1984 (10) TMI 71 - AT - Wealth-tax

Summary

Issues Involved:
1. Whether the gratuity liability of Rs. 5,64,528 should be deducted in working out the value of shares.
2. Whether the liability must be mentioned in the balance sheet to be considered for deduction.
3. Whether the gratuity liability is a contingent liability or an ascertained liability.

Issue-wise Analysis:

1. Gratuity Liability Deduction:
The primary issue was whether the gratuity liability amounting to Rs. 5,64,528 should be deducted while computing the value of shares held by the assessee in Jagdish Oil Industries (P.) Ltd. The assessee argued that this liability, though not provided for in the balance sheet, existed and should be considered. The Tribunal concluded that the liability must be taken into account irrespective of its appearance in the balance sheet, as a prospective purchaser would consider such existing liabilities when determining the value of shares. The Tribunal emphasized that the liability, if shown to exist, cannot be ignored in the valuation process.

2. Mention in the Balance Sheet:
The WTO and AAC rejected the assessee's claim on the grounds that the liability was not mentioned in the balance sheet. The Tribunal, however, determined that the non-mention of the liability in the balance sheet does not render it ineligible for deduction under rule 1D. The Tribunal noted that rule 1D does not explicitly prohibit the inclusion of liabilities not provided for in the accounts, provided they exist as liabilities. The Tribunal thus focused on the existence and ascertainment of the liability rather than its mention in the balance sheet.

3. Contingent vs. Ascertained Liability:
The Tribunal debated whether the gratuity liability was a contingent liability or an ascertained liability. The AAC and the learned Judicial Member viewed the liability as contingent, dependent on future events such as the retirement of employees. They argued that the liability should be scientifically determined or actuarially valued to be considered ascertained. Conversely, the learned Vice President and the Third Member concluded that the liability was real and certain, given the statutory obligation to pay gratuity under the Payment of Gratuity Act, 1972. They argued that the liability existed irrespective of the timing of the payment and should be deducted in the valuation of shares.

Separate Judgments:
- Vice President's Judgment: The Vice President held that the gratuity liability must be considered in the valuation of shares, irrespective of its mention in the balance sheet. He emphasized that the liability was real and should be taken into account, as it affects the overall assets of the company.
- Judicial Member's Judgment: The Judicial Member disagreed, arguing that the liability was contingent and not scientifically determined. He maintained that only actuarially valued liabilities should be considered for deduction under rule 1D.
- Third Member's Judgment: The Third Member agreed with the Vice President, stating that the liability was certain and should be deducted in the valuation of shares. He emphasized that the liability existed and was ascertainable under the Payment of Gratuity Act, thus affecting the market value of the shares.

Conclusion:
The Tribunal, by majority opinion, concluded that the gratuity liability of Rs. 5,64,528 was a proper liability deductible in working out the value of shares. The appeal was allowed, recognizing the liability as real and ascertainable, and not merely contingent. The decision emphasized the importance of considering existing liabilities in the valuation process, irrespective of their mention in the balance sheet.