Case: Commissioner of Wealth Tax, Madras Vs. K.S.N. Bhatt

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 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 th e 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 t he 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 asses see 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 P.A. Appavoo Pillai (supra). We are of opinion that the income tax liability for the assessment year 1965-66 of Rs. 72, 399 and the gift tax liability for the assessment year 1965-66 of Rs. 1, 13, 650, 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 s. 2(m) (iii) (a) and had to be taken into account as debts owed by the assessee on the valuation dates. It seems to us that the Appellate Tribunal has not correctly appreciated the scope of s. 2(m) (iii) (a). Section 2 (m) (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 s. 2(m) (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 s. 2(m) (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.4. 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. 72, 399 and the gift tax liability of Rs. 1, 13, 650 for the assessment years 1965-66 referred to earlier. The questions of which reference was sought by the Revenue are answered accordingly.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]We are of opinion that the income tax liability for the assessment year 1965-66 of Rs. 72, 399 and the gift tax liability for the assessment year 1965-66 of Rs. 1, 13, 650, 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 s. 2(m) (iii) (a) and had to be taken into account as debts owed by the assessee on the valuation dates. It seems to us that the Appellate Tribunal has not correctly appreciated the scope of s. 2(m) (iii) (a). Section 2 (m) (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 s. 2(m) (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 s. 2(m) (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.