1987 (1) TMI 121 - AT - Wealth-tax

Inclusion of CDS account balance in net wealth upheld; Gratuity liability not deductible for unquoted equity shares.

The Tribunal held that the credit balance in the CDS account is includible in the assessee's net wealth. Regarding the deduction of gratuity liability ... Valuation Of Assets, Unquoted Equity Shares Issues Involved:1. Inclusion of the assessee's credit balance in CDS account.2. Deduction of gratuity liability while valuing unquoted equity shares under rule 1D of the Wealth-tax Rules, 1957.Issue-wise Detailed Analysis:1. Inclusion of the Assessee's Credit Balance in CDS AccountThe first common controversy pertains to the inclusion of the assessee's credit balance in the CDS account of Rs. 82,762 for the assessment year 1979-80 and Rs. 1,03,142 for the assessment year 1980-81. The Commissioner (Appeals) had deleted these amounts based on the Tribunal Delhi Bench decision in WTO v. S. D. Nargolwala [1983] 5 ITD 690. However, the Tribunal, Special Bench, Bombay in Smt. Sushilaben A. Mafatlal v. WTO [1986] 18 ITD 189 held that the credit balance in the CDS account is includible in the assessee's net wealth. Following this decision, the orders of the Commissioner (Appeals) were vacated, and those of the WTO were restored for both years.2. Deduction of Gratuity Liability While Valuing Unquoted Equity Shares Under Rule 1DThe second controversy involves the deduction of gratuity liability while valuing unquoted equity shares held by the assessee under rule 1D of the Wealth-tax Rules, 1957. The WTO added Rs. 75,137 for the assessment year 1979-80 and Rs. 49,652 for the assessment year 1980-81. The Commissioner (Appeals) held that the gratuity liability as actuarially valued was an allowable deduction, following his order for the assessment year 1977-78 and the Bombay High Court decision in Tata Iron & Steel Co. Ltd. v. D. V. Bapat, ITO [1975] 101 ITR 292. However, the Supreme Court set aside this decision in D. V. Bapat, ITO v. Tata Iron & Steel Co. Ltd. [1968] 159 ITR 938, directing the Bombay High Court to reconsider in light of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585.The Commissioner (Appeals) also relied on Smt. Kusumben D. Mahadevia v. CET [1980] 124 ITR 799 (Bom.), which held that rule 1D was directory and not mandatory, and the proper method for valuation was the yield method. Despite this, the Commissioner (Appeals) directed that only the gratuity liability should be deducted, creating a contradiction since rule 1D follows the break-up method. The Tribunal noted that under rule 1D, Explanation II, clause (ii), any amount representing contingent liabilities shown in the balance sheet shall not be treated as liabilities, thus excluding actuarial valuations of future contingent liabilities.The Supreme Court in Standard Mills Co. Ltd. v. CWT [1967] 63 ITR 470 held that liability for gratuity was a contingent liability and not deductible as a debt owed on the valuation date. This was reaffirmed in subsequent cases, including Bombay Dyeing & Mfg. Co. Ltd. v. CWT [1974] 93 ITR 603 and Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585. The Tribunal concluded that the Supreme Court's consistent stance was that gratuity liability, being contingent, is not an allowable deduction under the Wealth-tax Act.The Madras High Court in CWT v. S. Ram [1984] 147 ITR 278, which the assessee relied upon, was distinguished by the Tribunal as it followed the principles under the Income-tax Act rather than the Wealth-tax Act. The Tribunal emphasized that the Supreme Court's rulings under the Wealth-tax Act should prevail.Factually, the Tribunal noted that only in the case of Simmonds Marshall Ltd. was a gratuity fund set up, and only a part of the liability was provided in the accounts of the companies involved. There was no evidence that the liability provided was based on actuarial calculations.In conclusion, the Tribunal held that gratuity liability is not allowable as a deduction under rule 1D while valuing unquoted shares. The orders of the Commissioner (Appeals) were vacated, and those of the WTO were restored for the assessment years 1979-80 and 1980-81.Judgment:The revenue's appeals for the assessment years 1979-80 and 1980-81 were accordingly allowed.