Holding

A tax liability is deemed a debt owed on the valuation date only if it has crystallised under the relevant taxing statute by that date and the ultimate judicial determination confirms a positive liability; if the final determination finds the liability nil, it is not a debt.

Summary

The assessee, K.S.N. Bhatt, claimed deductions in his wealth‑tax returns for income‑tax, wealth‑tax and gift‑tax liabilities, arguing that these amounts were debts owed on the valuation dates for the assessment years 1964‑65 to 1967‑68. The Wealth Tax Officer allowed only part of the deductions; the Appellate Assistant Commissioner dismissed the appeal and the Appellate Tribunal held that any liability that had crystallised before the valuation date could be treated as a debt, even if the assessment order was passed later. The Revenue contended that the income‑tax and gift‑tax liabilities for the year 1965‑66 had been cancelled on appeal after the valuation date and therefore were not debts owed. The Supreme Court held that a liability is a debt on the valuation date only if it has crystallised under the relevant statute by that date and the ultimate judicial determination confirms a positive liability; if the final determination finds the liability nil, it cannot be treated as a debt. Consequently, the cancelled income‑tax and gift‑tax liabilities for 1965‑66 could not be deducted, while the other liabilities could. The Court allowed the appeals in part.

Issues considered

Whether tax liabilities that crystallise before the valuation date but are quantified after can be treated as debts owed on the valuation date for purposes of deduction under s.2(m) of the Wealth Tax Act.
Whether the income‑tax and gift‑tax liabilities for assessment year 1965‑66, which were set aside on appeal after the valuation date, constitute debts owed on that date.
Interpretation of s.2(m)(iii)(a) of the Wealth Tax Act with respect to outstanding tax and pending appeals.

Legislation cited

Gift Tax Act, 1958s. 13, s. 15, s. 2, s. 3
Income Tax Act, 1961s. 80B
Wealth Tax Act, 1957s. 2(g), s. 2(m), s. 3

Subjects

wealth taxdeductiondebt owedvaluation datetax liability crystallisationsection 2(m) Wealth Tax Actincome taxgift taxappellate tribunalSupreme Court

Judgment

•
•

,490

COMMISSIONER OF WEALTH TAX, MADRAS
A
v.

K. S. N. BHATT
~
October 21, 1983
B
[R.S. PATHAK AND E.S. VENKATARAMIAH, JJ.]
•
Wealth Tax Act, 1957 (27 of 1957)-Sections '2(m). 2(g) and 3-Wealth
tax-Liability of-Crystallieses on the valuation date/or the relevant assessment
year-Computing net weaiJh-Tax liability' on valuation date-Whether ded~ctib!e
c ..
as 'debt owed' •

Gift Tax Act, 1958(/Bof1958)-Sections 2,3, 13 and 15-Gift tax-L/iabi-
lity of-Crystallises on the last date of the previous year.

0 , Income Tax' Act, 1961 (43 of 1961) Section 80B.-lncbme tax-Liability
. .
of-Crystallises on.the last date relevant to the assessment year.
•
In assessment proceedings under the Wealth Tax Act for four assessment
years the assessee claimed a deduction in the computation of his net wealth on
account of income tax, wealth tax and ·gift tax liabilities. The Wealth Tax
E .Officer allowed only part of the deducti.ons claimed The appeal of the assessee
was disniissed by the Appe!Jate Assistant Commissioner of Wealth Tax. In
the second appeal before the· Appellate Tribunal, the assessee filed statements
showing particulars of the income tax, wealth tax and gift tax liabilities in
respect of the different assessment years. The Revenue contended that the
income tax liability and the gift tax liability for one of the assessment yearS
[1965'66] liad been cancelled by the Appellate Assistant Commissioner .in
(l appeals against the assessment orders and those appellate orders of the Appel~
late Assistant Commissioner having becoine finill in ·view of the dismissal of
. the Reverfue's appeals by the Appellate Tribunal, there was no outstanding
demand on acCount of income tax and girt tax for that year and that therefore
these two items do not constitute ''debts owed' by ·the asSessee and so would
not qualify for deduction under section 2(m) of the_ Wealth- Tax Act. The
Apppllate Tribunal fOllo\ving two jud"gments of this Court {CommiS.tioner of
Income Tax v. Keshoram Industries Pvt. Ltd. (1966} 59 I.T.R. 767 and H.H. Setu
Parvati Bayiv. Commissioner of Wealth Tax Kera/a (1969) 69 I.T.R. 864J, held
that so long as the liability to pay the tax had arisen before the r!'levant valua·
tion dates it was immaterial that the assessments were quantified. after the
valuation of dates, that the question whether a debt was owed by the assessee
H must: be examined with-reference to the position obtaining on the valuation dat~
and that nothing happebing subsequently could be consislcred in computing the
net wealth.
· C. W. T. V. K. S. N. BHATT • 491

