9911796707
TMI Blog1990 (7) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... tober 26, 1973. The reference application was concerned with regard to the enhancement of the net wealth of Rs. 92,609. The background in which the controversy arose was about the valuation of equity shares of Krishna Mills Limited, which was a public limited company. The number of shares held by the assessee on the valuation date was 254. These shares were not quoted on the stock exchange. Their value, therefore, was to be determined in accordance with rule 1D of the Wealth-tax Rules, 1957. The said rule, at he relevant time, read as under : "The market value of an unquoted equity share of any company, other than an investment company or a managing agency company, shall be determined as follows: The value of all the liabilities as shown in the balance-sheet of such company shall be deducted from the value of all its assets shown in that balance-sheet. The net amount so arrived at shall be divided by the total amount of its paid-up equity share capital as shown in the balance-sheet. The resultant amount multiplied by the paid-up value of each equity share shall be the break-up value of each unquoted equity share. The market value of each such share shall be 85 per cent. of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Payment of Gratuity Act, 1972, the Appellate Assistant Commissioner held that the liability for payment of gratuity did not accrue or arise from year to year but arose or accrued on certain happenings only. For these reasons, the view of the Appellate Assistant Commissioner was that the liability on account of gratuity could be treated only as a contingent liability and could not be deducted from the assets for the purposes of valuation of shares. The appeal filed by the assessee against the order of the Appellate Assistant Commissioner was rejected by the Tribunal. The Tribunal took the view that the liability for payment of gratuity being contingent, the Wealth-tax Officer was right in refusing deduction thereof because of clause (ii) (f) of Explanation II to rule 1D. Against the judgment of the Tribunal, an application was filed under section 27(1) of the Wealth-tax Act by the assessee at whose instance the question mentioned above was referred. On behalf of the assessee, an argument raised before us was that when the provision for payment of gratuity has been made in the balance-sheet on actuarial basis representing a real and definite liability, it could not be treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 riot be a debt and, therefore, could not be deducted while computing the net wealth. These observations show that the 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 the instant case, the question is not whether such estimated liability arising under the gratuity schemes amounts to a debt or not. The question that concerns us is whether, while working out the net profits, a trader can provide from his gross receipts his liability to pay a certain sum for every additional year of service which he receives from his employees. This, in our view, he can do, if such liability is properly ascertainable and it is possible to arrive at proper discounted present value. Even if the liability is a contingent liability, provided its discount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able, it can be taken into account. Learned counsel for the assessee contended that the allowance is not restricted to the actual payment of gratuity during the year. In view of the observations of the Supreme Court in the case of Metal Box Co. of India Ltd. [1969] 73 ITR 53 (SC), it was contended before it in Bombay Dyeing and Manufacturing Co. Ltd. v. CWT [1974] 93 ITR 603 (SC), that the earlier decision of the Supreme Court regarding allowability of gratuity under section 2 (m) in Standard Mills Co. Ltd. [1967] 63 ITR 470 (SC), required reconsideration. It was held by the Supreme Court that there was no conflict between the decision in Metal Box Co. of India Ltd. [1969] 73 ITR 53 (SC), rendered under the Payment of Bonus Act, 1965, and the decision in the case of Standard Mills Co. Ltd. [1967] 63 ITR 470 (SC), rendered under the Wealth-tax Act and the latter decision did not require reconsideration. The Supreme Court affirmed its earlier view that, in computing the "net wealth" of the company, the estimated liability of the company in respect of gratuity in terms of the industrial court awards for the benefits of its employees in respect of their periods of service up to the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Statements and Standards, I Edn., 1986. Relevant portion of this book is as under : "Techniques of making estimates of this nature are developed in actuarial science and the problems of estimating the liability in respect of accruing gratuity benefits and devising appropriate financial arrangements to meet such liability fall within the province of the actuary. As the actuarial estimates are based on forecasts regarding future course of events, it becomes necessary for the actuary to keep the changing experience in respect of such events under constant review and to re-examine the working of financial arrangements in the light of such review. Thus arises the need for periodical actuarial valuations." No question has been referred to us on this controversy. Hence, we are unable to uphold the assessee's claim on this ground. For the purpose of sub-clause (f) of clause (ii) of Explanation II to rule ID of the Wealth-tax Rules, the term "contingent liability" has to be given a general meaning and the decision given on the interpretation of section 40A of the Income-tax Act is of no avail. The objects and purposes of the various sections of the Income-tax Act on which those decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in view of the special circumstances of the case. We would reproduce below the observations occurring at page 532 : "Learned counsel for the Revenue submitted that the liability to provide the sum of Rs. 19,11,620 was a contingent liability and in fact it was stated as such in the company's balance-sheet as on June 30, 1961, and, that, therefore, this amount cannot be deducted from the total value of the assets for the purpose of finding out the break-up value of the shares. In this connection, learned counsel also relied on the decision of the Supreme Court in Standard Mills Co. Ltd. v. CWT [1967] 63 ITR 470. That was case where the assessee-company in proceedings for assessment of wealth-tax claimed deduction, among other things, in respect of a sum of Rs. 25,02,675 on account of accrued liability for gratuity to workmen and staff as per the award of the industrial court and the Labour Appellate Tribunal. The Supreme Court held that on the plain terms of the award the liability to pay gratuity to the employees of the appellate-company on determination of employment is a mere contingent liability which arises only when the employment of the employee is determined by death, inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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