1. Messrs. Pierce Leslie and Co., Ltd., which is a non-resident company was assessed to tax under the Wealth Tax Act, 1957 for the assessment year 1957-58. We shall refer to this company as the assesses in this judgment. It filed a return under the Act stating that its net wealth was Rs. 59,51,073. In computing this net wealth the assessee claimed as deduction a sum of Rs. 33,24,609, as a debt due and owing which ought to be taken into account in fixing the taxable value under the Act. The break up of this figure Rs. 33,24,609 was as follows :
1. the amount of income-tax demanded as per order under Section 18-A of the Indian Income-tax Act and outstanding on the valuation date 30th June 1956 , Rs. 10,22,463
2. Amount of income-tax due and payable on the valuation date as per notice of demand under Section 29, Indian Income-tax Act Rs.2,56,762
3. Estimated reserve for liability to pay income-tax notassessed on the valuation date, but for which provisionwas made by the assessee in anticipation of a futureliability 20,45,384.
The Wealth Tax Officer, Madras disallowed the deduction claimed and computed the net wealth of the assessee at Rs. 92,95,104; The assesses preferred an appeal to the Appellate Assistant Commissioner. The appellate authority held that the income-tax demanded as due under Section 18-A aggregating to Rs. 10,224,463 was not deductible as the assessee could repudiate It by submitting its own estimate of income under Section 18-A (2).
With regard to the claim for deduction of Rs. 2,56,762 demanded from the assessee under Section 29 of the Act, the appellate authority held that it was not a debt owed by the assessee as the collection of the amount was postponed due to the claim made by the assessee for relief under 'double income-tax relief'. Regarding the sum of Rs. 20,45,384, the Assistant Commissioner's view was that it was a mere provision in the accounts of the assessee of anticipated tax liability, and that therefore it was not a real and present liability which can come in for deduction in computing the net wealth under the Act. The appeal therefore failed. The assessee preferred a further appeal before the Income-tax Appellate Tribunal. The Judicial member held that the assessee was entitled to deduct the sum of Rs. 10,22,463 and Rs. 2,56,762, the amounts due as per Section 18-A demand and Section 29 demand under the Indian Income-tax Act, but that the claim for deduction of Rs. 20,45,384 was not permissible. The accountant member however held that the assessee was entitled to detects the entire sum of Rs. 33,24,609. In this view of the matter his decision was the appeal should be allowed fully. Due to the difference of opinion between the two members of the tribunal, the matter was placed before the President. He agreed with the accountant member. He expressed his conclusion in these terms :
'In order to arrive at the correct net value of the business as a whole all known liabilities have to be provided. A provision made in anticipation of a liability is something very different than a provision made for a specific liability like that of Income-tax. In the first case, it is only a reserve, but in the latter case it is a liability which has to be taken into account in ascertaining the net value of the business as a whole. I do not agree with the departmental representatives that the payment for a tax is a contingent liability. If income accrues, the liability to tax also accrues with it.'
2. The result was that the assessee obtained the benefit of deduction of Rs. 33,24,609, in the computation of its wealth. On an application preferred by the Commissioner of Wealth Tax, Madras, the following question of law has been referred to us for consideration :
Whether on the facts and in the circumstances of the case and on a proper construction of Section 2(m) of the Wealth Tax Act, the sum of Rs. 10,22,463, Rs. 2,54,762 and Rs. 20,45,384, or any one or more of them are permissible deductions in the computation of the net wealth of the assessee for the assessment year 1957-58 (valuation date 30th June 1956).'
3. It is necessary to examine the provisions of the Wealth Tax Act, In so far as they are material for the present case, in order to determine whether the claim of theassessee for deduction of the amount is well founded. The definition of 'net wealth' (Section 2(m)) is the most important provision and that reads :
' '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 la the assessee on the valuation date, including assets required, to be included in this 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; and (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.'
This was the provision as it stood before its amendment in 1959. Act XII of 1959 amended the section. The amending Act states that the amendment shall be made and shall be deemed always to have been made. By reason of the amendment the word 'and' between Clause (i) and Clause (ii) was omitted; the word 'and' was added at the end of Clause (ii) and Clause (iii) was inserted. The inserted clause reads :
'(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.'
There is therefore a specific provision in the Act excluding the amount of tax levied under the Indian Income-tax Act which is outstanding on the valuation date, and which is claimed by the assessee in proceedings under the Act as not being payable by him, and which though not claimed by the assessee as not being payable, nevertheless remained outstanding for a period of more than 12 months on the valuation date. 'Valuation date' is defined in Section 2, clause (c), as meaning.
