D.N. Sinha, J.
1. The facts in this case are shortly as follows: On or about the 8th August, 1957 the petitioner, Kastur Chand Jain, made a gift of 250 shares of the face value of Rs. 100/- each, of R. McDill and Go. (Private) Ltd. and 100 shares of the face value of Rs. 100/- each, of Misrilall Dharamchand (Private) Ltd., belonging to him, to has daughter, Sm. Padmawati Debi. On or about the 28th July, 1959 the petitioner submitted a voluntary return of Rs. 35,000/- to the respondent No. 1, Gift Tax Officer 'K'--Ward, Dist. III(2) in respect of the aforesaid gift. The return was made on the basis of what the petitioner considered to be the face value of the said shares on the date of the gift. On the 24th February, 1960 the respondent No. 1 made an assessment order, whereby he has calculated the value of 250 shares of R. McDill and Co., (Private) Ltd. to be Rs. 1,83,781/- and the value of 100 shares of Misrilall Dharamchand (Private) Ltd. as Rs. 84,722/-. After granting the statutory exemption of Rs. 10,000/- the taxable amount has been ascertained as Rs. 2,68,503/- and the total tax payable as Rs. 21,020.36 nP. The assessment was done under Section 15(3) of the Gift Tax Act. On the face of the assessment order, it has been stated that the calculation was made on the basis of the latest balance-sheets available for these two Private Ltd. Companies, relevant to the date of the gift, namely the 8th August, 1957, i.e., for the year ending 31st July, 1957; copies of the balance-sheet are Ex. B to the petition. Apart from the fact that it has been stated in the assessment order, which is Exhibit A to the petition, that the calculation has been made on the basis of the balance-sheets, no further details have been given. On the 19th April, 1960 the petitioner was served with a notice of demand under Section 31 of the Gift Tax Act. Thereafter, this application has been made. It has been stated in the petition that the valuation has been made without disclosing the method of valuation, is arbitrary and should be set aside. Indeed, on the face of the assessment order, it is impossible to say what method has been followed, and although reference is made to the balance-sheets, the method is not ascertainable. At the first hearing of this application on the 18th November, 1960, learned counsel for the respondents made an elaborate argument to support the valuation made in the assessment order. As it was very difficult to follow this argument, I directed the respondents to file a competent affidavit setting out the method of computation by which the value of the shares have been arrived at, in the assessment order. Such an affidavit has now been filed by Joseph, Joseph Therattil, the Gift Tax Officer, 'K'-Ward, Dist. III(2), Calcutta, affirmed on the 26th November, 1960. Before I proceed to deal with the said affidavit, I must refer to an earlier affidavit of the said deponent, affirmed on the 13th July, 1960 in which it was stated as follows:
'I say that Rule 10(2) of the Gift Tax Rules, 1958, has been duly followed in the valuation ofthe said shares. The said two companies namely,R. McDill and Co., (Private) Ltd. and MisrilallDharamchand (Private) Ltd., are both PrivateLimited Companies and their shares are not soldfin the open market or reported in the Official StockExchange Quotation. The face value of the sharesof these two companies therefore did not bear anyrelation to the actual value of the shares andaccordingly the valuation had to be made withreference to the total assets of the company on thedate of the gift. The assessment records ofWealth-tax for the said two companies were therefore consulted and on the basis of the wealth ofthese two companies as computed therein the valueof each share of the said two companies was arrived at.'
2. The really important thing to note in theabove statement is that the computation was madeaccording to the Wealth-tax assessment of the saidtwo companies, that is to say, the valuation hasbeen made in accordance with the Wealth TaxAct. (3) Coming now to the second affidavit, we findthat the method of calculation has been set out indetail. Paragraph 6 states how the valuation of theshares of Misrilall Dharamchand Private Ltd., wasarrived at. Briefly speaking, the method is as follows: The total wealth as shown in the asset sideof the balance-sheet was first taken, namelyRs. 14,49,954/-. From this was deducted the Advance payment of income-tax and liabilities appearing on the liabilities side, but the amounts under the headings 'proposed dividend' and 'provision for taxation' were not deducted. It is statedthat these two items are not in law deductibleliabilities for the purpose of the computation ofassets. In paragraph 7, it is admitted that themethod of computation followed is in accordancewith the wealth-tax assessment of the company for the assessment year 1958-59. In other words, it has been made in accordance with the provisions of the Wealth-tax Act and the net wealth of the company has been computed as Rs. 8,21,801. The number of shares of the company, as on the 31st July, 1957 was 770 ordinary shares. Thus, the value of each share was calculated as the net wealth of the company divided by the number of shares, which works out at Rs. 847.127 per share. The valuation of the shares in Messrs. R. McDill and Co. (Private) Ltd., have been computed, in the manner described in paragraph 8. It has been done in the same manner, that is' to say, the amounts on the liabilities side under the headings 'proposed dividend' (Rs. 3,75,000) and 'provision for taxation' (Rs. 13,85,000/0 were not deducted on the ground that they are in law, not deductible liabilities. It is admitted that this computation is also in accordance with the Wealth-tax assessment of the company for the assessment year 1958-59. The copies of the Wealth-tax assessments have been annexed to the petition and marked as Exhibit 'A'. There is no dispute as to figures.
