(1) For the several assessment years 1940-41 to 1953-54, the assessee had been assessed to a total tax of Rs. 28.87 lakhs. Out of this the demand for Rs. 2.27 lakhs became invalidated by the decision of the Supreme Court relating to the Investigation Commission Act. Of the balance of the liability of Rs. 26.60 lakhs, the assessee had paid Rs. 11.11 lakhs. In April 1957, the assessee petitioned the Central Board of Revenue, pointing out that the liability that had been imposed upon him arose mostly out of the estimated additions which were disputed by him. He stated further that the net worth of his properties was only Rs. 6.51 lakhs and that if they were to be sold in realisation of the arrears of tax, the properties would fetch even less. He suggested that the total outstanding liability might be reduced to Rs. 6.50 lakhs and that he would withdraw all his petitions by way of appeals, revisions and the like for the relevant years. He also asked that the sum of Rs. 6.50 lakhs at which his tax liability should be settled, should be made payable in instalments. This request of the assessee was accepted by the Central Board of Revenue on 25-4-1957. Certain dates were fixed upon which portions of the amount of Rs. 6.50 lakhs should be paid. It was also stipulated that in default of payment of the specified amounts on the specified dates, the entire settlement should become void, that is to say, the total amount assessed in respect of the several years would become recoverable.
(2) In the wealth tax assessments for the years 1958-59 and 1959-60, the assessee claimed that on the respective valuation dates, the outstanding liability as a result of the above settlement should be treated as debts owed by him and should be deducted from the computation of the net wealth. The Wealth-tax Officer, however, refused to accept this contention. He took the view that no fresh liability was created by this settlement and the effect of the settlement was only that the department agreed to write off the difference between the amount due as per the assessments and the amount settled. In effect, therefore, according to the Wealth-tax Officer, this settled amount only represented a part of the original liability, but as that liability had been outstanding for a period of more than 12 months, it was not deductible as a debt owed within the definition of 'net wealth' contained in S. 2(m) of the Wealth-tax Act. On appeals, the Appellate Assistant Commissioner accepted this view. There were further appeals of the Tribunal. The Tribunal held in favour of the assessee, overruling the department's contention that because time had been granted for the payment of the amounts, the debt was not owing on the relevant valuation date. It held that the liability did exist, that it had been quantified and relying upon the decision in Rajah of Venkatagiri v. commr. of Income-tax, (1955) 28 ITR 189 : AIR 1957 AP 276 accepted the contention that for the first of the assessment years, the sum of Rs. 3.75 lakhs represented the debt owed, and for the second, the sum of Rs. 2.25 lakhs and that these amounts should be deducted in the computation of the net wealth.
(3) The Department applied under S. 27(1) of the Wealth-tax Act, and the following question was referred by the Tribunal for our determination :
'Whether on the facts and in the circumstances of the case, the sum of Rs. 3.75 lakhs and Rs. 2.25 lakhs being the amount of tax remaining unpaid on the two valuation dates were claimable deductions from the net wealth of the assessee under S. 2(m) of the Wealth-tax Act? '
It would be convenient to set out at this stage the relevant provisions of the Wealth-tax Act. Wealth-tax is payable under S. 3 of the Act in respect of the net wealth of every individual on the corresponding valuation date. 'Net wealth' as defined by S. 2(m) of the Act, means, broadly stated, the aggregate value of all the assets belonging to the assessee on the valuation date, as is in excess of the aggregate value of all the debts owed by the assessee on the valuation date. There are three exceptions to the class of debts which have to be deduced. One is debts which are specifically indicated in S. 6 as not liable to be taken into account. The Second is debts which are secured on, or which have been incurred in respect of any asset in respect of which wealth-tax is not payable. The third category is important from the point of view of the present reference. That is an amount of tax, penalty or interest payable in consequence of any order passed under or in pursuance of this Act, or by any law relating to taxation of income and profits, or the Estates Duty Act, 1955, the Expenditure Tax Act 1957, or the Gifts 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 payable by him, is nevertheless outstanding, for a period of more than 12 months on the valuation date. It is clear from this clause that where an amount of tax, penalty or interest, is payable by the assessee, and his liability is being questioned by him in proceedings in appeal, etc., that amount is not deductible. The other clause is, though the amount is not in dispute, if it is still outstanding for more than 12 months on the valuation date, that is not deductible. It is in the context of these exceptions that the present contention of the Department has to examined.
