1996 (4) TMI 78 - HC - Income Tax

Cash System, Estate Duty, Gratuity Liability, Partner In Firm, Passing Of Property, Quoted Equity Shares

Issues Involved:
1. Whether the provision for gratuity liability based on actuarial valuation should be considered in valuing the shares of Padinjarekara Estates Ltd. as per rule 1D of the Wealth-tax Rules, 1957.
2. Whether the deceased's right to receive pool payments subsequent to the date of death should be included in the principal value of the estate.

Issue-wise Detailed Analysis:

1. Provision for Gratuity Liability in Valuing Shares:

The primary issue was whether the provision for gratuity liability, based on actuarial valuation, should be considered in valuing the shares of Padinjarekara Estates Ltd. under rule 1D of the Wealth-tax Rules, 1957. The accountable person argued that this liability should be deducted when computing the market value of the shares. The assessing authority initially rejected this claim, but the Appellate Controller allowed it, following the Madras High Court's decision in CWT v. S. Ram [1984] 147 ITR 278. The Appellate Tribunal, however, reversed this decision, relying on its earlier ruling that gratuity provision is not an allowable deduction.

The High Court held that if the provision for gratuity is made on the basis of an actuarial valuation, it represents a known and existing liability for the year in question and cannot be termed a contingent liability. This conclusion was supported by the Supreme Court's decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, which distinguished between "reserve" and "provision." The High Court emphasized that an actuarial valuation makes the liability a present obligation, even if the payment is due in the future.

Given the lack of evidence that the Rs. 4,25,000 provision for gratuity was based on actuarial valuation, the High Court upheld the Appellate Controller's directive to the assessing authority to verify this and allow the deduction if it was actuarially determined.

2. Inclusion of Pool Payments in Principal Value of the Estate:

The second issue was whether the estimated coffee pool payments due to the deceased should be included in the principal value of the estate. The assessing authority included Rs. 6,00,000 as the estimated value of these payments, while the Appellate Controller deleted this inclusion. The Appellate Tribunal reinstated it, asserting that the right to receive these payments had accrued to the deceased before death, making it an asset.

The High Court agreed with the Tribunal, noting that the right to receive the coffee pool payments had indeed accrued before the deceased's death. This right constituted property that passed on the date of death and should be included in the estate's principal value. The High Court also endorsed the Tribunal's directions for estimating the value of this right, which aligned with the Supreme Court's principles in Mrs. Khorshed Shapoor Chenai v. Asst. CED [1980] 122 ITR 21. This estimation should consider the property's peculiar nature, marketability, and surrounding circumstances, including litigation risks.

Judgment Summary:

The High Court answered the first question in the negative, against the Revenue and in favor of the assessee, directing the assessing authority to verify the actuarial basis of the gratuity provision. The second question was answered in the affirmative, in favor of the Revenue and against the assessee, upholding the inclusion of the coffee pool payments in the estate's principal value. The matter was remanded to the assessing authority for further verification regarding the gratuity provision.

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