H.H. Gourilakshmi Bayi vs Commissioner of Wealth-tax

T. Kochu Thommen, J.—The following questions have been, at the instance of the assessee, referred to us by the Income Tax Appellate Tribunal, Cochin Bench :

"(1) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the claim of the assessee was not a mistake apparent on the face of the record and consequently Section 35 would not apply ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding in the face of the Appellate Assistant Commissioner of Wealth-tax admitting the appeal and deciding the appeal on merits against the assessee that the point in issue was a debatable one and, therefore, beyond the purview of Section 35 of the Act ?"

In respect of the assessment year 1974-75, the assessee filed a return under the Income Tax Act on the due date and the assessment was completed on December 31, 1974. Subsequent to the valuation date which fell on March 31, 1974, the assessee filed an additional (revised) return stating that, prior to the valuation date, the company in which the assessee held certain shares had declared in respect of those shares dividend in the sum of Rs. 28,650 and that the assessee was, therefore, liable to include the net dividend in the sum of Rs. 22,000 in her return under the Wealth-tax Act. The Wealth-tax Officer thereupon reopened the assessment and completed the same by adding the gross dividend of Rs. 28,650 instead of the net dividend of Rs. 22,000. The assessee requested the Wealth-tax Officer to rectify the mistake in exercise of his power u/s 35 by deleting the portion of the gross dividend representing the tax deducted or deductible at source. Since the assessee treated the inclusion of the gross dividend as a mistake, no appeal against the order on the merits had been filed, but only an application u/s 35. The Wealth-tax Officer rejected her application stating that no mistake had occurred in the order. Against that order, the assessee filed an appeal before the Appellate Assistant Commissioner but without success. The Tribunal confirmed the orders of the authorities below.

Counsel for the assessee submits that, under the Wealth-tax Act, what is assessable is only the net wealth of the assessee and, in computing the net wealth, the debt owed by the assessee in respect of the tax deductible at source ought to have been excluded. That the gross dividend declared was Rs. 28,650 and the net dividend due to the assessee was only Rs. 22,000 had been clearly stated by the assessee in the return. The officer was thus well aware that the differential, being the Income Tax due in respect of the dividend, did not form part of the net wealth. The inclusion of that differential in the computation of the assessee''s net wealth for the purpose of assessment under the Wealth-tax Act was, therefore, an error apparent on the face of the record and rectifiable u/s 35.

Counsel for the Revenue, however, submits that, although income arose to the assessee and was, therefore, taxable under the Income Tax Act in the year in which it arose, the tax deductible at source under the Income Tax Act was in fact deductible only after the valuation date, but before the payment of the dividend to the assessee. Admittedly, the dividend was not paid until after the valuation date and, therefore, Income Tax was also deducted only after that date. Consequently, counsel submits that no debt was owed by the assessee prior to the valuation date and the tax deductible at source, but not deducted, was not a debt which could be taken into account in computing the net wealth.

What is overlooked in this submission on behalf of the Revenue is that the debt was owed or the liability arose as soon as income accrued. Income accrued as soon as the dividend was declared, though not paid, and the liability to pay tax on the income arose as soon as the income accrued. When the tax is already paid or is deemed to have been paid by the assessee by reason of the deduction at source, it is no longer a debt that is owed. Nor is it an asset. It is thus neither her income nor an accretion to her wealth as she has no right or possession over that money (see ITR Nos. 190 of 1982-- Her Highness Setu Parvati Bayi, Maharani of Travancore Vs. Commissioner of Wealth-tax, ) and ITR Nos. 22 and 23 of 1984-- H.H. Marthanda Varma Vs. Commissioner of Wealth-tax, ).

The Income Tax Act says that dividend upon its declaration is, for the purpose of inclusion in the total income of the assessee, deemed to be the income of the previous year in which it was declared. It is the substantive liability of the assessee to pay the tax on his income. However, for the purpose of recovery, the liability is cast on the principal officer of the company to deduct at source the tax due on the dividend before making payment of the same to the assessee and within one week after such deduction, the company shall pay the money so deducted to the credit of the Central Government (see Section 194 of the Income Tax Act and Rule 30 of the Income Tax Rules). Deduction at source is only one mode of recovery and it is without prejudice to any other mode of recovery. The substantive liability of the assessee to pay the tax arose as soon as the income arose and the income arose as soon as the dividend was declared, although not actually paid.

In computing the net wealth u/s 2(m) of the Wealth-tax Act, Income Tax deductible at source in respect of the dividend declared, but not yet deducted, is a debt owed, and is, therefore, excluded, just as a dividend is included as an asset under the Act as soon as declared, although not received by the assessee. Such income arising on the declaration of the dividend being an accretion to wealth, the net wealth of the assessee must be computed by excluding the tax which is owed (or paid or deemed to have been paid) on such accrued income. This is the principle which we adopted in our judgment in ITRs Nos. 190 of 1982 Her Highness Setu Parvati Bayi, Maharani of Travancore Vs. Commissioner of Wealth-tax, )and ITRs Nos. 22 and 23 of 1984 H.H. Marthanda Varma Vs. Commissioner of Wealth-tax, ). We are fortified in this conclusion by the decision of the Mysore High Court in Commissioner of Income Tax/Wealth Tax Vs. Amco Batteries (P) Ltd., . Speaking for the Division Bench Hegde J., as he then was, observed (p. 371-72) :

"..... the provision made for the payment of Income Tax is a ''debt owed'' and the same is deductible from the ''gross wealth" to arrive at the ''net wealth''."

In this context, we refer to the following observations of the Supreme Court in Commissioner of Wealth-tax, Orissa Vs. Vysyaraju Badreenarayana Moorthy Raju, :

"The system of accounting, mercantile or cash or hybrid, is of no relevance for the purpose of determining the assets of the assessee (under the Wealth-tax Act)..... It is apparent that what accrues as a right also falls to be included within the assets of an assessee under the Wealth-tax Act. That being so, the conclusion is inescapable that even though the accounts of the assessee are maintained on cash basis, interest due on accrual basis, though not realised.....are liable to be included in the net wealth of the assessee."

For the reasons stated by us, question No. (1) is answered in the negative, that is, in favour of the assessee and against the Revenue. In the light of our answer to question No. (1), it is unnecessary for us to answer question No. (2) and we accordingly decline to answer question No. (2).

We direct the parties to bear their respective costs in this tax referred case.

A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.