# • STANDARD MILLS CO. LTD v. COMMISSIONER OF WEALTH-TAX, BOMBAY CITY

- **Citation:** [1967] 1 S.C.R. 768
- **Court:** Supreme Court of India
- **Decided:** 1966-10-06
- **Case number:** Civil Appeal No. l 129of1965
- **Bench:** J.C. Shah, V. Ramaswami, V. Bhargava
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/standard-mills-co-ltd-v-commissioner-of-wealth-tax-bombay-city-3912
- **Pages:** 9

## Headnote

B
Wealth Tax Act (27 of 1957), ss. 2(m) and 7(2)(a)-Claim regardillg
deductions of estimated inc()me tax and gratuity payable to employees under
awards-If a/fowab/e.
In the computation of th; net wealth of the appellant-company under
s. 2(m) of the Wealth Tax Act 1957, two de,ductions were claimed by the
company : (i) the amount of estimated in.come tax for the assessment
year, and (ii) the amount of gratuity pay~ble by the company to its employees under certain industrial awards.
HELD : The first claim was allowable but not the second. [776 DJ
•
Under s. 2(m) of the Act, the Wealth Tax Officer must first determine
the aggregate value of all the assets belonging to the assessee on the valu,-
ation date, and then determine the aggregate value of all the debts owed
by the assessee on the valuation date.
Excess of the aggregate value of
the assets over the debts is the ne.t wealth.
But on the terms of the awards
the liability to pay gratuity did not exist in praesenti : it was contingent
upon the determination of employment by death,. incapacity, retirement
or resignation of the employee, . and not b'efore. Therefore, it was not a
debt owned by the assessee on the valuation date. [772 C-D; 775 HJ
Nor could the appellant-company claim the deduction under .. 7(2)(a)
of the Act. The aggregate value of the assets must be computed in accordance with the provisions of s. 7. But in the aggregation of the value
of all the debts owned by the assessee on the valuation date, s. 7 has not
operation. Section 7 does not deal with the computation of net wealth
but only with the determination of the net value of the assets as a whole,
[776 A-CJ
Kesorani Industries and Cotton Mills Ltd. v. Coniniissioner of- Wealth
Tax (Centrr.l) (Calcutta), [1966] 2 S.C.R. 688, followed.
. Observations Contra in Commissioner of Wealth Tax, Gujarat v. A.jit
Mills Ltd. 55 l.T.R. 556 and Commissioner of Wealth Tax Gujarat v. New
Rajpur Mills 56 I.T.R. 544, disapproved.
Souther.n Railway of Peru v. Owen (Inspector of Ta:tes) [1957] A.C.
334, explamed.

## Text

•
STANDARD MILLS CO. LTD.
v.
COMMISSIONER OF WEALTH-TAX, BOMBAY CITY
October 6, 1966
A
[J.C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.j
B
Wealth Tax Act (27 of 1957), ss. 2(m) and 7(2)(a)-Claim regardillg
deductions of estimated inc()me tax and gratuity payable to employees under
awards-If a/fowab/e.
In the computation of th; net wealth of the appellant-company under
s. 2(m) of the Wealth Tax Act 1957, two de,ductions were claimed by the
company : (i) the amount of estimated in.come tax for the assessment
year, and (ii) the amount of gratuity pay~ble by the company to its employees under certain industrial awards.
HELD : The first claim was allowable but not the second. [776 DJ
•
Under s. 2(m) of the Act, the Wealth Tax Officer must first determine
the aggregate value of all the assets belonging to the assessee on the valu,-
ation date, and then determine the aggregate value of all the debts owed
by the assessee on the valuation date.
Excess of the aggregate value of
the assets over the debts is the ne.t wealth.
But on the terms of the awards
the liability to pay gratuity did not exist in praesenti : it was contingent
upon the determination of employment by death,. incapacity, retirement
or resignation of the employee, . and not b'efore. Therefore, it was not a
debt owned by the assessee on the valuation date. [772 C-D; 775 HJ
Nor could the appellant-company claim the deduction under .. 7(2)(a)
of the Act. The aggregate value of the assets must be computed in accordance with the provisions of s. 7. But in the aggregation of the value
of all the debts owned by the assessee on the valuation date, s. 7 has not
operation. Section 7 does not deal with the computation of net wealth
but only with the determination of the net value of the assets as a whole,
[776 A-CJ
Kesorani Industries and Cotton Mills Ltd. v. Coniniissioner of- Wealth
Tax (Centrr.l) (Calcutta), [1966] 2 S.C.R. 688, followed.
