Case: Standard Mills Co. Ltd Vs. Commissioner Of Wealth-Tax, Bombay City

1. For the assessment yearthe appellant Company claimed, in proceedings for assessment ofthat the following four amounts be deducted in the computation of its net wealthRs. 29,44,421 in respect ofliability relating to the assessment yearThis amount included Rs. 2,95,869 representing the last instalment of advance tax under S. 18A in respect of which a notice of demand had been issued.(2) Rs. 3, 70,083 in respect of business profits tax liability.(3) Rs. 20,23,500 in respect of proposed dividend.(4) Rs. 25,02,675 on account of accrued liability for gratuity to workmen and staff as per the award of Industrial Court and Labour Appellateclaim was rejected by theOfficer. 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. TheAppellate 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.2. At the instance of the Commissioner, the following four questions were referred to the High Court of Judicature at Bombay under S. 27 (1) of theAct 27 ofWhether on the facts and circumstances of this case the last instalment of advance tax in the sum of Rs. 2,95,869 paid by the assessee after the valuation date in accordance with the notice of demand, dated 20th October 1956 is an admissible deduction under Ss. 7 (2) and 2 (m) of theAct for the purpose of computation of the net wealth of the assessee for the assessment yearWhether on the facts and circumstances of the case in computing the net wealth of the assessee under S. 7 (2) read with S. 2 (m) of theAct the liability forand business profits tax could be allowed as a dedication ?(3) Whether on the facts and circumstances of the case the liability in the sum of Rs. 25,02,675 which arose as a result of the awards, dated 28th October 1948, 28th November 1956 and 17th October 1954 before the valuation date or any part thereof is allowable as a deduction in determining the net wealth of the assessee under S. 7 (2) read with S. 2 (m) of theAct ?(4) Whether on the facts and circumstances of the case the sum of Rs. 20, 23,500 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 assesseethe 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 theOfficer, and in the negative insofar as it related to the estimated liability ofThe 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.

Reasoning: 3. The second question insofar as it relates to estimated liability for payment ofneeds no detailed consideration, for the answer thereto will be governed by the judgment of this Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of(Central), Calcutta, (1966) 59 ITR 767  : (AIR 1966 SC 1370  ). It was held by this Court in that case that liability to paywas a present liability though the tax because 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 contingency liability, and the amount of the provision for payment ofin respect of the veal of account was a "debt owed" within the meaning of S. 2 (m) 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 forcannot, therefore, be sustained and that part of the question should be answered in thespeaking net wealth is the difference on the valuation date between the aggregate value computed in accordance with the provision 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 thee right to obtain gratuity under the awards arises only when there is determination of employment and not before. The liability does not exist in praesenti: it is contingent upon the determination of employment. This Court pointed out in Kesoram Industries and Cotton Mills case,ITR 767 at p. 780 : (AIR 1966 SC 1370   at p. 1377)* * the following definition is unamimously accepted: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 in futuro 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 S. 2 (m) of theAct can be defined as a liability to pay in praesenti or in futuro an ascertainable sum of money.In Commissioner ofGujarat v. New Rajpur Mills Ltd., (1965) 56 ITR 544  : (AIR 1967 Guj 12  ), 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 assessee under S. 7 (2) (a), the liability for payment of gratuity under such agreements would have to be estimated and the estimated value of the contingent liability could 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.9. The alternative plea that under Section 7 (a) (a) of the Act the appellant Company is entitled to claim deduction even if it cannot do so under S. 2 (m) has, in our judgment, no force. Section 7 deals with the manner of valuation of assets. It provides, insofar as it isThe 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 theOfficer it would fetch if sold in the open market on the valuation date.(2) Notwithstanding anything contained in) where the assessee is carrying on a business for which accounts are maintained by him regularly, theOfficer 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 theof such business as on the valuation date and making such adjustments therein as the circumstances of the case may7 falls in Ch. II which deals with the charge ofand 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 and Cotton Mills case,ITR 767 at p. 792: (AIR 1966 SC 1370   at p.ion theOfficer is authorised to estimate, for the purpose of determining the 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 true estimate of the net value of the total assets of the business. The legislature has, therefore, provided in(2) (a) 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 regard to theof such business on the valuation date and make such adjustments therein as the circumstances of the case may require. But the power conferred upon the tax officer by S. 7 (2) is to arrive at a valuation of the assets, and not to arrive it the net wealth of the assessee. Sections 7 (2) 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 value of the assets of the business.(2) (a) of S. 7 contemplates the determination of the net value of the assets having regard to theand after making such adjustments 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 S. 7 (2) 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 S. 7 (2). Counsel was unable to suggest any rational explanation 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 ofmajority of the Court did not express any opinion on this question. From the terms of S. 2 (m) 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 computed in accordance with the provisions of S. 7. But in the aggregation of the value of all the debts owed by the assessee on the valuation date, S. 7 has no operation.10. In holding, in New Rajpur Mills case,ITR 544 : (AIR 1967 Guj 12  ), that a contingent liability can be taken into account while computing the net wealth of the assessee under S. 7 (2) (a), in our judgment, the true function of S. 7 (2) (a) of theAct 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 S. 7 theOfficer 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 business as a whole, and not the net wealth of the business.