SINHA, J. - The facts in this case are shortly as follows :
On or about August 8, 1957, the petitioner, Kastur Chand Jain, made a gift of 250 shares of the face value of Rs. 100 each of R. McDill & Co. (Private) Ltd. and 100 shares of the face value of Rs. 100 each of Misrilall Dharamchand (Private) Ltd., belonging to him, to his daughter, Sm. Padmawati Debi. On or about July 28, 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 February 24, 1960, the respondent No. 1 made an assessment order, whereby he has calculated the value of 250 shares of R. McDill & 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 limited companies, relevant to the date of the gift, namely, August 8, 1957, i.e., for the year ending July 31, 1957; copies of the balance-sheet are exhibit B to the petition. Apart from the fact that it has been stated in 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 April 19, 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 November 18, 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, 1 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 November 26, 1960. Before proceed to deal with the said affidavit, I must refer to an earlier affidavit of the said deponent affirmant on July 13, 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 of the said shares. The said two companies namely, R. McDill & Co. (Private) Ltd. and Misrilall Dharamchand (Private) Ltd., are both private limited companies and their shares are not sold in the open market or reported in the official Stock Exchange quotation. The face value of the shares of these two companies, therefore, did not bear any relation to the actual value of the shares and accordingly the valuation had to be made with reference to the total assets of the company on the date of the gift. The assessment records of wealth-tax for the said two companies were therefore consulted and on the basis of the wealth of these two companies as computed therein the value of each share of the said two companies was arrived at.'
The really important thing to note in the above statement is that the computation was made according to the wealth-tax assessment of the said two companies, that is to say, the valuation has been made in accordance with the Wealth-tax Act.
Coming now to the second affidavit, we find that the method of calculation has been set out in detail. Paragraph 6 states how the valuation of the shares of Misrilall Dharamchand Private Ltd. was arrived at. Briefly speaking, the method is as follows : The total wealth as shown in the asset side of the balance-sheet was first taken, namely, Rs. 14,49,954. From this was deducted the advance payment of income-tax and liabilities appearing on the liabilities side, but the amount under the headings 'proposed dividend' and 'provision for taxation' were not deducted. It is stated that these two items are not in law deductible liabilities for the purpose of the computation of assets. In paragraph 7, it is admitted that the method of computation followed is in accordance with 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 July 31, 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 & Co. (Private) Ltd. has been computed in the manner described in paragraph 8. It his 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) were not deducted on the ground that they are in law not deductible liabilities. It is admitted that the 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 assessment have been annexed to the petition and marked as exhibit 'A'. There is no dispute as to figures.
The point taken by Mr. Choudhuri appearing on behalf of the petitioner is that 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.
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 of 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 :
'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-section (2) and (3), be estimated to be the price which is the opinion of the Gift-tax Officer is would fetch is 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 capitalized 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.'
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 is 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 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 value of 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 than the price in the open market shall be disregarded.'
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 value which the share 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 Indian Companies Act the balance-sheet has to be drawn up in the form prescribed in Schedule VI Part I of the (Indian) Companies Act, 1956. Under the heading 'current liabilities and provisions' must be shown the items 'proposed dividend' as also 'provision for taxation'. Thus, the provision made for taxation or contingencies or payment of dividend are grouped together with 'current liabilities'. This seems to be in accordance with common sense. 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 Acts, 12th edition, page 895, and Nicholson v. Rhodesia Trading Company). In the case of a dividend which has been proposed as 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 Horilram Ltd. v. Commissioner of Income-tax where the learned judge follows whitney v. Commissioner of Inland Revenue 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 hypothesis has already been fixed. But assessment particulars the exact sum 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 the 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 of the Act shows that the Act recognised the distinction between chargeability and the actual operation of the charge.'
The same principle has been expounded by the Judicial Committee in Wallace Bros. & Co. Ltd. v. Commissioner of Income-tax, 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 become 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 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 (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 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 :
'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 to the assessee on the valuation date including assets required to be included in his net wealth as on that dated under this Act is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than, -
(1) debts which under section 6 are not to be taken into account; and
(2) 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.'
It will thus be seen that net wealth under Wealth-tax Act is the value of assets minus the debts. I have already pointed out above the difference between the word 'liabilities' and 'debts'. All debts are liabilities, but all liabilities are not debts. It is obvious therefore that the method of calculation under the Wealth-tax Act is more severe. Under that Act, the taxing authority is not to give credit for liabilities which have not ripened into debts. The scheme of computation under the Gift-tax Act is however different. There, we are concerned with liabilities and not debts. It would therefore be an error to calculate or compute the value of assets under the Gift-tax Act in the mode and manner laid down by the Wealth-tax Act. As stated above this is precisely what has been done in this case and it has been admitted in the petition filed on behalf of the respondents that this is so. It is clear, therefore, that the calculation has been done erroneously, and cannot be supported. The assessment order is therefore bad and must be quashed and or set aside. Mr. Pal appearing on behalf of the respondents has not said very much more than taking a technical objection namely that there is no error on the face of the proceedings and as such an application under article 226 does not lie. In my opinion, this argument should not be expected in the facts and circumstances of this case. Under article 265 of the Constitution it has been laid down that no tax shall be levied or collected except by authority of law. If it is seen that an assessment has been made on 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 given and reference has been made to the balance-sheets and upon a comparison with the balance-sheets themselves it becomes obvious that some of the liabilities which should have been deducted have not been deducted. The affidavit subsequently filed merely specifies why these items have not been deducted. It now appears that this has been done on an erroneous view of the law. It is no good contending that the petitioner should have appealed against this order. As the assessment order has not laid down clearly the method of assessment it was scarcely possible for the petitioner to go on an appeal. In the absence of particulars he was scarcely in a position to formulate his objections.
The result is that this rule must be made absolute and the assessment of gift-tax for the year 1958-59 dated February 24, 1960, and the notice of demand in relation thereto dated February 24, 1960 must be quashed and/or set aside by a writ in the nature of certiorari and there will be a 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. There will be no order as to costs.
Rule made absolute.