. Observations Contra in Commissioner of Wealth Tax, Gujarat v. A.jit
Mills Ltd. 55 l.T.R. 556 and Commissioner of Wealth Tax Gujarat v. New
Rajpur Mills 56 I.T.R. 544, disapproved.
Souther.n Railway of Peru v. Owen (Inspector of Ta:tes) [1957] A.C.
334, explamed.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. l 129of1965.
Appeal from the judgment and order dated April 15, 16, 17,
1963 of the Bombay High Court in Wealth Tax Reference
No. 2 of 1961.
R. J. Ko/ah, N. D. Karkhanis and 0. C. Mathur, for the
appellant.
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B. Sen, R. Ganapathy Iyer and R. N. Sachthey, for the respondent.
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STANDARD MILLS V. COMMR. W. TAX (Shah, /.)
769
The JUdgment of the Court was delivered by
Shah, J. For the assessment year 1957-58 the
appellant
Company claimed in proceedings for assessment of wealth-tax
that the following four amounts be deducted in the computation of
i~s net wealth:
(1) Rs. 29,44,421 in· respect of. income-tax liability
relating to the assessment -year 1957-58. This amount
included Rs. 2,95,869 representing the last instalment of
advance tax under s. ISA in respect of which a notice
of demand had been issued.
(2) Rs. 3, 70,083 in respect of business profits tax ·
liability.
(3) Rs. 20,23,500 in respect of proposed dividend.
(4) Rs. 25,02,675 "on account of accrued liability for
gratuity to workmen and staff as per the award of Industrial
Court and Labour Appellate Tribunal."
The claim was rejected by the Wealth-tax Officer. The Appellate
Assistant Commissioner accepted the claim of the appellant Company in respect of the last instalment of the advance tax for which a
notice of demand had been issued, and rejected the claim in respect
of the rest. The Income-tax Appellate Tribunal upheld the claim
of the appellant Company in respect of the !st, 2nd and the 4th
items and rejected the claim in respect of the 3rd item.
At the instance of the Commissioner, the following four
questions were referred to the High Court of Judicature at Bombay
under s. 27(1) of the Wealth-tax Act 27 of 1957:
"(!) Whether on the facts and circumstances of this
case the last instalment of advance tax in the sum of Rs.
2,95,869 paid by the assessee after the valuation date in
accordance with the notice of demand dated 20-10-1956 is
an admissible deduction under
Sections 7(2) and 2(m)
of the Wealth-tax Act for the purpose of computation of the
net wealth of the assessee for the assessment year 1957-58?
(2) Whether on the facts and circumstances of the
case in computing the net wealth of the assessee under
Section 7(2) read with Section 2(m) of the Wealth-tax Act
the liability for income-tax and business profits tax could be
allowed as a deduction?
(3) Whether on the facts and circumstances of the
case the liability in the sum of Rs. 25,02,675 which arose
as a result of the awards dated 28-10-1948, 28-11-1956 and
17-10-1954 before the valuation date or any part thereof is
770
SUPREME COURT REPORTS
[1967] l S.C.R.
allowable as a deduction in determining the net wealth of the
assessee under Section 7(2) read with Section 2(m) of the
Wealth-tax Act ?
(4) Whether on. the
facts and
circumstances of
the case of the sum of Rs. 20,23,500
being
the
provision made for dividends and shown as a liability in
the balance sheet of the asscssee company could be allowed
as a deduction in computing the net wealth of the assessee
company?"
At the hearing before the High Court, the fourth question was not
pressed by the appellant Company. The High Court answered
the first question in the affirmative, the second question in the
affirmative insofar as it related to the estimated liability of busi·
ness profits tax subject to verification by .the Wealth-tax Officer,
and in the negative insofar as it related to the estimated liability of
income-tax. The third question was answered in the negative.
In this appeal the Company challenges the correctness of the answers
to the second part of the second question and the third question.