(4) The two valuation dates in respect of the two assessment years are 31-3-1958 and 31-3-1959. It is not in dispute that out of the sum of Rs. 6.50 lakhs settled sums of Rs. 3.75 lakhs and 2.25 lakhs were outstanding payments as on the respective valuation dates. On behalf of the department, Sri V. Balasubramaniam contended that having regard to the scope of the settlement as indicated by the letter of the assessee and the acceptance by the Central Board of revenue, it was only a settlement reducing an outstanding liability of a much larger amount, and that no new liability was created for the first time on the date of the acceptance by the Central Board of Revenue. If that should be the position, since the total liability of the assessee had been outstanding for several years, no deduction could be allowed. If, on the other hand, it is held that this debt represented by the sum of Rs. 6.50 lakhs came into existence on 25-4-1957, it is possible to hold that for the first assessment year, the balance that was outstanding, viz., Rs. 3.75 lakhs, could be regarded as a debt owed and hence deductible, for it had not been outstanding for more than 12 months from 25-4-1956. But, in respect of the next assessment year 1959-60, no deduction could be allowed, as, computed from the date of the settlement, the debt was more than 12 months old. The third view would be that as a result of the settlement, a debt came into existence, but since the settlement was not one which could be traced to any provisions of the Act, it was not one under the Act at all, that is to say, it was not an income-tax liability in the form it took, so that whether it was outstanding for more than 12 months or not, whatever was outstanding on the relevant dates would still be deductible.
(5) There is no doubt, to our minds that a debt was owed on the respective dates. The question is whether it is a debt owed at that point of time. The contention of the Department is that the amount outstanding represents a debt to be paid on a future date and therefore it is not owed on the valuation date. It seems to us that this contention does not represent the true state of things. The relevant clause relating to the payment of the instalments read thus :
'That the said amount of Rs. 6.50 lakhs may be allowed to be paid in the following instalments : Rs.on or before 5-4-1957 1,00,000do 31-7-1957 1,00,000do 15-3-1958 75,000do 31-7-1958 75,000do 31-12-1958 75,000do 31-5-1959 75,000do 31-10-1959 75,000do 31-3-1960 75,000'
That these amounts are payable on certain dates does not to our mind mean that the dates does not to our mind mean that the amount is not owing. Payability on a fixed date cannot certainly be equated to being owed on that date only. The entire amount is undoubtedly owed but, by arrangement between the parties, certain days of payment are fixed. In construing the expression 'whether it is owed' regard cannot be had to payability on a particular date. The total amount is undoubtedly payable, though on certain future dates. It nevertheless is a debt which is owed this very instant, though the whole or part of it may be payable only at a future date. That seems to us to be the correct interpretation of the expression 'a debt owed'. In Commr. of Wealth-tax v. Pierce Leslie & Co. Ltd. : 48ITR1005(Mad) , a Bench of this court to which one of us was a party, pointed out that the essential requisites of a debt are (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; and (3) the obligation must have accrued and must be subsisting and should not be that which is merely accruing. It was observed herein:
'Broadly stated, it (the debt) is a liquidated money obligation for the recovery of which an action will lie. It is an ascertained, liquidated and quantified obligation enforceable in praesenti or in futuro. A debt must be in debitum, that is due. The fact that the time for payment will arise in future does not make it any the less a debt. Debtium in praesenti solvendum in futuro;-this is not repugnant to the conception of 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 possibly ripen into a debt. A future contingent liability is not a debt due or owing. It is not only not due but being contingent never may become due.......'
It seems to us that considered in the light of these observations, there is no doubt that on the date of the settlement, that is, the 25th April 1957, a debt of Rs. 6.50 lakhs did come into existence and it continued to be owing, though the dates of payment were fixed in the future.
(6) We are not willing to subscribe to the contention of the learned counsel for the department that this sum represented a debt which had been outstanding for several years in the past. There was no doubt a lawful demand was made upon the assessee by the department in pursuance of the several provision of the Act for a different amount far in excess of Rs. 6.50 lakhs. The settlement as far as we can see is not the result of the application of any provision of the Income-tax Act. It is nothing more than an executive act by which the Government, in view of the impossibility of recovering the total amount demanded, was willing to accept a lesser amount, and an agreement, which has not been shown to be within the scope of the Act, was come to in this regard. It is true that if the contracting party, the assessee, failed to make the payments on the dates stipulated, the agreement would become void and the Government would have the right to proceed to recover the old income-tax arrears. But, if the assessee kept to the terms of the contract and made the payments on the due dates, Government lost the right to recover any amount over and above this amount of Rs. 6.50 lakhs. It seems to us that both in fact and in law, the settlement at Rs. 6.50 lakhs put an end to the old claim under the Income-tax Act and brought into existence a new claim altogether. If the provision that if default occurred, the settlement would be void and the Government would be restored to their old rights, did not exist, then the only manner in which the Government should realise this sum of Rs. 6.50 lakhs or any amount out of it remaining unpaid would be to institute a suit, for, to our mind, this is not an order made under any of the provisions of the Income-tax Act, and would not consequently arm the Government with any powers of recovery under the Act. The correct view to take appears to us to be that this debt came into existence on the date of the agreement, and being not under the Act at all, it cannot be said that it comes within the mischief of S. 2(m)(iii) of the Act.
(7) We are satisfied that the view taken by the Tribunal that these sums are deductible as debts owed on the respective valuation dates is correct. The question is answered accordingly. The assessee will be entitled to his costs. Counsel's fee Rs. 250.
(9) Reference answered.