Case: Commissioner of Wealth Tax, Kanpur Vs. Messrs J.K. Cotton Manufacturers Limited

M/s. J.K. Cotton Manufactures Ltd., the assessee, is a limited company engaged in the manufacture of cotton textiles, etc. and the assessment involved is the wealth-tax assessment for the year 1957-58 based on the valuation date 30.9.1956. It appears that as a result of proceedings taken and a settlement arrived at in 1952 under the Taxation on Income (Investigation Commission) Act 1947, a sum of Rs. 15, 99, 041 was determined as payable by the assessee company on its secreted profits and a scheme for the payment of the said liability by installments was laid down. Out of this, a sum of Rs. 10, 50, 000 had been paid before the valuation date (30.9.1956) and Rs. 5, 49, 041 remained unpaid on that date. The assessee company claimed that the balance of the demand that had remained unpaid was a debt owed by it and should be allowed as a deduction while computing its net wealth for the concerned year of assessmentthe case of M/s. J. K. Jute Mills Co. Ltd. the assessment involved under the Wealth-tax Act is also for the assessment year 1957-58 but the valuation date is 31.12.1956. In the case of this company also as a result of proceeding taken and a settlement arrived at in 1952 under the Taxation on Income (Investigation Commission) Act 1947 a sum of Rs. 42, 93, 392 was determined as payable by it on its secreted profits and a scheme for the payment of the said liability by installments was laid down. Out of this, a sum of Rs. 21, 31, 604 had been paid before the valuation date (31.12.1956) and Rs. 21, 61, 788 remained unpaid on that date. The assessee company claimed that the balance of the demand that had remained unpaid was a debt owed by it and should be allowed as a deduction while computing its net-wealth f or the concerned year of assessment [1957-58].The Wealth-Tax officer computed the net-wealth of each company by adopting the figures of assets and liabilities as shown in their balance-sheets as on their respective valuation dates after making such adjustments as he considered necessary but in both, the cases he disallowed the aforesaid claim for deduction on the ground that the liability was outstanding for more than 12 months on the valuation dates. The Appellate Assistant Commissioner confirmed the disallowance of the amounts but for different a reason. He took the view that the tax liabilities assessed by the Income-tax Investigation Commission had no relation to the assets or the declared wealth of the assessee companies, which were the basis of the wealth tax assessment and since the assets on which the said liability was assessed, namely, the secret profits were not included in the declared assets the disallowance was justified. In further appeals preferred by the assessee-companies to the Tribunal, the reasons given by the Wealth-Tax Officer as well as the Appellate Assistant Commissioner were assailed but without expressing any view on the validity or otherwise of the reason given by the Wealth-tax Officer, the Tribunal confirmed the disallowance by substantially agreeing with the view expressed by the Appellate Assistant Commissioner. The Tribunal pointed out that in s.2 (m, which defines net wealth, sub-s. (i) excludes debts located outside India in the case of certain classes of assessees, in whose case assets located out side India are excluded; that s.2 (m) (ii) bars the deduction of debts secured on or incurred in relation to exempted assets mentioned in s . 5 (1) and 5 (2); that s.4 (3) permits the deduction of debts relating to assets, which do not stand in the name of the assessee, but which are nevertheless to be included in the net wealth of the assessee by virtue of the provision in s. 4 (1) ; that s.6 (1) repeats the provision in s. 2 (m) (i) excluding the debts located outside India where corresponding assets are excluded; and according to the Tribunal these provisions indicated a scheme of the Act which suggested that debts which qualified for deduction in computation of the net- wealth were only those which were incurred in relation to the assets declared by the assessee, that is to say, in computing the net-wealth the principle to be adopted was that when any as sets were included the corresponding debts should be allowed but that when such assets were excluded or were liable to be excluded from the net-wealth the corresponding debts should also be excluded. The Tribunal further observed that since i n the case of the two companies it was not disputed on their behalf that the tax demands made by the Investigation Commission were in respect of secret profits which were not disclosed in their books of accounts and since it was also concede d that the assets shown in the balance sheets did not include any assets acquired out of such secret profits the balance of tax demand (Rs. 5, 49, 041 in one case and Rs. 21, 61, 788 in the other case) was not deductible.In the Reference s that were made at the instance of the assessee-companies, the High Court took a contrary view. It over-ruled the Tribunals conclusion that the provisions relied upon by it indicated any scheme leading to the principle that only such debts a s were incurred in relation to the asset declared or disclosed in the books qualified for deduction because the concerned provisions merely dealt with typical situations or special categories of assets and no general pattern or scheme as suggested could be inferred therefrom. The High Court therefore opined that the deductions claimed were allowable in computing the net wealth of the assessee-companies. The revenue has come up in appeals to this Court.

