T.V. Srinivasan vs Commissioner of Wealth-tax

Ramanujam, J.—At the instance of the assessee, the following two questions have been to this court by the Tribunal for its opinion under s.

27(2) of the W.T. Act, 1957 :

Whether, on the facts and in the circumstances of the case, the debt of Rs. 52,485 owing by the assessee to the Life Insurance Corporation of

India, as on the relevant valuation date, was one which was not to be deducted from the aggregate value of the assets of the assessee for

computing the net taxable wealth for the assessment year 1974-75 ?

Whether, on the facts and in the circumstances of the case, the sum of Rs. 11,676 being advance tax paid in excess by the assessee constitues

an asset chargeable to wealth-tax ?

The assessee obtained a loan of Rs. 28,000 by mortgaging his house property at No. 3, Ganesh Street, Gopalpuram. He also obtain a loan of

Rs. 24,485 from the Life Insurance Corporation on his insurance policy. In the wealth-tax proceedings for the year 1974-75, the assessee claimed

a deduction in relation to the aggregate sum of Rs. 52,485, on the ground that they are debts owned by him on the valuation date and that,

therefore, they should be deducted. The WTO, however, rejected the claim on the ground that the debts and been secured against exempted

assets and that, therefore, they cannot be deducted in computing the net wealth of the assessee in view of s. 2(m)(ii) of the W.T. Act. Aggrieved

by the decision of the WTO, an appeal was filed before the AAC, but without success. Thereafter, the matter was taken to the Tribunal. The

Tribunal, following its earlier decision rendered in the assessee''s own case for the earlier assessment year 1973-74, negatived the claim of the

assessee. Aggrieved by the view taken by the Tribunal, on this aspect of the matter, the assessee his raised the question No. 1 referred to supra.

In the same wealth-tax proceedings, the assessee was found to have paid excess advance tax of a sum Rs. 11,676. The WTO treated this

amount as an asset and included the same in his net wealth. The assessee took the matter in appeal before the AAC contending that the provisional

assessment under s. 141A of the I.T. Act, 1961, was made on November 6, 1974, i.e., long after March 31, 1974, the relevant valuation date

and the excess advance tax paid cannot as such be treated as amount due to the appellant assessee on March, 31, 1974, and hence, the sum of

Rs. 11,676, such should be excluded from the net wealth of the assessee. The AAC, however, upheld the inclusion of the said sum of Rs. 11,676,

being the excess advance tax paid by the assessee in his net wealth. The matter was taken before the Tribunal by the assessee contending that the

excess advance tax became refundable only on November 6, 1974, when the provisional assessment under s. 141A of the I.T. Act, was made

and that, therefore, the excess advance tax was not as asset belonging to the assessee on the relevant valuation date, i.e., March 31, 1974, and,

therefore, it cannot be included in the net wealth of the assessee. The Tribunal rejected the said contention of the assessee on the assessee on the

ground that the excess advance tax paid by the assessee should be taken to be deposit with the Government and that the assessee continued to be

the legal owner of the excess advance tax paid. The Tribunal also found that since s. 214(1) of the I.T. Act provides for payment of interest on the

excess advance tax paid from the date of its payment till the date of regular assessment under specified circumstances and in other cases from the

first day of April next following the relevant financial year to the date of regular assessment, the excess advance tax paid which actually earns

interest, should be taken to constitute an asset chargeable to wealth-tax under the W.T. Act. In this view, the Tribunal upheld the inclusion of the

said amount in the net wealth of the assessee. Aggrieved by the decision of the Tribunal on this aspect of the matter, the assessee has raised the

question No. 2 referred to supra.

So far as the question No. 1 is concerned, it is seen that in the assessee''s own case for the earlier year, this court in T.V. Srinivasan Vs.

Commissioner of Wealth-tax, , rejected his claim for deduction with reference to the identical loans, on the ground that as the loans have been

taken in respect of as assets which is exempted from the provisions of the Act, no deduction can be allowed in view of s. 2(m)(ii) of the W.T. Act.

