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TMI Blog1993 (10) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... nd it cannot be said to be enforceable on the deceased's death. The Tribunal considered that the claim for gratuity is not a debt and, therefore, not deductible under section 44 of the Estate Duty Act. The Tribunal further rejected the claim of deduction of estate duty in the computation of the taxable estate. Being aggrieved by the said decision, the applicant filed an application for making a reference to this court. On that application, the Tribunal has referred the following two questions of law for our opinion : "1. Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the accountable person was not entitled to the deduction of estate duty in the computation of taxable estate? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the actuarially computed liability of Rs. 63,517 was not a rightful deduction as debt or as charge or diminution in value of the estate?" Re. : Question No. 1 : In the case of P. Leelavathamma v. CED [1991] 188 ITR 803, the Supreme Court held that estate duty falling upon property passing on the death of the deceased is not deductible in compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions deal with the provision of wealth-tax and deductions under the Wealth-tax Act while computing the net wealth. In the case of Standard Mills Co. Ltd. [1967] 63 ITR 470, the Supreme Court has negatived the claim of the assessee that in computing his net wealth a certain estimated amount should be deducted on account of liability for gratuity to its workmen and staff in accordance with certain awards of the Industrial Court and the Labour Appellate Tribunal made before the relevant valuation date. The court held that the liability of the assessee to pay gratuity to its employees on determination of employment was a mere contingent liability which arises only when the employment of the employee is determined by death, incapacity, retirement or resignation. The liability did not exist in praesenti. The court, therefore, held that the amount claimed could not be deducted as a "debt" in computing the net wealth of the assessee nor can such contingent liability be taken into consideration in computing the net wealth of the assessee under section 7(2)(a) of the Wealth-tax Act, 1957. Section 2(m) of the Wealth-tax Act, considered by the Supreme Court, is as under : " 'net wealth' mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch accounts are maintained by him regularly. Sub-section (2) empowers the Wealth-tax Officer to determine the net value of the assets of the business as a whole having regard to the balance-sheet of such business as on the valuation date and making such adjustments therein as the circumstances of the case may require. The court referred to the following observations in the case of Kesoram Industries and Cotton Mills Ltd. [1966] 59 ITR 767, 792 (SC) : "Sub-section (2)(a) of section 7 contemplates the determination of the net value of the assets having regard to the balance-sheet and after making such adjustments as the circumstances of the case may require. It does not contemplate determination of the net wealth, because net wealth can only be determined from the net value of the assets by making appropriate deductions for debts owed by the assessee." (emphasis supplied). The court thereafter held : "The aggregate value of the assets must be computed in accordance with the provisions of section 7. But in the aggregation of the value of all the debts owed by the assessee on the valuation date, section 7 has no operation." (emphasis supplied). Hence, the court held that sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business." (emphasis supplied). The court thereafter considered the decision in the case of Standard Mills Co. Ltd. [1967] 63 ITR 470 (SC) and held that the decision turned on the question whether an estimated liability under gratuity schemes framed under industrial awards amounted to debts and could be deducted while computing the net wealth. The court held, in view of the terms of section 2(m) of the Wealth-tax Act, that as the liability to pay gratuity was not in praesenti but would arise in future on the termination of service, i.e., on retirement, death or termination, the estimated liability under the schemes would not be a debt and, therefore, could not be deducted while computing the net wealth. Thereafter, the court held that the question that required consideration in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing the business in the open market would always take into consideration such contingent liabilities and arrive at the proper discounted value (on the basis of scientific valuation). There is no prohibition under the Estate Duty Act which provides that such provision is not to be taken into account or is to be added while computing the net estate of the deceased. No provision is pointed out by learned counsel for the Revenue that there is such prohibition under the Estate Duty Act. Section 44 provides for grant of allowance for funeral expenses, debts and encumbrances and that debts specified in clauses (a) to (d) shall not be allowed. Clauses (a) to (d) apparently do not deal with the provision for gratuity. There is no section providing that the provision made for gratuity is not to be taken into account for determining the principal value