1979 (1) TMI 119 - AT - Wealth-tax

Summary

Issues Involved:
1. Method of valuation of shares.
2. Deduction of provision for taxation from liabilities.
3. Deduction of provision for gratuity from liabilities.

Issue-wise Analysis:

1. Method of Valuation of Shares:
The primary issue in this appeal is the method of valuation of shares of M/s International Instruments Pvt. Ltd. The valuation must be done in accordance with Rule 1D of the Wealth Tax (WT) Rules. The Wealth Tax Officer (WTO) valued the shares at Rs. 315.26 per share, while the assessee valued them at Rs. 220.24 per share. The difference arises due to the treatment of two liabilities: provision for taxation and provision for gratuity.

2. Deduction of Provision for Taxation from Liabilities:
The WTO deducted an excess provision for tax of Rs. 35 lakhs paid as advance tax from the liabilities, whereas the assessee did not. According to Rule 1D, the value of liabilities shown in the balance sheet should be deducted from the value of assets. Explanation II to Rule 1D specifies that advance tax paid should not be treated as an asset. Both parties deducted the advance tax from the assets side. However, the WTO also deducted it from the liabilities side, which the assessee contested. The Tribunal referred to decisions from the Bombay and Cochin Benches, which interpreted that advance tax shown as an asset should not be deducted from the provision for taxation shown as a liability under clause (ii)(e) of Explanation II. The Tribunal upheld the assessee's view, aligning with the Bombay Benches' interpretation, and emphasized that the benefit of doubt should be given to the taxpayer.

3. Deduction of Provision for Gratuity from Liabilities:
The WTO deducted the provision for gratuity of Rs. 12,39,643 from the liabilities, while the assessee did not. The departmental representative cited the Supreme Court's judgments in Standard Mills Co. Ltd. and Bombay Dyeing & Mfg. Co. Ltd., which held that estimated liability for gratuity should not be deducted as a debt in computing net wealth. However, the Tribunal noted that these cases were not directly applicable as they concerned the net wealth of the company, not the market value of shares under Rule 1D. Instead, the Tribunal referred to the Madras High Court's decision in CWT vs. Ranganayaki Gopalan, which allowed the deduction of a definite, ascertained liability for gratuity in valuing shares. The Tribunal concluded that the provision for gratuity should be deducted in arriving at the break-up value of the shares and directed the AAC to recompute the value accordingly.

Conclusion:
The appeal is partly allowed. The Tribunal upheld the assessee's method of not deducting the advance tax from the liabilities, aligning with the interpretation of the Bombay Benches. It also directed the AAC to recompute the value of the shares, considering the provision for gratuity as a deductible liability.