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Smt. Radhadevi Mohatta Vs. Commissioner of Wealth-tax, Bombay City-ii - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberWealth-tax Reference No. 9 of 1970
Judge
Reported in[1981]129ITR229(Bom); [1981]5TAXMAN137(Bom)
ActsIncome Tax Act, 1961 - Sections 45; Wealth Tax Act, 1957 - Sections 2(e), 2(m), 3, 7, 7(1) and 27(1)
AppellantSmt. Radhadevi Mohatta
RespondentCommissioner of Wealth-tax, Bombay City-ii
Excerpt:
- - advani, appearing on behalf of the assesse, has fairly brought to our notice two decisions which are against him, but according to the learned counsel, the claim which is made by the assessee for the reduction of a notional capital gains tax can be well supported by the recent decision of the supreme court in cwt v. sikand [1977]107itr922(sc) ,and it is on the basis of this decision as well as the decision of the delhi high court from which the appeal was taken to the supreme court and which is p. 7(1) of the act, which the asset would fetch, if sold in the open market on the valuation date,the value of the burden or restriction had to be deducted and if the assets like shares and securities were sold in the open market, so far as the assesssee was concerned, he would receive only.....chandurkar, j.1. the question which has been referred to this court under s. 27 (1) of the w. t. act, 1957 (hereinafter referred to as 'the act') at the instance of the assessee is as follows :'whether, on the facts and in the circumstances of the case, the tribunal was right in not taking into account the non-existent tax on notional capital gains which might have arisen if the shares and debentures had been sold on the valuation date at the market price, in determining the value of the shares and debentures as at the valuation date in terms of section 7(1) of the wealth-tax act, 1957 ?'2. in the course of assessment to wealth-tax the shares and debentures owned by the assessee were valued by the assessee herself at rs. 10,19,527. that value was accepted by the wto. however, it was the.....
Judgment:

Chandurkar, J.

1. The question which has been referred to this court under s. 27 (1) of the W. T. Act, 1957 (hereinafter referred to as 'the Act') at the instance of the assessee is as follows :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in not taking into account the non-existent tax on notional capital gains which might have arisen if the shares and debentures had been sold on the valuation date at the market price, in determining the value of the shares and debentures as at the valuation date in terms of section 7(1) of the Wealth-tax ACt, 1957 ?'

2. In the course of assessment to wealth-tax the shares and debentures owned by the assessee were valued by the assessee herself at Rs. 10,19,527. That value was accepted by the WTO. However, it was the claim of the assessee before the WTO that the value of the shares was the market value which was more than the cost price of the shares and, therefore, since the market value was the notional wealth, a notional tax liability in the form of capital gains tax should be taken into account while valuing the net wealth of the assessee. The asseessee's case was that on the basis of the market value of the shares and debentures, the capital gains tax liability would be about Rs. 80,200 and that this amount must be deducted while computing the net wealth of the assessee. Needless to say that this contention was rejected by the WTO as also by the AAC before whom it was raised in the appeal filed against the order of the WTO.

3. The assessee had appealed against his assessment to the Appellate Tribunal and dealing with the claim for deduction of the notional capital gains, the Tribunal took the view that though by taking the market value, there was a notional capital gain, the notional capital gain cannot be said to chargeable to any tax. The appeal filed by the assessee, therefore, came to be rejected. That is how the question reproduced earlier has been referred to this court.

4. Shri H. G. Advani, appearing on behalf of the assesse, has fairly brought to our notice two decisions which are against him, but according to the learned counsel, the claim which is made by the assessee for the reduction of a notional capital gains tax can be well supported by the recent decision of the Supreme Court in CWT v. P. N. Sikand : [1977]107ITR922(SC) , and it is on the basis of this decision as well as the decision of the Delhi High Court from which the appeal was taken to the Supreme Court and which is P. N. Sikand v. CWT : [1974]96ITR424(Delhi) , that an elaborate argument was advanced by the learned counsel for the assessee which requires some consideration.

