Net wealth deduction follows final tax assessment, and disputed wealth-tax is excluded only if outstanding on the valuation date.

Tax liability is treated as a present debt for net wealth computation, and where income-tax, wealth-tax or gift-tax is finally quantified by assessment, rectification or reassessment before completion of the wealth-tax proceeding, the assessed amount governs the deduction rather than the figure shown in the return. The Gujarat HC also held that wealth-tax liabilities for earlier years do not fall within section 2(m)(iii)(a) unless the tax was outstanding on the valuation date; if the notice of demand is issued only after that date, the liability is not excluded and remains deductible in computing net wealth. The references were answered in favour of the assessee.

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Issues: (i) Whether, in computing net wealth, the deduction for income-tax, wealth-tax or gift-tax liability is to be taken at the amount finally determined on assessment rather than the amount shown in the return, including where the assessment is rectified or reopened before completion of the wealth-tax assessment; (ii) Whether wealth-tax liabilities assessed for earlier years fall within the exclusion in section 2(m)(iii)(a) of the Wealth-tax Act, 1957 when the notice of demand is issued after the relevant valuation date.

Issue (i): Whether, in computing net wealth, the deduction for income-tax, wealth-tax or gift-tax liability is to be taken at the amount finally determined on assessment rather than the amount shown in the return, including where the assessment is rectified or reopened before completion of the wealth-tax assessment.

Analysis: Liability to tax on the relevant valuation date is a present debt, though its amount is quantified later by assessment. Once the taxing statute provides a legal machinery for determining that amount, the actual figure ascertained under that machinery supersedes any estimate made by the assessee in the return or balance-sheet. A rectification corrects an erroneous quantification, and a reassessment likewise only re-quantifies the same existing liability; neither creates a new liability. Where such final quantification takes place before wealth-tax assessment is completed, the liability to be deducted is the amount finally determined by assessment.

Conclusion: The deduction is to be allowed on the basis of the tax finally determined on assessment, and not on the basis of the amount shown in the return. This is in favour of the assessee.

Issue (ii): Whether wealth-tax liabilities assessed for earlier years fall within the exclusion in section 2(m)(iii)(a) of the Wealth-tax Act, 1957 when the notice of demand is issued after the relevant valuation date.

Analysis: The clause excludes only tax that is both outstanding on the valuation date and disputed in appeal or other proceeding as not payable. The word "outstanding" means payable but unpaid. Under the scheme of the Wealth-tax Act, the assessed amount becomes payable only upon service of a notice of demand under section 30, and payment is then required within the statutory period under section 31. If the notice of demand is issued after the valuation date, the tax cannot be treated as outstanding on that date. The disputed wealth-tax liabilities, therefore, do not satisfy the exclusionary condition.

Conclusion: Section 2(m)(iii)(a) does not apply, and the amounts remained deductible in computing net wealth. This is in favour of the assessee.

Final Conclusion: The references were answered in favour of the assessee by holding that tax liabilities are deductible at the amount finally quantified by assessment, rectification or reassessment before completion of wealth-tax proceedings, and that the disputed wealth-tax demands did not fall within the statutory exclusion because they were not outstanding on the valuation date.

Ratio Decidendi: For purposes of net wealth, a tax liability is a present debt and, once finally quantified under the governing statute before completion of wealth-tax assessment, the assessed amount governs deduction; the exclusion for tax "outstanding on the valuation date" applies only when the amount has become payable before that date and remains unpaid.

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