1996 (6) TMI 49 - HC - Wealth-tax

Summary

Issues:
Interpretation of industrial subsidy as contingent liability or ascertained liability under Wealth-tax Act, 1957.

Analysis:
The case involved a reference under section 27(1) of the Wealth-tax Act, 1957, regarding the classification of industrial subsidy received by the assessee as either a contingent liability or an ascertained liability. The amount in question was received as a subsidy for the development of the industrial concern, with the condition that it was refundable only if the industrial activity was closed due to the assessee not benefiting from the development process. The Income-tax Officer treated the subsidy as an asset to be included in the net wealth.

The first appellate authority considered the subsidy to be irrevocably received by the assessee, part of the capital, and not a liability that would reduce the cost of the asset. The Tribunal further deliberated on the nature of the subsidy, emphasizing that it was not refundable unless the unit went out of production within five years from the commencement or receipt of the subsidy. The Tribunal disregarded the mere entry of the subsidy as a liability in the balance-sheet as not determinative of its classification.

The judgment referred to a previous case regarding gratuity payments, where the court rejected the claim that it was a contingent liability, emphasizing that it was a definite, ascertained, and present liability. Applying this reasoning, the court concluded that the industrial subsidy received by the assessee did not create a liability at the time of receipt, as the liability would only arise if the unit went out of production within five years. Therefore, the amount received was considered income and part of the assessee's wealth, contributing to the formation of assets. Consequently, the court declined to answer the question referred and confirmed the Tribunal's order.

In light of the above analysis, the court determined that the industrial subsidy received by the assessee was not a contingent liability but an ascertained liability, as it was considered income and formed part of the assessee's wealth, contributing to the assets. The court relied on previous judgments regarding similar situations to support its decision and confirmed the Tribunal's order in this case.