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Petitioner: KESORAM INDUSTRIES AND COTTON MILLS LTD. VS Respondent: COMMISSIONER OF WEALTH JUDGMENT
Court Name: Supreme Court of India Judge(s): J. C. Shah, K. Subba Rao, S. M. Sikri Title:KESORAM INDUSTRIES AND COTTON MILLS LTD. vs COMMISSIONER OF WEALTH
JUDGMENT
Reported As: 1989 PTD 93 Result: Order accordingly Judgment JUDGMENT SUBBA RAO, J.-- Kesoram Industries and Cotton Mills Limited, the appellant herein, is a company incorporated under the Indian Companies Act. Its subscribed capital at the end of the relevant accounting year ending March 31, 1957, was Rs,2,29,99,125. The original cost of the fixed assets was Rs,2,30,32,833. During the year ended March 31,1950, the company made a revaluation of its assets and added an amount of Rs,1,45,87,000 to the cost of the said fixed assets. After certain adjustments, the value of the fixed assets was fixed at Rs,2,60,52,357. The said fixed assets of the assessee were shown in the balance-sheets issued by the assessee from time to time at the added value less depreciation calculated on the original cost. In the balance-sheet of the relevant accounting year also, the said amount was shown as the value of the fixed assets. In the profit and loss account for the said year a sum of Rs,15,29,855 was shown as the amount of dividend proposed to be distributed for that year. The said amount was declared as dividend at the general body meeting of the assessee held on November 27, 1957. The said balance-sheet as on March 31, 1957, also showed a provision for taxation amounting to Rs,1,03,69,009 and as against the said amount a sum of Rs,84,76,690 was shown as the taxes paid during the said accounting year. In computing the net wealth for the purposes of the Wealth Tax Act, 1957, the Wealth Tax Officer accepted the said valuation of the fixed assets under section 7(2) of the said Act, rejecting the plea of the assessee that each item o the assets should be valued at the market rate under section 7(1) thereof. He disallowed the claim of the assessee in respect of the proposed dividend estimated income-tax and super-tax on the ground that the said items w debts on the valuation date, i.e,, March 31, 1957, within the meaning of s (m) of the Wealth Tax Act. On appeal, the said order was
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confirme Appellate Assistant Commissioner except to the extent of outstanding income-tax for - Rs,30,305. On further appeals, the Income Tax Tribunal, Calcutta Bench 'A', not only disallowed the claims of the a, also allowed the appeal of the department in regard to Rs,30,3052, certain directions given by it. At the instance of the assessee, the for questions were referred to the High Court under section 27 of a:3,, l. Act: (1) Whether, on the facts and in the circumstances of the c),f40. Aith Tax Officer was justified in taking the value of the passive.,e ,essee , as shown in its balance-sheet on the relevant valuation da, (2) Whether, on the facts and in the circumstances of the case, in computing the net wealth of the assessee the amount of proposed dividend was deductible from its total assets? ' Whether, on the facts and in the circumstances of the case, in computing the net wealth of the assessee, the amount of the provision for payment of income-tax and super tax in respect of the year of account was a debt owed within the meaning of section 2(m) of the Wealth Tax Act, 1957, and as such deductible in computing the net wealth of the assessee. ' The High Court answered the three questions against the assessee. Hence the present appeal. ' Mr. Palkhivala, learned counsel for the assessee, raised before us the same arguments as he had unsuccessfully pressed before the High Court. We shall take each of them seriatim for our consideration. ' The first question is whether the High Court was right in agreeing with the Tribunal that the assessee's revaluation of the assets should be accepted for the purposes of the Wealth Tax Act. Section 7 of the Wealth Tax Act lays down how the value of assets is to be ascertained for the purposes of the said Act. It 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 any thing contained in subsection (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..." ' Under this section in the case of an assessee carrying on business the Wealth Tax Officer may determine the net value of the assets of the business as a whole having regard to the balance- sheet of the business as on the valuation date. 'le balance-sheet, as indicated earlier, as on March 31, 1957, showed the appreciated value on revaluation of the assets at Rs,2,60,52,357. As the value of the assets had increased, a corresponding balancing figure, viz., Rs,1,45,87,000, was introduced in capital reserve surplus: that figure represented the increase in the value of the assets. It was argued that the revaluation was done for other purpose, that it did not represent the real value of the assets and that that fact was also reflected by the said amount representing the difference being shown as a capital surplus. Apart from the argument raised, there is nothing on the record to disclose why the said figure did not represent the correct value of the assets. We do not also see how the fact that the said increase was shown as capital surplus would detract from the correctness of the valuation, for the corresponding balancing figure had to be introduced in the balance-sheet. Under section 211 of the Companies Act, 1956, every balance-sheet of a company must give a true and fair view of the state of its affairs as at the end of the financial year. When the assessee himself has shown the net value of the assets at a figure, the Wealth Tax Officer, in our view, rightly accepted it, as no one could know better the value of the assets than the assessee himself. It was open to the assessee to convince the authorities that the said figure was inflated for
