under the relevant tax statute outstanding on the valuation date
The expression debt owed has been held by this Court in Kesoram Industries  Cotton Mills Ltd vs Commissioner of Wealth Tax Central Calcutta 1 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 future 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 the scope down to a liability which exists in 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
In the present case it is clear that as the notices of demand respecting the wealth tax liability of Rs 22679 and Rs 39692 were served on the assessee subsequent to the valuation dates it can not be said that on the respective valuation dates the amounts of tax were outstanding
In the result a material requirement of section 2 m iii a is not satisfied and therefore that provision cannot be invoked by the Revenue
We now propose to consider the other point in controversy
As is apparent
if the Revenue desires to invoke section 2 m iii a it must establish not only that the amount of the tax penalty or interest envisaged in that provision is outstanding on the valuation date but it must also show that the amount is claimed by the assessee in appeal revision or other proceeding as not being payable by him
The question is whether it is a necessary requirement of the provision that the appeal revision or other proceeding should be pending on the valuation date itself or it suffices that the appeal revision or other proceeding is filed subsequent to the valuation date
In the present case the appeal against the wealth tax assessment order for the assessment year 1960 61 was filed on May 9 1961 and the appeal against the wealth tax assessment order for the assessment year 1961 62 was filed on May 9 1962
Both the appeals were filed therefore after the respective valuation dates March 31 1961 and March 31 1962 corresponding to the assessment years 1961 62 and 1962 63 1  305 under reference
But for section 2m iii an amount of a tax outstanding on the valuation date would constitute a debt owed by the assessee on the valuation date and the assessee would be entitled to claim its deduction in the process of computing his net wealth
Parliament however intended that if the amount of the tax was challenged by the assessee as not being payable by him by recourse to any of the statutory remedies prescribed in the relevant Act such 1 claim to deduction would be barred
Plainly in order to give full effect to that intent it is immaterial whether the statutory remedy is being availed of on the valuation date or has been taken thereafter
A challenge by the assessee that the amount outstanding is not payable by him is sufficient to bar his claim to deduction whether the challenge is subsisting on the valuation date or is initiated after the valuation date has passed
Accordingly we are of opinion that the appeals in the present case though filed subsequent to the respective valuation dates would nonetheless have sufficed to bring the second requirement of section 2m iii a into operation
The contrary view in respect of section 2 m iii a adopted by the Madras High Court in Late P Appavoo Pillai vs Commissioner of Wealth Tax Madras4 appears to us to be incorrect
However as in order to invoke the bar prescribed by section 2 m iii a it is necessary for the Revenue to establish that both requirements are satisfied that is to say that an amount of the tax is outstanding on the valuation date and further that the amount is claimed by the assessee in an appeal as not being payable by him and the Revenue has been unable to show that in the present case the sum of Rs 22679 and Rs 39692 representing the wealth tax liabilities for the assessment years 1960 61 and 1961 62 were outstanding on the respective valuation dates corresponding to the assessment year under reference the Revenue must fail
In the result the appeals are dismissed
SR Appeals dismissed


Summary:
For the assessment years 1961 62 and 1962 63 the corresponding valuation dates of which were March 31 1961 and March 31 1962 assessment orders were made under the Wealth Tax Act on March 24 1961 and March 23 1962 respectively while the notice of demands were served on the assessee on April 11 1961 and April 11 1962 respectively
Against the said notices of demand the assessee preferred appeals on May 9 1961 and May 9 1962 respectively
For the purpose of determining the assessee s net wealth the assessee s claim for a deduction of certain sums representing the estimated liabilities on account O  income tax and wealth tax was rejected in both assessments by the Wealth Tax Officer
On appeal by the assessee the Appellate Assistant Commissioner of Wealth Tax allowed a part of the claim
