R.L. Gulati, J. - (1.) THIS reference under Section 27(3) of the Wealth-tax Act, 1957, raises an interesting question of law. The question in short is whether the tax levied upon a person under Section 68 of the Finance Act, 1965, is a legitimate deduction in the computation of his net wealth upon which tax is to be levied.
(2.) THE assessee was carrying on the business of manufacture and sale of Ayurvedic medicines at Datia and had other sources of income also. On 28th May, 1965, he made a voluntary disclosure of his concealed income of Rs. 5 lakhs. This disclosure was made under Section 68 of the Finance Act, 1965. THE disclosure was accepted and the assessee paid a sum of Rs. 3 lakhs as income-tax on the disclosed income of Rs. 5 lakhs. It was the assessee's case that he had earned this income during a number of years in the past. In the wealth-tax returns for the years 1960-61 and 1961-62, he included in his net wealth a sum of Rs. 2,25,000 in the first year and a sum of Rs. 2,80,000 in the next year out of the concealed income. This was accepted by the Wealth-tax Officer. The assessee, however, appears not to have claimed any deduction on account of income-tax payable on the two amounts of Rs. 2,25,000 and Rs. 2,80,000. Before the Appellate Assistant Commissioner of Income-tax he put forward this claim. The appellate authority allowed him to raise this additional ground but on merits held that the assessee was not entitled to deduct any portion of the sum of Rs. 3 lakhs paid by him as tax in the year 1965, as, in his opinion, on the relevant valuation dates for the two assessment years in question there was no outstanding liability on account of income-tax. In other words, he held that there was no debt owed by him within the meaning of Section 2(m) of the Act. On second appeal, however, the claim of the assessee was allowed by the Income-tax Appellate Tribunal. The Tribunal held that the assessee was entitled to deduct proportionate amount of Rs. 3 lakhs in the two assessment years in question as they represented debts due on the valuation dates. The Commissioner is aggrieved and, at his instance, the following question of law has been referred for the opinion of this court: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was legally correct in holding that the income-tax liability under Section 68 of the Indian Finance Act, 1965, would be allowed in computing the assessee's wealth on the relevant valuation dates ?" Under Section 3 of the Wealth-tax Act, wealth-tax is payable by a person for every financial year on his net wealth on the corresponding valuation date. "Net wealth" has been defined in Section 2(m) to mean the amount by which the aggregate value computed in accordance with the provisions of the Act of all the assets belonging to the assessee on the valuation date is in excess of the aggregate value of the debts owed by him on the valuation date except those which are enumerated in Clauses (i) and (ii) of Section 2(m). In other words, wealth-tax is payable on the value of the total assets of a person minus the debts owed by him. The question which has to be decided is as to whether the assessee owed any debt by way of income-tax liability on the corresponding valuation dates of the financial years 1960-61 and 1961-62, for the purposes of the Wealth-tax Act.
(3.) NOW, admittedly, the assessee was in possession of the two sums of Rs. 2,25,000 and Rs. 2,80,000 on the respective valuation dates of the two assessment years in question on which the assessee was liable to pay the wealth-tax. Admittedly, again, these two amounts came out of the concealed income of Rs. 5 lakhs which the assessee ultimately declared in the year 1965. Assuming that these two amounts were earned in the previous years relevant to the assessment years 1960-61 and 1961-62, which fact has been accepted by the income-tax authorities, the assessee was clearly liable to income-tax on these two amounts. If the assessee had not concealed the income and had offered it for assessment at the appropriate time and if the tax had remained unpaid on the valuation dates the arrears of tax would constitute a debt liable to be deducted in the computation of total income. This position again is unexceptionable. NOW, the mere fact that the amounts had not been offered for assessment and no tax was levied thereon, will not, in our opinion, alter the position so far as the computation of wealth-tax is concerned. It must be remembered that under the Income-tax Act tax becomes payable immediately on the expiry of the previous year in which the income is earned. The assessment may take place later but the assessment merely quantifies the tax. The liability to pay tax arises much earlier, namely, on the close of the previous year in which the income is earned. It follows that if the assessee has offered these two amounts for assessment in the relevant assessment years but the assessments had not been made on the valuation dates, even then the assessee would be entitled to deduct the income-tax payable by him and such liability would amount to a debt owed by him. The fact that he did not disclose this income at the appropriate time and evaded the tax does not mean that he was not liable to pay the tax. As stated earlier, the liability to pay income-tax arises when the income is earned and not when it is disclosed or discovered. The quantification and determination of tax may be delayed because of the attempt of the assessee to conceal it from the department but his liability remains. A question then arises whether this position has changed as a result of the disclosure scheme contained in Section 68 of the Finance Act of 1965. The disclosure scheme, in our opinion, does not change the position except that there would be a difference in the amount of tax payable by the assessee. Income covered by the disclosure scheme is liable to be taxed at a flat rate of 60 per cent. whereas the income assessed in the normal course, under the provisions of the Income-tax Act, would be liable to tax at the rates specified in the relevant Finance Act. In either case, what is taxed is taxable income though rates are different. It is not disputed that if the assessee had been assessed to tax under the Income-tax Act in respect of the two amounts in question in the relevant assessment years and if the tax liability was outstanding he would be entitled to a deduction of the tax liability in the computation of his net wealth. There is no reason why the tax payable under the disclosure scheme should also not be allowed to him as a deduction in computing his net wealth. We wish to emphasise it once again that what is paid by an assessee under the disclosure scheme is nothing else but income-tax. Section 68 of the Finance Act is not a charging section in the sense that it brings under charge something which is not income under the Income-tax Act. This is clear from the provisions of Section 68 of the Finance Act itself. The scheme contained in that provision is to bring to tax an income which was chargeable to income-tax but which had, for some reason, escaped the charge because of the attempt of the assessee to conceal it. An assessee, therefore, can offer for assessment under the disclosure scheme a part of his income which was liable to income-tax. If the income disclosed by him is not liable to tax under the Income-tax Act, it would not be liable to tax under the disclosure scheme either.;