The second question insofar as it relates to estimated liability
for payment of income-tax needs no detailed consideration, for
the answer thereto will be governed by the judgment of this Court in
Kesoram Industries and Cotton Mills Ltd. v. Commissioner of
Wealth-tax (Central), Calcutta(•). It was held by this Court in
that case that liability to pay income-tax was a present liability
though the tax became payable after it was quantified in accordance
with ascertainable data: there was therefore a perfected debt at any
rate on the last day of the accounting year and not a contingent
liability, and the amount of the provision for payment of income·
tax in respect of the year of account was a "debt owed" within the
meaning of s. 2(m) on the valuation date and was as such deducti·
ble in computing the net wealth. The view expressed by the High
Court on the second question insofar as it relates to provision for
income-tax cannot therefore be sustained and that part of the
questio,n should be answered in the affirmative.
There remains the third question. Counsel for the Company
had conceded before the High Court that the liability to pay gratuity to the employees whose services were not terminated in the
relevant year of account was merely contingent, since it arose on
the happening of certain events such as death, physical incapacity,
voluntary retirement, or resignation, and was on that account not a
Clebt within the meaning of s. 2(m) of the Act.
But it was contended
before the High Court that the present value of the liability for
payment of gratuity was a permissible deduction in valuing the assets
of the business of the assessee under s. 7(2)(a) of the Act. The
(I) (1966) 2 S.C.R. 688 : 59 l.T.R. 767.
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STANDARD MILLS V. COMMR. W. TAX (Shah,/.)
771
High Court rejected that contention. Counsel for the Company
has ii:i this appeal contended that no such concession as is recorded
in the judgment of the High CQurt was made, and in any event,
the concession being on a question of law was not binding upon
the appellant Company.
Section 2(m) at the material time provided:
" 'net wealth' means the amount by which the aggregate value computed in accor.dance with the provisions
of this Act of all the assets, wherever located, belonging
to the assessee on the valuation date, including assets
required to be included in his net wealth as on that
date under this Act, is in excess of the aggregate value of all
the debts owed by the assessee.on the valuation date other
.than,-
(i) debts which under Section 6 are not to be taken
into account;
(ii) debts which are secured on, or which have been
incurred in relation to any property in respect of which
wealth-tax is not chargeable under this Act; "
By s. 3 the wealth-tax is charged for every financial year commencing on and from the first day of April, 1957 on the net wealth on the
corresponding valuation date of every individual, Hindu undivided
family and company at the rate or rates specified in the Schedule.
Broadly speaking net wealth is the difference on the valuation date
between the aggregate value computed in accordance with the
provisions of the Act of the assets belonging to the assessee and th&
aggregate value of all the debts owed by the assessee. If there is
no debt owed on the valuation date, it can obviously not be deducted in determining the net wealth which is liable to tax under
the Wealth-tax Act.
Apart from the concession made by counsel for the Company
there is little doubt on the plain terms of the awards that the liability to pay gratuity to the employees of the appellant Company on
determination of employment is a mere contingent liability which
arises only when the employment of the employee is determinep by
death. incapacity, retirement or resignation. The relevant terms
of the awards dated October 28, 1948, November 28, 1956 and
October 17, 1954 are as follows:
"Gratuity should be paid ............ on the following
scale:-
1. On the death of an employee, while in service of
the company or on his becoming physically or mentail :·
incapacitated for further service-one month's salarv
for each year of service. . . . . . . . . . . . . .
·
772
SUPllBMI!. COURT lll!PORTS
[llJ67] I S.C.R.
2. On voluntary retirement or resignation of an
.A.
employeeAfter 15 years' continuous service in the
company-15 months' salary.
3. On termination of his service by the Company-
( a) After 10 years' continuous service but
less than 15 years' service in the company-3/4th
of one month's salary for each year of service.
(b) After 15 years' continuous service in the
company-15 months' salary.
4. A gratuity will not be paid to any employee
who is dismissed for dishonesty or misconduct."
The right to obtain gratuity under the awards arises only when
there is determination of employment and not before. The liability
·does not exist in praesenti: it is contingent upon the determination
of employment. This Court pointed out in Kesoram Industries &
Cotton Mills' case(') at p. 703:
" ........ the following definition is unanimously
accepted:
'debt is a sum of money which is now payable or will
become payable in future by reason of a present obligation:
debilwn in praesemi, solvendwn in futuro.'
The said decisions also accept the legal position that
a liability depending upon a· contingency is not a debt in
praesenti or infuturo till the contingency happened.
But if
there is a debt the fact that the amount is to be ascertained
does not make it any the less a debt if the liability is certain
and what remains is only the quantification of the amount.
