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TMI Blog1987 (1) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... he Commissioner (Appeals) and restore those of the WTO for both the years. 4. The next controversy is regarding the deduction of gratuity liability while valuing under rule 1D of the Wealth-tax Rules, 1957 ('the Rules') unquoted equity shares held by the assessee in both the years. In the assessment year 1979-80 the WTO added Rs. 75,137 and in the assessment year 1980-81 Rs. 49,652 as detailed below: Assessment year Assessment year 1979-80 1980-81 Rs. Rs. "(i) Cambridge Instruments (I) Ltd. 13,373 10,194 (ii) J. N. Marshall (P.) Ltd. 48,459 30,341 (iii) Sepulchre Bros. (I.) Ltd. 5,544 6,266 (iv) Simmonds Marshall Ltd. 836 429 (v) Spirax Marshall Ltd. 6,925 2,422 ------ ------ 75,137 49,652" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 86 ITR 621 (which decision was rendered before the introduction of rule 1D) and which decision of the Bombay High Court was followed in Smt. Kusumben D. Maheadevia's case. However, as the Commissioner (Appeals) has directed that only gratuity liability should be deducted and has not interfered with the other portion of valuation of shares by the WTO under rule 1D and as only the revenue is in appeal before us objecting to the deduction of gratuity liability, we proceed on the basis that the shares are to be valued under rule 1D and that the limited question we have to decide is whether deduction for gratuity is to be allowed under rule 1D. 7. We note that under rule 1D, Explanation II, clause (ii) directs that following items shown as liability in the balance sheet shall not be treated as liabilities: "(f) any amount representing contingent liabilities ..." 8. Thus, rule 1D clearly directs that any amount representing contingent liabilities though shown in the balance sheet as liability, will not be treated as liabilities. The language of the said sub-clause, according to us, is quite clear to shut out not only contingent liabilities shown as such in the balance sheet but e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreements will have to be estimated and an estimated value of the contingent liability would be a permissible deduction in computing the net wealth of the assessee. In view of the Supreme Court specifically disapproving of the aforesaid observations of the Gujarat High Court, we are unable to accept the assessee's contention that the estimated present value (determined actuarially) of gratuity liability should be allowed as a deduction. The Supreme Court at page 477 (last paragraph) reiterated that the Gujarat High Court in New Rajpur Mills Ltd.'s case had not appreciated the true function of section 7(2)(a) because the said section does not deal with the computation of net wealth but with the computation of aggregate value of assets. In view of the said categorical observations of the Supreme Court, we are unable to accept the assessee's contentions for allowing deduction of present value of the contingent liability for gratuity. 10. The assessee's main plank for attacking the aforesaid Supreme Court decision in Standard Mills Co. Ltd.'s case is the observations of the Supreme Court in Metal Box Co. of India Ltd.'s case where while dealing with the Payment of Bonus Act, the Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court in Metal Box Co. of India Ltd.'s case was not casting any doubts on the correctness of the view taken in Standard Mills Co. Ltd.'s case. This was reiterated by the Supreme Court in Bombay Dyeing Mfg. Co. Ltd.'s case where it was observed "Metal Box Co.'s case [1969] 73 ITR 53 was decision rendered under the Bonus Act. In that decision the learned Judges referred to the decision of Standard Mills Co. Ltd. [1967] 63 ITR 470, and distinguished the same. In our opinion there is no conflict between the two decisions. "The Supreme Court, therefore, reiterated that the decision in Standard Mills Co. Ltd.'s case did not need reconsideration and, therefore, there was no justification not need reconsideration and, therefore, there was no justification for referring the Bombay Dyeing Mfg. Co. Ltd.'s case to a larger Bench for reconsideration of the decision in Standard Mills Co. Ltd.'s case. In the said case also, the company's liability in respect of gratuity was in terms of the Industrial Court Awards for the benefit of its employees. 13. We may note that the Bombay High Court in Tata Iron Steel Co. Ltd.'s case , which has since been set aside by the Supreme Court as noted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly the liability becomes payable in the case of each workman, and (ii) how much would be the amount which becomes due for payment. The Court, however, observed that if notwithstanding these two elements of uncertainty, it is yet possible to arrive on an actuarial basis at the present discounted value of liability to pay gratuity, payable in future, then according to well-accepted principles of commercial trading and commercial accounting, an employer is entitled to make the provision in the balance sheet equivalent to the discounted value of equivalent to the incremental value after charging the provision to profit and loss account, because it is a current provision for a present discounted value of the future liability. The Madras High Court quoted with approval a Tribunal's decision where it was held that in case of gratuity under an agreement or scheme, collective liability is certain to arise and only the extent of liability would vary as in any particular year. The liability towards particular employee may be contingent but the cumulative or collective liability of the company towards the employees in general is a certain liability and the extent of the liability would depen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tandard Mills Co. Ltd.'s case held the field in wealth-tax. We have also pointed out above that the Supreme Court in Standard Mills Co. Ltd.'s case had discussed Southern Railway of Peru Ltd., case which was a case under the 1961 Act and had held that the same considerations cannot apply to a case under the 1957 Act. 17. We may, therefore, with respect, point out that the three cases relied upon by the Madras High Court in S. Ram's case do not support the conclusion arrived at by the Madras High Court in that case. According to our understanding, the Supreme Court throughout has been categorical in holding that under the 1957 Act gratuity being a contingent liability is not an allowable deduction. Explanation II (ii) (f) to rule 1D clearly directs that any amount representing contingent liabilities is not to be allowed as liability. The words 'any amount representing contingent liabilities' would cover the present value of the future contingent liability and, therefore, the present discounted value on actuarial basis for future contingent liability cannot be allowed by backdoor while accepting that contingent liabilities are not allowable as deduction. 18. We may note that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 15,327 - 5. Spirax-Marshall Ltd. 86,256 59,231 50,833 65,362 -------- -------- -------- -------- 3,51,493 7,42,053 2,88,516 4,57,268 -------- -------- -------- -------- 20. Thus, what is not provided in the accounts of the companies as gratuity liability cannot be allowed as a deduction. Further, there is no evidence that the aforesaid liability provided in the accounts or as per notes in the accounts (when not provided) was based on actuarial calculation. 21. We may point out that the Tribunal Bench 'A' in the assessee's case for the assessment year 1976-77 had followed the Bombay High Court decision in Tata Iron Steel Co. Ltd.'s case which has since been set aside by the Supreme Court. They had also relied on S. Ram's case. We have discussed in detail the Supreme Court decisions which we are following and that is the reason why we are not ruling in line with the decision of the Tribunal, Bench 'A' in the assessee's case for the assessment year 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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