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J.K. Cotton Manufacturers Ltd. Vs. Commissioner of Wealth-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberWealth-tax Reference No. 327 of 1964
Judge
Reported in[1971]80ITR34(All)
ActsWealth Tax Act, 1957 - Sections 2
AppellantJ.K. Cotton Manufacturers Ltd.
RespondentCommissioner of Wealth-tax
Appellant AdvocateC.S.P. Singh, Adv.
Respondent AdvocateB.L. Gupta and ;R.R. Misra, Advs.
Excerpt:
- - 1,53,400 represents the amount provided for by the assessee-company in its accounts on the valuation date, for payment of dividends to the shareholders, as recommended by its directors. 11. referring to the provisions of the above sections the tribunal remarked that they clearly indicate that the principle to be adopted in computing the net wealth is that when any assets are included, corresponding debts are to be allowed, and when such assets are liable to be excluded from the net wealth, corresponding debts are also to be excluded. 14. section 6 refers to the assessment of non-citizens and it lays down that in computing the net wealth of such assessee, their assets as well as debts located outside india shall not be taken into account......for payment of income-tax and super-tax in respect of assessments not contemplated on the valuation date, was deductible in computing the net wealth of the assessee ?2. whether, on the facts and in the circumstances of the case, the provision for proposed dividend of rs. 1,53,400 was deductible in computing the net wealth of the assessee ?3. whether, on the facts and in the circumstances of the case, the sum of rs. 5,49,041 being the balance of the demand payable as a result of the findings and orders of the income-tax investigation commissioner was deductible in determining the net wealth of the company?'2. the first two questions may be disposed of at once in view of the decision of the supreme court in the case of kesoram industries and cotton mills ltd. v. commissioner of.....
Judgment:

T.P. Mukerjee, J.

1. The statement of the case in this reference raises the following three questions for our opinion :

'1. Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,01,994, being provision for payment of income-tax and super-tax in respect of assessments not contemplated on the valuation date, was deductible in computing the net wealth of the assessee ?

2. Whether, on the facts and in the circumstances of the case, the provision for proposed dividend of Rs. 1,53,400 was deductible in computing the net wealth of the assessee ?

3. Whether, on the facts and in the circumstances of the case, the sum of Rs. 5,49,041 being the balance of the demand payable as a result of the findings and orders of the Income-tax Investigation Commissioner was deductible in determining the net wealth of the company?'

2. The first two questions may be disposed of at once in view of the decision of the Supreme Court in the case of Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax, [1966] 59 I.T.R. 767; [1966] 2 S.C.R. 688 (S.C.). That decision was pronounced on November 24, 1965, and it was not, evidently, before the Tribunal when it decided the appeal on August 5, 1963, It has been laid down by the Supreme Court that Section 3 of the Income-tax Act, 1922, is the charging section which gives rise to the liability to pay income-tax, although the tax would become payable only after the assessment has been made by the Income-tax Officer after the Finance Act became operative for the relevant assessment year. It has also been held that the liability created by the charging section was a present liability of an ascertainable amount which became a perfected debt, at any rate, on the last day of the accounting year.

3. In the present case, the sum of Rs. 1,01,994 represents the provision made by the assessee in its accounts for payment of income-tax and supertax in respect of pending assessments. There is no case that the provision for tax liability amounting to Rs. 1,01,994 was an over-estimate. The amount, in view of the dictum laid down by the Supreme Court in the above case, is allowable as 'a debt owed by the assessee' within the meaning of Section 2(m) of the Wealth-tax Act, 1957.

4. The Supreme Court also laid down in the same case that the dividend proposed by the directors of a limited company for distribution to its shareholders, before the general body meeting is held, does not give rise to any debt owed by the company to the shareholders and the amount of the proposed dividend is not, therefore, deductible in the computation of the net wealth as defined in Section 2(m) of the Wealth-tax Act. In the instant case, the sum of Rs. 1,53,400 represents the amount provided for by the assessee-company in its accounts on the valuation date, for payment of dividends to the shareholders, as recommended by its directors. It is common ground that the general body meeting for the relevant year was not held on or before the valuation date which is September 30, 1956. The amount of proposed dividend is not, therefore, deductible in computing the net wealth of the assessee.

5. The result is that question No. 1 must be answered in the affirmative and in favour of the assessee, while question No. 2 must be answered in the negative and against the assessee.

6. We are now left with question No. 3. The assessee is a limited company engaged in the manufacture of cotton textiles, etc. As a result of proceedings under the Taxation on Income (Investigation Commission) Act, a sum of Rs. 15,99,041 was determined as payable by the assessee. Out of this a sum of Rs. 10,50,000 had been paid before the valuation date and Rs. 5,49,041 remained outstanding on that date. The assessee claimed that the amount of the outstanding demand should be deducted in the wealth-tax assessment for the year 1957-58. The Wealth-tax Officer disallowed the claim and the Appellate Assistant Commissioner confirmed the disallowance. The view taken by the Appellate Assistant Commissioner was that before a debt can qualify for deduction in the computation of the net wealth, it must have relation to the assets declared by the assessee. As, in the opinion of the Appellate Assistant Commissioner, the tax liability in question was not referable to the assets declared by the assessee, the Income-tax Officer was justified in refusing the deduction claimed.

7. The Tribunal also negatived the claim of the assessee on the same reasoning. It observed that according to the scheme of the Wealth-tax Act, debts which could be allowed in the computation of net wealth were only those debts which were incurred in relation to the assets declared by the assessee. The Tribunal then proceeded to demonstrate what it believed to be the scheme of the Act by referring to Section 2(m), Section 4(3) and Section 6 of the Wealth-tax Act. The provisions of these sections are set out below :

Section 2(m).

