Holding

The amount of income‑tax liability could not be deducted because it was a debt outstanding for more than twelve months on the valuation date, invoking the bar under sub‑clause (b) of clause (iii) of Section 2(m) of the Wealth Tax Act, 1957.

Summary

R.K. Deo, the former Raja of Jeypore, claimed a deduction of Rs 6,69,766, the income‑tax liability on his forest income, while computing his net wealth under the Wealth Tax Act, 1957 for the assessment years 1962‑63 to 1965‑66. The liability had been affirmed by the Supreme Court in 1958, a fresh demand notice was issued in October 1964 and the tax was finally paid in March 1965. The Wealth‑Tax Officer disallowed the deduction because the tax was outstanding for more than twelve months on each valuation date. The appellate authority allowed the deduction, but the Tribunal and the Orissa High Court set it aside. The Supreme Court held that an income‑tax liability is a debt within the meaning of Section 2(m) but the bar in sub‑clause (b) of clause (iii) applies when the debt is outstanding for more than twelve months on the valuation date, irrespective of when the demand notice was served. Consequently, the deduction could not be claimed and the appellant's appeals were dismissed.

Issues considered

Whether an income‑tax liability qualifies as a debt deductible under Section 2(m) of the Wealth Tax Act, 1957.
Whether the bar in sub‑clause (b) of clause (iii) of Section 2(m) applies when the tax debt is outstanding for more than twelve months on the valuation date.
From which date the twelve‑month period should be calculated – the date of crystallisation of liability (1958) or the date of the fresh demand notice (October 1964).
Effect of pending reference or appeal proceedings on the applicability of the deduction provision.

Legislation cited

Income Tax Act, 1922s. 29
Wealth Tax Act, 1957s. 2(m), s. 66, s. 66(5), s. 66(7)

Subjects

Wealth TaxIncome Tax LiabilityDeductionDebtOutstanding for 12 monthsValuation dateSection 2(m)Section 66Reference proceedingsAppeal

Judgment

R.K. DEO A
"'"(
v.
COMMISSIONER OF WEALTH-TAX, ORISSA.

May 12, 1992

[R.M. SAHAI AND A.S. ANAND, JJ.) B

Wealth Tax Act, 1957 :
~
Sections 2(m), 66 : Income Tax liability as a deduction from wealth
tax-Outstanding on the valuation date for more than 12 months-:-Whether
could be al/owed-Relevant date for purpose of calculating the period of 12
c
months-Wliat is-Pendency of reference/appeal before court-Effect of.

The appellant-assessee, in bis wealth-tax assessments, claimed
r-- deduction towards tax liability which arose on account of bis income from
forest brought to tax and upheld by this Court. The Wealth-Tax Officer D

• disallowed the claims as the tax payable remained outstanding for more
than tWelve months. on the valuation date. On appeal, the Appellate Assis-
tant Commissioner held that the assessee was entitled to claim the said
deduction in view of the fact that the liability was created by the judgment
of the Court and discharged subsequently. However, on appeal the
Tribunal set aside the order or the appellate authority. The High Court E
affirmed the finding or the Tribunal.

The assessee has preferred the present appeals against the High
~ Court's orders.
I
It was contended on behalf of the appellant that his liability crystal- F
;.__ lised on the last day of the previous year and it became a debt or might
have become a debt with the passing of the order by this Court in 1958,
" but since it was quantified only iQ October, 1964 when a fresh demand
notice was issued, the period of 12 months was liable to be counted from
that date. G
Dismissing the appeals, this <;ourt,
---<
HELD 1. The High Court was right in holding that the amotult of
Rs. 6,69,766 was not admissible as deduction while computing the net
wealth or the appellant under the Wealth Tax Act for the assessment yeats H
203
204 SUPREME COURT REPORTS (1992] 3 S.C.R.

A 1962-63 to 1965-66. (212 -BJ

2. That an Income Tax liability is a debt within the meaning of
section l(m) of the Wealth Tax Act, 1957 is settled law. In the instant case,
the amount payable by the &ppellant was, undoubtedly, a debt owed by him
on the valuation dates. But the appellant could claim its deduction only if
B the revenue failed to show that it was not outstanding for more than 12
months on the va~uation date. (210 G, H; 211 -A]

Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth
Tax (Central), Calcutta, (1966) 59 ITR 767 SC; Commissioner of Wealth Tax,
C Gujarat v. Kantilal Manila/, (1985) 145 ITR 447 SC and Doorga Prasad v.
Secretary of State, (1945) 13 ITR 285, relied on.

