Wealth-tax deduction rules: only crystallised liabilities qualify as debts owed, while proposed dividend provisions do not.

In wealth-tax computation, assessed income-tax and super-tax outstanding for more than one year or in dispute were treated as excluded under section 2(m)(iii) and therefore not deductible as debts owed, while a provision for the accounting year's crystallised tax liability was deductible. A provision for proposed dividend was not a deductible debt owed and was disallowed. The balance of demand payable under the findings and orders of the Income-tax Investigation Commission was treated as a debt owed and allowed as a deduction. The governing principle is that only legally deductible liabilities existing on the valuation date can reduce net wealth.

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Issues: (i) whether the amount provided for income-tax and super-tax was deductible as a debt owed in computing the assessee's net wealth, (ii) whether the provision for proposed dividend was deductible in computing net wealth, and (iii) whether the balance of demand payable pursuant to the findings and orders of the Income-tax Investigation Commission was deductible in determining net wealth.

Issue (i): whether the amount provided for income-tax and super-tax was deductible as a debt owed in computing the assessee's net wealth.

Analysis: The liability represented by assessed taxes outstanding for more than one year, or in dispute, was treated as falling within the exclusion contained in section 2(m)(iii) of the Wealth-tax Act and therefore not deductible as a debt owed. The remaining sum, being a provision for income-tax and super-tax for the accounting year ending on the valuation date, was treated as a debt owed in view of the principle that a tax provision for a crystallised liability is deductible even before formal quantification by assessment.

Conclusion: The amount of Rs. 13,04,243 was not deductible, but the sum of Rs. 50,000 was deductible in favour of the assessee.

Issue (ii): whether the provision for proposed dividend was deductible in computing net wealth.

Analysis: A provision for proposed dividend was held not to constitute a deductible debt owed for the purposes of computing net wealth.

Conclusion: The claim to deduct the provision for proposed dividend was rejected and the issue was answered against the assessee.

Issue (iii): whether the balance of demand payable pursuant to the findings and orders of the Income-tax Investigation Commission was deductible in determining net wealth.

Analysis: The balance of demand payable on account of the findings and orders of the Income-tax Investigation Commission was treated as a debt owed and, following the earlier decision on the same point, was held deductible in the computation of net wealth.

Conclusion: The issue was answered in favour of the assessee.

Final Conclusion: The reference was answered by allowing deduction only to the extent recognised as a debt owed under the Wealth-tax Act, while disallowing the claim in respect of the non-deductible portions.

Ratio Decidendi: For wealth-tax purposes, only liabilities that are legally deductible as debts owed on the valuation date can reduce net wealth, and provisions for tax or other liabilities are deductible only when they satisfy that test under the statutory exclusions.

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