''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 other than,--

(i) debts which under Section 6 are not to be taken into account ;

(ii) debts which are secured on, or which have been incurred in relation to, any asset in respect of which wealth-tax is not payable under this Act ; and

(iii) the amount of the tax penalty or interest payable in consequence of any order passed under or in pursuance of this Act or any law relating to taxation of income or profits or the Estate Duty Act, 1953, the Expenditure-tax Act, 1957, or the Gift-tax Act, 1958,--

(a) which is outstanding on the valuation date and is claimed by the assessee in appeal, revision or other proceeding as not being payable by him, or

(b) which, although not claimed by the assessee as not being payable by him, is nevertheless outstanding for a period of more than twelve months on the valuation date.'

8. Section 4(3) runs as follows :

'Where the value of any assets is to be included in the net wealth of an assessee in accordance with Clause (a) of Sub-section (1) there shall be deducted from such value any debts owing on the valuation date by the transferee mentioned in that sub-section in so far as such debts are referable to the assets.'

9. Section 6 runs as follows :

'In computing the net wealth of an individual who is not a citizen of India or of an individual or a Hindu undivided family not resident in India or resident but not ordinarily resident in India, or of a company not resident in India during the year ending on the valuation date--

(i) the value of the assets and debts located outside India ; and (ii) the value of the assets in India represented by any loans or debts owing to the assessee in any case where the interest, if any, payable on such loans or debts is not to be included in the total income of the assessee under Sub-section (3) of Section 4 of the Income-tax Act ; shall not be taken into account.'

10. The rest of the section is not material.

11. Referring to the provisions of the above sections the Tribunal remarked that they clearly indicate that the principle to be adopted in computing the net wealth is that when any assets are included, corresponding debts are to be allowed, and when such assets are liable to be excluded from the net wealth, corresponding debts are also to be excluded. It was not disputed on behalf of the assessee that the demand for tax made by the Investigation Commission was in respect of secreted profits which had not been disclosed in the books of account maintained by the assessee arid it was also conceded that the assets shown in the balance-sheet did not include any assets acquired out of such secreted profits. The Tribunal, therefore, held that the liability of the assessee to pay the tax demand amounting to Rs. 5,49,041 was not allowable as a deduction from the aggregate value of the assets disclosed in the balance-sheet.

12. In our opinion, the conclusion drawn by the Tribunal from the terms of the above sections is fallacious. Section 2(m) does not say that the debts owed by the assessee on the valuation date should be referable to the assets to be entitled to deduction. Had it been the intention of the legislature to allow deduction in respect of only such debts as are related to the assets, one would expect that the terms of Section 2(m) would be otherwise. In that case, another sub-clause would have been added after Sub-clause (ii) of Section 2(m) excluding debts which have not been incurred in relation to any asset in respect of which wealth-tax is chargeable under the Wealth-tax Act. The very fact that there is no such sub-clause appended to Section 2(m) is a clear indication that the legislature never intended that only such debts should be allowed in the computation of the net wealth as are referable to the declared assets.

13. Section 4(3) imposes a vicarious liability on an assessee to wealth-tax in respect of assets belonging to certain connected persons and it lays down that when the value of any such assets is included in the net wealth of an assessee, the debts referable to such assets shall also be allowed. From this, however, it does not necessarily follow that debts which are not referable to any of the assets shall not be allowed in the assessment.

14. Section 6 refers to the assessment of non-citizens and it lays down that in computing the net wealth of such assessee, their assets as well as debts located outside India shall not be taken into account. This section refers to a special class of assessee and special category of assets and debts. It would be illogical to lay down a general proposition applicable to all assessee from the terms of this section. It would be equally illogical to seek to deduce the scheme of the Wealth-tax Act from Section 4(3) which is operative only in specific cases.

15. The amount of income-tax and super-tax, etc., payable on business profits which were originally suppressed, but subsequently disclosed by the assessee and assessed by a statutory authority should be allowed as a deduction being a debt owed by the assessee on the valuation date within the meaning of Section 2(m) of the Wealth-tax Act. The assessee is not required to prove that such profits were used for acquisition of any of the assets of business.

16. The view taken by the Tribunal of the scheme of the Act would lead to absurdities. If an assessee being a limited company, in a certain year, earns an amount of profit and distributes the whole of it to the shareholders by way of dividends, the profit is not referable to the creation of any of the assets of the company. It would be absurd to say that the income-tax payable on such profit is not allowable as a debt of the assessee in the evaluation of the existing assets of the assessee. Again, where an assessee has made an overdrawal from a bank for the purpose of carrying on its day-to-day business, and the overdrawal is not utilised for acquisition of any tangible assets of the business, the overdrawal has, still, to be allowed as a debt owed by the assessee in computing its net wealth. It is sheer misconception of the law to hold that, to be allowable as a deduction, a debt should be relatable or referable to any particular asset or assets declared by the assessee for the purpose of computation of the net wealth. No such principle can be deduced from the decision of the Supreme Court in the case of Kesoram Industries and Cotton Mills Ltd. in which the allowability of debts has been discussed exhaustively nor, as pointed out above, from the definition of the term 'net wealth' in Section 2(m) of the Wealth-tax Act.

17. We are, therefore, of the opinion that the Tribunal committed an' errorof law in taking the view that it did with regard to the sum of Rs. 5,49,041payable by the assessee on the basis of a tax demand made by the Investigation Commission. We would, therefore, answer question No. 3 in theaffirmative and in favour of the assessee. . We make no order as to costs.Counsel's fee is assessed at Rs. 200.


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