3. The appellant was bound to pay the tax assessed irrespective of
whether he had filed a reference or not'. This, admittedly, was not done by the .
assessee, and the amount remained outstanding throughout the period the
D reference was. pending in the High Court. Effect of answering the reference in
favour of assessee was that he could claim refund. But that occasion could
arise only if order under section 66(5) was passed by the High Court. But
before that the correctness of the order was challenged by the department by
filing an appeal in this Court which was allowed and liability orthe appellant
to pay tax was upheld. The tax assessed thus remained unpaid during
E pendency of the reference in High Court, as also during pendency of the
appeal in this Court and it was paid only in March 1965. Effect of non-pay-
ment of tax under sub-section (7) of section 66 was that the tax payable
became outstanding by operation of law and it remained so on the valuation
date. Therefore, the bar of sub-clause (b) of clause (iii) of sub-section 2(m)
F operated and the appellant could not claim the amount as deductible while
computing his net wealth. It was outstanding on the valuation dates for more
than 12 months whether the period is calculated from service of notice of
demand in pursuance of assessment order or from th~ final determination of
liability by the order passed by this Court in 1958 or because of operation of
G sub-section (7) of section 66 of the Act. However, on the facts of the instant
case it could not be calculated from October 1964 when the notice of demand
was served by the Income Tax Officer in pursuance of the order passed by the
Tribunal. [211 E - H; 212 -A]

Commissioner of Wealth Tax, Madras v. KS.N. Bhatt, (1984) 145 ITR
H 1 SC, relied on.
R.K. DEO v. COMMISSIONER (SARAI, J.] 205

Commissioner of Wealth Tax, Gujarat v. Vimlaben Vadilal Mehta, A
(1984) 145 ITR 11 SC; Commissioner of Wealth Tax v. Vadilal Lallubhai,
(1984) 145 ITR 7 and Ahmed Ibrahim Sahigra Dhoraji v. Commissioner of
Wealth Tax, Gujarat, [1981) 3 SCC 77, distinguished.

Vikram Deo Vanna, Maharaja of Jeypore v. Commissioner of Income
Tax, Bihar and Orissa, (1956) 29 ITR 77, referred to. B
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 788-791
<4. (NT) of 1977.

From the Judgment and Order dated 25.11.1975 of the Orissa High
Court in SJ.Cs Nos. 164 to 167 of 1975. C
T.S. Krishnamoorthy Iyer, V.B. Saharya and S. Prasad for the Ap-
pellant..

J. Ramamurthi, Ranbir Chandra and Ms. A. Subhashini for the
Respondent.
D

•The Judgment of the Court was delivered by

R.M. SAHAI, J. T.hese appeals are directed against order of the
Orissa High Court which decided the Wealth Tax Reference under Section E
27(1) of the Wealth Tax Act, 1957 in favour of the department. The
assessment years in dispute are 1962-63, 1963-64, 1964-65 and 1965-66. The
question of law referred to the High Court was :

"Whether on the facts and in the circumstances of the case, the
claim of the assessee for deduction of the tax liability amounting F
to Rs. 6,69,766 in computing the net wealth in four wealth-tax
assessments is admissible under the provisions of the Wealth
Tax Act."

According to the statement of case the appellant erstwhile Raja of
Jeypore, owner of extensive forests, prior to abolition of estate in 1953, was G
assessed to income-tax, on forest income, for assessment years 1942-43 to
1946-47 to an aggregate of Rs. 6,69,766. Validity of the levy, was decided
ultimately, by the High Court in reference under Section 66 of the Income-
Tax Act 1922 (in brief 'the Act') in Vikram Deo Vanna, Maharaja of Jeypore
v. Commissioner of Income Tax, Bihar and Orissa,, (1956) 29 ITR 77, and H
206 SUPREME COURT REPORTS (1992) 3 S.C.R.