' 'valuation date' in relation to any year for which an assessment is to be made under this Act, means the last day of the previous year as defined in Clause (21) of Section 2 of the Income-tax Act if an assessment were to be made under that Act for that year .....'
4. In the present case there is no dispute that the valuation date is 30th June 1956. The charging section under the Act is Section 3 and that reads :
'Subject to the other provisions contained in this Act, there shall be charged for every financial year commencing on and from the first day of April 1957, a tax (hereinafter referred to as wealth tax) in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule.'
5. It is the net wealth of the assessee which is charged to tax, Section 4 of the Act provides that in computing the net wealth of an individual, there shall be included, as belonging to him the value of assets which on the valuation date are held by his wife to whom such assets have been transferred otherwise than for adequate consideration or in connection with an agreement to live separately, those held by a minor child (not being a married daughter) to whom such assets have been transferred by the individual otherwise than for adequate consideration and other assets specified as enumerated in that section. Section 4 lays down what assets have to be included in the net wealth of an individual. Section 5 is the exemption provision and that states what assets shall not be included in the net wealth. Under Section 6 of the Act, assets and debts outside India, under certain circumstances, shall not be taken into account. The mode of valuation of the assets is prescribed under Section 7 of the Act. That reads,
''(1) The 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 the Wealth Tax Officer it would fetch if sold in the open market on the valuation date.
(2) Notwithstanding anything contained in Sub-section (1)-
(a) where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth Tax Officer 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 the balance sheet of such business as on the valuation date and making such adjustments therein as the circumstances of the case may require ;
(b) where the assessee carrying on the business, is a company and not resident in India and a computation in accordance with Clause (a) cannot be made by reason of the absence of any separate balance sheet drawn up for the affairs of such business in India, the Wealth Tax Officer may take the net value of the assets of the business in India to be that proportion of the net value of the assets of the business as a whole wherever carried on determined as aforesaid as the income arising from the business in India during the year ending with the valuation date bears to the aggregate income from the business wherever arising during that year.'
The assessee in the present case was a non-resident company. The net value has therefore to be ascertained under Clause (b).
6. In the instant case, there is no difficulty, and we must say there is no dispute also, regarding the valuation of the assets of the assessee company. The point mooted is whether the amount of Rs. 33,24,609 which consists partly of a quantified tax liability in respect of which a demand for collection has actually been made by the income-tax department and partly of an anticipated or expected liability to pay income-tax, can be called 'a debt owed' within the meaning of Section 2(m) of the Wealth Tax Act to enable the assessee to claim it as a deduction in the computation of its net wealth.
7. Debt is a common expression and it is difficult to believe that it can give rise to any controversy in interpreting it. Broadly stated it is a liquidated money obligation for the recovery of which an action will lie. It is an ascertained liquidated quantified obligation enforceable 'in praesenti' or 'in futuro'. A debt must be a 'debitum' that is due. The fact that the time for payment will arise in future does not make it any the less a debt. 'Debitum in praesenti, solvendum in future'--this is not repugnant to the conception if a debt, because the obligation is crystallised and it is only the payability that is in abeyance, but a debt has to be distinguished from what can only be described as something which will probably or partly ripen into a debt. A future contingent liability is not a debt due and owing. It is not only not due but being contingent never may become due. An inchoate liability with a fair prospect of maturity into a debt in future and still in its embryo stage would not answer the description of a debt. Tillit is born it is not a debt. Every kind of liability, immature, formative and in the course of evolution to becomea debt, cannot be called a debt, in anticipation of the ultimate.
8. The normal conception of a debt is that what it is held to be in Sabju Sahib v. Noordin Sahib, ILR 22 Mad 139. This was a case where a son of a deceased partner of a firm sued the surviving partners for an account of the profits and assets of the partnership, and for payment to him of the amount which might be found due to the share, of the deceased father. The plaintiff' had neither letters of administration nor a succession certificate. The point in issue was whether the plaintiff was entitled to maintain the suit without letters of administration or succession certificate. It was held by a Bench of three learned Judges that the claim in the suit being for an unliquidated amount was not a debt within the meaning of the Succession Certificate Act of 1889. At page 143, Subramania Aiyar, J. observed as follows :
'The liability arising from this obligation cannot be held to be a debt in the accepted ordinary legal sense of the term, for the obvious reason that the liability is not in respect of a liquidated sum. If authority were required for this conclusion, I would refer to Johnson v. Diamond, (1855) 11 Ex 73, where Parke, Platt and Martin BB. held that the liability arising from a contract by C to pay D such costs as the latter should become answerable to J in an action carried on by D at the request of C was not a liability to pay a liquidated sum and therefore not a 'debt'
9. This decision was followed with approval by a Full Bench of this Court in Doraiswami Padayachi v. Vaithialinga Padayachi, ILR 40 Mad 31 : AIR 1918 Mad 1145. The Calcutta High Court, also followed the case in ILR 22 Mad 139 in Bancharam Majumdar v. Adyanath Bhattacharja, ILR 36 Cal 936 (FB). Jenkins C. J. quoted with approval the following observations in Webb v. Stenton, (1883) 11 QBD 518,
'A debt is a sum of money which Is now payable or will become payable in future by reason of a present obligation.'