5. Before we consider the arguments of the learned counsel for the assessee in detail, we may point out that question, which is posed before us for consideration and which has been now argued, was debated in the Madras High Court and in the Allahabad High Court. The decision of the Madras High Court is Late T. S. Srinivasa Iyer v. CWT : [1976]104ITR625(Mad) . Before the Madras High Court it was contended that if under the provisions of s. 7(1) of the ACt the assets have to be revalued at the price which they would fetch if sold in the open market on the valuation date, the capital gains tax payable on such valuation should be reduced from the total value in ascertaining the net wealth. The Madras High Court took the view that in arriving at the net wealth of the assessee, any notional capital gains tax which may be payable by the assessee in the event of the assets being sold in the open market on the valuation date is not an allowable deduction from the value of the property for the purposes of s. 7. It was held that the hypothetical expenditure in relation to the hypothetical sale could not deducted from the market value of the asset determined under s. 7(1) of the Act. In reaching this conclusion, the Madras High Court relied on the decision of the Supreme Court in Pandit Lakshmi Kant Jha v. CWT : [1973]90ITR97(SC) . The Madras High Court also observed in that case that s. 7 of the ACt must be understood as referring to the gross price which the purchaser would have paid if the assets were sold in the open market and not even the hypothetical expenditure in relation to that sale were deductible.

6. The decision of the Allahabad High Court in Bharat Hari Singhania v. CWT : [1979]119ITR258(All) . It may be pointed out that this decision of the Allahabad High Court was delivered after a consideration of the decision of the Supreme Court in Sikand's case : [1977]107ITR922(SC) . The question which was referred to the Allahabad High Court by the Tribunal arose out of the valuation of certain unquoted shares held by the assessee which the WTO valued in terms of r. 1D of the W. T. Rules. The WTO had rejected the submission of the assessee that while computing the net wealth on the valuation date, the estimated amount of capital gains tax which would be payable by him in the event of the sale of these shares should be rejected. The Allahabad High Court was, therefore, called upon to deal with the question as to whether the asssessed was entitled to a deduction of the estimated amount of capital gains. The Allahabad High Court held that Sikand's case : [1977]107ITR922(SC) was distinguishable on facts. The High Court also negatived the claim of the assessee that the estimated amount of capital gains should be treated as 'debt owed' within the meaning of s. 2(m) of the ACt and observed that the word 'debt' as used in s. 2(m) referred to debts actually and really owned by the assessee and did not extend to notional debts. Consequently, the High Court took the view that the estimated amount of capital gains tax notionally liable to be paid was not to be deducted from the value of the unquoted shares which they would fetch at an open sale in order to compute their value as assets.

7. In the course of arguments advanced by the learned counsel for the assessee, the correctness of the view taken by the Madras and the Allahabad High Courts, was put in issue because, according to the learned counsel, it was clear from the decision of the Supreme Court in Sikand's case : [1977]107ITR922(SC) , that in estimating the price under s. 7(1) of the Act, which the asset would fetch, if sold in the open market on the valuation date,the value of the burden or restriction had to be deducted and if the assets like shares and securities were sold in the open market, so far as the assesssee was concerned, he would receive only whatever remained after payment of capital gains tax and, therefore, the total value as determined under s. 7 minus the hypothetical or notional liability of capital gains tax would alone represent the net worth of the assets to the assessee. In other words, the contention is that the liability to pay capital gains tax must be treated as a burden on the asset or, in any case, it should be treated, as a diversion at the source and consequently was deductible from the value of the assets determined under s. 7(1). As already pointed out, the foundation of this argument, according to the learned counsel, is the ratio of the decision of the Superme Court in Sikand's case : [1977]107ITR922(SC) .

8. Shri Advani has also alternatively claimed that the notional liability to capital gains must be treated as a debt owed within the meaning of net wealth as defined in s. 2(m) of the Act and as elaborated in the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT : [1966]59ITR767(SC) . According to the learned counsel, the claim for deduction of the notinal capital gains tax could be supported on both grounds stated above, though in the course of the arguments Shri Advani had submitted that the claim could more properly be made under s. 2(m) of the Act.

9. According to Shri Advani, the liability to pay capital gains tax was an obligation which had to be taken into account by the revenue for the purposes of assessment of the net wealth and our attention was invited to the decision of the Supreme Court in Sudhir Chandra Nawn v. WTO : [1968]69ITR897(SC) . That was a decision in which the validity of the W. T. ACt was challenged and while dealing with the nature of the tax, the Supreme Court has observed as follows (p. 900) :

'It is a tax imposed on the capital value of the assets of individuals and companies, on the valuation date. The tax is not imposed on the components of the assets of the assessee : it is imposed on the total assets which the assessee owns, and in determining the net wealth not only the encumbrances specifically charged against any item of asset, but the general liability of the assessee to pay his debts and to discharge his lawful obligations have to betaken into account.'

