K.C. Agrawal, C.J. - (1.) BY the reference application filed under Section 27(1) of the Wealth-tax Act, 1957, Seth Mukund Das Rathi, the assessee, required the Tribunal to refer to the High Court of Judicature for Rajasthan at Jaipur, three questions which were enumerated in the application. The application was allowed partly and the following question was referred by the Tribunal to the High Court for its opinion : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not allowing deduction for the gratuity liability amounting to Rs. 12,79,000 from the total assets of the company as per balance-sheet as on December 31, 1972, while valuing the unquoted equity shares of M/s. Krishna Mills Ltd., Beawar, in accordance with Rule 1D of the Wealth-tax Rules, 1957 ?"
(2.) THE reference application pertained to the wealth-tax assessment for the year 1974-75. THE valuation date was October 26, 1973. THE reference application was concerned with regard to the enhancement of the net wealth of Rs. 92,609. The background in which the controversy arose was about the valuation of equity shares of Krishna Mills Limited, which was a public limited company. The number of shares held by the assessee on the valuation date was 254. These shares were not quoted on the stock exchange. Their value, therefore, was to be determined in accordance with Rule 1D of the Wealth-tax Rules, 1957. The said rule, at the relevant time, read as under : "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 liabilities 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." According to the assessee, the value per share worked out was Rs. 897.60, whereas, according to the Wealth-tax Officer, the value per share came to Rs. 1,262.20. The difference was caused solely by the provision for gratuity appearing on the liabilities side of the balance-sheet of Krishna Mills Limited. The balance-sheet as on December 21, 1972, showed the amount of such provision at Rs. 15 lakhs. The Wealth-tax Officer ignored the provision for gratuity completely and redetermined the value per share, as already, stated, at Rs. 1,262.30. The Wealth-tax Officer ignored the provision for gratuity as he found that Sub-clause (f) of Clause (ii) of Explanation II of the said Rules specifically prohibited deduction representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares. The Explanation relied upon is as under : "Explanation II.--For the purposes of this rule--..... (ii) the following amounts shown as liabilities in the balance-sheet shall not be treated as liabilities, namely :--.... (f) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares." For the view he took, the Wealth-tax Officer relied on the decision of the Supreme Court in Standard Mills Co. Ltd. v. CWT [1967] 63 ITR 470. The Wealth-tax Officer held, on the basis of this decision, that the provision for gratuity was a contingent liability. He derived support' from a later decision of the Supreme Court in the case of Bombay Dyeing and Manufacturing Co. Ltd. v. CWT [1974] 93 ITR 603. Against the order of the Wealth-tax Officer, the assessee preferred an appeal to the Appellate Assistant Commissioner on the ground that the provision for gratuity could not be held to be a contingent liability. The assessee claimed, in the appeal, that the gratuity amount had been quantified on a scientific basis by an expert valuer at the figure of Rs. 12.79 lakhs and the amount was duly accounted for in the books of account of the assessee and, therefore, it was a definite and ascertained liability and could not have been treated as a contingent one. The Appellate Assistant Commissioner held that the Wealth-tax Officer rightly treated the provision for gratuity as a contingent liability.
(3.) ON an interpretation of the various sections of the Payment of Gratuity Act, 1972, the Appellate Assistant Commissioner held that the liability for payment of gratuity did not accrue or arise from year to year but arose or accrued on certain happenings only. For these reasons, the view of the Appellate Assistant Commissioner was that the liability on account of gratuity could be treated only as a contingent liability and could not be deducted from the assets for the purposes of valuation of shares. The appeal filed by the assessee against the order of the Appellate Assistant Commissioner was rejected by the Tribunal. The Tribunal took the view that the liability for payment of gratuity being contingent, the Wealth-tax Officer was right in refusing deduction thereof because of Clause (ii) (f) of Explanation II to Rule 1D. Against the judgment of the Tribunal, an application was filed under Section 27(1) of the Wealth-tax Act by the assessee at whose instance the question mentioned above was referred. ;