.. The High Court having refused te call for a reference from the Appellate
Tribunal under section . 27(3) of. the Act the
.
Revenue appealed
'
to this .~ourt.

Allowing the appeals in part ..

HELD : 1. Whether a debt. was owed by the assessee on the valuation -
date would depend on the fact that a liability had already crystallised under the
relevant (axing statute on the valuation date .. [494 DJ B
.2. An income tax liability. crystallises on the last day of the previous
year relevant _to the assessment· year under the Income Tax Act, a wealth tax
liability crystallises on the valuation date for the releVant assessm~nt year
· under the Wealth Tax Act and a gift tax liability crystallises on the last day of~
the previous year for the relevant assessment year under the Gift Tax Act. C
[494 E]

3. The quantification of the income tax, wealth tax or gift tax liability
is determined bY a cofrespbnding.assessment order, and even ift~e assessment-
·order is made after the vaiuatioD. date relevant to the wealth tax assessment in
which the claim to 4eduCtion is made, there is a debt owed ~y the assessee on· -
ihe valuation date. It is the quantification of the tax liability by the ultimate
judicial authority which will determine the amount of the tlebt owed b)' the
assessee on the valuation date. SO long as such ultimate determination indi~
cates the existence of a positive tax liability, it must be held that there is a debt
owed by the assessee on the valuation date even though ~uch determination
may be subsequent in point of time to the valuation date. If, however, it is
found on such ultimate determination that there is no tax liability it cannot
be said that merely because originally a tax liability could· be envisaged there
E.
was a debt owed by the assessee.. (495 B-E] •

4. Section 2(m) (iii) (a) denies deduction of ap amount of tax which
is outstanding on the valuation date if the assessee contends in appeal, revision
or other proceeding that he is not liable to pay the tax. .It presuppo~es that
there is a subsisting tax demand and the ass~ssee has challenged its validit)r.
It refers to t!"ie initial stage only where an appeal, revision or other proceeding
is pending merely. "It does not proc.eed beyond that stage to the point where,

../
in consequence of such appeal, revision or other proceeding, the tax liability
has been found to be nil.. ollce it is determin~d that the tax liability is. nil, it
cannot be said that any amount of tax is 9utstanding. Such a situation does
not bring section 2(m) (iii) (a) into operation at all. If upon the ultimate
r determination it is found that the amount of tax is nil, the assessee is denied ~
G·
the deduction ·claimed by him not _on the ground of section 2(m) (iii) (a) but
because the superior:, authority has found that there is no tax liability
whatever. (496 A·D] •·

In the instant case, the income tax and the gift tax liabilities for the H-~
assessment year 1965-66 Subsequently set aside on appeal after the valuation
dates, cannot be regaided as debts owed by the. assessee on the rel.evant valua-
tion qates. [495 Gj · ·
492 • SUPREME COURT REPORTS • (1984) I S.C.R,
-
Commissioner of ./rklime Tax v. Keshoram Industries Pvt. Ltd. (1966) 59
J.T.R: 767; H.B. Setu Parvati Bayi v. Commissioner of Wealth Tax, Ktrala
(1969)'69 I.T.R. 864 referred to. ·

Late P. Appavoo ·Pillai v. Commissioner of Wealth Tax Madras (1973) 91
J.T.R. 138 reversed.

