1. These two appeals by the assessee relate to the assessment years 1976-77 and 1977-78, for which the relevant valuation dates are 31-12-1975 and 31-12-1976, respectively. By order dated 6-4-1974, the Director, Enforcement Directorate, New Delhi, imposed penalty of Rs. 5 lakhs on the assessee under Section 23(1)(a) of the Foreign Exchange Regulation Act, 1947, for contravention of the provisions of Section 4(1) and Section 5(1)(a) of the said Act. It was mentioned in the said order that the penalty imposed should be deposited by the assessee at the Bombay Office of the Directorate within 45 days of the date of issue of the said order. The Foreign Exchange Regulation Appellate Board, by order dated 17-1-1980, confirmed the said order of penalty and dismissed the appeal of the assessee. The assessee filed further appeal under Section 23 EE of the Foreign Exchange Regulation Act to the High Court. The High Court stayed the recovery of the amount on the condition of furnishing of security by the assessee. The High Court has not yet disposed of the said appeal.
2. The assessee claimed deduction of the said amount of Rs. 5 lakhs in both the assessment years, on the ground that it represented a debt owed by the assessee on the relevant valuation dates. The WTO as well as the AAC has disallowed the said claim.
3. In disallowing the said claim, the WTO in his order for the assessment year 1976-77 has observed as follows: This penalty was levied by the Enforcement Directorate. However, the assessee has denied the penalty and has appealed against its imposition to the High Court. Since the amount has still not been paid and the matter is pending before the Court, this liability is disallowed.
While dismissing the appeal of the assessee, the learned AAC in his common order for both the years has observed as follows: Since the appellant still disputes the imposition of penalty, it cannot be said that liability has become final. Furnishing of security before the High Court does not amount to payment of penalty or acceptance of liability. It is a settled principle that liability will arise in the year when such liability becomes final. As the High Court has to decide about the liability of the appellant to pay the penalty, I hold that the liability has not arisen to the assessee so far.
4. The assessee has now come in appeal before us and his contention is that in the circumstances of the case, the said amount represented debt owed by the assessee on the relevant valuation dates and, as such, the said amount should have been allowed as deduction. The learned representative for the department relied on the reasons given in the order of the AAC.5. We have considered the rival submissions and facts on record.
Section 2(m) of the Wealth-tax Act, 1957 ('the Act'), so far as relevant, defines 'net wealth' as the amount by which the aggregate value of all the assets is in excess of the aggregate value of all the debts owed by the assessee on the valuation date. Clauses (i), (ii) and (ii) of Section 2(m) enumerate those debts, which would not be taken into account for computing the net wealth. The scheme, which emerges from Sections 2(m) and 3 of the Act, clearly shows that all debts other than those which fall within the exclusionary part of Section 2(m), owed by the assessee have to be deducted from the aggregate value of assets belonging to him on the valuation date. In other words, in order to get disqualified for the purposes of deduction, the debt must fall within the exclusionary part. In the present case, admittedly, none of the three clauses in the exclusionary part of Section 2(m) is applicable. Consequently, the assessee would be entitled to claim deduction of the said amount, provided that the said amount represented 'debt owed by the assessee on the valuation date'.
6. As already indicated, Director. Enforcement Directorate, had imposed penalty of Rs. 5 lakhs on 6-4-1974 under Section 23(1)(a) of the Foreign Exchange Regulation Act for contravention of the provisions of Sections 4(1) and 5(1)(a) of the said Act and the assessee had been directed to pay the penalty imposed within 45 days of the date of issue of the said order. This clearly indicates that the assessee had incurred a liability to pay the said amount on 6-4-1974. The assessee had not paid the said amount prior to the relevant valuation dates.
Consequently, that amount represented a debt owed by the assessee on the relevant valuation dates. The order of the Director, Enforcement Directorate, was confirmed, subsequently, by the Foreign Exchange Regulation Appellate Board. This subsequent event confirmed a conclusion that the liability to pay the said amount had come into existence prior to the relevant valuation dates. The said liability was a statutory liability in the circumstances ; there can be no escape from the conclusion that the said amount represented debt owed by the assessee on the relevant valuation dates.