4. The point taken by Mr. Choudhury appearing on behalf of the petitioner is that the entire computation is wrong because the computation under the Gift-tax Act has been made according to the provisions of the Wealth-tax Act, although the method of computation under the two Acts are entirely different.
5. Let us, first of all, see the method of valuation as laid down in the Gift-tax Act, being Act No. 18 of 1958. The charging section is Section 3, which states that, subject to the other provisions contained in the Act, there shall be charged for every financial year, commencing on and from the 1st day of April, 1958, a tax (referred to as the gift-tax) in respect of gifts, if any, made by a person during the previous year (other than gifts made before the 1st day of April 1957) at the rate or rates specified, in the schedule to the Act. Section 5 specifies certain exemptions. Section 6 is important and relates to the method of determining the value of gifts and runs as follows:
'Section 6. Value of gifts, how determined: (1) The value of any property other than cash transferred by way of gift shall, subject to the provisions of Sub-sections (2) and (3), be estimated to be the price which in the opinion of the Gift-tax Officer it would fetch if sold in the open market on the date on which the gift was made.
(2) Where a person makes a gift which is not revocable for a specified period, the value of the property gifted shall be the capitalised value of the income from the property gifted during the period for which the gift is not revocable.
(3) Where the value of any property cannot be estimated under Sub-section (1) because it is not saleable in the open market, the value shall be determined in the prescribed manner'.
6. In the present case, we are concerned with either Sub-section (1) or Sub-section (3). The shares are not quoted in the Stock-Exchange, although I do not know why it should be held that they cannot be sold in the open market. However, as will presently be seen, the principle involved, so far as this case is concerned, would not be different in either of these sub-sections. Sub-section (3) speaks about the value being determined 'in the prescribed manner'. That means, according to the manner prescribed by rules framed under the Act. Rules have been framed, known as the 'Gift-tax Rules'. The relevant Rule is Rule 10(2) which runs as follows:
'Where the articles of association of a private company contain restrictive provisions as to the alienation of shares, the value of the shares, if not ascertainable by reference to the total assets of the company, shall be estimated to be what they would fetch if on the date of gift they could be sold in the open market on the terms of the purchaser being entitled to be registered as holder subject to the articles, but the fact that a special buyer would for his own special reasons give a higher price than the price in the open market shall be disregarded.'
7. Both the companies being private companies, contain restrictive provisions as to the alienation of shares. We, therefore, arrive at the proposition that, in the present case what will have to be considered is the value which the shares may fetch in the open market, on the assumption that there are no restrictions on alienation. In such a case, a purchaser would always deduct the whole of the liabilities from the assets, in coming to a computation of the valuation. Indeed, this is the normal method of valuation and is the way in which the balance-sheets of companies have to be drawn up. Under the Companies Act, the balance sheet has to be drawn up in the form prescribed in schedule VI part I of the Companies Act, 1956 Under the heading 'current liabilities and provisions' must be shown the items 'propose dividend' as also 'provisions for taxation'. Thus, the provisions made for taxation or contingencies or payment of dividend, are grouped together with 'current liabilities'. This seems to be in accordance with commonsense. There is a difference between a 'debt' and a 'liability'. For example, a dividend, when proposed, does not become a debt, but only becomes a debt when declared. (See Buckley on The Companies Act 12th Edn. page 895 and Nicholson v. Rhodesia Trading Co., (1897) 1 Ch 434. In the case of a dividend which has been proposed, a buyer in the open market will not care whether it is a debt or a liability. Since the dividend has been proposed, and was likely to be paid, he will deduct its value from the assets. Similarly, in the case of 'provisions for taxation' a buyer in the Open market will deduct it from the assets, because this is a liability and he will doubtlessly consider that the amount, of taxation will have to be paid, and will eventually come out of the assets In other words, a buyer in the open market will not make a valuation of notional assets but of real assets. That which is earmarked to be paid out, or which must be paid out because there is a legal liability, will never be considered by him as an asset for the purpose of calculating the value which he is prepared to pay for buying a share. So far as income-tax is concerned, the distinction between a liability' and a 'debt' is well-founded. The position has been explained clearly by Jagannadhadas, J. in a Supreme Court decision, Chatturam Horiram Ltd. v. Commissioner of Income-tax, B. and O. : 27ITR709(SC) , where the learned Judge follows Whitney v. Commissioners of Inland Revenue, (1926) AC 37 and states as follows :
'There are three stages in the imposition of a tax. There is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment. That, ex hypothesi, has already been fixed. But assessment particularises the exact sum which a person liable is to pay. Lastly, come the methods of recovery if the person taxed does not voluntarily pay...... Thus, under the scheme of the Income-tax Act, the income of an assessee attracts the quality of taxability with reference to the standing provisions of the Act but the payability and the quantification of the tax depend on the passing and application of the annual Finance Act. Thus, income is chargeable to tax independent of the passing of the Finance Act but until the Finance Act is passed no tax can be actually levied. A comparison of sections 3 and 6 shows that the Act recognises the distinction between chargeability and the actual operation o the charge.'
