1. Income-tax Appellate Tribunal, Indore Bench, has referred under Section 27(1) of the W.T. Act some questions for our opinion.
2. Before reproducing the questions, we may briefly narrate the material facts. The assessee, M/s. Gwalior Rayon Silk Mfg. (Wvg.) Company Ltd., Nagda, is a public limited company. Relevant assessment years are 1958-59 and 1959-60 for which valuation dates were 31st March, 1958, and 31st March, 1959, respectively. The assessee-company had claimed deduction of depreciation from the gross value of its fixed assets. It was contended that deduction of additional and initial depreciation on the fixed assets as allowed under the I.T. Act should be allowed for computing the taxable net wealth of the assessee also. It was not disputed that the deduction of normal depreciation from the value of fixed assets had been allowed by the AAC. For the revenue, the contention was that the assessee was not entitled to the deduction of normal depreciation as is allowed under the I.T. Rules, but such deduction could be allowed only on the basis of depreciation actually provided by it in its books of account.
3. Following the decision of the Madhya Pradesh High Court in MCC No. 309/1968 decided on 12-9-1974 (CWT v. Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. : 131ITR148(MP) ) in respect of this very assessee, the Tribunal rejected the objections raised by the assessee as well as the revenue and confirmed deduction of normal depreciation from the value of the fixed assets.
4. The assessee had claimed deduction of arrears of dividend on cumulative preference shares amounting to Rs. 54,79,375 for assessment year 1958-59 and Rs. 49,22,434 for assessment year 1959-60. It was contended on behalf of the assessee before the Tribunal and also before the AAC that the preference shares being cumulative, the dividend at 6% per annum was payable by the assessee-company on the said shares whetherprofits were earned or not and hence the arrears of dividend on preference shares should be held to be deductible for arriving at the taxable net wealth of the assessee-company. The contention was rejected by the Appellate Tribunal on the basis of the decision of the Madras High Court in Kothari Textiles Ltd. v. CWT : 48ITR816(Mad) .
5. For the assessment year 1959-60, one more contention has been raised by the assessee. It was claimed that the assessee was entitled to a deduction of Rs. 6,32,832 for the purpose of working out the taxable wealth of the assessee-company. This claim represented the amount of managing agency commission short provided in the balance-sheet and claimed as deduction in the wealth-tax return filed before the WTO. This amount comprised of additional managing agency commission at 2.5%. It was contended by the assessee before the WTO and the AAC that this amount had not been shown in the balance-sheet of the relevant previous year because the approval of the Government on the proposal by the company for increasing the managing agency commission was received on July 11, 1959. However, it was operative with effect from April 1, 1957, and, therefore, irrespective of the fact that this amount was not shown in the balance-sheet, the company owed it as a debt in the assessment year in question and the same was liable to be deducted.
6. The WTO and the AAC rejected this contention, but the Appellate Tribunal accepted the claim advanced by the assessee and allowed the deduction as a debt.
7. The following questions at the instance of the assessee as well as the department have been referred to us for opinion :
(1) Question of the assessee :
'Whether, on the facts and in the circumstances of the case, for purposes of arriving at the value of assets the Tribunal was justified in not giving allowance in respect of initial and additional depreciation of the A. Ys. 1958-59 and 1959-60 ' (2) Question of the Commissioner of Wealth-tax:
'Whether, on the facts and in the circumstances of the case, for the purpose of arriving at the value of assets Under Section 7(2) of Wealth-tax Act, the Appellate Tribunal was justified in giving directions to allow depreciation as per income-tax records for the A. Ys. 1958-59 and 1959-60 when the actual amount written off in the books was less ' (3) Question of the assessee :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not allowing deduction of Rs. 54,79,375 and Rs. 49,22,443 from the total value of the assets in the wealth-tax A. Ys. 1958-59 and 1959-60, respectively, being the arrears of dividend on preference shares ' (4) Question of the Commissioner : 'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the additional managing agency commission for which the sanction of the Central Government as required Under Section 329 of the Companies Act, 1956, and was allowable as a deduction for determining the taxable wealth of the assessee-company irrespective of the fact that no provision for such liability was made in the books of account '
8. Questions Nos. 1 & 2 were answered by this court in MCC No. 309/1968 decided on 12-9-1974--CWT v. Gwalior Rayon Silk Mfg.(Wvg.) Co. Ltd. (See page 148 infra). Following the above decision, we answer question No. 1 in the affirmative and in favour of the revenue. Question No. 2 is answered in the affirmative and in favour of the assessee.