10. That contingent liability is not a debt is now well settled. If a liability is to arise in future on the happening of a contingency which may or may not happen it is not a liability at all, till it actually fructifies. A contingent liability or a contingency debt, as it is sometimes called, is therefore neither a liability nor a debt. It would be a contradiction in terms to describe the future accrual of a debt however possible or imminent it may be, as a debt, the essence of which is an existing obligation. There Is another class of liability, we do not wish to call it a debt, which is spoken of as an accruing debt thereby implying that it is in the stage of forming into debt, and may culminate into a debt at sometime in the future. The question whether such accruing debts are attachable in garnishee proceedings at the instance of judgment creditors has often arisen in English Courts. In (1883) 11 QBD 513, the debt sought to be attached was one alleged to be payable by a trustee to the beneficiaries in future. It was held that it was not a 'debt owing or accruing'. Lindley L. J. observed thus ;
'I should say, apart from any authority, that debts legal or equitable can be attached whether it be a debt owing or accruing, but it must be a debt, and a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation, 'debitum in praesenti, solvendum in futuro'. An accruing debt, therefore,is a debt not yet actually payable but a debt which is represented by an existing obligation ....... The resultseems to me to be this you may attach all debts, whether equitably or legal, but only debts can be attached, and moneys which may or may not become payable from trustao to his 'cestui que trust' are not debts.'
The Supreme Court dealt with the true nature of a contingent debt in C. A. Nos. 319 and 320 of 1961 : : 2SCR297 , Shanti Prasad Jain v. Union of India. Venkatarama Aiyar J. delivering the judgment, of the Court stated the position thus :
'The law is thus well settled that a contingent debt is not a debt until the contingency happens, and as the right of the appellant to the amount in deposit in his name in the Doutsche bank arises only on the happening of the contingency already mentioned, it follows that there is no debt due to him 'in praesenti' and there could be no loan thereof within Section 4(1) of the Act.'
11. The Act referred to in that case is the Foreign Exchange Regulation Act, VII of 1947. The section provides as follows :
'Except with the previous general or special permission of the Reserve Bank, no person resident in India shall buy or borrow from, or sell or lend to, or exchange with, any person not being an authorised dealer, any foreign exchange.'
The essential requisites of a debt are therefore (1) an ascertained or readily calculable amount ; (2) an absolute unqualified and present liability in regard to that amount with the obligation to pay forthwith or in future within a time certain; (3) the obligation must have accrued and subsisting and should not be that which' is merely accruing.
12. Mr. Ramamani, learned counsel for the--assesses relied upon the decision in O'Driscoll v. Manchester Insurance Committee, 1915 3 KB 499 in support of the proposition that a debt owing or accruing need not be a liquidated amount but may also consist of an unascertained amount. In that case an insurance committee constituted under the National Insurance Act, 1911, and 1913, entered into agreements with the panel doctors of that district by which the whole amounts received by the Committee from the National Insurance Commissioners were to be pooled and distributed among the panel doctors in accordance with the scale of fees. The total amount available for medical benefit so received by the committee was to be the limit of their liability to the panel doctors; and if the total pool was insufficient to meet all the proper charges of the panel doctors in accordant with the scale there was to be a 'pro rata' reduction for each doctor, and on the other hand if it should be in excess of the amount required the balance was to be distributed among the panel doctors. It was held that when a panel doctor has done work under his agreement with the Insurance Committee and the Committee have received funds in respect of the medical benefit from the National Insurance Commissioners, there is a debt owing or accruing from the Insurance Committee to the panel doctor which may be attached under Order XLV, Rule 1 notwithstanding that as a matter of calculation the exact share payable to him may not yet have been ascertained. At page 512 Swinton Eady L. J. stated thus :
'It is contended, however, that there cannot be a 'debt' until the amount has been ascertained, and in respect of this contention cases have been cited to us where it was attempted to attack unliquidated damages. But in such cases there is no debt at all until the verdict of the jury is pronounced assessing the damages and judgment is given. Here there is a debt, uncertain in amount, which will becomecertain when the accounts are finally dealt with by the Insurance Committee. Therefore there was a 'debt' at the material date, though it was not presently payable and theamount was not ascertained. It is not like a case wherethere is a mere probability of a debt, as, for instance,where a person has to serve for a fixed period before beingentitled to any salary, and he has served part of that periodat the time the garnishee order nisi is served. In such acase there is no 'debt' until he has served the wholeperiod.'