We are in entire agreement with the view taken by this court in T.V. Srinivasan Vs. Commissioner of Wealth-tax, . Hence, following the said

decision, we answer question No. 1 in the affiramtive and against the assessee.

Coming to the second question, as already stated, the Tribunal has treated the excess advance tax paid by the assessee as a deposit by the

assessee with the Government and that as the assessee continued to be the owner of the said sum, it should be treated as an asset of the assessee

and included in his total wealth. The learned counsel for the assessee contends that the view taken by the Tribunal that the excess advance tax paid

by the assessee is a deposit by the assessee with the Government is not legally sustainable when the advance tax is paid as per the provisions of the

statute and the non-payment of which is made penal and that, therefore, the notion of a deposit will run contra to the statutory provisions. The

learned counsel for the assessee also brings to our notice the decision of a Bench of this court in Joint Official Liquidators of the Peerdan Juharmal

Bank v. CIT [1954] 25 140 and the decision of the Calcutta High Court in Indian Steel and Wire Products Ltd. Vs. Commissioner of Income

Tax, West Bengal, Calcutta, , in which the contention that the advance tax paid is in the nature of deposit, has been reject. In Joint Official

Liquidators of the Peerdan Juharmal Bank Ltd. Vs. Commr. of Income Tax, Madras, , Rajamannar, Chief Justice, speaking for the Bench held

that the advance tax paid cannot treated as a deposit. In that case, a question rose as to whether the dance Income Tax demanded from the

company under s. 18A of the Indian I.T. Act, 1922, within 12 months before the date of the winding up order, is a tax falling within s. 230(10)(a)

of the Indian Companies Act, 1913, in which the State can claim a priority of debts. It was contended by the offical liquidator that since the

demand made under s. 18A of the I.T. Act is not Income Tax as such, but it is only a deposit, it cannot be taken to be tax which has become due

within 12 months before the date of the winding up order and, therefore, the State cannot claim priority in respect of the said advance-tax

demanded. It was also contended that since the actual tax payable has not been ascertained, quantified and notified to the assessee with a demand

for payment of the same, what is contemplated under s. 18A of the I.T. Act cannot be taken to be the tax payable under the I.T. Act. The court

rejected both the contentions and observed that what was demanded is a tax and that it is a debt due to the State so as to enable the State to claim

priority for that debt under s. 213(1)(a) of the Companies Act.

In Indian Steel and Wire Products Ltd. Vs. Commissioner of Income Tax, West Bengal, Calcutta, , the nature of the advance tax paid was

considered and it has been observed that advance payments of tax made under s. 18A of the I.T. Act are payments on account, made under

compulsion of a statute towards the discharge of an instant liability for liquidating a charge, the precise measure of which is to be determined at

later date, that such payments cannot be regarded as payments made by way of creating a reserve, that the disposting power of the company over

the moneys paid as advance tax is completely and irretrievably lost and that, therefore, it is not possibly to say that the moneys paid and advance

tax are still lying as a part of the company''s reserve.

Apart from these decisions which take the view that advance tax paid cannot either be treated as deposit with the Government or a reserve, we

also feel that having regard to the statutory provisions which compel the assessee to pay advance tax and make the non-payment of advance tax

penal, the amount of advance tax or excess advance tax paid in pursuance of a statutory compulsion, cannot be taken to be a deposit. As a matter

of fact, the learned counsel for the Revenue, does not seek to support the reasoning given by the Tribunal for taking the view that the excess

advance tax is an asset of the assessee and that it has to be included in his net wealth. Mr. Jayaraman, the learned counsel for the Revenue,

however, seeks to support the view taken by the Tribunal by a different reasoning which appears to us to be consistent with the statutory

provisions. According to him, not only the excess advance tax, but the entire advance tax paid has to be treated as an asset of the assessee on the