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acceptable reasons; but it did not make any such attempt. It was also open to the Wealth Tax Officer to reject the figure given by the assessee and to substitute in its place another figure, if he was, for sufficient reasons, satisfied that the figure given by the assessee was wrong. But he did not find any such reasons to do so. When he accepted the figure shown by the assessee himself, he did the right thing and there is nothing to complain about. The High Court was right in answering the first question in the affirmative. ' The second question does not call for a detailed scrutiny. Under section 2 (m) of the Wealth Tax Act, "net-wealth" means the amount by which the aggregate value computed in accordance with the provisions of the said Act of all the assets of the assessee on the valuation date is in excess of the aggregate value of all the debts owed by the assessee on the said date. The directors of the assessee-company showed in the profit and loss account a sum of Rs,15,29,855 as the amount of dividend proposed to be distributed for the year ending March 31, 1957; but the said dividend was declared by the company at its general body meeting only on November 27, 1957. The question is whether the amount set apart as dividend by the directors was a debt owed by the company on the valuation date. The directors cannot distribute dividends but they can only recommend to the general body of the company the quantum of dividend to be distributed. Under section 217 of the Indian Companies Act, there shall be attached to every balance-sheet laid before a company in general meeting a report by its board of directors with respect to, inter alia, the amount, if any, which it recommends to be paid by way of dividend.Till the company in its general body meeting accepts the recommendation and declares the dividend, the report of the directors in that regard is only a recommendation which may be withdrawn or modified as the case may be. As on the valuation date nothing further happened than a mere recommendation by the directors as to the amount that might be distributed as dividend, it is not possible to hold that there was any debt owed by the assessee to the share-holders on the valuation date. The High Court rightly answered the second question in the negative. ' The third question raised a serious controversy between the parties. This question the High Court held that although the assessee was liable income-tax on the valuation date, the actual amount of the liability was not ascertained until some time after the passing of the Finance Act and determination made by the income-tax authorities and, therefore, no debt was owed by the assessee on the valuation date. In that view, it answere the third question in the negative. ' A few facts relevant to this question may be recapitulated. Under the Wealth Tax Act, 1957, the Wealth Tax Officer valued the net wealth of the assessee as on March 31, 1957, which was the valuation date as defined under the said Act. The Finance Act came into force on April 1, 1957. The question is whether the liability to pay income-tax and super-tax became a debt owed by the assessee on March 31, 1957, or on April 1, 1957: if it was a debt on the latter date, it could not be deducted from the gross assets of the assessee to arrive at the net wealth; if it was on the former date, it could be. Mr. Palkhivala argued that the liability to pay tax arose by virtue of the charging section, i.e,, section 3 of the Income-tax Act, and that it arose not later than the close of the previous year though the quantification of the amount payable was postponed till the Finance Act was passed and that, therefore, it being a liability in praesenti existing on the valuation date, it was a debt owed by the assessee on the said date. MrA.V. Viswanatha Sastri, learned counsel for the Revenue, argued that the expression "debt owed" meant an obligation to pay an ascertained amount, that the said obligation to pay income-tax arose only on the passing of the Finance Act and that, therefore, on the valuation date no debt was owed by the assessee to the department within the meaning of section 2(m) of the Wealth Tax Act. ' At the outset it will be convenient to gather the material provisions of the relevant Act at one place. They read:
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' WEALTH TAX ACT. 1957 "Section 2(m).-- '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 date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date... ' Section 3.-- 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. ' Section 2 (q): '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 (11) of section 2 of the Income-tax Act if an assessm ent were to be made under that Act for that year...." ' INCOME-TAX ACT, 1922 "Section 2 (11): 'Previous year' means-- (i) in respect of any separate source of income, profits and gains-- (a) the twelve months ending on the 31st day of March next preceding the year for which the assessm ent is to be made, or if the accounts of the assessee have been made upto a date within the said twelve months in respect of a year ending on any date other than the said 31st day of March, then, at the option of the assessee, the year ending on the date to which his accounts have been so made up. ' Section 3: Where any Central Act enacts that income-tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or the members of the association individually. ' Section 55: In addition to the income-tax charged for any year, there shall be charged, levied and paid for that year in respect of the total income of the previous year of any individual, Hindu undivided family, company, local authority, unregistered firm or other association of persons, not being a registered firm, or the partners of the firm or members of the association individually, an additional duty of income-tax (in this Act referred to as super-tax) at the rate or rates laid down for that year by a Central Act. ' Section 67-B.