7. The question then is whether the facts that the assessee had not subsequently paid the said amount and that the assessee had obtained an order staying the recovery of the said amount on furnishing security from the High Court by filing an appeal, would make any difference. The view expressed by the WTO as well as by the learned AAC is that this would make a difference. We are unable to agree with this view. On account of the said order, the date for payment of penalty stands postponed to the future date and that future date is the date on which the High Court would finally dispose of the appeal. The said order does not obliterate the debt itself. Consequently, it cannot be said that because of the stay order, the said amount did not represent the debt owed by the assessee on the relevant valuation dates. Similarly, the fact that the assessee has challenged the legality of imposition of penalty by filing an appeal before the High Court, would not take that amount within the category of 'debt owed by the assessee on the relevant valuation dates'. The order imposing penalty remains binding on the assessee till it is vacated by the High Court. The High Court had not vacated the said order prior to the date of the assessment order or even at the stage of arguments before us, the High Court had not decided the appeal of the assessee. Consequently, the debt, which was created on account of the order of the Director, Enforcement Directorate, continued to exist. Another reason given by the learned AAC is that the said amount had not been paid by the assessee. The fact that the said amount had not been paid by the assessee, could also not take the said amount out of the ambit of the debt owed by the assessee on the relevant valuation date. As already stated, the assessee has given security for payment of the said amount and the factum of non-payment is irrelevant as far as the point at issue is concerned.
8. We may mention here that the position would have been different if the order of the Director, Enforcement Directorate, imposing the penalty had been vacated by the Appellate Board and the Government had filed the appeal before the High Court challenging the cancellation of the said order. If in that event, the assessee had claimed deduction on the ground that the cancellation of penalty had not become final, his claim would have been liable to be rejected. However, in the present case, enforceable order of penalty existed not only on the relevant valuation dates but also on the date of the assessment order.
Consequently, the mere fact that the assessee was contesting the legality of the penalty by filing an appeal before the High Court, would not mean that the liability had not crystallised. The reasons given by the WTO as well as the AAC are wholly unsustainable.
9. We may usefully refer to the decision of the Supreme Court in Kedamath Jute Mfg. Co. Ltd. v. CIT  82 ITR 363. In that case, the sales tax demand in respect of the relevant accounting year had been raised against the assessee after filing of the return and the assessee claimed deduction in respect of that liability, although no provision had been made in the books of account. The claim was based on the ground that the liability had been incurred in the relevant accounting year and as the assessee was maintaining its accounts on mercantile system, the assessee was entitled to deduction in respect of that liability. On behalf of the revenue, one of the grounds on which the right to claim deduction was challenged was that the assessee had filed appeal against the order of sales tax assessment and the assessee was disputing the liability to pay the said tax. The Supreme Court held that the assessee was entitled to the deduction of the amount of sales tax, which it was liable to pay during the relevant accounting year and that the said liability did not cease to be a liability because the assessee had taken proceedings before the higher authorities for getting it reduced or wiped out so long as the said liability was not finally reduced or wiped out. The said decision arose in proceeding for assessment for income-tax. However, the basic principle laid down therein would be applicable in the wealth-tax proceedings also. That principle is that where there is statutory liability to pay any amount, that liability did not cease to be a liability merely because the assessee had filed an appeal before the higher authorities to get rid of that liability. In other words, disputed liabilities are not necessarily contingent in nature. When this principle is applied to the facts of the present case, it must be held that the amount representing the penalty was a debt owed by the assessee on the relevant valuation dates, in spite of the fact that the assessee had filed an appeal before the High Court and had obtained stay of the operation of the order on furnishing security.
10. Reliance was placed on behalf of the department on the decisions in CWT v. Kantilal Manilal  88 ITR 125 (Guj.) and Kesoram Industries & Cotton Mills Ltd. v. CWT  59 ITR 767 (SC) in support of the contention that unpaid and disputed liability did not amount to debt owed by the assessee on the relevant valuation date.
11. We have carefully considered these decisions. In the case of Kantilal Manilal (supra), all that has been laid down is that if the final assessment order quantifying the tax payable is available on the date of assessment of the wealth-tax proceedings, that amount should be taken as debt owed by the assessee and the amount as per return should not be taken to be such amount. The principle enunciated in the said decision is not applicable to the facts of the present case. In the case of Kesoram Industries & Cotton Mills Ltd. (supra), it has been laid down that the term 'debt owed' within the meaning of Section 2(m) could be defined as 'the liability to pay in praesenti or infuturo an ascertainable sum of money'. The amount with which we are concerned would certainly come within this definition. Consequently, this decision confirms the view which we have already taken. It is of no assistance to the department. For the reasons given above, we set aside the order of the learned AAC and direct the WTO to treat the amount of Rs. 5 lakhs as debt owed by the assessee on the relevant valuation dates and allow deduction in respect thereof for ascertaining the net wealth.