1. This appeal by the department relates to the assessment year 1971-72. For this assessment year, the original assessment was made on 30-10-1972. In making this assessment, the WTO had occasion to value 8,201 shares in T.V. Sundaram Iyengar and Sons Ltd., as also 51 shares in Sundaram Textiles Ltd. The valuation of these shares was made by the break-up method. He proceeded on the footing that certain amounts exhibited as provisions for gratuity in the respective balance sheets represented true provisions and, therefore, he considered the same as outgoings in arriving at the net value of shares for the purpose of determining the break up value.
2. Subsequently, the WTO made a note (we are informed that the noting in this case and other cases was similar) that "the unquoted shares are to be revalued including provision for gratuity as appearing in company balance sheets. The assessment is, accordingly, reopened under Section 17 of the Wealth-tax Act, 1957 ('the Act')". Thereafter the assessment was finalised on 6-12-1975 and in doing so, the break up value of shares in the aforesaid two companies were recomputed making an adjustment for the amount of provision for gratuity as appearing in the balance sheet. In other words, these amounts were not treated as outgoings and, therefore, went to swell the total value of assets for arriving at the break-up value. There is no further discussion in the assessment order.
3. The assessee appealed to the AAC and contended that the reopening was illegal and without jurisdiction. The AAC held that the contention was in order in view of the ratio of the judgment in Kalyanji Mavji & Co. v. CIT  102 ITR 287 (SC). This point has not been elaborated upon in the order of the AAC.4. The question before us is whether there is only a mere change in opinion on the part of the WTO which permitted him to take action under Section 17 or whether there was information in his possession. The Supreme Court in the aforesaid case had stated that the provisions of Section 34(1)(b) of the Indian Income-tax Act, 1922, analogous to Section 17 of 1957 Act would apply to the following categories of cases: (1) where the information is as to the true and correct state of the law derived from relevant judicial decisions; (2) where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income-tax Officer. This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority; (3) where the information is derived from an external source of any kind. Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment; (4) where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law.
If these conditions are satisfied then the Income-tax Officer would have complete jurisdiction to reopen the original assessment. It is obvious that where the Income-tax Officer gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, Section 34(1)(b) would have no application.
We, therefore, have to determine whether the facts in the present case would fall within any of the categories enumerated in the decision of the Supreme Court. Then alone the revenue can succeed in the contention that the reopening was valid and not otherwise. Under Section 148(2) of the Income-tax Act, 1961 ('the 1961 Act') the ITO has statutorily to record his reasons for initiating action for reopening an assessment before issuing any notice. Under the 1961 Act, therefore, where no reasons are recorded or if the reasons recorded are extraneous to the statutory conditions for taking action under Section 147 of the 1961 Act the assessment would be vitiated. (See in this regard the ratio of the judgment of the Supreme Court in Union of India v. Rai Singh Deb Singh Bist  88 ITR 200 and the ratio of the judgment of the Madras High Court in CIT v. T.R. Rajakumari  96 ITR 78). However, under the 1957 Act there is no statutory provision which requires the recording of reasons and, therefore, merely because reasons may not be recorded or the reasons as recorded may not be full and complete, it cannot be said that the reopening would be invalid provided the reasons which prompted the WTO to initiate the reassessment proceedings could be inferred from circumstantial evidence and the reason so inferred is a reason which would make the reopening valid.
5. We have already stated that in the present case, the original assessment was completed on 30-10-1972. At that time there was in existence a circular of the CBDT on the point of valuation of shares.
This circular was Circular No. 47 [F. No. 9/100/69-IT/II], dated 21-9-1970 wherein the Board had stated that they had come to the conclusion that liability for gratuity as estimated by an actuarial valuation would represent a real liability of the employer and cannot be considered to be a contingent liability. Subsequent to the completion of the assessment the Board issued another Instruction No.736 in F. No. 326/15/74-WT, dated 14-8-1974. In this instruction, the Board referred to the decision of the Supreme Court in the case of Standard Mills Co. Ltd. v. CWT  63 ITR 470 and stated that the Court had held that the provision for gratuity in computing the net wealth had to be construed not as a debt owed, but only as a contingent liability and, therefore, it followed that for valuation of shares also it would be a contingent liability.
