Valuation of unquoted shares: actuarial gratuity provision is deductible, and a 30 per cent discount may apply under rule 1D.

While valuing unquoted equity shares under the break-up value method, an actuarially ascertained provision for gratuity is treated as a present and existing liability and is deductible from net assets; the contrary view that it is only contingent was rejected. The same valuation approach also supports allowing a 30 per cent discount under rule 1D of the Wealth-tax Rules where controlling precedent on the method permits it. The result is that the assessee's valuation treatment was upheld and the Revenue's objections failed.

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Issues: (i) Whether, while valuing unquoted equity shares under the break-up value method, the provision made for gratuity in the balance-sheet is deductible as a liability; (ii) Whether a discount of 30 per cent. could be allowed from the break-up value instead of 15 per cent. under rule 1D of the Wealth-tax Rules, 1957.

Issue (i): Whether, while valuing unquoted equity shares under the break-up value method, the provision made for gratuity in the balance-sheet is deductible as a liability.

Analysis: The provision for gratuity, when made on a scientific and actuarial basis, represents a present and existing liability and not a mere contingent liability. The earlier binding line of authority treated such provision as deductible in computing the net asset value of unquoted shares. The subsequent decision relied on by the Revenue dealt with a different deduction question and did not displace the specific principle governing gratuity provision under rule 1D.

Conclusion: The provision for gratuity is deductible as a liability while valuing unquoted equity shares under the break-up value method, in favour of the assessee.

Issue (ii): Whether a discount of 30 per cent. could be allowed from the break-up value instead of 15 per cent. under rule 1D of the Wealth-tax Rules, 1957.

Analysis: The question of discount had already been considered in an earlier decision of the same court concerning the same valuation method. Following that decision, the higher discount was held to be justified on the facts and in the valuation context under rule 1D.

Conclusion: A discount of 30 per cent. was rightly allowed, in favour of the assessee.

Final Conclusion: The questions referred were answered against the Revenue and the valuation adopted by the Tribunal was upheld.

Ratio Decidendi: For valuation of unquoted equity shares under the break-up value method, an actuarially ascertained gratuity provision is to be treated as a deductible liability, and the applicable discount under rule 1D must follow the controlling precedent on valuation.

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