B CtVIL APPELLATE JURISDICTION : Civil Appeals Nos. 384 to 387
of 1978. · · · '

From the Judgment and Order dated the .18th January, 1977 of
the High Court at Madras in T.C. Petitions. Nos. 409 to 412 of
1976~
a
.S._C. Manchanda and Miss A. Subhashlni for the Appellant.
'
Gopa/a Subramanium and Mrs. S. Gopalakrishnan for , the
Respondent.

• The Judgment of the Court was delivered by

PATHAK, J. These appeals are directed against the judgment or'
the Madras High Court refusing to .call for a reference from the'
. Appellate Tribunal under s.. 27 (3) of the Wealth Tax Act on the
following two questions :- ,

'
"I. Whether on the facts and in the circumstances of the
case, the. Tribunal was right in holding that -the
liabilities claimed by the assessee, though existence of
the very liability was questioned ·by ·the· assessee,
. should be aliowed as a 'debt owed' in computing' the
net wealth of the assessee ?
-
2. · Whether on the facts and in the_ circumstances of the
case, the Tribunal was right in holding that the tax .
liabilities as allowed by the Wealth Tax Officer was
not in accordance with law?"

we think that the questions are indeed questions of law and the
High Court should have called for a statement of the case from the
Appellate Tribunal and rendered its opinion. on the said questions.
Ordinarily, we would have allowed the appeal and directed the , High
Court ' . ' . referenc~ from[.the Appellate
. . . to- requisition[a
~ .
Tribunal
.
to enable
••
. ·~ '
c. w. r. v. K. s.. N. BHATT (Pathak, J) 493

the High Court to decide the two questions of law. But we refrain ·
from doing so as th~ points have already been considered on the
merits by .us in judgments delivered today in tl).e appeals listed and
heard along With these cases, and therefore we shall express our
opinion directly on the two questions.

In assessment proceedings under th1; Wealth Tax A~t for the B
assessment years 1964-65, 1965-66, 1966-67 and J967-68, the corres·
ponding valuation dates being March 31, 1964, March 31, 1965,
March 31, 1966 and March.31, 1967, the assessee claimed a deduction
in the computation of the assessee's net wealth on account of income·
·tax, wealth-tax and gift-tax liabilities. The Wealth Tax officer alJowed
oipy part of the deductions claimed, an4.an appeal by the assessee c
was dismissed by the Appellate Assistant Commissioner of Wealth
Tax. In second appeal before the Appellate Tribunal, the assessee
filed statements showing particulars of the income tax, w~alth t•x
and gift tax !iabililties in respect of the diffe'rent assessment years.
The Appellate Tribunal found that so far as the assessment year
D
1964-65 was concerned all the demands were raised on)y after the
relevant valuation date, that in respect of the assessment.year 1965-66,
the demands; except for items Nos. 1 to 5 and 12, were raised: subse-
quent to the relevant valuation date, that in respect of the assessment
y~ar 1966:67 all the demands, except iterns I. to 3 and 8 to· 10, were
raised subsequent to tb.e relevant valuation date and that so far as the E