-- If on the 1st day of April in any year provision has not yet been made by a Central Act for the charging of income-tax for that year, this Act shall nevertheless have effect until such provision is so made as if the provision in force in the preceding year or the provision proposed in the Bill then before Parliament, whichever is more favourable to the assessee, were actually in force." ' The Finance (No,2) Act, 1957 (Act No,XXVI of 1957). ' (It received the assent of the President on September 11, 1957.) "(Section 2: (1) Subject to the provisions of sub-sections (2),(3),(4) and (5) for the year beginning on the 1st day of April, 1957,-- (a) Income-tax shall be charged at the rates specified in Part I of the First Schedule, and, in the cases to which Paragraphs A, B and C of that Part apply, shall be increased by a surcharge for purposes of the Union and a special surcharge on unearned income, calculated in either case in the manner provided therein; and (b) Super-tax shall, for the purposes of section 55 of the Indian Income-tax Act, 1922 (XI of 1922) (hereinafter referred to as the Income-tax Act), be charged at the rates specified in Part II of the First Schedule...."
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' A gist of the said provisions, excluding the controversial points, relevant to the assessment under scrutiny may be given thus: Under section 3 of the Wealth Tax Act, the net wealth of the assessee was assessable as on the valuation date, i.e,, March 31, 1957, at the rate or rates specified in the Schedule to the said Act. "Net wealth" is the amount by which the aggregate value of the assets of the assessee as on the said date is in excess of the aggregate value of the debts owed by it on the said date. Under section 3 of the Income-tax Act, the assessee was liable to pay income-tax and super-tax on its income ascertained during the accounting year ending with March 31, 1957, at the rates prescribed under the Finance Bill or the previous Finance Act whichever was less, as the Finance Act of 1957 was passed only in September, 1977. On those facts, the question is whether the liability of the assessee to pay income-tax and super-tax arose on the valuation date, i.e,, March 31,1957, the last day of the accounting year, or subsequently during the assessment year, i.e, during the period April 1, 1957, to March 31, 1958. ' Looking at the problem from the standpoint of a businessman or looking at the question from a commonsense view, one will reasonably hold that the net wealth of an assessee during the accounting year is the income earned by him minus the tax payable by him in respect of that income. If a person earns Rs,1,00,000 during the accounting year and has to pay Rs,60,000 as tax in respect of that income, it will be incongruous to suggest that his wealth at the end of that year is Rs,1,00,000. A reasonable man will say that his income is only Rs,40,000, which represents his wealth at the end of the year. But it is said that what is just is not always legal. This Court has, on more than one occasion, emphasized the fact that the real income of an assessee has to be ascertained on commercial principles subject to the provisions of the Income-tax Act. Is there any provision in the Wealth Tax Act which compels us to come to a conclusion which is unjust on the face of it? ' The problem presented can satisfactorily be solved by answering two questions, namely, (1) what does the expression 'debt owed' mean? And (2) when does the liability to pay income-tax and super-tax under the Income-tax Act become a debt owed within the meaning of that expression? ' If we ascertain the meaning of the word "debt", the expression 'owed' does not cause any difficulty. The verb 'owe' means 'to be under an obligation to pay'. It does not really add to the meaning of the word "debt". What does the word "debt" mean? A simple but a clear definition of the word is found in Webb v. Stenton (1883) 11 Q B D 518, 527. Wherein Lindley L. J. Said " 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.' ' This view was accepted by the other Lord Justices. The Court of Appeal in O'Driscoll v. Manchester Insurance Committee [1915] 3 K.B. 499, 512, 515, 517. Considered the word 'debt' in the context of fees payable by the National Insurance Committee to panel doctors. The insurance committee entered into agreements with the panel doctors of their 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 a scale of fees. The Court held that where a panel doctor had done work under his agreement with the insurance committee, and the committee had received funds in respect of medical benefit from the National Insurance Commissioners, there was a debt owing or accruing from the insurance committee to the panel doctor which might be attached, though the exact share payable to him was not yet ascertained. It was argued that there could not be a debt until the amount had been ascertained and in support of that contention cases relating to unliquidated damages were cited. Distinguishing those cases on the ground that there was no debt until the verdict of the jury was pronounced assessing the damages and judgment was given, Swinfen Eady L.J. Observed: "Here there is a debt, uncertain in amount, which will become certain 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 the amount was not ascertained."