9. The claim out of which question No. 3 arose is based on the facts which have been briefly narrated in para. 4 of this Order. (See at p. 142 supra). In its balance-sheet, the assessee-company had shown a sum of Rs. 54,79,375 under the head :
' Contingent liability not provided for: [Arrears of dividends on cumulative preference shares for the years 1951 to 1957-58].'
10. Similar provision was made for the subsequent year and a sum of Rs. 49,22,434 had been shown under the same head in the balance-sheet.
11. The contention on behalf of the assessee was that these were cumulative preference shares and the company was bound to pay dividend at 6% per annum irrespective of the fact whether profits were earned or not. This, according to the learned counsel for the assessee, was a liability which amounted to a debt deductible from the assets for computing the net wealth of the company.
12. Section 85 of the Companies Act refers to ' preference share capital'. It is as under:
''Preference share capital means, with reference to any company limited by shares, whether formed before or after the commencement of this Act, that part of the share capital of the company which fulfils both the following requirements, namely:-- (a) that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate, which may be either free of or subject to income-tax; and...... '
13. In Palmer's Company Law, 21st Edn., p. 293, the following observations are important:
' No absolute right to dividend
Preference shares invariably carry a preferential right as to dividend which is expressed as a percentage of the nominal amount of the share, e.g., ' 7 per cent. preference shares '.
This does not mean that the preference shareholder is invariably entitled to 7 per cent. per annum. Unlike the debenture holder, the preference shareholder, who, after all, is a shareholder, is only entitled to income from his investment if a distributable profit within the meaning of the law is available. His right is not to dividend but to preferential treatment if and when a dividend is distributed. '
14. At p. 294, the author refers to cumulative dividend rights. The observations are :
' Cumulative dividend rights
Prima facie where the clause defining the preferential rights declares that the preference shares are to be entitled to a preferential dividend at a specified rate per cent., the dividend is cumulative, but for clearness the word 'cumulative' is sometimes inserted in the definition of rights, e.g. ' a fixed cumulative preferential dividend of 7 per cent. per annum'.'
15. Quoting certain English decisions, the author goes on to note :
' If it is plain that a preferential dividend is to come only out of the profits of a particular year, the court will give effect to the intention though imperfectly expressed.'
16. This being the legal position, the Tribunal was fully justified in repelling the contention of the assessee and holding that there was no such statutory liability on the assessee-company to pay dividends compulsorily on cumulative preference shares and the same was not a 'debt owed' within the ambit of Section 2(m) of the W.T. Act.
17. Learned counsel alternatively raised an entirely new contention before us. He submitted that the assessee-company had declared that dividends on preference shares will be paid irrespective of the fact whether profits were earned or not. There is no foundation for this argument in the statement of the case nor any material was placed before us to support it. If such a condition had been introduced by the assessee-company in its articles of association, the same should have been placed before the authorities below. We will, therefore, not consider such a hypothetical argument.
18. It is thus clear that dividends on preference shares which had been shown in the balance-sheet under the head 'Contingent liability not provided for' were not deductible from the assets as this liability had not become a debt. In Kothari Textiles Ltd, v. CWT : 48ITR816(Mad) , the Madras High Court considered a similar question and observed that unlesson or before the valuation date the general body declared the final dividends, the sum shown in the balance-sheet as a liability, by itself, will not amount to a debt within the meaning of the definition of net wealth in Section 2(m) of the W.T. Act.
