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TMI Blog1984 (10) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... al valuation which was properly proved before him. 2. The learned counsel for the assessee has pointed out that the amount payable by way of gratuity has been properly computed. The people who were on the list of the employees of the company were known. They were entitled to be paid gratuity on retirement, etc. The amount of Rs. 5,64,528 was calculated on the basis that all the persons on the list of the company on the valuation date, if retired, etc., would have to be paid this amount by way of gratuity. According to the learned counsel, this was a real liability and the fact that it did not find a place in the balance sheet did not alter the position with regard to the value of the shares. 3. After hearing the learned counsel for the department who laid stress on the orders of the authorities below, we see no reason to reject the assessee's claim. Whether a liability appears in the balance sheet or not, if it were shown to exist, it has to be taken into account. A prospective purchaser of shares is not likely to be blind to the existing liability to the extent of more than Rs. 5 lakhs which the assessee has to discharge at any time, the conditions for payment are satisfied. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the assessee before the WTO was that liability of the company to pay gratuity to its employees should be taken into account in the process of determination of the value of the shares of the company and this liability, according to him, was Rs. 5,64,528. 4. The WTO rejected the prayer on the ground that this liability had not been mentioned in the balance sheet of the company, whereas rule 1D required that only those liabilities should be taken into account which have been mentioned in the relevant balance sheet. 5. In the appeal filed by the assessee, the AAC confirmed the decision of the WTO not only on the ground that the said liability had not been mentioned in the balance sheet, but also on additional ground to the effect that the amount claimed did not represent actuarial valuation of the liability to pay gratuity and that the scientific method had not been employed to arrive at the said figure. 6. In this appeal, it was stated before us that the amount of Rs. 5,64,528 was the amount which the company would have been required to pay to all employees who were in employment of the company on the valuation date, if all those employees had retired on that date. This amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmined, no deduction on that account can be claimed. In fact, without such ascertainment, the said liability would remain a contingent liability as far as the valuation date is concerned. 10. It is true that the break-up value method is, normally, appropriate when the company is ripe for winding up. However, the break-up method (or asset-backing method, as it is sometimes called) has been prescribed as a method for valuation under rule 1D and, as such, when this method is applied in cases of the companies, which are not ripe for winding up, what we have to take into account is the present value of the future liability ascertained on actuarial valuation or on scientific basis and not the amount payable to all the employees who are in employment on the valuation date on the hypothesis that they all retired on that date. 11. Reliance was placed before us on the decision of the Tribunal in the case of ITO v. Charandas Vallabhdas [WT Appeal Nos. 218 to 220 (Bom.) of 1976-77] pertaining to the assessment years 1973-74 and 1974-75. In that case, provision for gratuity had been made in the balance sheet itself and it was not the revenue's case that the said provision was on scientific ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd. In working out the value of the shares for the purpose of the wealth-tax assessment, the assessee deducted the liability in respect of the gratuity payable to the employees which was worked out at Rs. 5,64,528. It has to be noted that this amount was not provided for in the balance sheet, i.e., in the accounts. However, this was pointed out by way of a note in Schedule 'B' attached to the balance sheet. The auditors also qualified their report by referring to the non-provision for gratuity, among others and subject to the non-provision, they certified that the balance sheet as giving a true and fair view of the state of affairs of the company as on 30-9-1978. In other words, the auditors of the company considered the non-provision for gratuity as a point worthy of being brought to the notice of the shareholders, meaning thereby that if a provision had been made for gratuity in the accounts the position of the state of affairs as then disclosed would be more truer and fairer. 3. In the course of the assessment proceedings, the assessee contended that even though the liability for gratuity was not provided for in the accounts, nonetheless the liability did exist and should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether for the purpose of rule 1D, the liability to pay gratuity should be provided for in the accounts or not, it was also one of the reasons why the department did not allow the assessee's claim, he assumed that the mere non-mention of the liability to pay gratuity in the balance sheet of the company would not ipso facto render that liability ineligible for deduction under rule 1D although the words used in the said rule make a reference only to those liabilities which find a mention in the balance sheet. Thus, the Judicial Member proceeded on the assumption that it was not necessary for the mention of the liability to pay gratuity in the accounts of the company provided it is a liability. He, therefore, concentrated on the issue whether on the facts of this case that amount could be termed as a liability. For an amount to represent a liability in praesenti as on a particular valuation date, the amount must be such that it is an ascertained liability either by actuarial valuation or some other scientifically determined method. He was of the opinion that in the case of a running business which has not come to an end the liability to pay gratuity does not arise all by itself unles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the market value of the shares of which two have assumed a sort of universal acceptance and judicial recognition ; one is yield method and the other is break-up value method or intrinsic value method. The income method is the method which is generally accepted and adopted by almost all the dealings where shares are concerned. The intrinsic value method or the break-up value method is general and so accepted in commercial world all because even if the intrinsic value of the shares is more, if the yield from shares is less than expected, the low potentiality of the yield would bring down the market value of the shares even if the intrinsic value happens to be more. There are several difficulties in arriving at the intrinsic value of the shares because that would depend upon the realisable value of the various assets in the balance sheet which is often very difficult to ascertain which, again, will depend upon the market value of the assets. Similarly, the liability also. Though it is well settled that the most rational method of valuing the shares is the yield method, of the Rules, by rule 1D, gives preference to valuation of shares by break-up value method by providing in specific t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the liability was properly ascertained or not. The liability for the payment of gratuity is to be ascertained as per the provisions of the Payment of Gratuity Act and the rules made by the assessee-company governing the payment of gratuity. If as per these provisions and the rules the amount now claimed as a liability was arrived at, that amount has to be allowed as a deduction. In allowing the said amount as a liability the issue that the payment is postponed cannot enter into calculation. As already observed earlier, liability can accrue but the payment may be postponed and yet the liability subsists. The contingent liability is a liability the payment of which has to depend upon the happening of a particular event. In this case the retirement of the employees is an event which will certainly take place. If under the Payment of Gratuity Act and the rules made by the assessee-company for the payment of gratuity, it is to be assumed that the employees would retire on the balance sheet day and if a provision for payment of gratuity is required to be made on those lines, then the amount provided for to meet that eventuality is nontheless a liability although the employees do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part with this order, I would also like to mention that the view expressed by another Bench, Bombay Bench, in the case of Charandas Vallabhdas, another shareholder of the same company that gratuity should be allowed as a deduction and that it was in the nature of a liability in praesenti is correct and I would agree with it. The distinction the learned Judicial Member brought about between that case and the present case does not, in my opinion, really matter for the simple reason that having proceeded on the assumption that even if the liability is not provided for in the accounts, still it can be considered as a liability provided it is a liability, the fact that that liability was provided for in the books for that year in that case would not really make a difference. The position would have been different if the assumption of the Judicial Member had been that it was necessary to provide for the liability in the accounts. If it is considered that the provision in the books is not necessary for the amount to be claimed as a liability, the fact that no provision was made in the accounts could not be a distinguishing feature. 7. Now the matter will go before the regular Bench for d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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