Crystallised debt rule under Wealth-tax Act bars deduction of contingent liabilities and undeclared preference dividend arrears.

Under the Wealth-tax Act, depreciation issues were treated in line with the earlier valuation ruling on the same assessee, while the claim for arrears of cumulative preference dividend failed because dividend does not become a debt owed unless declared or otherwise crystallised into an enforceable liability. A mere contingent entry in the balance-sheet was insufficient. Additional managing agency commission sanctioned after the valuation date also could not be deducted, because only liabilities existing on the valuation date qualify as debts for net wealth computation; later retrospective sanction does not convert a contingent obligation into an existing debt.

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Issues: (i) whether, for valuation of assets under the Wealth-tax Act, depreciation including initial and additional depreciation could be allowed; (ii) whether arrears of dividend on cumulative preference shares were deductible as a debt owed on the valuation date; and (iii) whether additional managing agency commission sanctioned after the valuation date could be treated as a deductible debt for computing net wealth.

Issue (i): whether, for valuation of assets under the Wealth-tax Act, depreciation including initial and additional depreciation could be allowed.

Analysis: The issue was governed by the earlier decision already rendered on the same assessee's valuation dispute. The court followed that decision and accepted the revenue's position on the assessee's first question while accepting the assessee's position on the Commissioner's related question, thereby maintaining the approach to depreciation for wealth-tax valuation as determined earlier.

Conclusion: The question was answered against the assessee and the companion question was answered in favour of the assessee.

Issue (ii): whether arrears of dividend on cumulative preference shares were deductible as a debt owed on the valuation date.

Analysis: A preference shareholder has a right to dividend only in accordance with the terms of issue and, even where the dividend is cumulative, the right does not become a debt unless the dividend is declared or otherwise crystallises into an enforceable liability. A mere entry in the balance-sheet under contingent liability does not, by itself, create a debt owed. On the valuation dates there was no material to show that the general body had declared the dividend, so the claim did not satisfy the statutory concept of debt owed under the Wealth-tax Act.

Conclusion: The deduction was not allowable and the question was answered against the assessee.

Issue (iii): whether additional managing agency commission sanctioned after the valuation date could be treated as a deductible debt for computing net wealth.

Analysis: A liability must exist on the valuation date to qualify as a debt for wealth-tax purposes. The later governmental sanction, though made effective from an earlier date, did not convert an uncrystallised and contingent liability into an existing debt on the valuation dates. The distinction between a debt presently owed and a contingent obligation remained decisive, and the liability could not be deducted merely because it was later sanctioned with retrospective effect.

Conclusion: The deduction was not allowable and the question was answered in favour of the revenue.

Final Conclusion: The reference was disposed of by giving mixed answers, sustaining the revenue on the depreciation and commission questions while rejecting the assessee's claim for deduction of arrears of preference dividend.

Ratio Decidendi: For wealth-tax valuation, only a liability that has crystallised into an enforceable debt on or before the valuation date is deductible; contingent or later-sanctioned obligations do not qualify as debts owed.

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