10. The contention advanced before us by the learned counsel was that the Supreme Court has pointed out that the net wealth can be determined only after taking into account the liability of the assessee to discharge his lawful obligations and the liability to pay capital gains tax being a lawful obligation, that must be taken into account for the purposes of determination of net wealth.

11. We shall first consider the argument of the learned counsel based on the decision in Sikand's case : [1977]107ITR922(SC) . Before we

refer to Sikand's case, it is necessary to refer to the provisions of s. 7(1), which read as follows;

'Subject to any rules made in this behalf, the value of any assets, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valution date.'

12. It is not in dispute that in order to determine the value of the asset, the price which the asset would fetch, if it is sold in the open market on the valuation date, has to be found out. As pointed out by this court in CWT v. Purshottam N. Amersey : [1969]71ITR180(Bom) , s. 7 deals with the mode in which the value of the assets has to be determined. This court has also pointed out in that case that the words 'if sold in the open market' in s. 7(1) do not contemplate any actual sale or the actual state of the market but they only enjoin that it should be assumed that there is an open market and the property can be sold in such a market and, on that basis, the value should be found out. It was pointed out that s. 7(1) contemplates that there is an open market in which the asset can be sold and the WTO can proceed to evaluate on that basis. The words 'if sold' create a fictional position which the WTO has to assume. The Supreme Court has approved of the view taken by this court in Purshottam N. Amersey's case : [1969]71ITR180(Bom) in Ahmed G. H. Ariff v. CWT : [1970]76ITR471(SC) , where the observations quoted above were expressely approved. Later,referring to the decision of the Supreme Court in Ahmed G.H. Ariff's case : [1970]76ITR471(SC) , the appeal filed by the assessee from the decision in Purshottam N. Amersey case : [1969]71ITR180(Bom) also came to be dismissed. This decision of the Supreme Court is Purshottam N. Amarsay v. CWT : [1973]88ITR417(SC) .

13. Therefore, a hypothetical sale has to be assumed and the price which the asset would fetch at such a hypothetical sale is taken to be the price or the value of the asset under s. 7(1). At this stage, we may also refer to the provisions of s. 2(m) with which we will have to deal later when dealing with the alternative contention advanced by the learned counsel for the assessee. The material part of the definition of 'net wealth' in s. 2(m) reads as follows :

''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 this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date.....'

14. The definition of net wealth refers to the aggregate value of all the assets computed in accordance with the provisions of the Act. The relevant provision for the purposes of the present case is in s. 7(1) of the Act. We may incidentally point out that s. 2(e) of the Act defines' assets' as including property of every description, movable or immovable, with certain exceptions with which we are not immediately concerned.

15. Now, the charging provision in the ACt is in s. 3. Section 3 provides that subject to the other provisions contained in the Act, there shall be charged for every assessment year commencing on and from 1st day of April 1957, a tax in respect of the net wealth on the corresponding valuation date of every individual, HUF and company at the rate specified in Sch. I. Wealth-tax is, therefore, charged on the net wealth of the assessee on the corresponding valuation date and, as pointed out, net wealth has to be computed by determining the value of the assets in accordance with the provisions of the Act and deducting from the aggregate value of the assets the aggregate value of debts owed by the assessee.

16. The question which falls for consideration on the argument of the learned counsel, is whether when s. 7 requires the value of an asset, determined by finding out the price which it will fetch if sold in the market, to be taken into account, then whether any deduction therefrom is permissible for determining the net wealth of the assessee and whether it is permissible for the assessee to claim, in so far as the present case is concerned, that if the shares had to be treated as having been sold in the open market, then the assessee must he held to have incurred a notional liability to pay capital gains tax and this should be allowed to be deducted from the value for the purposes of computation of net wealth.

17. The observations of the Supreme Court in Sudhir Chandra Nawn's case : [1968]69ITR897(SC) are not of much assistance to the assessee on the facts of the present case. It is no doubt true that the Supreme Court has observed therein that while determining the net wealth of the assessee, the general liability of the assessee to pay his debts and to discharge his lawful obligations has to be taken into account. While it cannot be disputed that the obligation to pay capital gains tax, when it arises, is a lawful obligation, in so far as the present case is concerned, such an obligation has not arisen at all, but what is urged is that there is a notinal obligation. Therefore, unless it is possible for the assessee to show that the value of such a notional obligation was deductible from the value of the asset as determined under s. 7(1), it would not be possible to accept the claim of the assessee that the value of the asset as determined according to the provisions of s. 7(1) should not be taken as the value for the purpose of computation of net wealth.