A it was held that the income being from agriculture was not exigible to tax.
On further appeal to this Court, at the instance of the department, the
order of the High Court was set aside on 14th October 1958 and the
assessee was held liable to pay tax on the forest income. In conformity with
the order, passed by this Court, the tribunal passed the order under Section
B 66(5) read with Section 66A{4) of the Act after 30th June 1%4. In
pursuance of this order the Income Tax Officer issued fresh notice of
demand on 4th October 1964 and the amount was paid on 25th March
1965. In wealth tax assessments for the years 1962-63 to 1965-66 the >-
assessee disputed his liability in view of the judgment given by this Court
C in 1958 and claimed that it being a debt within meaning of sub-section (m)
of Section 2 of the Wealth Tax Act the amount was liable to be deducted
while computing his net wealth. The Wealth Tax Officer did not allow the
'- claim as the tax payable remained outstanding for more than twelve months
on the valuation date. The Appellate Assistant Commissioner allowed the
appeals as' the liability was created by the judgment of this Court which
D was discharged in 1965, therefore, the assessee was held entitled to claim
its deduction for determination of the net wealth in the assessment years
in dispute. On further appeal, at the instance of the department, the ~der
of the appellate authority was set aside by the tribunal and it was held,

E "The decision of the Supreme Court was only to declare the
correct state of law, applicable to the income disputed by the
assessee in appeal and not to create, for the first time, a liability
to tax on such income. The demands in respect of the amounts
in question were admittedly created as a result of assessment
of such income and the assessee has been claiming in appeal
F and further in reference proceedings that the same was not
payable by him. The demands were also admittedly outstanding
for more than 12 months if the period is computed from the
date of original demand notices pertaining to assessments
made."
G _The finding was affirmed by the High Court and it was held that the
amount was not deductible while computing the net wealth of the assessee.

That an income tax liability is a debt within meaning.of Section 2(m)
of the Act is settled by series of decisions of this Court beginning from
H Kesoram Industries and Cotton Mills Ltd. v. Commis_sioner of Wealth Tax
R.K. DEO v. COMMISSIONER [SAHAI, J.] '207

(Central), Calcutta, (1966) 59 ITR 767 SC. In Commissioner of Wealth Tax, A
Gujarat v. Kantilal Manila/, (1985) 145 ITR 447 SC this Court approved
the decisions of Privy Council in Doorga Prasad v. Secretary of State, (1945)
13 ITR 285 that an income tax liability becomes a debt when payment of
the tax is demanded by a notiee issued under Section 29 of the Act. The
question, therefore, that requires consideration is if the High Court was B
right in its conclusion that even though the amount was debt it could not
be deducted while determining the net wealth as either the payability of
tax was in dispute on the valuation date or the demand had remained
unpaid for more than 12 months on the valuation date. To examine the
co~rectness of it Section 2(m) of the Wealth Tax Act is e~tracted below:
c
" '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 th.e
valuation date, inclu~g assets required to be included in his
net wealth as on that date under this :Act, is in excess of the D
aggregate value of all the debts owed by the assessee on the
valuation date other than, -

(i) debts which unde1 Section 6 are not to be taken into
account;
E
(ii) debts.which are secured on, or which have been incurred
in relation to, any property in respect of which wealth-tax is
not chargeable under this Act; and

(iii) the amount of the tax, penalty or interest payable in
consequence of any order passed under or in pursuance of this F
Act or any law relating to taxation of income or profits, or the
Estate Duty Act, 1953 (34 of 1953), the Expenditure-tax Act,
1957 (29of1957), or the Gift-tax Act, 1958 (18 of 1958),-

(a) which is outstanding on the valuation date and is claimed G
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 being
payable by him, is nevertheless outstanding for a period of more
than twelve months on the valuation date. " H
208 SUPREME COURT REPORTS [1992] 3 S.C.R.