valuation date and the same time, the entire liability towards Income Tax should be taken as debt owned to the State. If such a calculation is made,

the fees advance tax paid will fall on the assets side and naturally it will be included in the net wealth of the assessee. The learned counsel for the

assessee contends that it is not possible to treat the entire advance Income Tax paid as an asset of the assessee and such an assessment will run

contra to the various provisions of the Act dealing with the payment of advance income tax. According to the learned counsel for the assessee, the

advance tax is only paid as tax and it can never be treated as an asset of the assessee under any circumstances and the learned counsel relies on

certain decisions to show that the advance tax paid is a tax and it cannot be taken to be a payment towards a future liability and it should be

treated as having the same character as tax. But it is not necessary to refer to the said decisions, for s. 219 of the I.T. Act itself clearly states that

any sum paid as advance tax under Chapter XVII of the I.T. Act shall be treated as part of the tax in respect do the assessment year next

following the financial year in which it is payable. Having regard to the said specific provision, it is unnecessary to refer to the decisions for

establishing the proposition that advance tax is a payment of tax for the relevant accounting year. But the fact that the advance tax paid is treated as

a tax under s. 219 of the I.T. Act does not throw any light on the question as to whether the excess advance tax paid by him is an asset includiable

in his net wealth. Section 219 of the I.T. Act itself after treating the advance tax as a tax, proceeds to say that credit for the same will be given to

the assessee in the regular assessment. This provisions for giving credit to the advance tax paid at the stage of the regular assessment indicates that

the advance tax paid is a tentative payments towards tax which gets adjusted at the time of the regular assessment. The proviso to s. 219 of the

I.T. Act provides for a credit being given for advance tax paid even at the state of the provisional assessment under s. 141A of the I.T. Act and in

this case, there has been a provisional assessment on the assessee on November 6, 1974. At the time of the provisional assessment, it has been

found that the assessee has paid excess advance tax of Rs. 11,676. The learned counsel for the assessee contends that once an amount is paid as

tax, the disposing power of the assessee over the moneys paid as advance tax is completely and irretrievably lost and, therefore, it cannot be

treated as continuing to be an asset of the assessee. But having regard to s. 219 of the I.T. Act which provides for a credit being given to the

assessee for the payment of advance tax at the stage of the regular assessment, the payment of advance tax cannot be taken to be a final payment

towards tax as contended by the learned counsel for the assessee. Giving credit at the stage of the regular assessment or at the stage of the

provisional assessment under s. 141A of the I.T. Act as provided under s. 219 of the said Act, will arise only if the assessee is entitled to the

credit, that is, when he is the owner of the amount paid which has to be given credit. The fact that s 219 of the Act contemplates credit being given

to the assessee for his payment towards advance tax at the time of the regular assessment, shows that the Legislature intended that the advance

payment of tax is tentative payment towards a liability and after the assessee''s actual liability is determined at the stage of the regular assessment,

the assessee will get the credit for the advance tax paid earlier as required under the provisions of the I.T. Act.

The Learned counsel for the assessee refers to the decision in Commissioner of Wealth-tax, Gujarat-III Vs. Arvindbhai Chinubhai, , as

supporting his stand. In that case, the Gujarat High Court has held that the payment of advance tax result in the discharge of the personal liability

which the assessee had incurred as the tax payable is a debt owed by him and which is otherwise available for deduction under s 2(m) of the W.T.

Act 1957, and that, therefore, the amount actually paid as advance tax, cannot be converted into a real asset in the hands of the assessee. In that

case, there was an excess payment of advance tax of Rs. 76,857. That amount was treated in the wealth-tax proceedings as an asset of the

assessee on the relevant valuation date. The question arose laws to whether the amount of Rs. 76,857 representing the Income Tax refund due to

the assessee, formed part of the taxable assets under s. 2(e) of the W.T. Act on the relevant valuation date. In that case, the court replying on the

principle laid down by the Supreme Court in Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Wealth Tax, (Central) Calcutta, ,

held that since the advance tax was paid in discharge of a debt owed to the Stated by the assessee, it cannot be treated as asset of the assessee.