-
assessment· year 1967-68 was concerned, except the ,first item, the
demands in respect of the rest of the items were raised subsequent to
the relevant valuation 'date. The Appellate Tribunal held, following
the judgment of this court in Commissioner of Income TO?C v. Keshoram
Industries Pvt. Ltd.(1) and H.H. Setu Parv~ti Bayi v. Commissioner of
F
·-, .>-- . Wealth Tax, Kera/a,(') that so long as the liability to pay the tax had
arisen before the.relevant valuation dates it w~s immaterial that the
asse,sments were quantified after the relevant. valuation dates. It was
J r
pointed out by the Revenue before the Appellate Tribunal that .the
income tax liability for the assessm~nt year 1965-66 of .Rs. 72,399
and the gift tax liability' for the assessment year 1965-66 •of G
Rs. 1,13,650 had been cancelled by the Appellate Assisstant Commis-
sione.r in appeals against the assessment orders, and ·those appellate
orders of the Appellate Assisstant Commissioner had become final
in view of·the dismissal of the Revenu~'s, appeals by tbe Appellat<i
H
(I) (1966) S9J.T.R. 767.
(2) (1969) 69 I.T,R. 864,
SUPREME COURT REPORTS · {1984) I s.c.k.

Tribunal, with the result that there· was no outstanding demand on
A account.of income tax.and gift tax for that. year. It was urged that
·. the two sums of income tax liability and gift tax liability would not
constitute 'debts. owed' by the assessee and, therefore: w~uld not
qualify for deduction under s. 2(m) of the Wealth Tax Act. Th~
AppeUate 'tribunal rejected the contention, holding that the question
B whether a debt was owed by. the assessee must be examined with
reference to the position obtaining in the valuation date, and that
not)ling happening subsequently could be considered in computing
the net wealth. It observed that the fact that the assessee had· filed
appeals subsequent to the valuation dates and that relief had been
granted by the Appellate Anthority would have no relevance for
c determining'whether a debt. was owed on the releyant valuation datl!,
Reference was made to the decision of the Madras High Court ·hi
Late P: Appavoo Pillai v. Commissioner of Wealth Tax, Madras.(')
We are unab!O to agree with the view taken by the Appellate
a
Tribunal. Whether debt was owed by the assessee on the valuation
< date would depend, as was observed by this Court .in Keshor~m
Industries Pvt.. Ltd. (supra) and H.H. Setu Parvati Bayi (supra), on
the fact that a liability had already crystallised under the relevant
taxing statute on the valuation date. An income tax liability crystal-
lises on the last day of the previous year relevant to ·the assessment
year under the Income Tax Act, a wealth tax liability cry'stallises on
E the valuation date for the relevant assessment year under the Wealth

F
Tax Act.and a gift tax liability crystallises on the last day of the pre-
vious year for the relevant assessment year under the Gift Tax Act.
En passant, we may explain why we say that'a gift tax liability crys-
tallises oil the last day of the pertinent previous year under the Gift
Tax Act. Section 3 of the Gift Tax Act levies gift tax in respect of
the gifts made by a· person during the previous year at the rates
-
specified in the Schedule. Section 13 provides for . the filing of a
return of the gifts made during the previom year. Section 15 requires.
the Gift Tax· Officer to assess the value of the, taxable. gifts made
during the . previous yea~ and determine the amount of gift tax
G payable. The gift tax so payable ·is envisaged as a single sum in
respect of the totality of the gifts made by the assessee during the
previous year. Moreover, the Schedule prescribes graduated scales
. of rates of gift tax in ascending order. All these considerations
point to the conclusion. that the liability to gift tax crystallises,
H not in relation to each gift individually, but in relation

(1) (1973) 911.T.R. 138.
I·
c. w; T. v. Ki. s. N. BHATT (Pathak, J) 4§5
io the assessed aggregate. value of the gifts made during the
previous year. In other words, a gift tax liabiliiy crystallises
on the last day of the prevlt>us year.. Now the quantification of ·
} the income tax, wealth tax or gift tax liability is determined by a
corresponding assessment order, and even if the assessment order is
m.ade after the valuation date relevant to the wealth tax assessment
in which the claim to deducti.on is made, there is a debt owed by the
assessee on the valuation date. The quantification effected by an
assessment order may ·oo varied as the im;ome tax, wealth tax
and gift tax case is carried in appeal to the Appellate Assisstant
Commissioner, or thereafter to the Appellate Tribunal, and indeed
even in ~eference later to the High Court or subsequent appeal to
this Court. It is the quantification of the tax liability by the ultimate Cf
judicial authority whioh will determine the amount of the debt owed
by the assesste on the valuation date. So long as such ultimate
0