Reasoning: In the first place the analogy of the rule applicable in income-tax cases would be inapplicable in wealth-tax cases inasmuch as in the former case the unexplained cash credit item is regarded as income of the assessee from undisclosed source having accrued to him during the accounting year while in the latter case only the valuation date is relevant on which date the assets (secret pro fits) must be held by the assessee and it will not do that such asset was held by him some time during the concerned year. Secondly, after a lapse of sufficiently long period no presumption can be raised that a secret profit earned some time during the concerned year has continued to be held by the assessee on the valuation date. In the instant case the secret profits admittedly earned by the assessee companies related to assessment years prior to September, 1948 (as proceedings under Taxation on Income (Investigation Commission) Act 1947 could be taken only in respect of assessment years prior to 1.9. 1948) and the tax liability in respect thereof was determined in 1952 but we are concerned with the valuation dates 30.6. 1956 and 31.12.1956 and, therefore, the presumption as suggested by the counsel cannot be drawn against the assessee companies after a lapse of 8 long years. In Annamma Paul Perincherry v. Commissioner of Wealth-Tax, Keral a(1) and Commissioner of Wealth-Tax. Kanpur v. J.K. Jute Mills Co. Ltd(2)., the Kerala High Court as well as the Allahabad High Court have taken a similar view that no such presumption can be raised after a lapse of sufficiently long period and we approve of the said view. In any case, as stated above, the deducibility of the two tax liabilities in question does not depend upon whether the assets, in respect whereof such liability has been determined, are available or not while aggregating the assets of the assessee companies. The contention of the counsel for revenue, therefore, must fail.Coming to the second contention the question is whether the deductions claimed fall within the exclusionary part of sec. 2(m) (iii) of the Act, that is whether the two sums of tax liabilities were outstanding for more than 12 months on the respective valuation dates ? According to counsel the expression "outstanding" means remaining unpaid after becoming due and since the liability to pay income-tax for any assessment year crystalises on the last day of the previous year and becomes payable for that assessment year even before it gets quantified, the two tax liabilities in question which pertained to assessment years prior to 1948, must be regarded as having become due by the last day of the concerned previous years and since these were not cleared soon thereafter these were outstanding since at least 1948 and thus became disallowable. In the alternative counsel urged that if payability is made to depend upon the date of an order passed quantifying the same then at least in 1952 these became payable when the order of the Investigation Commission was passed and more than 12 months had passed since then. Counsel urged that granting of installments under the settlement merely amounted to showing some concessions to the assessee-companies and did not affect the payability in 1952 of the arrears of tax. In our view, there is no force in any of these submissions made by counsel. The aspect that the liability to pay income-tax for any assessment year crystalises on the last day of the previous year and, therefore, becomes payable on the expiry of the last day irrespective of quantification of the dues would be irrelevant having regard to the express language of sec. 2 (m) (iii). Sub-cl.(iii) requires that the tax liability must be one which is "payable in consequence of any order passed" under any law relating to taxation on income or profits, etc. such liability so payable under an order passed must remain "outstanding for a period of more than 12 months on the valuation date." The alternative submission that the tax liabilities in the instant case must be taken to have become payable in 1952 under the Investigation Commissions order and must be regarded as having remained outstanding since 1952 is equally of no avail for the payability of the dues must depend upon the terms of the Commissions order and admittedly a scheme for payment of the dues by installments was provided in the order and each installment would become payable on the date on which it is directed to be paid. In our view, the expression outstanding in sec. 2 (m) (i ii) (a) and (b) will have to be construed in the background of the phrase "amount of tax...... payable in consequence of an order" and in that context it must mean remaining unpaid after the obligation to pay is incurred. We are informed that similar construction has been placed on the expression outstanding occurring in sec. 2 (m) (iii) of the Act by the Calcutta High Court in Commissioner of Wealth-tax, West Bengal III v. Banarshi Prasad Kedia(1) and by the Allahabad High Court in Commissioner of Wealth-Tax, U.P., and Others v. Padampat Singhania(2) and we affirm the same. In the instant case it was an admitted position before the Tribunal that under the scheme of installments sanctioned in the settlements the two sums, in respect where of deductions were claimed, had not become due for payment before the valuation dates. It is therefore, clear that the deductions claimed do not fall within the exclusionary part contained in sec. 2 (m) (iii) of the Act.