TMI Blog1978 (3) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... e sheets. The assessment is, accordingly, reopened under section 17 of the Wealth-tax Act, 1957 ('the Act')". Thereafter the assessment was finalised on 6-12-1975 and in doing so, the break up value of shares in the aforesaid two companies were recomputed making an adjustment for the amount of provision for gratuity as appearing in the balance sheet. In other words, these amounts were not treated as outgoings and, therefore, went to swell the total value of assets for arriving at the break-up value. There is no further discussion in the assessment order. 3. The assessee appealed to the AAC and contended that the reopening was illegal and without jurisdiction. The AAC held that the contention was in order in view of the ratio of the judgment in Kalyanji Mavji Co. v. CIT [1976] 102 ITR 287 (SC). This point has not been elaborated upon in the order of the AAC. 4. The question before us is whether there is only a mere change in opinion on the part of the WTO which permitted him to take action under section 17 or whether there was information in his possession. The Supreme Court in the aforesaid case had stated that the provisions of section 34(1)(b) of the Indian Income-tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion which requires the recording of reasons and, therefore, merely because reasons may not be recorded or the reasons as recorded may not be full and complete, it cannot be said that the reopening would be invalid provided the reasons which prompted the WTO to initiate the reassessment proceedings could be inferred from circumstantial evidence and the reason so inferred is a reason which would make the reopening valid. 5. We have already stated that in the present case, the original assessment was completed on 30-10-1972. At that time there was in existence a circular of the CBDT on the point of valuation of shares. This circular was Circular No. 47 [F. No. 9/100/69-IT/II], dated 21-9-1970 wherein the Board had stated that they had come to the conclusion that liability for gratuity as estimated by an actuarial valuation would represent a real liability of the employer and cannot be considered to be a contingent liability. Subsequent to the completion of the assessment the Board issued another Instruction No. 736 in F. No. 326/15/74-WT, dated 14-8-1974. In this instruction, the Board referred to the decision of the Supreme Court in the case of Standard Mills Co. Ltd. v. CWT [1967 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 1D lays down the method for computing the market value of an unquoted equity share. It would be relevant to set out in full this rule : "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 liabilites 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 the break-up value so determined : Provided that where, in respect of any equity share, no dividend has been paid by such company continuously for not less than three accounting years ending on the valuation date or in a case where the accounting year of that company does not end on the valuation date, for not less than three continuous accounting years ending on a date immediately before the valuation date the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and equity shares where such dividends have not been declared before the valuation date at a general body meeting of the Company ; (c) reserves, by whatever name called, other than those set apart towards depreciation ; (d) credit balance of the profit and loss account ; (e) any amount representing provision for taxation [other than the amount referred to in clause (i)(a)] to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto ; (f) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares." Broadly, the rule requires that the value of all the liabilities as shown in the balance sheet of a company is to be deducted from the value of all its assets in order to arrive at the break up value. However, there are certain Explanations and Explanation II prescribes certain amounts which though shown as assets in the balance sheet has not to be treated as assets and certain amounts though shown as liabilities in the balance sheet are not to be treated as liabilities. One such item which is not to be treated as a liability is item Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referring to certain resolutions at the 19th annual meeting of the T.V.S. Workers' Union (Resolution No. 2) and stated that an agreement was arrived at in 1966. He also cited a subsequent news item in the Dinamani of 26-2-1969 which referred to an agreement having been entered into. He stated that the mere formulation of the terms of the agreement already entered into, into a written document on 3-7-1971 did not postpone the date of accrual of the liability to that date. Even according to the document, the scheme came into existence from 31-3-1971 and, therefore, in any view of the matter he submitted that there was an accrued liability on 31-3-1971. 11. We have considered the rival submissions. The document of 3-7-1971 enumerates in detail the negotiations which started from 1966. It is clear that up to 17-11-1968, there was no final settlement reached between, the management and employees though matters had almost reached the stage of settlement. Even an affidavit relied on by the learned counsel for the assessee, i.e., an affidavit dated 21-4-1972 filed during an appeal before the AAC by Sundaram Industries (P.) Ltd. (IT Appeal No. 1183 of 1971-72] by one D. Bommiah, general s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilities and making all fair and reasonable allowances for its uncertain and contingent liabilities. The value of the company's gross assets cannot be an index of the value of its shares and a valuation of the shares based on the value of the gross assets without taking into account all the debts and liabilities is worthless. . . ." [Emphasis supplied] The aforesaid observations are authority for the proposition that it is not in every case that the principles applicable for computing 'net wealth' under the Act are equally applicable for computing the market value of shares. In arriving at the market value of shares the deductions for liabilities to be allowed have to be more liberal so that a realistic value is arrived at of the shares based on the effective net worth which would fall for distribution to the shareholders. 