1973 (5) TMI 6 - HC - Wealth-tax

Whether, on the facts and in the circumstances of the case, the sum of Rs. 19,11,620 on account of contribution to Kasturi and Sons Ltd. Employees Gratuity Fund was deductible for purposes of ascertaining the value of equity shares in Kasturi and Sons Ltd.? - sum of Rs. 19,11,620 was deductible for the purpose of ascertaining the value of equity shares and we, accordingly, answer the question referred in the affirmative and against the revenue

Summary

Issues:
1. Deductibility of liability for employees' gratuity from the total value of assets for valuation of equity shares.

Analysis:
The case involved an agreement executed for the payment of gratuity to employees by a company. An actuary was appointed to advise on the financial arrangements needed for the gratuity scheme. The actuary reported that the company should contribute 4% of the wage bill annually to the fund. The liability for existing employees' services rendered prior to 1960 was determined at Rs. 19,50,000. The company decided to pay the initial contribution in instalments without interest. The company's balance sheet showed an actuarial liability for employees' gratuity as Rs. 19,11,620.

The issue arose when two shareholders claimed a deduction of Rs. 19,11,620 for the gratuity liability from the valuation of their shares for wealth tax assessment. The Wealth-tax Officer rejected the claim, stating it was a contingent liability. However, the Tribunal ruled that the liability was real and had already arisen for existing employees' services. The Tribunal allowed the deduction, leading to a reference to the High Court.

The High Court analyzed the trust deed and the company's obligations. The trust deed required the company to pay the determined amount to the trustees, either in a lump sum or in instalments. The court referred to legal precedents defining a debt as a liability to pay an ascertainable sum of money. The court concluded that the liability of Rs. 19,50,000 was definite, ascertained, and present, not contingent. The company's option to pay in instalments did not change the character of the liability. The court held that the amount was deductible for valuation of equity shares.

In conclusion, the High Court answered the question in the affirmative, allowing the deduction of Rs. 19,11,620 for the employees' gratuity liability from the valuation of equity shares. The court awarded costs to the respondents and clarified the nature of the liability as a definite and present obligation, not contingent.