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TMI Blog1986 (9) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... e, investment allowance reserve, etc., could not be included in computing the net wealth of the firm. A claim was made before the WTO for deduction of gratuity reserve liability. The WTO held that rule 2E provided that provision for any purpose other than taxation shall be treated as a reserve. Therefore, the amount standing. to the credit of the account called 'gratuity reserve liability' was covered by the provisions of rule 2E(b) or 2E(c) and Explanation to rule 2E. Accordingly, such amount could not be treated as liability to be deducted from the net wealth of the firm. Consequently, the WTO added one-third of this amount in determining the value of the assessee's one-third interest in the firm. Thus, the WTO treated development rebate reserve, gratuity reserve liability and investment allowance reserve amounting in all to Rs. 47,35,192 as a liability and added one-third of the above amount (Rs. 15,78,397) to the net wealth of the assessee. 3. The matter was taken in appeal by the assessee where several authorities were cited. The Commissioner (Appeals) held that the authorities relied upon by the assessee's representative do not support the contention that rule 2E to 2G do n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral decisions of the Tribunal in the cases of Smt. Pramila Devi Jayaswal v. WTO [1985] 11 ITD 614 (Cal.) and Hansraj Vallabhdas v. Tenth WTO [1985] 13 ITD 259 (Bom.) (TM) on the interpretation of rule 1D of the Rules in support of his case. He has filed the working of the actuarial valuation made by one Mr. Y. V. Deshpande, actuary dated 19-2-1984 of the gratuity liability of the firm as at 31-3-1981. Shri Dalal finally relied on the decision of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 and in particular the portion of the head note at page 562. 5. In reply Shri Ray pointed out that the interest of the partner in a partnership firm had to be valued after first valuing the net wealth of the firm. The valuation of the net wealth of the firm was made in terms of section 7 of the Wealth-tax Act, 1957 ('the Act') and section 7 provided that the valuation of some of the assets had to be made in the light of the specific adjustments that were provided for in rules 2A to 2G. According to Shri Ray, when specific Rules were provided for valuation of a particular asset, those Rules had to be given their proper interpretation and relevance. Wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake the adjustments specified in rules 2B to 2G. Rule 2E provides that : "The following amounts shown as liabilities in the balance sheet shall not be taken into account for the purposes of rule 2A :--- (a) capital employed in the business other than that attributable to borrowed money ; (b) reserves, by whatever name called ; (c) any provision made for meeting any future or contingent liability ; (d) any debt owed by the assessee which has been specifically utilised for acquiring an asset in respect of which wealth-tax is not payable under the Act :" [Emphasis supplied] It may be mentioned here that the word 'shall' is used in rules 2, 2A to 2F and where specific adjustments are required to be made in a given set of circumstances, the WTO is obliged to make such adjustments, while making the valuation of business assets under section 7. This position in law has already been recognised by the Supreme Court in the case of Juggilal Kamalapat Bankers v. WTO [1984] 145 ITR 485. On pages 494, 495 and 496 the Court have discussed the scope of rule 2 concerning valuation of interest in partnership or an AOP. They have also taken note of section 7 in this regard and on p. 496 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." Thus, the Supreme Court clearly laid down that different consideration would apply to cases arising under the Wealth-tax Act and the Income-tax Act. Notwithstanding this observation of the Supreme Court in the context of the admissibility of a liability of this type in computing the net wealth, even under the 1961 Act the Supreme Court in a later decision has struck a different note. Reference may be made to their decision in the case of Shree Sajjan Mills Ltd. . In this case the Supreme Court held that : "Contingent liabilities do not constitute expenditure and cannot be the subject matter of deduction even under the mercantile system of accounting. Expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability in praesenti in the hands of the firm and whether, therefore, correspondingly the partner's share has to be also treated as a liability in praesenti and allowed as a deduction. For this purpose we are concerned with the interpretations of rules 2B to 2G and in particular rule 2E. Similarly, in the second case relied on by the assessee's counsel in the case of Laxmipat Singhania the same decision as the one given in Padampat Singhania's case was given. Therefore, both these cases do not help the assessee in any way. 9. Before parting with this appeal, we may refer to one of the latest decisions of the Supreme Court in Tata Iron Steel Co. Ltd.'s case. The Supreme Court set aside the Bombay High Court's decision in Tata Iron Steel Co. Ltd. Y. D. V. Bapat, ITO [1975] 101 ITR 292 and directed that the High Court should examine whether the provisions of section 40A(7)(b)(ii) which have been recently construed by the Supreme Court in Shree Sajjan Mills Ltd.'s case have been complied with having regard to what has been laid down by the Supreme Court in that case. 10. Having thus considered all aspects of the issue in dispute as discussed in the preceding paragraphs, we wo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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