A The net wealth according to sub-section (m) of Section 2 is aggregate
value computed in accordance with the provisions of the Act less the value
of all the debts owed by the assessee. Since income-tax liability is a debt
the assessee was entitled to claim its deduction from the aggregate value
to arrive ac the net wealth. But the deduction of debt was permissible, only,
if it did not fall in one of the sub-clauses mentioned in clause (iii). Relevant
B date for operation of either-clause was the valuation date. Clause (a) was
construed in Commissioner of Wi:ahh Tax v. Kantilal Mani/al (supra) and
it was held that in order to invoke the bar prescribed by Section 2(m) 3(a)
it was necessary for the department to establish that both the requirements
were satisfied, that is, the amount of tax was outstanding on the valuation
c date and further tha~ it was claimed by the assessee in appeal, revision or
any other proceeding as not being payable by him. The valuation dates for
the assessment years in dispute were 30th June 1961, 1962, 1963, 1964
respectively. Since the amount had not been paid by the assessee it was
outstanding on the valuation date but on these dates no appeal, revision or
D any other proceeding was pending in which the assessee had claimed that
the amount was not payable by him. On plain reading of the provisions it
is doubtful if the appellant could be precluded from.claiming deduction of
the income-tax dues under sub-clause (a). To this extent the order of the
High Court and the tribunal do not appear to be well founded. To support
the order of the High Court the learned counsel for the department urged
E that the proceedings which had been started by the appellant by way of
reference before the High Court did not come to an end in 1958 by the
order passed by this Court in appeal filed by the department as the order .
passed in advisory jurisdiction either by the High Court or in appeal by
this Court could become final only when the tribunal passed the order in
F conformity with the order passed by this Court. Since admittedly the order
under Section 66(5) of the Act was passed in October 1964 the proceedings
initiated at the instance of appellant shall be deemed to have been pending
till then. In our opinion it appears unnecessary to express any opinion on
the nature of reference proceedings and whether the appeal filed by the
department should be deemed to be continuation of the claim that the tax
G was not payable by the appellant for purposes of sub-clause (a) as once
the question of law, was decided against the appellant by this Court in 1958,
may be in appeal filed by the department, the appellant's claim that the
amount was not payable by him stood finally adjudicated. Nothing more
H remained to be decided. The order of the tribunal, in conformity with the
R.K. DEO v. COMMISSIONER [SARAI, J.] 209

order passed by this Court, could be relevant for the department, only, to A
enable it to proceed to realise the amount. It ·Could not stand as bar to the
.claim of the appellant under Section 2(m) by operation of sub-clause (a)
of clause (iii).

For operation of sub-clause (b) the revenue had to establish that the B
amount remained outstanding for a period of more than 12 months on the
valuation date. In Commissioner of Wealth Tax v. Kantilal Manila/ (supra)
it was held that an amount becomes outstanding after it had been quan-
··~
tified. The liability under the Income Tax Act arises in the previous year
corresponding to the assessment year ~d it becomes due as held in
Kesoram's case after it had been, 'quantified in accordance with ascer- C
tainable data'. The liability of the assessee was determined by the Income
tax Officer and a demand notice was also served on him. The amount thus
became due and payable and if the period of 12 months is calculated from
this date the amount, obviously, remained outstanding for a period of more
than 12 months on the valuation date. But the le~rned counsel for the D
appellant urged that on facts of this case the department cannot succeed
on this ground. He urged that the High Court having answered the refer-
ence in favour of the appellant the quantification stood set aside and the
period could be counted from the date fresh notice of demand was served
by the Income Tax Officer in 1964. The submission ignores that once>
proceedings became final and the law was declared by this Court and it. E
was held that forest income was taxable then the liability to pay the amount
shall be deemed to have existed from the date the demand was created by
the Income Tax Officer. Therefore, the tax payable for which a notice of
demand had been served on the assessee but it had not been paid because
of pendency of a:ppeal, revision or other proceeding, became payable and F
~ince it remained outstanding for a .period of more than 12 months on the
valuation date bar ·under clause (b), in our opinion, applied squarely.
Reliance was placed by the learned counsel for appellant on Commissioner
of Wealth Tax, Gujarat v. Vimlaben Vadilal Mehta, (1984) 145 ITR 11 SC
and it was urged that the -liability of the appellant crystallised on the last
day of the previous year and it became·a debt but it having been quantified G
in October 1964 when Income Tax Officer issued fresh notice of demand
the period of 12 months was liable to be counted .from this date. We do
not think that this decision can be applied in the manner as argued by
learned counsel for appellant. The jurisdiction exercised· by the High Court
under Section 66 or by the Supreme Court in an appeal against that order H
210 SUPREME COURT REPORTS (1992) 3 S.C.R.