13. Against this view of the learned Lord Justice it is interesting to note the view of Haliett J. in Seabrook Estate Co. v. Ford, (1949) 2 All ER 94. The facts in that case were as follows. A debenture holder of a limited company appointed a Receiver and manager of the premises charged by the debentures. The receiver filed returns of receipts and payments for two periods of six months ending 30th June 1948 and 31st December 1948 respectively showing a balance in his hands of 89/- Sh. 1 d-4 out of which he expected to have to pay 425 to debenture holders, the costs and legal charges of the receivership and a preferential claim for income-tax. Before the receivership was terminated a judgment-creditor of the company served on the Receiver an order nisi for the attachment of 559, sh. 13 or part of that sum out of the amount in the hands of the receiver as a debt due by the receiver to the company. It was held that on the date of the service of attachment order there was no debt 'in praesenti' and therefore there was no debt owing or accruing to the company from the receiver within the meaning of Order 14, Rule 1 of the rules of the R. S. C. The order nisi was discharged. The case in 1915-3 KB 499 was referred to by Haliett J. and treated as a binding authority for the proposition that where a debt is established 'in praesenti' it is not sufficient objection to say that the exact amount of the debt will be the subject of a calculation which has not yet been made and, it may be, cannot yet be made. The following observation of Bankes L. J. in 1915 3 KB 499 is adapted by Hallett J. as laying down the correct position in law :
'But the distinction must be borne in mind between the case where there is an existing debt, payment whereof is deferred, and the case where both the debt and its payment rest in the future. In the former case there is an attachable debt, in the latter case there is not. If for instance, a sum of money is payable on the happening of a contingency, there is no debt owing or accruing. But the mere fact that the amount is not ascertained does not show that there is no debt.'
14. In our opinion, the decision in 1915 3 KB 499 is authority only for the limited position that there can be an attachable debt within the meaning of the said expression under Order XLV, Rule 1 of R. S. C., where the liability is present and accrued but where the quantification of that liability is readily ascertainable but not ascertained. We must point out however that we are concerned in this case with the language of the Wealth Tax Act which uses the definition 'debt owed'. The words of the Act must be given their ordinary and material signification and decisions and opinions of Judges upon the language of other Acts are in unsafe guide.
15. Now we have to turn to the provisions of the Indian Income-tax Act to ascertain when a tax liability emerges into a debt due to the revenue. Under this Act, it is perfectly clear that the tax liability becomes a debt due only after a notice of demand under Section 29 is served on the assessee. This section requires the Income-tax Officer to serve upon the assessee or other person liable topay the tax a notice of demand in the prescribed form specifying the sum payable. If the assesses fails to pay the amount demanded within the time and the place and to the person mentioned in the notice he shall be deemed to be in default. It is however open to the income-tax Officer to treat the assessee as not being in default when he has presented an appeal against the order of assessment, When an assessee is in default in paying the tax levied the Income-tax Officer may direct the recovery of that amount by forwarding to the Collector a certificate under his signature specifying the amount of arrears due from the assessee; the Collector on receipt of such certificate shall proceed to recover from the assessee the amount specified as if it were an arrear of land revenue. The basic requirement for payability of the tax and for the exercise of the right of the department to collect the tax is therefore conditioned on the issue of a notice of demand.
The scheme of the Act is that the Income of 'previous year' is assessed to tax in the 'assessment year'. The total world income of the assessee in the whole of 'the previous year' is computed and brought to tax. The Finance Act of each year fixes the rate of taxation in regard to each assessment year which is always the financial year. It is true that the liability to tax arises only by virtue of the charging sections, Section 3 or Section 6 at the close of the previous year and earlier than the commencement of the assessment year. It is that liability which is assessed and quantified in the assessment proceedings. A) pointed out by the Federal Court in Chatturam v. Commr. of Income-tax, Bihar, (1947) 15 ITR 302 at D. 308 AIR 1947 FC 32 , following the observation in Whitney v. Commr. of Inland Revenue (1926) 10 Tax Cas 88, the liability does not depend on assessment, that 'ex hypothesi' has already been fixed clearly by Act. The incidence of liability is statutory and is 'de hors' the assessment. But when does the tax liability assume the character of a debt is the real question in this case. At the close of the previous year it is an unascertained liability. After the order of assessment it is specified, being quantified. Even at that stage the assessee is not a debtor having regard to the provisions of the Act. It is only the service of the notice of demand by the department calling upon the assessee to pay the tax levied that marks the emergence of a debt.