In short, a debt owed within the meaning of section 2(m)
of the Wealth-tax Act can be defined as a liability to pay
in praesenti or in futuro an ascertainable sum of money."
Observations made by the High Court of Gujarat in Commissumer of Wealth-tax, Gujarat v. Ajit Mills Ltd.,(2) that deduction
for an amount claimed on account of liability for gratuity for workers
and employees based on awards of the labour courts and agreements will be admissible deductions in the computation of the net
wealth are plainly obiter, and in our judgment are not correct.
The decision of the House of Lords in Southern Railway of
.Peru Ltd. v. Owen (Inspector of Taxes) (l) chat the asscssec company
(I)' (1%6] 2 S.C.R. 688.
(2) 55 1.T.R. 556.
(3) [19571 A.C. 331 : 32 l.T.R. 737.
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STANDARD MILLS v. COMMR. W. TAX (Shah,/,)
773'
was entitled to charge against each year's receipts the cost of making provision for the retirement payments which would ultimately
be payable as it had the benefit of the employees' services during that
year, provided the present value of the future payments could be
fairly estimated, were a permissible deduction in the computation
of income-tax, have in our judgment no relevance in this case. In
Southern Railway of Peru Ltd's case(') under the legislation of
Peru a Company operating a railway was bound to pay its employees
compensation on the termination of their services. The right to
receive compensation arose on dismissal or on termination of the
employment by the employer by proper notice, or on such termination by the death of the employee or on the expiry of the term of
the employment. The compensation was an amount equivalent
to one month's salary at the rate in force at the date of determination for every year of service. The company claimed in the
computation of taxable income, under the Income-tax Act, 1918,
to be entitled to charge against each year's receipts the cost of making provision fbr the retirement payments which would ultimately
be thrown on it, calculating what sum would be required to be
paid to each employee if he retired without forfeiture at the close of
the year and setting aside the aggregate of what was required in so far
as the year had contributed to the aggregate. It was held that the
company was not entitled to make the deductions, but the company
was entitled to charge against each year's receipts the cost of making provision for the retirement payments which would ultimately
be payable as it had had the benefit of the employees' services during
that year, provided the present value of the future payments could
be fairly estimated. The question arose under the English Incometax Act of 1918. Lord MacDermott observed at p. 345:
" ........ as a general proposition it is, I think, right
to say that, in computing his taxable profits for a particular
year, a trader, who is under a definite obligation to pay his
employees for their services in that year an immediate·
payment and also a future payment in some subsequent
year, may properly deduct, not only the immediate
payment, but the present value of the future payment,.
provided such present value can be satisfactorily determine<L
or fairly estimated."
Similar observations were made in the judgment of Lord Radcliffe ..
But the House in that case was concerned to determine the deductibility of the present value of a liability which may arise in future in
the computation of taxable profits for the relevant year
under
.
the Income-tax Act. The same considerations cannot, however.
\
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apply to a case under the Wealth-tax Act, where the liability to pay
wealth-tax is charged upon the net wealth of an assessee.
- . (IJ (1957] A.C. 334 : 32 I.T.R. 737.
774
SUPRl!MI! COURT REPORTS
[1967) I S.C.R.
In Commissioner of wealth-tax,
Gujarat v.
New Rajpur
Mills Ltd. (1) the assessee company claimed to deduct gratuity
payable to employees under an agreement
e:-.~cred into with
the labour associations before the valuation date. The Court
in that case observed that the liability was not a debt owed by
the assessec on the valuation date since the gratuity was not payable
on the valuation date, but was payable only on fulfilment of the
contingencies set out in those agreements. But the Court proceeded
to observe that since contingent liabilities can be taken into account
while computing the net wealth of the asseessee under s. 7(2)(a)
the liability for payment of gratuity under such agreements would
have to be estimated and the estimated value of the contingent
liability would be a permissible deduction. in computing the net
wealth of the assessee. In our view the first observation of the Court
is correct, but the second is not. We will presently set out the
reasons for that view.
The alternative plea that under s. 7(2)(a) of the Act the appellant Company is entitled to claim deduction even if it cannot do so
under s. 2(m) has, in our judgment, no force. Section 7 deals with
the manner of valuation of assets. It provides insofar as it is
material:
"(I) The value of any asset, other than cash, for the
purposes of this Act, shall be estimated to be the price which
in the opinion of the Wealth-tax Officer it would fetch if
sold in the open market on the valuation date.