With respect, we do not see how the decision in Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Wealth Tax, (Central) Calcutta,

of the Supreme Court will be relevant. That was case wherein the Supreme Court held that the phrase ""debt owed"" within the meaning of s. 2(m)

of the W.T. Act, 1957, could be defined as the liability to pay in present or in future an ascertainable sum of money, that the charging section for

the purpose of Income Tax was s. 3 of the Indian I.T. Act, 1922, and the annual Finance Acts only gave the rate for quantifying the tax, that a

liability to pay Income Tax was a present liability, though the tax became payable after it was quantified in a cordons with ascertainable data and

that in any event that liability becomes a perfected debt at any rate on the last day of the accounting year.

The contention of the assessee before the Supreme Court in Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Wealth Tax,

(Central) Calcutta, , was that the Income Tax liability can be taken as a debt owned for the purpose of determining the net wealth of the assessee

and the Revenue''s contention was that since the exact Income Tax liability can be determined only in the final assessment to be made after the

relevant valuation date, there is no liability and it cannot, therefore, be taken as debt owed. But the Supreme Court rejected the Revenue''s

contention and held that the liability to pay Income Tax accrues on the last day of the accounting year and through the amount of tax is quantified

only at the time of final assessment, the liability should be taken to have accrued and it cannot be said to be contingent liability. The issue before the

learned judges of the Gujarat High Court was whether the excess advance Income Tax paid can be taken to be an asset of the assessee on the

relevant valuation date and the view taken by the court was that the mere possibility of getting Income Tax refund in future as and when the

assessment proceedings are finalised would not form part of an asset of the assessee on the valuation date, that on the valuation date what the

assessee does, is to discharge his legal and statutory obligations of paying advance tax, which, if undischarged, will remain as a debt owned by him

on the valuation date, and that, therefore, the payment of any advance tax cannot be treated as an asset of the assessee which belongs to him. With

respect, we are not included to accept the reasoning of the learned judges of the Gujarat High Court. The payment of advance tax has been held

by the learned judges to be discharge of a debt owed and, therefore, it cannot be taken to be an asset of the assessee. The advance tax paid has

been taken as payment towards a debt owed relying on the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. Vs.

Commissioner of Wealth Tax, (Central) Calcutta, . As already stated, that decision laid down a principle that the liability towards Income Tax

would accrue only on the last date of the accounting year and that it cannot be said to have accrued before that date. If the said decision of the

Supreme Court is taken as the basis, then the Income Tax liabilities would accrue only at the end of the accounting year and the payment of

advance tax cannot, therefore, be said to be in discharge of an accured liability. Though the statute provides for the payment of advance tax even

before the actual accrual of the Income Tax liablitity, the advance tax cannot be said to be a payment towards an accrued liability. Therefore, even

though the payment of advance tax is statutory and its non-payment is made penal, the same cannot be said to have been paid in discharge of an

accrued liability for Income Tax. So long as the Income Tax liability accrues only at the end of the accounting year, the advance tax cannot be said

to be a payment towards such an accrued liability which come into existence only at the end of the accounting year. There is one more reason as to

why the decision of the Gujarat High Court cannot be accepted as correct. If payment of advance tax is taken to be in discharge of a debt owed,

then the accrued liability for Income Tax as quantified by the final assessment will also be a debt owned and thus in respect of an Income Tax

liability of a particular year, there will be two debts owed to the Government, namely, (1) when a payment is made a advance tax, and (2) when

final assessment is made quantifying the Income Tax liability. To avoid such a situation, the correct and proper way is to treat the payment of

advance tax paid as an asset and the entire accrued liability for Income Tax as a liability. Section 219 of the Act also in a way supports such a

treatment being given to advance tax as well as the accrued liability towards Income Tax. As already stated, after treating the advance tax paid as

tax, it proceeds to say that the assessee will get credit for the advance tax paid as against accrued Income Tax liability. That means the advance tax

paid has to be brought on the credit side and the accrued Income Tax liability on the debt side. We are, therefore, inclined to agree with the

contention of the learned counsel for the Revenue that having regard to the statutory provisions dealing with the payment of advance tax and the

final assessment including s. 219 of the Act, it is proper to take the entire advance tax as an asset of the assessee and the entire accrued Income