6. Under the provisions of Section 13 of the Act all officers employed in the execution of the Act were to follow orders, instructions and directions of the Board. Here we are not concerned with whether the WTO was bound to follow the directions of the Board. What we have to consider is whether on the basis of reasonable probability it can be inferred that it was this circular of the Board which prompted the WTO to take action or whether it was a mere change in opinion. The circular of the Board having been issued on 14-8-1974, we consider it only reasonable to infer that this circular would have been read by the WTO as he was statutorily bound to do. This being so, the mere fact that he did not mention in the order sheet entry recorded on 21-4-1975 while reopening the assessment, the exact nature of the information consequent to which he was initiating action for reopening, it cannot be inferred on the facts of this case that he was not acting in consequence of information derived from an external source about the state of law. On the facts as set out by us the contention of the assessee which was accepted by the AAC and which was reiterated before us by the learned counsel for the assessee that there was only a mere change of opinion cannot be accepted. There was information in the possession of the WTO which had prompted him to take action and the information was of such a nature which falls within item 3 or item 4 of the classification as made by the Supreme Court which we have set out earlier. We would, therefore, set aside the findings of the AAC that the reopening of the assessment was invalid and without jurisdiction.
7. We now come to the merits of the case. The valuation of shares has to be made in pursuance of Rule 1D of the Wealth-tax Rules, 1957 ('the 1957 Rules'). This rule was introduced by the Wealth-tax (Amendment) Rules, 1967, by notification dated 6-10-1967. Hence, as on the valuation date, i.e., 31-3-1971 these rules were very much in existence and there can be no controversy about the applicability of the rules as far as this assessment year is concerned. Rule 1D lays down the method for computing the market value of an unquoted equity share. It would be relevant to set out in full this rule: 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: Provided that where, in respect of any equity share, no dividend has been paid by such company continuously for not less than three accounting years ending on the valuation date or in a case where the accounting year of that company does not end on the valuation date, for not less than three continuous accounting years ending on a date immediately before the valuation date the market value of such share shall be as indicated in the table below:Number of accounting years ending on the valuation dateor in a case where the accounting year does not end on thevaluation date, the number of accounting years ending on Market valuea date immediately preceding the valuation date, for whichno dividend has been paidThree years 82 per cent of the break-upFour years 80 per cent of the break-upFive years 77 per cent of the break-upSix years and above 75 per cent of the break-up Explanation I: For the purposes of this rule, 'balance sheet', in relation to any company, means the balance sheet of such company as drawn up on the valuation date and where there is no such balance sheet, the balance sheet drawn up on a date immediately preceding the valuation date and in the absence of both, the balance sheet drawn up on a date immediately after the valuation date.
(i) the following amounts shown as assets in the balance sheet shall not be treated as assets, namely:-- (a) any amount paid as advance tax under Section 18A of the Indian Income-tax Act, 1922 (11 of 1922), or under Section 210 of the Income-tax Act, 1961 (43 of 1961); (b) any amount shown in the balance sheet including the debit balance of the profit and loss account or the profit and loss appropriation account which does not represent the value of any asset; (ii) the following amounts shown as liabilities in the balance sheet shall not be treated as liabilities, namely:-- (b) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the valuation date at a general body meeting of the Company; (c) reserves, by whatever name called, other than those set apart towards depreciation; (e) any amount representing provision for taxation [other than the amount referred to in Clause (i)(a)] to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (f) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.
Broadly, the rule requires that the value of all the liabilities as shown in the balance sheet of a company is to be deducted from the value of all its assets in order to arrive at the break up value.
However, there are certain Explanations and Explanation II prescribes certain amounts which though shown as assets in the balance sheet has not to be treated as assets and certain amounts though shown as liabilities in the balance sheet are not to be treated as liabilities.