(2) Notwithstanding anything contained
in subsection (1),-
(a) where the assessee is carrying on a business for
which accounts arc maintained by him regularly the
Wealth-tax Officer may, instead of determining separately the value of each ;isset held by the assessee in such
business, determine the net value of the assets of the
business as a whole having regard to the balance-sheet
of such business as on the valuation date and making
such adjustments therein as the circumstances of
the case may require;"
•
Section 7 falls in Ch. II which deals with the charge of wealth-tax
and assets subject to such charge: it is intended to provide machinery for determination of the value of assets. It was observed in
the minority judgment in Kesoram Industries & Cotton Mills'
<:ase(2) at p.717 :
"By the first sub-section the Wealth-tax
Officer is
authorised to estimate, for the purpose of determining the
(I) :61.T.R. 544.
(21 11966) 2 S.C.R. 688 : 59 1.T R. 767.
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STANDARD MILLS V. COMMR. W. TAX (Shah, /.)
775
value of any asset, the price which it would fetch, if sold in
the open market on the valuation date. But this rule in the
case of a running business may. often be inconvenient and
may not yield a true estimate of the net value of the total
assets of the business. The legislature has therefore provided in sub-section (2)(a) that where the assessee is carrying
on a business for which accounts are maintained by him
regularly, the Wealth-tax Officer may determine the net
value of the assets of the business as a whole, having regard to the balance-sheet of such business as on the valuation date and make such adjustments therein as the circumstances of the case may require. But the power conferred
upon the tax officer by section7(2) is to arrive at a valuation
of the assets, and not to arrive at the net wealth of the assessee. Section 7(2) merely provides machinery in certain
special cases for valuation of assets, and it is from the
aggregate valuation of assets that the net wealth chargeable
to tax may be ascertained. The power conferred upon the
tax officer to make adjustments as the circumstances of the
case may require is also for the purpose of arriving at the
true value
of the assets of the business. Sub-section
(2)(a) of section 7 contemplates the determination of the
net value .of the assets having regard to the balance-sheet
and after making such adjustment as the circumstances of
the case may require. It does not contemplate determination of the net wealth, because net wealth can only be
determined from the net value of the assets by making
appropriate deductions for debts owed by the assessee.
The argument raised by counsel for the assessee is
that substantially section 7(2) is a definition section, which
extends, for the purposes of the Act, the definition of the
'net wealth' of assessees carrying on husiness. There is no
warrant for this argument in the language used in section
7(2). Counsel was unable to suggest any rational explanation why, if what he contends was the intention, Parliament should have adopted this somewhat roundabout
way of incorporating a definition of net wealth in a section
de!lling with valuation of assets."
The majority of the Court did not express any opinion on this
question. From the terms of s. 2(m) it appears clear that the
tax officer must first determine the aggregate value of all the assets
belonging to the assessee on the ;valuation date, and then determine
the aggregate value of all the debts owed by the assessee on the
valuation date. Excess of the aggregate value of the assets over the
debts is the net weafth. The aggregate value of the assets must be
776
SUPR.BME COUJ.T REPORTS
(1967] I S.C.R..
computed in accordance with the provisions of s. 7.
But in the
aggregation of the value of all the debts owed by the assessee on the
valuation date, s. 7 has no operation.
In holding in New
Rajpur Mills' case(') that a contingent
liability can be taken into account while computing the net wealth
of the assessee under s. 7(2) (a), in our judgment, the true function
of s. 7(2J(a) of the Wealth-tax Act was not appreciated. Section 7.
does not deal with the computation of net wealth. It deals with
the computation of the aggregate value of the assets.
Under s. 7
the Wealth-tax Officer is competent, where the assessce is carrying
on business of which accounts are maintained regularly, to determine
the net value of the assets of the business as a whole.
But in doing
so he determines the value of the assets of the business as a whole,
and not the net wealth of the business.
The appeal therefore is partially allowed.
Insofar as the
claim relates to deduction of estimated income-tax for the assessment
year, the answer will be in favour of the appellant-company, and in so
far as the claim relates to deduction of gratuity payable to the
employees of the company, the answer will be in the negative. There
will be no order as to costs in this appeal.
V.P.S.
Appeal a/101.·ed in part.
(I) 561.T.R. 5"4.
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