19. In Kesoram Industries and Cotton Mills Ltd. v. CWT : 59ITR767(SC) , a question had arisen whether the dividend shown by the assessee-company in its profit and loss account for the year ending March 31, 1957, could be treated as ' debt owed' when the dividend was finally declared by the company afterwards at its general meeting held on 27th November, 1957. The court held (headnote) :
'That until the company in its general body meeting accepted the recommendation of the directors and declared the dividend, the report of the directors in that regard was only a recommendation which might be withdrawn or modified. As on the valuation date nothing had happened beyond a mere recommendation by the directors as to the amount that might be distributed as dividend, there was no debt owed by the company to the shareholders on that date. The proposed dividend of Rs. 15,29,855 was not deductible in computing the net wealth of the appellant-company. '
20. We have noted that, in the instant case, there was no material on the record to show that the general body had declared the dividends on or before the valuation date and, therefore, the claim made by the assessee could not be sustained. We, therefore, answer question No. 3 in the affirmative and against the assessee.
21. Question No. 4 relates to the assessee's claim for the amount set apart as additional managing agency commission for the assessment year 1959-60. The facts on which this claim was founded have been stated in para. 5 (see p. 143 supra). The company in the earlier years had paid commission to its managing agents at 2% (or 5%) of the net profits only. Some time in 1956 or 1957, the assessee-company moved the Government, as required by Section 329 of the Companies Act, for raising the commission payable to its managing agents. The Government, vide letter dated September 11, 1959, agreed to raise the commission to 7 1/2% on the net profits of the company with effect from 1st April, 1957. Copy of the letter has been filed as annex. ' B-III '. It was claimed by the company that the sum of Rs. 6,32,832, which became payable as additional managing agency commission, was a 'debt owed' and qualified for deduction for the computation of the net wealth of the assessee. The WTO and the AAC rejected this contention, but the Appellate Tribunal disagreed with the view of the revenue and allowed deduction of this amount holding that a 'debt owing', meaning thereby a 'debt payable at a future date', was as much a debt as a ' debt owed ' and, therefore.such a debt was also deductible for computing the net wealth. The Tribunal referred to the Government letter dated September 11, 1959, raising the managing agency commission with effect from 1st April, 1957. According to the Tribunal, the effect of this order was to give rise to a debt owing from April 1, 1957, onwards, which could be claimable on the two valuation dates of the assessee-company falling after that date, i.e., March 31, 1958, and March 31, 1959. '
22. Learned counsel for the revenue referred to the decision of the Supreme Court in Kesoram Industries : 59ITR767(SC) , and to the observations of the court to the effect that to qualify for deduction, the debt must exist on the valuation date. The ratio of the above decision is that a liability which arose after the valuation date, even though it related back to the period before the valuation date, could not be allowed as a deduction while computing the net wealth of an assessee. It appears that the Tribunal misconstrued the statement of law in Kesoram Industries : 59ITR767(SC) , in its attempt to seek a distinction between a 'debt owed' and a ' debt owing '. In Kesoram Industries, 'their Lordships had referred to Banchharam Majumdar v. Adyanath Bhattacharjee ilr  Cal 933and reproduced the following passage in People v. Arguello  37 Cal 521, from the judgment of the Supreme Court of California, which was quoted by Mookerjee J., in the Calcutta case (see p. 779 of 59 ITR):
' 'Standing alone, the word 'debt' is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due.
In other words, debts are of two kinds : solvendum in praesenti and solvendum in fuluro......A sum of money which is certainly and in allevents payable is a debt, without regard to the fact whether it be payable now or at a future time. A sum payable upon a contingency, however, is not a debt, or does not become a debt, until the contingency has happened.' '
23. Their Lordships then observed (p. 779 of 59 ITR) :
'This passage brings out with clarity the essential characteristics of a debt. It also indicates that a debt owing is a debt payable in future. It also distinguishes a debt from a liability for a sum payable upon a contingency. '
24. The Tribunal thought that as a result of the Government order in question the liability became a 'debt ownig' in the assessment year even though the order was passed after the valuation date. There is no authority for this view and Kesoram Industries : 59ITR767(SC) , in effect, repels this view. The liability was only contingent on the valuation date and had not crystallised into a 'debt owed' or 'debt owing '.
25. To sum up, a debt which did not exist on the valuation date could not be taken into consideration for determining the net wealth for puposes of the W.T. Act. Such a debt must exist on or before the valuation date. We, therefore, find that the Tribunal was not justified in holding that the additional managing agency commission was allowable as a deduction for determining the taxable wealth of the assessee-company.
26. We answer this question in favour of the revenue and against the assessee.
27. In view of the divided success, we direct the parties to bear their own costs.