One such item which is not to be treated as a liability is item Explanation II (ii)(f), i.e., contingent liabilities (other than arrears of dividends payable in respect of cumulative preference shares). If the 'provision for gratuity' would be within the meaning of Rule 1D looking to the purpose for which the rule has been enacted, namely, to evaluate the market value of a share a 'contingent liability' then the amount would not qualify for a deduction. Otherwise the amount would qualify for a deduction. To determine whether the liability is contingent or otherwise we have to look to the relevant facts starting with the respective balance sheet.
8. The first company of which the shares are valued is T.V. Sundaram Iyengar & Sons Pvt. Ltd. The balance sheet as on 31-3-1971 shows under the head 'Current liabilities and provisions' (see page 14 of the printed accounts and Schedule 12) a provision for employees' gratuity of Rs. 9,14,003. This amount has been debited to the profit and loss account for the year ended 31-3-1971. The report of the directors in this regard states: The working results of the company for the year ended 31-3-1971 after providing for depreciation of Rs. 15,30,112, reserves for development rebate of Rs. 36.263 and provision of Rs. 9,14,003 for employees' gratuity for one year, show a net profit of Rs. 68,82,525.
Your directors wish to report that the company has entered into an agreement with the T.V.S. Workers' Union for institution of a gratuity scheme for the employees of the company. Based on the terms of settlement reached with the union, the company's liability towards gratuity for the period till 31-3-1971 was determined at Rs. 85,27,265 on actuarial valuation. Out of this amount a sum of Rs. 9,14,003 has been provided for in the profit and loss account for the year under review.
According to the assessee, this is a clear provision and not a contingent liability.
9. The learned departmental representative, on the other hand, relying on the judgment of the Supreme Court in Standard Mills Co. Ltd.'s case (supra) submitted that as gratuity was payable only on the happening of certain contingencies, it was clearly a contingent liability and had been pronounced by the Supreme Court to be so.
10. The learned counsel for the assessee in reply submitted that on the facts of the present case the liability was not a contingent one, but was really an accrued one. He sought to support his contention by referring to certain resolutions at the 19th annual meeting of the T.V.S. Workers' Union (Resolution No. 2) and stated that an agreement was arrived at in 1966. He also cited a subsequent news item in the Dinamani of 26-2-1969 which referred to an agreement having been entered into. He stated that the mere formulation of the terms of the agreement already entered into, into a written document on 3-7-1971 did not postpone the date of accrual of the liability to that date. Even according to the document, the scheme came into existence from 31-3-1971 and, therefore, in any view of the matter he submitted that there was an accrued liability on 31-3-1971.
11. We have considered the rival submissions. The document of 3-7-1971 enumerates in detail the negotiations which started from 1966. It is clear that up to 17-11-1968, there was no final settlement reached between the management and employees though matters had almost reached the stage of settlement. Even an affidavit relied on by the learned counsel for the assessee, i.e., an affidavit dated 21-4-1972 filed during an appeal before the AAC by Sundaram Industries (P.) Ltd. [IT Appeal No. 1183 of 1971-72] by one D. Bommiah, general secretary of the T.V.S. Workers' Union, clearly states that the final oral settlement was arrived at only in December 1970. We, therefore, negative the plea of the learned counsel for the assessee that there was any final settlement prior to December 1970. In any event, there was the document of the 3-7-1971 and by virtue of that document the employees specified became eligible to gratuity from 31-3-1971.
12. The assessee had an actuarial valuation made of the liability for gratuity as on 31-3-1971. The reports of the actuary gave the figure of gratuity liability as under:Date of report Amount of gratuity Unit liability16-8-1971 60,89,130 T.V.S. (Main Unit)15-9-1971 19,02,831 Sundaram Motors Unit23-8-1971 5,35,304 Madras Auto Service UnitTotal 85,27,265 It may be mentioned that Sundaram Motors (P.) Ltd. and Madras Auto Service (P.) Ltd. were separate companies which were merged with T.V.Sundaram Iyengar & Sons (P.) Ltd. on 24-12-1970 as evident from the directors' report for the year ended 31-3-1971. As a result of the above merger and in consequence of the actuarial valuation, etc., made in the balance sheet under the sub-head 'Provisions' under the major head 'Current liabilities and provisions', provision for gratuity of Rs. 9,13,003 was made (see Schedule 12) and included in the total amount of Rs. 13,93,133.
