Crystallised tax liability is a deductible debt for wealth-tax, but mere reserves for anticipated tax are not.

For wealth-tax purposes, only a crystallised and presently existing tax liability qualifies as a "debt owed" under section 2(m) of the Wealth-tax Act, 1957. Amounts already quantified and demanded under section 18A and section 29 of the Indian Income-tax Act were treated as deductible debts because they had become ascertainable obligations on the valuation date. By contrast, a reserve created for anticipated or future income-tax liability was only a provision for a possible demand and had not yet crystallised into an existing debt. The sums demanded were deductible, but the reserve for anticipated tax liability was not.

---

---

Issues: Whether the amounts claimed towards advance tax demanded under section 18A of the Indian Income-tax Act, tax demanded under section 29 of the Indian Income-tax Act, and the reserve for anticipated income-tax liability were deductible as "debts owed" in computing net wealth under section 2(m) of the Wealth-tax Act, 1957.

Analysis: The expression "debt owed" in section 2(m) was construed in its ordinary legal sense as a quantified and existing obligation. A liability that is only contingent, inchoate, or merely anticipated does not amount to a debt. Tax liability, though statutorily arising at the close of the previous year, becomes a debt for the purpose of collection only when it is ascertained and a notice of demand is served. Amounts demanded under section 18A and section 29 of the Indian Income-tax Act were therefore treated as existing debts on the valuation date, since they had been quantified and demanded. By contrast, the reserve made for future or unassessed tax liability was only a provision for a possible future demand and had not crystallised into a debt owed.

Conclusion: The sums demanded under section 18A and section 29 were deductible, but the amount set apart as reserve for anticipated income-tax liability was not deductible. The answer was therefore partly in favour of the assessee and partly in favour of the department.

Ratio Decidendi: For purposes of section 2(m) of the Wealth-tax Act, 1957, only a crystallised and presently existing tax liability, evidenced by ascertainment and demand, is a "debt owed"; a merely contingent or anticipated liability is not.

---