15. In a very recent case, which came up before the Supreme Court, i.e., Cosmosteels (P.) Ltd. v. Jairam Das Gupta AIR 1978 SC 375 (the matter was a company miscellaneous petition preferred by certain minority shareholders against oppression by majority shareholders), the Court upheld in passing judgment by way of a consent decree the view that in computing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent methods of providing for gratuity in accounts is (i) cash basis, (ii) accrual method, and (iii) gratuity fund. Under the accrual method (para 3.1.2) (iii) it is stated : "(iii) As a further alternative, the liability for gratuity is computed by actuarial method taking into account : (a) the rate of return expected to be earned on the funds, if separately invested, so as to arrive at the discounted present value ; (b) future level of employees' remuneration ; (c) life expectancy of employees before and after retirement ; (d) retirement age ; (e) expected rate of employees before and after retirement ; and (f) any other matter which may be considered relevant or appropriate." Para 3.1.3 deals with gratuity fund and the relevant portion reads as under : "Under this method a separate gratuity fund administered by trustees is set up by a trust deed and the contributions are handed over to the trustees. The computation of the contributions may be made in any of the methods described in 3.1.2." The computation of the contribution is to be made according to the methods prescribed in 3.1.2. That includes the actuarial method. The constitution of the fund is, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ritten off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy ;" It is clear from the aforesaid that the provision for gratuity is for a known liability. In the present case because there is an actuarial valuation, it can be said that it has been determined also with substantial accuracy. At this stage we may state that the Government of India, Ministry of Law, Justice and Company Affairs, has issued a Circular No. 13/77 [8/31/211/77-CL. V], dated 21-11-1977 addressed to all Chambers of Commerce, wherein they have stressed the importance for providing the gratuity liability in the accounts to satisfy the requirements of Schedule VI to the Companies Act. This circular reads as under : "I am directed to say that it has been observed that some Companies which do not make any provision for 'Gratuity Liability' in their accounts do not even add a suitable note to the balance sheet disclosing the extent of the company's liability on this count. Some companies make a bald statement by way of a note to accounts, saying that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each such contingent liability, if material, shall also be specified. 19. If we now come to the 'Statement on Auditing Practices' issued by the Research Committee of the Institute of Chartered Accountants of India, 1977 edition (the former edition was referred to by the Supreme Court in the course of its judgment in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167) the following appears regarding contingent liabilities : "9.16 These refer to possible liabilities arising from past circumstances or actions, which may or may not crystallise into actual liabilities and which, if they do become actual liabilities, give rise to a loss or an expense or an asset of doubtful value. The uncertainty as to whether there will be any legal obligation differentiating a contingent liability from an actual liability. Some of the instances are : (a) law suits against the company for (i) Patent or trade mark infringements ; (ii) Pollution of the environment ; (iii) selling defective or harmful goods ; (b) as a member of a company limited by guarantee ; (c) as a partner in a firm ; The following general procedures will be found useful in discovering contingent liabiliti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssued in income-tax matters on the same point the Bombay High Court in Tata Iron Steel Co. Ltd.'s case observed as under : ". . . A proper review of the Supreme Court decisions to which we have adverted during the course of this judgment would seem to indicate that permissible deductions are not restricted to those indicated in sections 30 to 37, that such a provision is not for a contingent liability in the sense of the liability similar to that of the assessee-company in Indian Molasses Co.'s case [1959] 37 ITR 66 (SC) but must be properly regarded as, if scientifically estimated, a provision for a present liability which is allowable in the case of an assessee which keeps its accounts on the mercantile system : it must be further held that there is no bar against such provision being allowable as a deduction by reason of section 36 or 37 which are mentioned in paragraph 3 of the second circular. It appears to us that the first circular issued by the Board had been issued on a proper consideration of the law laid down by the Supreme Court of India in Metal Box Company's case [1969] 73 ITR 53, which law was in accord with its earlier decisions, and that the second circular whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here there is an uncertainty as to whether there would be legal obligation to pay the money or not. Any other interpretation would make the rules, which are intended for arriving at the break-up value of shares by a rough and ready method unrealistic. In the case of gratuity under an agreement or scheme, the collective liability is certain to arise and only the extent of the liability would vary in any particular year. The liability towards a particular employee may be contingent but the cumulative or collective liability of the company towards the employees in general is a liability which is certain and the extent of the liability will depend upon contingencies that will take place in respect of each employee in a particular year. Hence, though as far as the computation of net wealth is concerned provision for gratuity will not be a debt owed, nevertheless since on the folding up of a company the money would not come back to the shareholders since it would have to be paid out to the employees under a legal obligation a prospective buyer would not consider provision for gratuity as a contingent liability from the point of view of valuation of shares. We, therefore, hold that the li ..... X X X X Extracts X X X X X X X X Extracts X X X X
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