ivil Appeals Nos
384 to 387 of 1978
From the Judgment and Order dated the 18th January 1977 of the High Court at Madras in TC Petitions Nos 409 to 412 of 1976
SC Manchanda and Miss A Subhashini for the Appellant
Gopala Subramanium and Mrs section Gopalakrishnan for the Respondent
The Judgment of the Court was delivered by PATHAK J
These appeals are directed against the judgment of the Madras High Court refusing to call for a reference from the Appellate Tribunal under section 27 3 of the Wealth Tax Act on the following two questions 1 Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the liabilities claimed by the assessee though existence of the very liability was questioned by the assessee should be allowed as a debt owed  in computing the net wealth of the assessee  2
Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the tax liabilities as allowed by the Wealth Tax Officer was not in accordance with law  We think that the questions are indeed questions of law and the High Court should have called for a statement of the case from the Appellate Tribunal and rendered its opinion on the said questions
Ordinarily we would have allowed the appeal and directed the High Court to requisition a reference from the Appellate Tribunal to enable 493 the High Court to decide the two questions of law
But we refrain from doing so as the points have already been considered on the merits by us in judgments delivered today in the appeals listed and heard along with these cases and therefore we shall express our opinion directly on the two questions
In assessment proceedings under the Wealth Tax Act for the assessment years 1964 65 1965 66 1966 67 and 1967 68 the corresponding valuation dates being March 31 1964 March 31 1965 March 31 1966 and March 31 1967 the assessee claimed a deduction in the computation of the assessee s net wealth on account of income tax wealth tax and gift tax liabilities
The Wealth Tax Officer allowed only part of the deductions claimed and an appeal by the assessee was dismissed by the Appellate Assistant Commissioner of Wealth Tax
In second appeal before the Appellate Tribunal the assessee filed statements showing particulars of the income tax wealth tax and gift tax liabilities in respect of the different assessment years
The Appellate Tribunal found that so far as the assessment year 1964 65 was concerned all the demands were raised only after the relevant valuation date that in respect of the assessment year 1965 66 the demands except for items Nos 1 to 5 and 12 were raised subsequent to the relevant valuation date that in respect of the assessment year 1966 67 all the demands except items 1 to 3 and 8 to 10 were raised subsequent to the relevant valuation date and that so far as the assessment year 1967 68 was concerned except the first item the demands in respect of the rest of the items were raised subsequent to the relevant valuation date
The Appellate Tribunal held following the judgment of this court in Commissioner of Income Tax vs Keshoram Industries Pvt
Ltd1 and HH Setu Parvati Bayi vs Commissioner of Wealth Tax Kerala2 that so long as the liability to pay the tax had arisen before the relevant valuation dates it was immaterial that the assessments were quantified after the relevant valuation dates
It was pointed out by the Revenue before the Appellate Tribunal that the income tax liability for the assessment year 1965 66 of Rs 72399 and the gift tax liability for the assessment year 1965 66 of Rs 113650 had been cancelled by the Appellate Assistant Commissioner in appeals against the assessment orders and those appellate orders of the Appellate Assistant Commissioner had become final in view of the dismissal of the Revenue s appeals by the Appellate 494 Tribunal with the result that there was no outstanding demand on account of income tax and gift tax for that year
It was urged that the two sums of income tax liability and gift tax liability would not constitute debts owed  by the assessee and therefore would not qualify for deduction under section 2m of the Wealth Tax Act
The Appellate Tribunal rejected the contention holding that the question whether a debt was owed by the assessee must be examined with reference to the position obtaining in the valuation date and that nothing happening subsequently could be considered in computing the net wealth
It observed that the fact that the assessee had filed appeals subsequent to the valuation dates and that relief had been granted by the Appellate Authority would have no relevance for determining whether a debt was owed on the relevant valuation date
Reference was made to the decision of the Madras High Court in Late P Appavoo Pillai vs Commissioner of Wealth Tax Madras 1 We are unable to agree with the view taken by the Appellate Tribunal
Whether a debt was owed by the assessee on the valuation date would depend as was observed by this Court in Keshoram Industries Pvt
Ltd supra and HH
Setu Parvati Bayi supra on the fact that a liability had already crystalized under the relevant taxing statute on the valuation date
An income tax liability crystallises on the last day of the previous year relevant to the assessment year under the Income Tax Act a wealth tax liability crystallises on the valuation date for the relevant assessment year under the Wealth Tax Act and a gift tax liability crystallises on the last day of the previous year for the relevant assessment year under the Gift Tax Act