18. Since the argument that a notional amount of capital gains tax should be deducted from the value determined in accordance with s. 7(1) is founded on the decision of the Supreme Court in Sikand's case : [1977]107ITR922(SC) , we must first consider the exact ratio of the decision in Sikand's case. It will, however, be advantageous to first refer to the decision of the Delhi High Court from which decision the appeal was taken to the Supreme Court. The property assessable to wealth-tax in that case consisted of a leasehold interest in the land together with the building upon it. The land belonged to the President of India. Under the agreement of lease, the lessee could not part with her interest in the land without the sanction of the Chief Commissioner of Delhi and upon transfer of her interest with such sanction, the lessor (the President of India) was entitled to recover at the time of transfer 50% of the unearned increase in the value of the land, that is, the difference between the premium already paid and the current market value. The premium for the grant of the lease was Rs. 24,400. The lessor had also a pre-emptive right to the property of deducting 50% of the unearned increase as aforesaid. The assessee had contracted a large building on the land and in the wealth-tax assessment, though the value of the property on the basis of annual rent came to Rs. 8,29,560, the WTO reduced the value of the property to Rs. 6 Lakhs since that was the figure accepted by the revenue in the earlier assessments. The contention of the assessee before the wealth-tax authorities was that the fact that the assessee might have to pay 50% of the unearned increase to the lessor should be taken into account for the valuation of the property under s. 7 of the Act, but the wealth-tax authorities and the Tribunal took the view that this did not affect the valuation of the property under s. 7 of the Act.

19. Therefore, the question as to whether 50% of the unearned increase payable to the lessor of the land formed part of and was not deductible out of the valuation of the property for the purposes of the W. T. Act came to be referred to the High Court

20. The Delhi High Court took the view that the lessor had a right to recover 50% of the unearned increase in the value of the property when granting his consent without which the sale could not take place and that the lessor's entitlement to the 50% of the unearned increase was a condition precedent without which the sale could not be completed. The High Court also referred to an overriding right of pre-emption which vested in the lessor and to a further condition with regard to the forfeiture of the lease if any condition was breached. The High Court thus held that there was a restriction or limitation attached to the rights of the assessee and that restriction or limitation determined the nature and character of the property which is to be valued for the purpose of levying wealth-tax. Referring to the obligation to pay 50% of the unearned increase to the lessor, which was rejected by the wealth-tax authorities, the Delhi High Court observed (p. 431) of 96 ITR 424 :

'... in disregarding this obligation of the assessee on the plea, that it was not relevant for the purpose of valuation, amounted to estimating the value of a property difference from the one which was the subject of assessment. For the purpose of making a correct estimate of the price, which the property would fetch if sold in the open market, both advantages and disadvantages have to considered.'

21. Thus, after taking the view that the nature and character of the property has to be considered for the purpose of determining the value under s. 7(1), the Delhi High Court further went on to consider the claim as to whether the 50% of the unearned increase could be deducted under s. 2(m) of the ACt and the High Court further observed as follows (p. 431) :

'The hypothetical sale cannot be assumed unless we also assume that the consent of the lessor has been obtained. This consent under the terms of the lease was not be be granted without entitling the lessor to recover 50% of the unearned increase in the value of the land at the time of transfer. If we have to assume a sale, as indeed we have to, then there is no escape from assuming the existence of this liability to the extent of 50% of the said unearned increase in the value of land as well. This would, therefore, be a debt owed by the assessee on the valuation date. In order to ascertain the amount by which the aggregate value of the assets on the valuation date is in excess of the aggregate value of the debts owed by the assessee on that date, which would be 'net wealth', as defined in section 2(m), this 50% of the unearned increase has to be deducted as debt owed by the assessee on the valuation date out of the value which has been determined without considering this condition as an important limitation attached to the property.'

22. Thus, the Delhi High Court took the view that the assessee was entitled to deduct from the valuation of the asset the 50% of the unearned increase on either of the two grounds, viz., (1) that there was a restriction attached to the property affecting its value, or (2) the amount payable to the lessor was a debt owed by the assessee on the valuation date. This will clear from the following observations in the judgment (p. 431) :

'In short, this 50% of the unearned increase in the value of land payable to the lessor, has to be deducted from the valuation whether it is taken as a limitation or restriction attached to the property in question, affecting its value to that extent or as a debt owed by the assessee on the valuation date.'