8. The same principle has been expounded by the judicial Committee in Wallace Brothers and Co., Ltd. v. Commissioners of Income-tax, Bombay , where it has been pointed out that the liability to tax arises by virtue of the charging section alone, and it arises not later than the close of the previous year, though the quantification of the amount payable is postponed. After quantification and the service of the demand notice, the amount of tax becomes a debt and is payable. It is clear, therefore, that the item 'provision for taxation' is in respect of taxation which has become a liability but not yet a debt. Being a liability, the proposed buyer in the open market will certainly deduct it from the assets, because the amount will eventually have to be paid and, as stated above, he is not going to calculate the notional assets, but the real assets. Coming now to the Wealth-tax Act No. 27 of 1957, we find that the method of calculation is entirely different and peculiar to that Act. Under Section 3 of this Act, subject to the other provisions contained in the Act, there shall be charged for every financial year commencing on and from the 1st day of April, 1957, a tax (referred to as Wealth-tax) in respect of net wealth on the corresponding valuation date of every individual, Hindu; undivided family, and a company at the rate or rates specified in the schedule. The expression 'net wealth' has been defined in Sub-section (m) of Section 2 of the said Act. The definition is set out below:
' 'Nett wealth' means the amount by which the aggregate value computed in accordance with theprovisions of this Act of all the assets, whereverlocated, belonging to the assessee on the valuationdate, including assets required to be included inhis nett wealth as on that date under this Act, isin excess of the aggregate value of all the debtsowed by the assessee on the valuation date otherthan,-
(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;'
9. It will thus be seen that net wealth underthe Wealth-tax Act is the value of assets minus thedebts. I have already pointed out above, the difference between the word 'liabilities' and 'debts'.All debts are liabilities, but all liabilities are notdebts. It is obvious, therefore, that the method ofcalculation under the Wealth-tax Act is moresevere. Under that Act, the taxing authority is notto give credit for liabilities which have not ripenedinto debts. The scheme of computation under theGift-tax Act is however different. There, we areconcerned with liabilities and not debts. It wouldtherefore be an error to calculate or compute thevalue of assets under the Gift-tax Act, in the modeand manner laid down by the Wealth-tax Act. Asstated above, this is precisely what has been donein this case and it has been admitted in the petition filed on behalf of the respondents that thisis so. It is clear, therefore, that the calculationhas been done erroneously, and cannot be supported. The assessment order is, therefore, badand must be quashed and/or set aside. Mr. Palappearing on behalf of the respondents has notsaid very much more than taking a technical objection, namely that there is no error on the face ofthe proceedings, and as such an application underArticle 226 does not He. In my opinion, this argument should not be accepted in the facts and circumstances of this case. Under Article 265 of theConstitution, it has been laid down that no taxshall be levied or collected except by authority oflaw. If it is seen that an assessment has been madeon a wrong basis altogether, not warranted by law,then an application would lie in this jurisdiction.By simply omitting to mention the method of calculation in the assessment order, an illegal assessment cannot be made. Even on the face of the assessment order, certain figures have been givenand reference has been made to the balance-sheet,and upon a comparison with the balance-sheetsthemselves, it becomes obvious that some of theliabilities which should have been deducted havenot been deducted. The affidavit subsequently filedmerely specifies why these items have not beendeducted. It now appears that this has been doneon an erroneous view of the law. It is no goodcontending that the petitioner should have appealed against this order. As the assessment orderhas not laid down clearly the method of assessment, it was scarcely possible for the petitioner togo on an appeal. In the absence of particulars, hewas scarcely in a position to formulate his objections.
10. The result is, that this rule must be made absolute and the assessment of gift tax for the year 1958-59 dated 24th February, 1960 and the notice of demand in relation thereto dated 24th February, 1960 must be quashed and/or set aside by a writ in the nature of certiorari and there will be writ in the nature of 'mandamus directing the respondents not to give effect to the same. This means that the assessment will have to be made once again upon notice to the petitioner, and in accordance with law. Interim orders are vacated. Therewill be no order as to costs.