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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 & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; ------ ------ 5. The Commissioner (Appeals) in his consolidated order for both the years vide paragraph 8, held that the gratuity liability as actuarially valued was an allowable deduction. He followed his order for the assessment year 1977-78. In the assessment year 1977-78 the Commissioner (Appeals) followed Tata Iron & Steel Co. Ltd. v. D. V. Bapat, ITO [1975] 101 ITR 292 where the Bombay High Court had referred to the Supreme Court decisions under the Wealth-tax Act, 1957 ('the Act') of Standard Mills Co. Ltd v. CWT [1967] 63 ITR 470 and Bombay Dyeing & Mfg. Co. Ltd. v. CWT [1974] 93 ITR 603 and under the Payment of Bonus Act, 1965 of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 and had held that provision for gratuity based on actuarial valuation was allowable as deduction under the Income-tax Act, 1961 ('the 1961.Act'). The said Bombay High Court decision has since been set aside by the Supreme Court in D. V. Bapat, ITO v. Tata Iron & Steel Co. Ltd. [1968] 159 ITR 938 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 even actuarial valuation of the said future contingent liability because the said actuarial valuation would represent the contingent liability for gratuity which is to arise in future. Even if gratuity liability is held to be present liability, still under said sub-clause it would be shut out being a contingent liability. We contrast the language of the aforesaid sub-clause with clause (c) of rule 2E of the Rules which directs that 'any provision made for meeting any future or contingent liability' should not be taken into account for the purposes of rule 2A of the Rules under which the net value of assets of business as a whole is determined having regard to balance sheet of such business under section 7(2)(a). 9. We may now refer to the Supreme Court decisions holding that gratuity is contingent liability. The Supreme Court in Standard Mills Co. Ltd.'s case held that liability for gratuity to employees under the Industrial Court Awards was not deductible as debt owed on valuation date because liability to pay gratuity to its employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Supreme Court observed that the company's profits should be determined on commercial principles for the purpose of ascertaining the profits which are available for distribution as bonus to employees. In this context, the Supreme Court observed at pages 64-65 that "contingent liabilities discounted and valued as necessary can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into account." An estimated liability under a scheme of gratuity, if properly ascertainable and its present value is discounted, is deductible from the gross receipts while preparing the profit and loss account. This is recognised in trade circles and there is nothing in the Payment of Bonus Act which prohibits such a practice and, therefore, such a provision is not a reserve. In this context, the Supreme Court referred to Southern Railway of Peru Ltd.'s case and observed at page 67: "In our view, an estimated liability under gratuity schemes such as ones ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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 above, while dealing with deduction under section 36(1)(v) of the 1961 Act, had held following Metal Box Co. of India Ltd.'s case that the gratuity liability as actuarially determined is allowable as deduction under the 1961 Act. As the decision has since been set aside, we, therefore, need not discuss this decision in further detail. In this context, we may note that the Supreme Court in Shree Sajjan Mills Ltd.'s case reiterated that liability to pay gratuity continues to be contingent liability for the employer because right to receive gratuity accrues to the employees on their retirement or termination of their services and liability to pay gratuity becomes accrued liability of the assessee when the employees retire or their services are terminated and till then the right to receives gratuity was a contingent right and the liability to pay gratuity continued to be contingent liability for the employer. 14. We are now left with CWT v. S. Ram [1984] 147 ITR 278 on which the assessee relies heavily. The Madras High Court in that case wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive or collective liability of the company towards the employees in general is a certain liability and the extent of the liability would depend on contingencies that may take place in each employee in a particular year. The Madras High Court following Vazir Sultan Tobacco Co. Ltd.'s case held that provision for gratuity is a current provision and is a proper charge against the profits of the year. The Madras High Court followed its earlier decision in CWT v. S. Ramaswami [1983] 140 ITR 606 where the company was under an obligation to make over annual sums equivalent to the incremental value of gratuity to the gratuity trust because under the very terms of the scheme, the amounts ascertained on actuarial valuation became a debt by the company to the gratuity trust. Thought in the case of S. Ram in the relevant year no amounts were transferred to the gratuity trust because the trust had not yet come into existence under agreement dated 3-7-1971, the High Court still held following S. Ramaswami's case that provision for gratuity was allowable deduction for valuing shares under rule 1D. At page 287 the High Court distinguished 'gratuity' and 'provision for gratuity'. They held that tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility cannot be allowed by backdoor while accepting that contingent liabilities are not allowable as deduction. 18. We may note that the Payment of Gratuity Act. 1972 clearly lays down under section 4 as under: "Payment of gratuity.--(1) Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years,-- (a) on his superannuation, or (b) on his retirement or resignation, or (c) on his death or disablement due to accident or disease: Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement: Provided further that in the case of death of the employee, gratuity payable to him shall be paid to his nominee or, of no nomination has been made, to his heirs." 19. Thus, gratuity is payable only in the contingencies mentioned above and is not a present liability under the said Act. 19.1 Dealing factually with the claim before us, we may point out that only in the case of Simmonds Marshall Ltd. a gratuity fund is claimed to have been set up. Further, only a part of liability had been pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; in noted in noted in noted in accounts accounts accounts accounts ----------------------------------------------------------- 1. Cambridge In-struments 72,790 1,15,217 52,262 89,678 (India) Ltd. 2. J. N. Marshall (P.) Ltd. 1,32,432 &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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