23. It is not seriously in dispute that when the matter went in appeal to the Supreme Court, the question as to whether the 50% of the unearned increase was 'debt owed' for the purpose of s. 2(m) of the ACt was not considered by the Supreme Court.

24. If we now carefully consider the decision of the Supreme Court, it is clear from that decision that the assessee was held entitled to deduction of 50% of the unearned increase on the ground that the burden or disadvantage in the form of liability to pay 50% of the unearned increase to the lessor could not be ignored because that determined the content and the quality of the interest which was owned by the assessee. The covenant requiring 50% of the unearned increase in the value of land was held to be a covenant running with the land and, therefore, binding on whosoever was the holder of the leasehold interest for the time being. This covenant, the Supreme Court held, had plainly and undisputably the effect of depressing the value which the leasehold interest would fetch if it were free from this burden or disadvantage. What is important to note is that the liability to pay 50% of the unearned increase to the lessor was considered as quantitatively and qualitatively affecting the nature of the interest of the lessor. Posing the question as to what would be price which the asset would fetch if sold in the open market on the valuation date, the Supreme Court observed that this question could not be satisfactorily answered unless the nature of the asset was first determined, that is, 'what is the interest in property, qualitative as well as quantitative, which this asset represent ?'

25. In that context, the Supreme Court pointed out as follows (p. 928 of 107 ITR) :

'Therefore, when the leasehold interest in the land has to be valued, this burden or disadvantage attaching to the leasehold interest must be duly discounted in estimating the price which the leasehold interest would fetch. To value the leasehold interest on the basis that this burden or disadvantage were to be ignored would be to value an asset different in content and quality from that actually owned by the assessee.'

26. Analysing the effect of the right to 50% of the unearned increase in favour of the lessor, it was pointed out that what vested in the lessor was not merely the reversion but in addition to that, there was something more and that this something would necessarily be subtracted from the interest of the lessee and to that extent, the interest of the lessee would stand reduced. Thus the Supreme Court took the view that what goes to augment the interest of the lessor would correspondingly reduce the interest of the lessee and it could not be taxed as the wealth of both the lessor and the lessee. Consequently holding that the leasehold interst is cut down by the burden or restriction and some right or interest is subtracted from it, the Supreme Court pointed out that the problem of valuation became a difficult one and some method has to be evolved for resolving it. The only way it could be done, according to the Supreme Court, was by taking the market value of the leasehold interest as it were, unencumbered or unaffected by the burden or restriction, and deducting from it 50% of the unearned increase in the value of the land on the basis of the hypothetical sale as representing the value of such burden or restriction. The additional ground on which this conclusion was supported, according to the Supreme Court, was that 50% of the unearned increase in the value of the land would be diverted to the lessor before it reaches the hands of the assessee as part of the price because 50% of the unearned increase belonged to the lessor and it could not be treated as a part of the wealth of the assessee.

27. It is, therefore, clear from the decision of the Supreme Court that while determining the nature of the leasehold interest as an asset, the value of which was to be ascertained under s. 7(1), the view taken by the Supreme Court was that the leasehold interest in its entirety could not be held to be the asset which was to be valued as belonging to the assessee. What belonged to the assessee was held to be the entire leasehold interest minus 50% of the unearned increase and that alone could, therefore, be taken into account as a part of the net wealth of the assessee.

28. Drawing an analogy from the facts on which the decision of the Supreme Court was based in Sikand's case : [1977]107ITR922(SC) , the learned counsel for the assessee contended before us that when the assets, the shares and the debentures in the present case were being valued under s. 7(1) of the Act and if what belonged to the assessee was really the material factor to be considered, the liability to pay capital gains tax was a burden which had to be taken into account and, therefore, the amount of capital gains tax was liable to be deducted from the value determined under 7(1).