En passant we may explain why we say that a gift tax liability crystallises on the last day of the pertinent previous year under the Gift Tax Act
Section 3 of the Gift Tax Act levies gift tax in respect of the gifts made by a person during the previous year at the rates specified in the Schedule
Section 13 provides for the filing of a return of the gifts made during the previous year
Section 15 requires the Gift Tax Officer to assess the value of the taxable gifts made during the previous year and determine the amount of gift tax payable
The gift tax so payable is envisaged as a single sum in respect of the totality of the gifts made by the assessee during the previous year
Moreover the Schedule prescribes graduated scales of rates of gift tax in ascending order
All these considerations point to the conclusion that the liability to gift tax crystallises not in relation to each gift individually but in relation 495 to the assessed aggregate value of the gifts made during the previous year
In other words a gift tax liability crystallises on the last day of the previous year
Now the quantification of the income tax wealth tax or gift tax liability is determined by a corresponding assessment order and even if the assessment order is made after the valuation date relevant to the wealth tax assessment in which the claim to deduction is made there is a debt owed by the assessee on the valuation date
The quantification effected by an assessment order may be varied as the income tax wealth tax and gift tax case is carried in appeal to the Appellate Assistant Commissioner or thereafter to the Appellate Tribunal and indeed even in reference later to the High Court or subsequent appeal to this Court
It is the quantification of the tax liability by the ultimate judicial authority which will determine the amount of the debt owed by the assessee on the valuation date
So long as such ultimate determination indicates the existence of a positive tax liability it must be held that there is a debt owed by the assessee on the valuation date even though such determination may be subsequent in point of time to the valuation date
If however it is found on such ultimate determination that there is no tax liability it cannot be said that merely because originally a tax liability had been determined and stood existing on the valuation date there was a debt owed by the assessee
The fact cannot be ignored that when the case was carried in appeal or reference it was found by the superior authority that in fact there was no tax liability at all
That final determination even though rendered after the valuation date directly relates to the question whether on the valuation date there was a debt owed by the assessee
If the finding is that there was no tax liability it must be held that there was no debt owed by the assessee on the valuation date
In this regard we do not agree with what has been said by the Madras High Court to the contrary in PA Appavoo Pillai supra
We are of opinion that the income tax liability for the assessment year 1965 66 of Rs 72399 and the gift tax liability for the assessment year 1965 66 of Rs 113650 subsequently set aside on appeal after the valuation dates cannot be regarded as debts owed by the assessee on the relevant valuation dates
Towards the close of its order the Appellate Tribunal pointed to the fact that the different demands of tax were served on the assessee subsequent to the respective valuation dates and on that ground observed that the tax liabilities did not fall within the prohibition of section 2m iii a and had to be taken into account as debts 496 owed by the assessee on the valuation dates
It seems to us that the Appellate Tribunal has not correctly appreciated the scope of section 2m iii a
Section 2m iii a denies deduction to an amount of tax which is outstanding on the valuation date if the assessee contends in appeal revision or other proceeding that he is not liable to pay the tax
It presupposes that there is a subsisting tax demand and the assessee has challenged its validity
It refers to the initial stage only where an appeal revision or other proceeding is pending merely
It does not proceed beyond that stage to the point where in consequence of such appeal revision or other proceedings the tax liability has been found to be nil
Once it is determined that the tax liability is nil it cannot be said that any amount of tax is outstanding
Such a situation does not bring section 2m iii a into operation at all as is clear indeed from its very terms
If upon the ultimate determination it is found that the amount of tax is nil the assessee is denied the deduction claimed by him not on the ground of section 2m iii a but because the superior authority has found that there is no tax liability whatever
It must be taken that in law there never was any tax liability
So far as the remaining tax liabilities are concerned the Tribunal is right in allowing the income tax wealth tax and gift tax liabilities to be deducted in computing the net wealth of the assessee for the respective assessment years even though the assessment orders were finalised after the respective valuation dates
