Contingent liability treatment for gratuity provision barred deduction in valuing unquoted shares under wealth-tax rules.

Provision for gratuity shown in the balance-sheet was held to be a contingent liability, not a deductible item, when valuing unquoted equity shares under rule 1D of the Wealth-tax Rules, 1957. The break-up method under rule 1D excludes contingent liabilities, and gratuity payable only on future contingencies such as retirement, resignation, death or disablement does not become a liability in praesenti merely because it is actuarially estimated. Earlier Supreme Court rulings on gratuity and net wealth were treated as controlling, and the insertion of rule 1D did not change that position. The valuation was therefore upheld without allowing deduction for the gratuity provision.

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Issues: Whether provision for gratuity shown in the balance-sheet could be deducted while valuing unquoted equity shares under rule 1D of the Wealth-tax Rules, 1957, or whether it was a contingent liability excluded by Explanation II, clause (ii)(f).

Analysis: The valuation of unquoted shares under rule 1D proceeds on the break-up method, but the rule expressly excludes contingent liabilities from deduction. The liability for gratuity under the Payment of Gratuity Act, 1972 arises only on specified contingencies such as superannuation, retirement, resignation, death or disablement, and therefore does not become a liability in praesenti merely because it is estimated on an actuarial basis. The earlier Supreme Court rulings on gratuity and net wealth were treated as governing the field, and the insertion of rule 1D was held not to alter that position. The Court also noted that the claim had not been shown to rest on proved actuarial accounting materials, and that fiscal provisions must be construed according to their language.

Conclusion: The provision for gratuity was a contingent liability and was not deductible in computing the value of the unquoted shares; the question was answered in favour of the Revenue and against the assessee.

Final Conclusion: The reference was answered against the assessee, and the valuation made without allowing deduction for gratuity liability was upheld.

Ratio Decidendi: Under rule 1D of the Wealth-tax Rules, 1957, a provision for gratuity payable only upon future contingencies is a contingent liability and cannot be deducted in valuing unquoted equity shares for wealth-tax purposes.

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