of any property as a whole and that the market value is to be determined by ignoring the provision made for payment of gratuity. Sub-section (2) of section 36 only provides that in estimating the principal value under section 36(1) the Controller shall fix the price of the property according to the market price at the time of the deceased's de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a provision intended to meet a known liability, though a contingent one, for, the expression 'liability' occurring in clause 7(1)(a) of Part III of the Sixth Schedule to the Companies Act includes any expenditure contracted for and arising under a contingent liability ; but if the sum so appropriated is shown to be in excess of the sum required to meet the estimated liability (discounted present value on a scientific basis) it is only the excess that will have to be regarded as a reserve under clause 7(2) of Part III to the Sixth Schedule," (emphasis supplied). With regard to Standard Mills Co. Ltd.'s case [1967] 63 ITR 470 (SC), the court, after considering the ratio laid down therein, observed : "It will thus appear that this court was of the view that though such a liability is a contingent liability and, therefore, not a 'debt' under section 2(m) of the Wealth-tax Act, it would be deductible under the Income-tax Act while computing the taxable profits ; in other words different considerations would apply to cases arising under the Wealth-tax Act and the Income-tax Act." (emphasis supplied). Thereafter, the Supreme Court referred to and relied upon the following observati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted by the Supreme Court by its order dated January 22, 1990. In our view, considering the aforesaid judgments, for working out the principal value on the basis of section 36 of the Estate Duty Act, the provision for gratuity is required to be taken into consideration. The principal value of the property is to be estimated on the basis as to what price it would fetch if sold in the open market at the time of the death of the deceased. For determining the market value of the property, the principles that have to be applied are those which are part of the commercial practice or which an ordinary businessman would resort to at the time of estimating the price of the property. He would take into consideration the plus and minus factors, i.e., its peculiar advantages and disadvantages or drawbacks, and would estimate the value with reference to its commercial value rather than with reference to any abstract legal rights or the provisions for deductible debts under section 44 of the Estate Duty Act. Therefore, a willing purchaser, who is a businessman, would certainly take into account the provision for gratuity which is required to be made and its discounted present value. That means ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of a debt which was prohibited by the legislation. The court held that sections 7 and 2(m) of the Act apply at two different stages. Section 7 is the estimation of the market value of the asset whereas section 2(m) enjoins that from the same the debt owed by the assessee is to be deducted. The debt owed would be computed in accordance with section 2(m) but the estimation of the value of the asset is on the basis which such asset would fetch in the open market taking into consideration the view-point of a willing purchaser. Similarly, in the case of CED v. Mrudula Nareshchandra [1986] 160 ITR 342, the Supreme Court dealt with the question as to whether or not the goodwill of the partnership firm in a case where it was specifically stipulated in the partnership agreement that the partner dying shall have no right whatever in the goodwill of the firm, is to be taken into account for determining the value of his estate. The court dealt with the provisions of sections 2(15), 2(16) and 36 of the Estate Duty Act. The court thereafter referred to clause (10) of the partnership deed, which provided that the firm shall not stand dissolved on the death of any of the partners and the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the said analogy, it can be said that, if there is a contingent liability for gratuity, it will not disappear or evaporate because of the deceased's death. It is required to be scientifically evaluated and its discounted present value is to be taken into account before deciding the market value of the estate. Hence, if there is provision for gratuity which is determined scientifically or on actuarial basis, then that amount is required to be deducted before arriving at the market value of the estate. In the result, it can be held that, while determining the market value of the estate, the authority has to estimate on the basis as to what price it would fetch if sold in the open market. A prudent purchaser or businessman would take into consideration the plus and minus factors before offering a price. Apart from other facts which he may take into consideration, he is bound to consider the liability to pay gratuity to the employees. He may work out that liability by a scientific method or on the basis of actuarial valuation which would constitute provision representing fairly and accurately all the existing liabilities on the date of purchase. After taking into consideration all ..... X X X X Extracts X X X X X X X X Extracts X X X X
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