Tax liability for the relevant accounting year as a debt owed by the assessee to Government. In this case, if such a treatment is given to the advance

tax paid and also to the accrued liability, which is admittedly a debt owed by the assessee to the Government, the result will be the excess advance

tax will continue to have character of an asset of the assessee.

In Commissioner of Wealth-tax, Gujarat-III Vs. Arvindbhai Chinubhai, , the court has referred to rules 1D and 2D of the W.T. Rules, 1957,

as indicating the intention of the Legislature not to treat the advance tax paid as an asset of the assessee. Rule 1D of the Act deals with the

determination of the market value of unquoted equity shares of companies other than investment companies and managing agency companies. The

rule provides that while determining the market value of the unquoted equity shares of companies other than investment companies and managing

agency companies, the advance tax paid shall not be taken as an asset of the company. Similarly rule 2D of the Act provides that while valuing the

assets which are declared in the balance-sheet of the company, the amount paid as advance tax under s. 18A of the Indian I.T. Act, 1922, or

under s. 210 of the I.T. Act. 1961, shall not be taken into account for the purpose of determining the net value of the assets of the business as a

whole. It is no doubts true that these provisions direct that the advance tax shall not be taken into account in the valuation of shares in once case

and the assets of the business in the other. But that is obviously for the reason that in the balance-sheet of companies dealt with in rule 1D of the

Act and of the business under rule 2A of the Act, the advance tax paid is shown as an asset and, therefore, the Rules direct that though the

advance tax paid is shown as an asset in the balance-sheet, that shall not be taken into account for the purpose of determining the value of the

assets of the business as a whole and the value of the unquoted shares of the company. We do not see how those provisions will how the

Legislature''s intention not to treat the advance Income Tax paid as an asset.

As already stated, though there is a payment of advance Income Tax as required under the provisions of the Act, the said payment is not

towards the accrued liability for Income Tax. For the liability to pay Income Tax accrues only on the last date of the accounting year and not at any

time earlier, though the statute contemplates the payment of advance tax during the accounting year. The amount of advance tax paid was an asset

of the assessee which he has parted with as advance tax in view of the provision of the I.T. Act. That payment is not towards the accrued liability,

but towards a continent liability. Since the payment is towards a contingent liability for the Income Tax, the advance payment of Income Tax

cannot be said to be payment in discharge of a debt owed. The contingent liability becomes an accrued liability only at the end of the accounting

year and only payment made toward such an accrued liability can be treated as payment is discharge of a debt owed. In this view of the matter, we

have to uphold the ultimate conclusion of the Tribunal though for a different reason. We, therefore, answer question No. 2 in the affirmative and

against the assessee. The Revenue will have its costs from the assessee. Counsel''s fee Rs. 500.

The learned counsel for the assessee prays for leave appeal to the Supreme Court against out judgment just now pronounced. While answering

question No. 2, we have different from the view expressed by the Gujarat High Court in Commissioner of Wealth-tax, Gujarat-III Vs. Arvindbhai

Chinubhai, . We also find that such a question has not come up for consideration before the Supreme Court so far. In view of the fact that there is

a difference of opinion between this court and the Gujarat High Court and so far the Supreme Court has not expressed its opinion on the said

question, we grant leave to appeal to the Supreme court against our judgment, so that the Supreme Court can give authoritative ruling on the

question involved in this case.