A was only advisory. There would have been some substance· in the submis-
sion of the learned counsel if the tribunal would have passed the order -y·
under Section 66 in conformity with the opinion given by the High Court
that the assessee was not liable to pay any tax on the forest income. That
may have resulted in wiping off the demand created initially by the Income
Tax Officer. But the High Court found and it was not disputed that no
B
order was passed by it before the law was declared by this Court in 1958.
The original demand thus remained outstanding and became operative
after the decision of this Court. Reliance was also placed on Commissioner
of Wealth Tax v. Vadila/ Lallubhai, (1984} 145 ITR 7 and it was urged that )-
in computing the net wealth of assessee the deductions admissible must be
c calculated on the basis of the tax as finally quantified even though the
assessment may have been made subsequent to the. valuation date. It was
urged that even assuming that the liability arose from the order passed by
this Court in 1958 it having been finally quantified after the order was
-
passed by the tribunal the period of 12 months should be calculated from
that date. The facts of the case were entirely different. In Vadilal's case the
D
question was whether deduction could be claimed on basis of estimated
liabilities mentioned in the return or the amount which is finally deter-
mined at the final assessment. It was held that it was not possible to accept
the claim of the department that the net wealth for purposes of Section
2(m) was the tax liability disclosed by an assessee in his return. What could
E be deducted was the liability ultimately determined as payable. In the case
of appellant quantification had already been done. If the order of this
;..._
Court would have necessitated variation in it, as happened in Commissioner
of Wealth Tax v. Vimlaben Vadilal Mehta (supra) something could be said
in favour of appellant. From the decision in Commissioner of Weal(h Tax,
F Madras, v. K.S.N. Bhatt, (1984} 145 ITR 1 SC, it is clear that payability of
tax for purposes of clauses (a) and (b) is dependent on liability to pay. If
the liability goes then the amount ceases to be debt even if the determina-
tion of liability takes place after the valuation date. In appellant's case
liability stood determined finally in 1958. Therefore the payability of tax
started operating from this date and the period of 12 months could be
G calculated from this date and not from October 1%4. The decision in
Ahmed Ibrahim Sahigra Dhoraji v. Commissioner of Wealth Tax, Gujarat,
(1981) 3 sec 77 .is also not of any help, to the appellant, as the amount
payable by the appellant was, undoubtedly, a debt owed by him on the '-r
valuation dates. But the appellant could claim its deduction only if the
H
R.K. DEO v. COMMISSIONER (SARAI, J.] 211

revenue failed to show that it was not outstanding for more than 12 months A
on the valuation date.

There is yet another reason why the claim of the department that the
bar of sub-clause (b) operated appears to be well founded. Sub-section (7)
of Section 66 of the Act reads as under : -
B
';(7) Notwithstanding that a reference has been made under
this section to the High Court, income-tax shall be payable in
accordance with the assessment made in the case :

Provided that, if the amount of an assessment is reduced as
a result of such reference, the amount overpaid shall be C
- refunded with such interest as the Commissioner may allow
unless the High Court, on intimation given by the Commis-
sioner \vithin thirty days of the receipt of the result of such
reference that he intends to ask for leave to appeal to the
Supreme Court makes an order authorising the Commissioner D
to postpone payment of such refund until the disposal of the
appeal to the Supreme Court."

The appellant was, therefore, bound to pay the tax assessed irrespective of
whether he had filed a reference or not. This, admittedly, was not done by
the assessee, and the amount remained outstanding throughout the period · E
the reference was pending in the High Court. Effect of answering the
reference in favour of assessee was that he could claim refund. But that
occasion could arise only if order under Section 66(5) was passed by the
High Court. But before that the correctness of the order was challenged
by the department byfiling an appeal in this Court which was allowed and F
liability of the appellant to pay tax was upheld. The tax assessed thus
remained unpaid during pendency of the reference in High Court, and
during pendency of the appeal in this Court and it was paid only in March
1965. Effect of non-payment of tax under sub-section (7) of Section 66 was
that the tax payable became outstanding by operation of law and it
remained so on the valuation date. Therefore, the bar of sub- clause (b) of G
clause (iii) of sub-section 2(m) operated and the appellant could not claim
the amount as deductible while computing his net wealth. It was outstand-
ing on the valuation dates for more than 12 months whether the
period is calculated from service of notice of demand in pursuance of
assessment order or from the final determination of liability by the order H
212 . SUPREME COURT REPORTS (1992) 3 S.C.R.

A passed by this Court in 1958 or because of operation of sub-section (7) of
Section 66 of the Act. On the facts of this case it could not be calculated
from October 1964 when the notice of demand was served by the Income
Tax Officer in pursuance of the otder passed by the tribunal.

For these reasons the High Court rightly held that the amount of Rs.
B 6,69,766 was not admissible as deduction while computing the net wealth
of the appellant und~r the Wealth Tax Act in assessment years 1962-63 to
1965-66. The api)eais, accordingly, fail and are dismissed with costs.

G.N. Appeals dismissed:

.
'
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