In appeal before the Appellate Tribunal the Revenue contended that since the assessee had disputed the wealth tax liability of Rs 22679 in respect of the assessment year 1960 61 and the sum of Rs 39692 in respect of the assessment year 1961 62 he was not entitled to a deduction of the same being barred by reason of the provisions of section 2m iii a of the Wealth Tax Act
The Tribunal rejected the said contention and held that section 2 ma was not attracted as the tax had not become payable on the relevant valuation dates
The Wealth Tax References made at the instance of the Revenue were decided in favor of the assessee by the High Court of Gujarat by its common judgement in Commissioner of Wealth Tax vs Kantilal Manilal reported in The present appeal by special leave arises therefrom
Dismissing the appeal the Court  HELD 11 In order to invoke the bar prescribed by Section 2m iii a of the Wealth Tax Act it is necessary for the Revenue to establish that both 298 requirements therein are satisfied that is to say that an amount of the tax is outstanding on the valuation date and further that the amount is claimed by the assessee in an appeal as not being payable by him
302E F 12 An amount of tax is outstanding if it is payable and has remained unpaid
In other words if there is a debt due and there has been no payment of the debt
There are three stages in respect of an income tax liability
The tax liability comes into existence on the last day o f the previous year relevant to the assessment year
Thereafter when the assessment proceedings take place an assessment order is made quantifying the assessable income and determining the tax payable
Thereupon a notice of demand is served for payment of the tax and the tax then becomes payable and a debt becomes due to the Revenue
A survey of the provisions of the Wealth Tax Act contained in Sections 14 to 17 and Section 30 makes it clear that in all material respects the scheme of the Wealth Tax Act is in this regard substantially the same as that incorporated in the Income Tax Act
The notice of demand requiring payment of the tax interest or penalty is issued pursuant to Section 30 of the Act
If the amount remains unpaid within the periods specified in the notice the amount of the tax is said to be outstanding 303D F 13 Section 2miiia of the Wealth Tax Act 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 tax statute and outstanding on the valuation dates 303H 304A 14 The expression debt owed is a debt which the assessee is under an obligation to pay and therefore it includes both a liability to pay in present as well as a liability to pay in future an ascertainable sum of money
Both kinds of liabilities are included within the expression debt owed
But Section 2miiia narrows the scope down to a liability which exists in present time because the clause speaks of tax outstanding in consequence of an order passed under the relevant taxing statute
304B C 15 In the present case the notice of demand in each case was served after the valuation date had been passed
There was no demand already subsisting on the respective valuation dates
As the notices of demand respecting the wealth tax liability of Rs 22679 and Rs 39692 were served on the assessee subsequent to the valuation dates if cannot be said that on the respective valuation dates the amount of tax were outstanding
In the result a material requirement of Section 2m iii a is not satisfied and therefore it cannot be invoked by the Revenue
304D E Commissioner of Wealth Tax vs Kantilal Manilal  approved
Doorga Prasad vs The Secretary of State  quoted with approval 299 Kesoram Industries  Cotton Mills Ltd vs Commissioner of Wealth Tax Central Calcutta   followed
16 The appeals in the present case though filed subsequent to the respective valuation dates would none the less have sufficed to bring the second requirement of section 2 m iii a into operation
But for Section 2 m iii a an amount of a tax outstanding on the valuation date would constitute a debt owed by the assessee on the valuation date and the assessee would be entitled to claim its deduction in the process of computing his net wealth
Parliament however intended that if the amount of the tax was challenged by the assessee as not being payable by him by recourse to any of the statutory remedies prescribed in the relevant Act such claim to deduction would be barred
Plainly in order to give full effect to that intent it is immaterial whether the statutory remedy is being availed of on the valuation date or has been taken thereafter
A challenge by the assessee that the amount outstanding is not payable by him is sufficient to bar his claim to deduction whether the challenge is subsisting on the valuation date or is initiated after the valuation date has passed
305 D A C Late P Appauoo Pillai vs Commissioner of Wealth Tax Madras overtuled