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' Phillimore L. J. Dealing with the argument based on the fact that the sums were not ascertained at the time they were sought to be attached, observed:- "No doubt these debts were not presently payable, and the amounts were not, on April 9, 1914, ascertained in the sense that no one could say what the result of the calculations would be, but it was curtain on that date that a payment would become due from the committee to the doctors out of the balance of the moneys in the hands of the committee for 1913.." ' So also Bankes L.J. Observed: "Dr. Sweeny fulfilled that condition, and a debt arose, though the amount of it was not ascertained on April 9, 1914, and was not then payable." ' This judgment in substance ruled that a present liability to pay an amount in future, though it was not ascertained but was ascertainable, was a debt liable to attachment. ' The word 'debt' was again considered in Inland Revenue Commissioners v. Bagnall Ltd. (1944) 1 All E R 204, 206 in connection with the excess profits tax. There, the Board of Inland Revenue accepted an offer of L.10,000 made by the respondent-company's accountants in settlement of their earlier liability. That offer was accepted only on September 22, 1937. The company contended that the sum was a debt due from the respondent to the Inland Revenue as from January 1, 1935. As the offer was not accepted, it was held that the sum was not a debt. It was argued that even if there was a liability on January 1, 1935, that liability did not become a debt within the meaning of the Finance (No,2) Act, 1939. Adverting to that argument, Macneghten J. Observed:- "It is true that the word 'debt' may, in certain connections, be used so as to cover a mere liability, but I think that in this Act it is used in the proper sense of an ascertained sum and that the contention of the Attorney-General is well-founded." ' This decision, while holding that in the context of the Finance Act of 1939, there was no debt until the liability was quantified, conceded that the expression 'debt' was wide enough to take in a liability; it also did net define the scope of the expression 'ascertained', that is to say whether the said expression would take in amounts ascertainable. ' The King's Bench Division in Seabrook Estate Co. Ltd. v. Ford (1949) 2 All E R 94, 96 held that money in the hands of a receiver for debenture-holders was not a debt owing or accruing and, therefore, was not liable to attachment. But Hallett, J. Accepted the following proposition laid down by Rowlatt, J. In O'Driscoll v. Manchester Insurance Committee (1915) 3 K.B. 499:- " 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." ' This question fell to be decided again in Dawson v. Preston (Law Society, Garnishee) (1955) 3 All E R 314;318. The question there was whether a sum representing damages paid to the legal aid fund could be attached by a creditor of a legally aided plaintiff. At the time when the garnishee order was sought to be issued, a part of the decree amount was with the Law Society, subject to any charge conferred on the Law Society to cover the prescribed deductions which remained to be quantified, e.g., deduction for the taxed costs of the action. The Court held that there was an existing debt although the payment of the debt was deferred pending the ascertainment of the amount of the charge in favour of the Law Society. Ormerod, J. Observed: ' that is merely a question of ascertaining the debt which has to be paid over to the assisted person and does not prevent that debt from being an existing debt at the material date." ' This decision also recognized that, if there was a liability in praesenti, the fact that the amount was to be ascertained did not make it any the less a debt. ' In Dunlop & Ranken Ltd. v. Hendall Steel Structures Ltd. (Pitchers Ltd., Garnishees) (1957) 1 W L R 1102, 1104, it was held that the issuing of the architect's certificate was just as much a necessity for investing a cause of action in sub-contractors as it was in the main contractors, and the
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judgment-debtors had no right to be paid, and therefore, there was no debt, until the architect had certified the amount to be paid for the work ordered by the granishees. On that reasoning it was held that no garnishee order should have been made. Strong reliance was placed on this decision in support of the contention of the revenue that there could not be a debt if the ascertainment of the debt depended upon a certificate to be issued by a third party. But a perusal of the judgment shows that in such contracts a certificate by the architect was a condition for imposing a liability and that, therefore, till such a condition was complied with, there could not be any debt. This decision does not throw any light on the question that now arises before us. The principle of the matter is well put in the Annual Practice, 1950, at page 808, thus: "But the distinction must be borne in mind between the case where there is an existing debt, payment whereof is deferred, and a 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." ' In our view this is a full and accurate statement of law on the subject and the said statement is supported by English decisions we have discussed earlier. ' We shall now notice some of the decisions of the Indian Courts on this aspect. ' A Special Bench of the Madras High Court in Sabju Sahib v. Noordin Sahib (1899) I L R 22 Mad. 139, 141 (SB) held that a…
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