• determinatio n indicates the existence of a posith<e ._tax liability, it
must be held that there is a dobt owed by the assessee on the valu-
ation date even though such determination may be subsequent in
point of time to the valuation date. If, however, it is found on such
'ultimate determination that.there is no tax liability, it cannot be said
that merely because originally a tax liability had been determined and
~toad existing on the valuation date there was a debt owed by the
assessee. The fact cannot be ignored that when the case was carried
in appeal or reference it was found by the superior authority that in F
fact there was no tax liability at all. That final determination,
even though rendered after the valuation dat~, directly relates to the
question whether on the valuation date there was a debt owed by the
asses see. If the finding is that there was no tax liability, it must be
held that there was no debt owed by the assessee on the valuation
date. In this regard, we do not agree with what has been said by the
Madras High Court to the contrar.y in P.A. Appavoo Pillai (supra).
We are of opinion that the income tax liability for ·the· assessment
year 1965-66 of.Rs. 72,399 and the gift tax libility for the ·assessment
year 1965-66 of Rs. 1,13,650, subsequently set aside on appeal after
the valuation dates, cannot be regarded as debts owed by the assessee G
on the relevant valuation dates. ·

Towards the close of its order the Appellate Tribunal pointed
to the fact that the different demands of tax were served on the
assessee subsequent to the respective valuation dates and, on that
H
ground, observed that the tax liabilities did not fall within the prohi-
bition of s. 2{m) (iii) (a) and had to be taken into account as debts
.,

496 l!UPREMB COURT REPORTS [ 19841 1 s.c. R
owed by. the assessee on the v11luaiion dates. It seems to us that the
i\ppellate Tribunal has not correctly appreciated the scope of s. 2(m)
(iii) (a). Section 2(m) (iii) (a) denies deduction to an amount of tax
which 'is outstanding on the valuation date if the assessee. contends in
appeal, revision or other proceeding that he is not liable to. pay the
tax. It presupposes that there is a subsisting tax demand and the
B assessee has challenged its validity. It refers to the initial stage only
where an appeal, revision Of other proceeding is pending merely. It
does not proceed beyond that stage to the point where, in conse·
qµence of such appeal, revision or other proceedings, the. iax liability
· has been found to be nil. Once it is determined that the tax liability
is nil,. it cannot be said that any amount of tax is outstanding.' Such
c a situation does not bring s. 2(m) (iii) (a) into operation at all, as is
clear indeed ·from its very terms. If upon the ultimate determination
it is f~und that the amount of tax is nil, the .asscssee is denied the
deduction claimed by him not on the ground of 8. 2(m) (iii) (a) but
because the superior authority has found that there is no tax liabilty
D whatever. 'It must be taken that in law there never was any tax
liability.

So far as the remaining tax Ii~bilities are concerned, the Tribunal '
is right in allowing theincome tax, wealth tax and gift tax liabilities
to be deducted in computing the net wealth of the asse'ssee for the \.,
E · respective assessment years, even though, the assessment orders were
finalised after the resp~ctive valuation dates. We may point out that
it has not been shown to us that the assessee filed appeals questioning
the income· tax, wealth tax and gift tax Liabilities other than the
income tax liability of Rs. 72,399 and the gift tax liability of
F . ·.Rs. 1,13,650 fur the assessment years 1965-~6 refer,red to earlier.·
The questions of which reference was sought by the Reyemie -\'
are answered accordingly.

G
The appeals are allowed in part in the terms already set out.
.There is no order as to costs.
··t-
N.V.K. Appeals partly at/owed.