1980 (3) TMI 47 - HC - Wealth-tax

Court allows bonus provision as 'debt owed' deduction under Wealth Tax Act.

Commissioner Of Wealth-Tax, Bombay City II Versus Associated Cement Co. Limited

The court ruled in favor of the assessee, holding that the provision for bonus payable to employees constituted a 'debt owed' under Section 2(m) of the ... Net Wealth, Wealth Tax Issues Involved:1. Whether the provision for bonus payable to employees can be considered a 'debt owed' under Section 2(m) of the Wealth Tax Act for the purpose of computing the net wealth of the company.Issue-wise Detailed Analysis:1. Provision for Bonus as 'Debt Owed':The primary issue in this case is whether the amounts set apart by the assessee, Associated Cement Company Ltd., for payment of bonus to employees for the assessment years 1957-58 to 1959-60, can be considered a 'debt owed' under Section 2(m) of the Wealth Tax Act, 1957, and thus be deducted from the computation of the company's net wealth.The Wealth Tax Officer (WTO) initially declined to exclude the provision for bonus, arguing that the liability was neither determined nor credited to individual employees' accounts on the valuation dates. The WTO viewed the provision as a contingent liability rather than a debt owed.However, the Appellate Assistant Commissioner (AAC) allowed the deduction, following a precedent that considered the provision for bonus as an 'existing obligation' necessary for the company to continue its business. The Tribunal upheld this view, referencing the Calcutta High Court's decision in Textile Machinery Corporation Ltd. v. CWT [1968] 67 ITR 122, which considered such provisions as debts owed.The revenue, represented by Mr. Joshi, argued that the liability to pay bonus was contingent until adjudicated by the industrial court in 1962. He cited the Gujarat High Court's decision in CWT v. Sayaji Mills Ltd. [1974] 94 ITR 54, which held that a liability becomes a debt only when it is a liquidated money obligation, determined either by statutory obligation or industrial adjudication.The court referred to the Supreme Court's decision in Kesoram Industries & Cotton Mills Ltd. v. CWT [1966] 59 ITR 767, which defined a debt as a present obligation to pay an ascertainable sum of money, whether payable in praesenti or futuro. The Supreme Court emphasized that a contingent liability does not become a debt until the contingency occurs.The court distinguished the present case from the Gujarat High Court's decision, noting that the employer had not disputed the bonus liability and had consistently set aside amounts for bonus based on a definite basis over previous years. The court observed that the amounts set apart represented an ascertained present liability, not a contingent one.The court concluded that the amounts set apart for bonus were rightly treated as debts owed, as there was no dispute between the employer and employees regarding the bonus to the extent of the amounts set apart. The court affirmed the Tribunal's decision, holding that the provision for bonus was a permissible deduction in computing the net wealth of the company.Conclusion:The court answered the question in the affirmative, ruling in favor of the assessee. The revenue was directed to pay costs to the assessee.