Crystallised tax liability test: only subsisting demands count as debts in net wealth computation, cancelled liabilities excluded.

Income-tax, wealth-tax and gift-tax liabilities are deductible in computing net wealth only if they have crystallised and subsist on the valuation date. Assessment may quantify the liability later, but that does not prevent it from being a debt once it has arisen under the taxing statute. Where appellate or superior proceedings finally hold that no tax liability exists, the supposed demand is treated as never having been outstanding and cannot be deducted as a debt. On that principle, liabilities cancelled in appeal were excluded from deduction, while the remaining tax liabilities were allowable even though final assessment orders were passed later.

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Issues: Whether income-tax, wealth-tax and gift-tax liabilities, including liabilities subsequently cancelled on appeal, constituted debts owed on the valuation date for deduction in computing net wealth.

Analysis: A liability is deductible only if it has crystallised under the relevant taxing statute on the valuation date. Quantification by assessment may occur later, but that does not defeat the existence of a debt if the liability has already arisen. However, where the appellate or superior authority ultimately determines that no tax liability exists, the supposed demand cannot be treated as an outstanding debt on the valuation date, because the law then treats the liability as never having existed. The prohibition in section 2(m)(iii)(a) applies only where a subsisting tax demand is outstanding and its validity is under challenge; it does not apply where appellate proceedings end in a finding that the liability is nil. On that footing, the liabilities for assessment year 1965-66 that were set aside in appeal could not be regarded as debts owed, while the remaining tax liabilities were deductible even though final assessment orders were passed later.

Conclusion: The liabilities cancelled on appeal were not debts owed on the relevant valuation dates, but the remaining income-tax, wealth-tax and gift-tax liabilities were allowable deductions.

Final Conclusion: The reference was answered by applying the principle that only a crystallised and subsisting tax liability counts as a debt owed on the valuation date, and liabilities finally found not to exist are excluded from deduction, while the rest remain deductible.

Ratio Decidendi: A tax liability is a debt owed for wealth-tax purposes only if it has crystallised and subsists on the valuation date; if superior adjudication finally negates the liability, it is treated in law as never having been outstanding.

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