1981 (4) TMI 3 - SC - Wealth-tax

Supreme Court rules in favor of assessee, clarifies tax liability on disclosed income

The Supreme Court allowed the appeals, ruling in favor of the assessee, and set aside the High Court's judgment. The Court held that the tax liability on ... Voluntary Disclosure Scheme - Liability to Income-Tax - deductible as ' debt owed ' on valuation date Issues Involved:1. Deductibility of income-tax payable on concealed income under section 68 of the Finance Act, 1965, in computing net wealth under section 2(m) of the Wealth-tax Act, 1957.2. Determination of whether the liability to pay tax on disclosed income under section 68 of the Finance Act, 1965, arises under the Finance Act or under the Indian Income-tax Act, 1922, or the Income-tax Act, 1961.Issue-Wise Detailed Analysis:1. Deductibility of Income-Tax Payable on Concealed IncomeThe key question was whether the liability for income-tax on the concealed income disclosed under section 68 of the Finance Act, 1965, could be deducted under section 2(m) of the Wealth-tax Act, 1957, in computing the assessee's net wealth for the assessment years 1959-60 to 1964-65.The Supreme Court examined section 68 of the Finance Act, which allowed for the voluntary disclosure of previously concealed income. The Court noted that the tax paid under section 68 was indeed income-tax, as indicated by the language of the provision and the legislative intent. The Court referenced the case of Kesoram Industries and Cotton Mills Ltd. [1966] 59 ITR 767, which established that income-tax payable on the valuation date is a debt owed by the assessee and thus deductible when determining net wealth.The Court concluded that the tax paid under section 68 was not a new charge but rather a method for liquidating an existing income-tax liability. Therefore, the tax liability on the disclosed income was deductible under section 2(m) of the Wealth-tax Act.2. Determination of the Origin of Tax LiabilityThe second issue was whether the liability to pay tax on the disclosed income under section 68 arose under the Finance Act, 1965, or under the Indian Income-tax Act, 1922, or the Income-tax Act, 1961.The Supreme Court emphasized that the income disclosed under section 68 was income that was already liable to be taxed under the relevant income-tax laws but had not been disclosed earlier. The Court clarified that the liability to pay tax on this income arose from the charging sections of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961, and not from section 68 of the Finance Act, 1965.The Court dismissed the High Court's view that section 68 created a new charge, stating that the Finance Act merely provided a mechanism for the payment of tax on previously concealed income. The Court held that the tax paid under section 68 should be considered as income-tax under the existing income-tax laws, making it a 'debt owed' on the valuation date and thus deductible under section 2(m) of the Wealth-tax Act.ConclusionThe Supreme Court allowed the appeals, setting aside the High Court's judgment. The Court answered the questions referred to the High Court in the affirmative, ruling in favor of the assessee. The department was ordered to pay the costs of the appellant-assessee.Appeals AllowedThe Supreme Court concluded that the tax liability on the disclosed income under section 68 of the Finance Act, 1965, was deductible under section 2(m) of the Wealth-tax Act, 1957, and that this liability arose under the Indian Income-tax Act, 1922, or the Income-tax Act, 1961, rather than the Finance Act, 1965.