1978 (3) TMI 136 - AT - Wealth-tax

Summary

Issues Involved:
1. Legality and jurisdiction of reopening the assessment under section 17 of the Wealth-tax Act, 1957.
2. Whether the provision for gratuity should be considered a contingent liability for the purpose of share valuation under Rule 1D of the Wealth-tax Rules, 1957.

Detailed Analysis:

1. Legality and Jurisdiction of Reopening the Assessment:
The primary issue was whether the reopening of the assessment under section 17 of the Wealth-tax Act, 1957, was valid. The original assessment was completed on 30-10-1972. The WTO later reopened the assessment on 6-12-1975, based on the inclusion of the provision for gratuity in the valuation of shares. The assessee contended that this reopening was illegal and without jurisdiction. The AAC upheld this contention, citing the Supreme Court judgment in Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287 (SC).

The Tribunal had to determine if the WTO had new information or merely changed his opinion. The Supreme Court in Kalyanji Mavji & Co. outlined four categories where section 34(1)(b) of the Indian Income-tax Act, 1922, analogous to section 17 of the 1957 Act, would apply. The Tribunal concluded that the WTO had new information derived from an external source, specifically a circular issued by the CBDT on 14-8-1974, which prompted the reopening. This information fell within item 3 or item 4 of the Supreme Court's classification, making the reopening valid.

2. Provision for Gratuity as a Contingent Liability:
The second issue was whether the provision for gratuity should be considered a contingent liability under Rule 1D of the Wealth-tax Rules, 1957, for share valuation purposes. The WTO had not treated the provision for gratuity as an outgoing, thus increasing the total value of assets for determining the break-up value of shares.

The Tribunal examined the balance sheets of T.V. Sundaram Iyengar & Sons Pvt. Ltd. and Sundaram Textiles Ltd., which showed provisions for gratuity based on actuarial valuations. The assessee argued that these were real liabilities, not contingent ones. The departmental representative, however, relied on the Supreme Court judgment in Standard Mills Co. Ltd. v. CWT [1967] 63 ITR 470, which held that gratuity provisions were contingent liabilities.

The Tribunal considered various judicial precedents and accounting principles. It noted that the provision for gratuity, when based on actuarial valuations, should not be treated as a contingent liability from an accountancy point of view. The Tribunal referenced the Companies Act, 1956, and guidelines from the Institute of Chartered Accountants of India, which supported the view that such provisions represent known liabilities.

The Tribunal concluded that the provision for gratuity should not be excluded in the computation under Rule 1D, as it was not a contingent liability within the meaning of the 1957 Rules. Consequently, the valuation of shares in both companies did not call for revaluation, and the additions made in the revised assessments were deleted.

Conclusion:
The Tribunal allowed the appeal in part, upholding that the reopening of the assessment was valid but agreeing with the AAC that the revaluation of shares was not in order due to the incorrect classification of the provision for gratuity as a contingent liability.