H.H. Sethu Parvathi Bayi vs Commissioner of Income Tax

M. Fathima Beevi, J.—The Income Tax Appellate Tribunal has u/s 27(1) of the Wealth-tax Act, 1957, referred the following question for the opinion of this court :

" Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in holding that the amendment brought about by the Finance Act, 1974, effective from April 1, 1975, in Section 2(e)(2)(ii) and Section 5(1)(vi) would be effective for computing the net wealth with reference to the valuation date of March 31, 1975 ? "

The matter arises out of the wealth-tax assessment for the assessment year 1975-76 for which the valuation date is March 31, 1975. The point that came up for consideration before the Tribunal was whether the interest in life insurance annuities and life insurance policies could be included in the net wealth of the assessee for the assessment year 1975-76. The policies were for a term of less than ten years.

u/s 5(1)(vi) of the Wealth-tax Act, exemption is available in respect of the right or interest of the assessee in any policy of insurance before the moneys covered by the policies become due and payable to the assessee. The proviso to Clause (vi) was introduced with effect from April 1, 1975. It is laid down in this proviso that in the case of a policy of insurance where the premium or other payment is payable during a period of less than ten years, the amount that shall not be included in the net wealth of the assessee under Clause (vi) shall be a sum that bears to the value of the right or interest of the assessee in the policy the same proportion as the number of years during which the premium or other payment on the policy is payable bears to ten.

The Wealth-tax Officer held that this proviso will have to be applied for this assessment year as the proviso was introduced with effect from April 1, 1975, by the Finance Act, 1974. On appeal, the Commissioner of Wealth-tax (Appeals) held that the law as it stands on the valuation date and not on the first day of the assessment year is applicable and, therefore, the proviso which came into existence on April 1, 1975, cannot be applied bringing to charge an item of asset as on March 31, 1975. The Appellate Tribunal allowed the appeal preferred by the Revenue holding that the determination of the net wealth as on the valuation date has to be made in accordance with the law as on the first day of the assessment year and, therefore, the proviso that came into force on April 1, 1975, will determine the net wealth on the valuation date in the case of the assessee. The question of law thus arising from the order has been referred.

Sri Krishnamoorthy, learned counsel for the assessee, had drawn our attention to the definition of " net wealth " u/s 2(m) of the Wealth-tax Act and contended that when the charge u/s 3 of the Act is on the net wealth on the corresponding valuation date and the liability becomes crystallised on that date, the state of affairs as on the valuation date alone could be reckoned and there is no scope for applying the proviso that came into force subsequent to the valuation date. The point stressed is that the limitation prescribed under the proviso with effect from April 1, 1975, can have no application in determining the net wealth as on March 31, 1975.

Sri Menon, standing counsel for the Revenue, pointed out that in assessments, the law that is applicable is the one in force as on the first day of the assessment year and computation of the net wealth as on the Valuation date has necessarily to be made by applying the provisions in force as on the first day of the relevant assessment year. If that be so, the proviso introduced with effect from April 1, 1975, is applicable in determining the net wealth for the assesssment year 1975-76.

u/s 3 of the Act, wealth-tax is charged in respect of the net wealth on the corresponding valuation date of every individual. The net wealth as on the date of the valuation should be arrived at by computing the aggregate value of the assets belonging to the assessee as also those required to be included in these assets under some provisions of the Act and deducting therefrom the debts owing by the assessee. The charge is subject to the general exemptions enumerated in Section 5. For the purposes of wealth-tax, the assessment is to be made separately on the wealth valued on each valuation date. Wealth-tax is to be charged every financial year. The liability to pay wealth-tax gets crystallised on the valuation date though tax is levied and becomes payable in the relevant assessment year.

In H.H. Setu Parvati Bayi Vs. Commissioner of Wealth Tax, Kerala, , considering the question whether the wealth-tax liability of an assessee on the valuation date for the assessment year beginning on the 1st of April following, is a " debt owed " within the meaning of Section 2(m) of the Act, the Supreme Court held that in the case of wealth-tax, the rates are prescribed in the Schedules to the Act itself and the liability to pay wealth-tax becomes crystallised on the valuation date, though the tax is levied and becomes payable in the relevant assessment year and wealth-tax liability as on the valuation date was a " debt owed " within the meaning of Section 2(m) of the Act. The question whether computation has to be made in accordance with law as on the first day of the assessment year did not arise for consideration in that case.

Section 5 of the Act enumerates assets exempted and specifically provides that such items shall not be included in the net wealth of the assessee. The exemption has to be applied when the computation of net wealth is made. When such computation is made only in the assessment year, exemption provided in the statute as on the first day of the assessment year would be operative. If any restriction is imposed or any exemption is taken away with effect from that date, that provision must also be applicable.

Similarly, Section 4 requires certain items to be included in the net wealth. Sections 4 and 5 prescribe the mode of computation and are applicable when the actual computation is made. Therefore, the law as it stands in the assessment year has to be applied for the purpose of making such additions and deletions. Even though the charge is on the net wealth as on the valuation date and the liability to wealth-tax accrues on the valuation date, that liability is determined in the assessment year following. For the purpose of determination of the liability, machinery is provided under the Act. Provisions are made for the inclusion of specified assets ; exemptions are also provided. The law relating to such inclusions and exemptions is applied only when the liability is determined. Therefore, the law applicable for the determination of net wealth and consequent tax liability is the one in force on the first day of the assessment year.

When Clause (vi). Sub-section (1) of Section 5 is applied for the purpose of allowing exemption specified therein, the extent to which the exemption is to be allowed has to be determined with reference to the proviso thereunder which is effective from April 1, 1975. We are, therefore, of the opinion that the Tribunal was right in holding that the proviso is applicable in determining the net wealth of the assessee as on the relevant valuation date.

The question referred is accordingly answered in the affirmative and in favour of the Revenue and against the assessee.

A copy of the 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.