16. The above position has now been settled by a catena of decisions. In Doorga Prasad v. Secy. of State , Sir John Beaumont delivering the judgment of the Judicial Committee observed.
'.... . although income-tax may be popularly described as due for a certain year, it is not in law so due. It is calculated and assessed by reference to the income of the assessee for a given year, but it is due when demand fs made under Section 29 and Section 45. It then becomes a bebt due to the Crown, but not for any particular period.'
17. Dealing with a case of a levy of sales-tax under the Bengal Finance (Sales-tax) Act, 1941, Chakravarti C. J. of the Calcutta High Court stated in Recols (India) Ltd. in re, 4 STC 271,
'A tax is due only when it has been ascertained, quantified and notified to the assessee with a demand for payment and that seems to me to be the effect of the Sales-tax Act itself, as much as of the Income-tax Act.'
18. in Joint Official Liquidators of P. J. Bank v. Commr. of Income-tax, : 25ITR140(Mad) , the question arose whether the advance income-tax demanded from a company under Section 18-A of the Indian Income-tax Act, is a tax falling within Section 230(1)(a) of the IndianCompanies Act in respect of which State has got a right of priority over other debts. A Division Bench of this Court, Rajamannar C. J. and Venkatarama Aiyar J. held that it was a tax. In that case it was common ground that there was a demand of the advance tax within the prescribed period. At page 147 (of ITR) : (at p. 860 of AIR), the learned Chief Justice observed thus ;
'That question is whether the amount for which at demand has been issued and which we have already held is in the nature of a tax is due from the company at the date of the winding up order and became due and payable? within 12 months next before that order ....... Asobserved by the Privy Council in , the tax becomes due when demand is made under Section 29 or under Section 45 of the Act.'
In the present case it is common ground that there-was a demand of the tax within the prescribed period. The tax, therefore, became due and payable on such demand. It would therefore fall within the category mentioned in Section 230(1)(a) of the Indian Companies Act. In our opinion a levy of income-tax does not by itself constitute a debt; the essential thing that creates a debt in consequence of the levy is the issue and service of a demand under Section 29 of the Act.'
19. The definition of 'net wealth' under Section 2(m) as amended in 1959, which is clearly retrospective in operation, tends to support the view that assessment to tax would not bring into existence an owing debt. The section provides that if the tax is objected to in appeal or revision or remains unpaid for twelve months prior to the valuation date it is not a debt owed. Even after demand is made if the assessee questions the levy in appropriate proceedings or neglects to comply with the demand for more than twelve months prior to the valuation date the character of debt is lost for the purpose of computation of the net wealth.
20. In Ramchandra Rao v. Commr. of Wealth Tax, Madras, T. C. No. 18 of 1960 : : 48ITR959(Mad) , we held that estate duty payable by the assessee is not a debt owed by the assessee on the valuation date. Referring: to the expression 'debt owed' we observed,
'This expression came in for consideration in M. P. Kothari Textiles Ltd., Madras v. Commr. of Wealth Tax, Madras, T. C. No. 210 of 1959 : 48ITR816(Mad) , where we held that a claim against an estate of an unascertained nature cannot be regarded as a debt owed by the assessee on the valuation date. It is not disputed that in the present case the assessment to estate duty was, made long subsequent to the valuation date. There was no doubt the liability under the Estate Duty Act, but that liability was not ascertained or quantified.'
21. We are' of opinion that the definitive word of Section 2(m) of the Wealth Tax Act, permitting deduction of 'debt owed' cannot be stretched without doing violence to the language to cover an amount reserved for a tax liability, in anticipation of assessment or future demand if assessment has been made. In this view of the matter it follows that the assessee is entitled to claim the two sums of Rs. 10,22,463 and Rs. 2,56,092 relating to advance tax under Section 18-A and the final assessment to tax respectively as deduction in the computation of net wealth as they were debts by reason of the demand for payment issued by the department. The other sum of Rs. 20,45,384 is not a debt owed within the meaning of Section 2(m) as it is common ground that the department had not even assessed the income and levied the tax.
22. We agree with the conclusion of the Judicial Member of the Tribunal. The question is thus answered partly in favour of the assessee and partly in favour of the department. There will be no order as to costs.