TMI Blog1981 (12) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... The approval by the Commissioner was granted on March 9, 1976, but with effect from January 1, 1973. The common question in all these references relates to the valuation of shares in the two companies and the valuation of the partnership interest in the firm held by the assessees on all valuation dates which fall subsequent to January 1, 1973. It is needless to say that the shares held by the assessees in Shri Ramalinga Mills Private Ltd. and Aruppukkottai Shri Jayavilas Private Ltd. are not shares quoted in the share market. The W.T. Rules, 1957, make provision for ascertaining the value of unquoted equity shares. The relevant rule is r. ID. The rule merely incorporates what goes by the name of " break-up method of valuation " of shares. Under this system, the surplus of the assets of a company over the liabilities, which leaves us with the net worth of the company, is regarded as the first step in the valuation of the shares in the company. The individual market value of a share, under this method, is to be regarded as a fraction of the net worth of the company, arrived at by dividing the company's net worth by the number of shares in the company. Rule ID, however, lays down t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e concerns to the gratuity funds before the Commissioner granted the approval or afterwards, it seems to us, however, quite clear that this initial contribution was the first contribution which the concerns ought to be making, having decided to create the gratuity funds. The question which had arisen in these cases was whether the initial contribution by the three concerns to the respective gratuity funds as well as the subsequent years' annual contributions can be regarded as contingent liabilities and hence to be disregarded in the computation of the net worth of these concerns or whether they should be held to be " other liabilities " which have got to be deducted from the assets without question, for the purpose of computing the net wealth of these concerns as on the relevant valuation dates. The WTO did not regard the liabilities towards gratuity as a present liability, but as a contingent liability, and in that view disallowed the amounts in the computation of the net worth of these concerns. On appeal, the AAC was not consistent in his decision. In some cases, relating to some assessment years, he held that the contribution made by the companies and the partnership fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the amount becomes due to be paid either to the employee or to his next of kin. Till so long as these eventualities do not happen, learned counsel said, the provision made in the balance-sheet, although on the basis of scientific or actuarial valuation, can only be regarded as a contingent liability, and as contingent liability it cannot be deducted from the assets of these companies or of the firm for the purpose of arriving at their net worth. We do not wish to enter into a general discussion as to whether a provision made in a balance-sheet for liability towards gratuity on the basis of an actuarial valuation can be treated as a mere contingent liability or as a known and existing liability. We think it is unnecessary to enter into this discussion, because the question in this case can be decided on the basis of the application of the relevant W.T. Rules to which we have made reference earlier and in the light of the provisions in the I.T. Act, 1961, relating to approved gratuity funds. Both r. ID read with Expln. II(ii)(f) and r. 2 read with r. 2E(c) of the W.T. Rules expressly exclude from the computation of the net wealth of the companies or of partnerships, all contin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of approval dated March 9, 1976, shows that the fund was created not later than January 1, 1973. If so much is granted, then in terms of the requirments of rr. 103 and 104 of the I.T Rules, 1962, relating to approved gratuity funds, the three concerns were under a statutory obligation to make over their initial and annual contributions to the trustees of the gratuity funds. If the contributions are actually made, to that extent, the concerns would not be having equivalent assets, because that is the effect of payments out. But to the extent that the initial contributions have not been made, the concerns will necessarily have to be debtors to the trustees of the fund, the liability being a present liability, having already accrued by the very creation of the gratuity funds. The error we find in the Tribunal's order if it can be so called, is in mistaking the obligation to make contributions to the fund as a mere self-made provision for gratuity figuring only in the balance-sheets and proceedings to discuss whether such provision is to be deducted in the computation of the net worth of the concerns. The learned standing counsel referred to the ceiling fixed in rr. 103104 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alan [1973] 92 ITR 529, was cited before us. In that case, a company had a scheme of gratuity. Under that scheme the company agreed to transfer to a proposed trust sum of Rs. 19,50,000 being the liability towards gratuity which arose to its employees up to a particular date to start with, on the basis of an actuarial valuation. Under the gratuity trust deed, the company had the option to pay to the fund either the entire sum in one lumpsum or in instalments. The company paid certain sums by way of annual instalments. These payments, however, left a balance of Rs. 19,11,620. The question arose whether, in ascertaining the net worth of the company, this outstanding liability of Rs. 19,11,620 owed by the company to the trustees of the gratuity fund can be regarded as a liability to be deducted or whether it represented a mere contingent liability. The question arose in the context of the wealth-tax assessment of the shareholders of the company, and the question was what would be the correct method of valuing the shares of the shareholders in that company. The Department took the view that in ascertaining the net worth of the company, the liability to the fund of Rs. 19,11,620 should n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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