736/CBDT. - Income Tax - 736/CBDT

INSTRUCTION NO. 736/CBDT Dated : August 14, 1974 ule 1D of Wealth-tax Rules prescribes the method of determining the market value of unquoted equity shares of all companies other than certain types. For this purpose the value of all the liabilities as shown in the balance-sheet of the company has to be deducted from the value of its assets shown in the balance-sheet. In terms of sub-clause (f) of clause (ii) of Explanation II to the rule "any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares" shall not be treated as liability even though it is shown as liability in the balance-sheet. A question has arisen whether provision for gratuity shown in the balance-sheet is hit by this provision. 2. The Supreme Court in the case of Standard Mills Company Limited vs. C.W.T., Bombay (63 ITR 470) held that the liability of the assessee to pay gratuity to its employees on determination of employment was a mere contingent liability which arose only when the employment of the employee was determined by death, in capacity, retirement or resignation; the liability did not exist in present. Provision for gratuity could not be deducted as a debt in computing the net wealth of the assessee; nor could such a contingent liability be taken into account in computing the net value of the assets of the assessee u/s 7(2) (a) of the Wealth-tax Act. It is incorrect to assume that the decision in the Standard Mills Co. Ltd. stood modified by the latter decision of the Supreme Court in the case of Metal Box Co. of India Ltd. vs. their Workmen (73 ITR 53). The Court while deciding the case of Metal Box Company Ltd. vs. their Workmen distinguished the case of Standard Mills Company Limited on the ground that in the latter case the question was whether estimated liability under gratuity schemes framed under industrial awards mounted to a debt or not in terms of Section 2(m) of the Wealth-tax Act, the conclusion was that such liability was a contingent sum for every additional year of service which he received from his employees. Further, the Supreme Court was moved in the case of Bombay (Unreported) to have the decision in the case of Standard Mills Company Ltd. reconsidered by a larger bench in view of the subsequent decision in the case of Metal Box Company Ltd. vs. their Workmen. The Supreme Court observed "Metal Box Company ltd. case was a decision rendered under the Bonus Act. In that decision the learned judges referred to the decision of the Standard Mills Co. and distinguished the same. In our opinion there is no conflict between the two decisions" and did not accede to the request for reconsideration. In these circumstances, provision for gratuity cannot be treated as a liability for the purpose of determining the value of shares. 3. The position in law as explained in the preceding para may please be brought to the notice of all the assessing Officers in the charge.