29. It is not possible for us to accept this contention. As pointed out in the Supreme Court decision in Sikand's case : [1977]107ITR922(SC) , the ownership of the interest of the assessee in the leasehold rights was first ascertained. In ascertaining that, the liability created by the covenant to pay 50% of the unearned increase to the lessor was taken into consideration and it was held that this 50% of the unearned increase really never belonged to the assessee. If, as held by the Supreme Court, this amount never belonged to the assessee, it could never be treated as a part of his wealth. The notional liability of capital gains tax determined on the basis of the value of the shares does not in the least go to affect the interest or ownership rights of the assessee in the shares and debentures absolutely held by the assessee. There is no comparison between the nature of the obligation of the lessee in Sikand's case : [1977]107ITR922(SC) and in the liability of an assessee to pay tax on income though the tax is paid out of the income. The liability to pay capital gains tax is liability which accrues on the sale of these shares. It was no doubt true that in case the shares were sold, the amount of capital gains is fictionally deemed to be the income of the assesse under s. 45 of the I. T. Act. But the entire value of the asset sold belongs to him absolutely and the obligation to pay tax is to be discharged only when the entire value received is first treated as his income. The liability to pay tax cannot be described as an overriding charge. The concept of the overriding charge and application of income is fully explained by the Supreme Court in the decision in CIT v. Sitaldas Tirathdas : [1961]41ITR367(SC) , which has been referred to by the Supreme Court in Sikand's case : [1977]107ITR922(SC) . In Sitaldas's case the Supreme Court has pointed out that in order to decide whether there is a diversion by overriding title, the nature of the obligation is material. The following observations of the Supreme Court in Sitaldas's case : [1961]41ITR367(SC) may be quoted (headnote) :

'Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where, by the obligation, income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable,'

30. Thus, in Sikand's case : [1977]107ITR922(SC) the 50% of the unearned increase in the value was held to fall in that kind of obligation the nature of which was such that it could not be treated as part of the income of the assssee.

31. Now, when capital gains tax is assessable on the footing that capital gain is deemed to be the income of the assessee, the amount, which represents the liability to pay tax, is really paid out of the income and it is, therefore, really an application of the income in order to discharge a certain obligation. The obligation to pay tax is discharged after the income reaches the hands of the assessee and the amount of capital gains tax cannot, therefore, be said to be an amount which is collected on behalf of the revenue by the assessee. Therefore, the decision of the Supreme Court in Sikand's case : [1977]107ITR922(SC) cannot be of any avail to the assessee because the very nature of the liability in that case does not stand comparison with the nature of the liability to pay capital gains tax.

32. Possibly realising this infirmity in the argument, the learned counsel contended that more appropriately, the amount of capital gains should be treated as 'debt owed'. Mr. Advani has fairly not disputed that the liability cannot be said to be a present liability. What was, however, argued was that if for the purposes of s. 7(1) there is a fictional sale and as all the material facts necessary for giving effect to the fiction must be assumed, the fictional liability to pay capital gains tax must also be taken into account while construing the words 'debt owed'.

33. As already pointed out, in Kesoram Industries' case : [1966]59ITR767(SC) , the concept of debt owed has been fully explained after a review of several English and Indian authorities in the following words at page 784 :

'To summarize : A debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in praesenti or in futuro : debitum in praesenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened. A liability to pay income-tax is a present liability though it becomes payable after it is quantified in accordance with ascertainable data. There is a perfected debt at any rate on the last day of the accounting year and not a contingent liability. The rate is always easily ascertainable. If the Finance ACt is passed, it is the rate fixed by that Act; if the Finance Act has not yet been passed, it is the rate proposed in the Finance Bill pending before Parliament or the rate in force in the preceding year, whichever is more favourable to the assessee. All the ingredients of a 'debt' are present. It is a present liability of an ascertainable amount.'

34. It was held in Kesoram Industries' case : [1966]59ITR767(SC) , that the amount of provision for payment of income-tax and super-tax in respect of the year of account was a debt owed within the meaning of s. 2(m) on the valuation date with reference to that year of account and as such deductible in computing the net wealth.

35. Shri Advani has vehemently contended that the liability to pay wealth-tax is attracted on the determination of the appreciated market value of the shares and the fact that such capital gains tax may be paid in future will not take it out of the concept of debt owed. Shri Advani did not dispute that unless the fiction was so extended as to create the liability of payment of capital gains and thus a fictional amount of capital gains was determined, the deduction would not be permissible under s. 2(m). It is, therefore, necessary to consider whether such a fictional liability can be included within the meaning of the words 'debt owed' and whether there is any scope for such deduction having regard to the manner in which net wealth has been defined.