We may point out that it has not been shown to us that the assessee filed appeals questioning the income tax wealth tax and gift tax Liabilities other than the income tax liability of Rs 72399 and the gift tax liability of Rs 113650 for the assessment years 1965 66 referred to earlier
The questions of which reference was sought by the Revenue are answered accordingly
The appeals are allowed in part in the terms already set out
There is no order as to costs
NVK Appeals partly allowed


Summary:
In assessment proceedings under the Wealth Tax Act for four assessment years the assessee claimed a deduction in the computation of his net wealth on account of income tax wealth tax and gift tax liabilities
The Wealth Tax Officer allowed only part of the deductions claimed The appeal of the assessee was dismissed by the Appellate Assistant Commissioner of Wealth Tax
In the second appeal before the Appellate Tribunal the assessee filed statements showing particulars of the income tax wealth tax and gift tax liabilities in respect of the different assessment years
The Revenue contended that the income tax liability and the gift tax liability for one of the assessment years 1965 66 had been cancelled by the Appellate Assistant Commissioner in appeals against the assessment orders and those appellate orders of the Appellate Assistant Commissioner having become final in view of the dismissal of the Revenue s appeals by the Appellate Tribunal there was no outstanding demand on account of income tax and gift tax for that year and that therefore these two items do not constitute debts owed  by the assessee and so would not qualify for deduction under section 2m of the Wealth Tax Act
The Appellate Tribunal following two judgments of this Court Commissioner of Income Tax vs Keshoram Industries Pvt
Ltd 1966 59 ITR 767 and HH Setu Parvati Bayi vs Commissioner of Wealth Tax Kerala  held that so long as the liability to pay the tax had arisen before the relevant valuation dates it was immaterial that the assessments were quantified after the valuation of dates that the question whether a debt was owed by the assessee must be examined with reference to the position obtaining on the valuation date and that nothing happening subsequently could be considered in computing the net wealth
491 The High Court having refused te call for a reference from the Appellate Tribunal under section 273 of the Act the Revenue appealed to this Court
Allowing the appeals in part
 HELD 1
Whether a debt was owed by the assessee on the valuation date would depend on the fact that a liability had already crystallised under the relevant taxing statute on the valuation date
494 D 2
An income tax liability crystallises on the last day of the previous year relevant to the assessment year under the Income Tax Act a wealth tax liability crystallises on the valuation date for the relevant assessment year under the Wealth Tax Act and a gift tax liability crystallises on the last day of the previous year for the relevant assessment year under the Gift Tax Act
494 E 3
The quantification of the income tax wealth tax or gift tax liability is determined by a corresponding assessment order and even if the assessment order is made after the valuation date relevant to the wealth tax assessment in which the claim to deduction is made there is a debt owed by the assessee on the valuation date
It is the quantification of the tax liability by the ultimate judicial authority which will determine the amount of the debt owed by the assessee on the valuation date
So long as such ultimate determination indicates the existence of a positive tax liability it must be held that there is a debt owed by the assessee on the valuation date even though such determination may be subsequent in point of time to the valuation date
If however it is found on such ultimate determination that there is no tax liability it cannot be said that merely because originally a tax liability could be envisaged there was a debt owed by the assessee
495 B E 4
Section 2m iii a denies deduction of an amount of tax which is outstanding on the valuation date if the assessee contends in appeal revision or other proceeding that he is not liable to pay the tax
It presupposes that there is a subsisting tax demand and the assessee has challenged its validity
It refers to the initial stage only where an appeal revision or other proceeding is pending merely
It does not proceed beyond that stage to the point where in consequence of such appeal revision or other proceeding the tax liability has been found to be nil
Once it is determined that the tax liability is nil it cannot be said that any amount of tax is outstanding
Such a situation does not bring section 2m iii a into operation at all
If upon the ultimate determination it is found that the amount of tax is nil the assessee is denied the deduction claimed by him not on the ground of section 2m iii a but because the superior authority has found that there is no tax liability whatever
496 A D In the instant case the income tax and the gift tax liabilities for the assessment year 1965 66 subsequently set aside on appeal after the valuation dates cannot be regarded as debts owed by the assessee on the relevant valuation dates
495 G 492 Commissioner of Income Tax vs Keshoram Industries Pvt Ltd   HH Setu Parvati Bayi vs Commissioner of Wealth Tax Kerala referred to
Late P Appavoo Pillai vs Commissioner of Wealth Tax Madras reversed