Wealth-tax treatment of settled tax liability: debt crystallises on binding settlement, and only due instalments count as outstanding.

A tax liability settled between the assessee and the department crystallised as a debt on the date the settlement terms were accepted, even though the formal approval order came later, because the arrangement already fixed the concealed income, tax liability and instalment mode of payment. For wealth-tax purposes, the exception for tax "outstanding" for more than twelve months was construed strictly: only the instalment that had actually fallen due and remained unpaid on the valuation date could be treated as outstanding. The balance of instalments not yet due was not excluded merely because the full settled amount remained unpaid. The settled tax liability was therefore deductible as a debt owed.

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Issues: (i) Whether the unpaid income-tax liability crystallised as a debt owed on the valuation date even though the settlement order under section 34(1B) of the Income-tax Act, 1922 was passed later; (ii) Whether the balance tax liability payable in instalments was hit by section 2(m)(iii)(b) of the Wealth-tax Act, 1957 as an amount of tax outstanding for more than twelve months on the valuation date.

Issue (i): Whether the unpaid income-tax liability crystallised as a debt owed on the valuation date even though the settlement order under section 34(1B) of the Income-tax Act, 1922 was passed later?

Analysis: The settlement terms were accepted by the assessee and the department on 17 January 1957, and the Board's later order was treated as a formal approval of an already concluded arrangement. The settlement fixed the concealed income, the tax liability, and the mode of payment. On that basis, a binding obligation arose before the valuation date and the liability was not dependent on the later order alone.

Conclusion: The liability had crystallised before the valuation date and was a debt owed on that date.

Issue (ii): Whether the balance tax liability payable in instalments was hit by section 2(m)(iii)(b) of the Wealth-tax Act, 1957 as an amount of tax outstanding for more than twelve months on the valuation date?

Analysis: The exception in section 2(m)(iii)(b) was construed strictly and in the context of the object of the provision. The word "outstanding" was held to refer to an amount that had fallen due for payment and remained unpaid, not merely to the existence of an undischarged obligation in the abstract. Where tax is payable in instalments under a settlement, only the instalment that has actually fallen due by the valuation date can be regarded as outstanding. Treating the entire balance as outstanding would distort the computation of real net wealth.

Conclusion: The unpaid instalments were not disallowed merely because the whole settled amount had remained unpaid for more than twelve months; only the instalment then due could be treated as outstanding.

Final Conclusion: The reference was answered in favour of the assessee, and the deductible debt treatment of the settled tax liability was upheld.

Ratio Decidendi: For wealth-tax purposes, a tax liability payable under a settlement in instalments is a debt owed from the date the settlement creates a binding obligation, and "outstanding" in the exception for old tax liabilities means an amount that has actually fallen due and remains unpaid on the valuation date.

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