36. We have referred earlier to the definition of net wealth which is substantially in two parts. It first requires the ascertainment of the aggregate value of the assets in accordance with the provisions of the Act and then it provides for determination of the aggregate value of all debts owed by the assessee. Net wealth is thus the excess of the agregate value of the asset over the agregate value of all debts owed. Now, so far as the first part of the definition of net wealth is concerned, when it contemplates that the value of the assets is to be determined in accordance with the provisions of the Act, and the relevant provision in the instant case is s. 7(1), then for the purposes of the first part of the definition whatever may be the appreciated value of the shares and the debentures or for the matter of that, any asset, that alone will have to be taken into consideration. Having regard to the view which we have taken on the nature of the valuation under s. 7(1), the market value of the shares and the debentures in the instant case will alone have to be taken into consideration. Now, it is no doubt true that such a value is determined after assuming certain facts, namely, a hypothetical sale and the assets being sold in the open market on the valuation date when in fact there may be no sale at all, but we cannot lose sight of the fact that s. 2(m) provides for the manner of determination of net wealth and what can be subtracted from the aggregate value of the assets is the aggregate value of only the debts owed. The definition of net wealth by itself does not import nor does it permit any fiction to be imported in the concept of debt owed. On the contrary, the words 'debt owed' on the valuation date contemplate actual debts owed or debts owed factually in the sense that there is a present liability which has accrued. Crelarly, the fictional liability to capital gains tax on the basis of the value of the assets determined on the basis of the value of the asserts determined on the basis of a hypothetical sale is in no sense of the term a present liability and no such liability can be sid to have ever accrued.

37. The argument that the fiction must be carried to its full length and given a full effect is also not of much assistance to the assessee in this case because the fiction is created only for the purposes of s. 7. The principle that the friction must be carried to its full length and must be given its full effect can hardly be disputed, but the extent to which the fiction can be carried on it can be given effect to is limited by the purpose for which the fiction has been created. The fiction which is created is to be found in s. 7(1) of the ACt. The purpose of s. 7(1) is to determine the value of the property for the purposes of the Act in the manner provided by the Act. It is no doubt true that for the operation of the fiction created by s. 7,all conditions necessary for the operation of that fiction will also have to be assumed. But then this fiction cannot be carried beyond the purpose for which it is intended, namely, the determination of the valuation. If the fiction is created only for that limited purpose, it will not be permissible for us to extend the fiction any further and assume some fictional liability which is wholly immaterial for the purpose of the provisions of s. 7(1). The facts which are to be assumed if the fiction contemplated by s. 7(1) is to operate are, firstly, that there is an open market and, secondly, that the shares and the debentures can be sold, which will imply that there are willing buyers for such an asset. In so far as the present case is concerned, we fail to see what scope there can be for carrying the fiction beyond this.

38. There is an inherent limitation in the definition of net wealth when it come s to finding out what can be deducted from the aggregate value of the assets. That limitation is contained in the words 'debt owed' and if, as is not disputed before us, and indeed very fairly so, a fictional liability cannot be said to be 'debt owed' or a liability which has accrued in preasenti, it will not be permissible to include a fictional liability to capital gains within the meaning of the words 'debt owed'.

39. It is no doubt true that the decision of the Delhi High Court in Sikand's case : [1974]96ITR424(Delhi) , has alternatively permitted the deduction of 50% of the unearned increase as a debt owed, but that part of the decision does not seem to have been expressly approved or disapproved by the Supreme Court. But we fail to see how that part of the decision can be of any assistance to the assessee. The Supreme Court has in its decision, while dealing with the second ground on which it has come to the conclusion that 50% of the unearned increase has to be excluded, has positively referred to the fact that the amount is being collected on behalf of the lessor. The view of the Delhi High Court that deduction of 50% of the unearned increase would be permissible as 'debt owed' would thus be contrary to the view taken by the Supreme Court that 50% of the increase was being collected on behalf of the lessor. In view of the decision of the Supreme Court, the view of the Delhi High Court that 50% of the unearned increase could be deducted as debt owed cannot now be relied upon by the assessee.

40. Having thus considered the arguments advanced on behalf of the assessee in this case, it is possible for us to take the view which is canvassed before us, which according to the learned counsel, was also supported bny certain observations by the learned author, Shri Sampath Iyengar, in his latest commentary on The The Three New Taxes [1979], 5th Edn, p. 462.

41. We are, therefore, of the view that the question referred to us has to be answered in the affirmative and against the assessee. The question is accordingly answered in the affirmative and against the assessee. In the circumstances of the case, there will be no order as to costs.


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