13. We would now examine the broad concept of share valuation with particular reference to the provisions of the 1957 rules.
14. As far as the general principles are concerned, in a gift-tax case where Rule 10(2) of the Gift-tax Rules, 1958, permitted a valuation on the basis of total assets in accordance with general commercial principles the Calcutta High Court in the case of GTO v. Kastur Chand Jain  53 ITR 411 observed as under: ... Now the Gift-tax Officer made a fundamental error in taxing the artificial wealth of the company computed under Section 2(m) of the Wealth-tax Act, 1957, as the basis of the valuation. This artificial wealth cannot be the correct measure of the value of the interest of the shareholders in the company. In valuing the shares on the basis of the value of the total assets of the company, the Gift-tax Officer must take into account the net value of its assets ascertained by deducting from the value of its gross assets, all its debts and liabilities and making all fair and reasonable allowances for its uncertain and contingent liabilities. The value of the company's gross assets cannot be an index of the value of its shares and a valuation of the shares based on the value of the gross assets without taking into account all the debts and liabilities is worthless....
The aforesaid observations are authority for the proposition that it is not in every case that the principles applicable for computing 'net wealth' under the Act are equally applicable for computing the market value of shares. In arriving at the market value of shares the deductions for liabilities to be allowed have to be more liberal so that a realistic value is arrived at of the shares based on the effective net worth which would fall for distribution to the shareholders.
15. In a very recent case, which came up before the Supreme Court, i.e., Cosmosteels (P.) Ltd. v. Jairam Das Gupta AIR 1978 SC 375 (the matter was a company miscellaneous petition preferred by certain minority shareholders against oppression by majority shareholders), the Court upheld in passing judgment by way of a consent decree the view that in computing the break-up value of shares deduction is to be made for contingent and anticipated debts, etc. The observations of the Supreme Court in this regard are: ... The order of the Court dated 31st May, 1977 clearly provides that the Chartered Accountants and Auditors will determine the value of the shares as on the date of filing of the petition under Sections 397 and 398 on the basis of the existing as also contingent and anticipated debts, liabilities, claims, demands and receipts of the Company and for the purpose of determining the value, they will be at liberty to examine the accounts of the Company for the last five years. Therefore, while ascertaining the break-up value of the shares on the date of filing of the petition under Sections 397 and 398, the Chartered Accountants and Auditors will have to take into account the assets of the Company as also the existing, contingent and anticipated debts, liabilities, claims, demands, etc. This would indisputably include the claims made by the interveners in the two suits filed by them to the extent to which they appear genuine and well-founded. They need not, therefore, have the slightest apprehension that their interests are not safeguarded by the direction given by the Court....
The fact that this judgment was delivered in the course of compromise does not detract from the weight of the principles enunciated in view of the observations of the Court on the general position of passing consent orders as under: Even if the petition is being disposed of on a compromise between the parties yet the Court before sanctioning the compromises, would certainly satisfy itself that the direction proposed to be given by it pursuant to the consent terms, would not adversely affect or jeopardise the interest of the creditors.
The judicial authority is, therefore, in favour of providing for all foreseeable outgoings in arriving at the market value of a share for such outgoings would not come to the prospective buyer where the net worth with reference to assets and liabilities is to be computed.
16. The Institute of Chartered Accountants of India have brought out several brochures and a perusal of the same would indicate the following position. In the brochure 'Statement on the Treatment of Retirement Gratuity in Accounts' (brochure No. 205 published in 1974), it has been stated that the different methods of providing for gratuity. in accounts is (i) cash basis, (ii) accrual method, and (iii) gratuity fund. Under the accrual method (para 3.1.2) (iii) it is stated: (iii) As a further alternative, the liability for gratuity is computed by actuarial method taking into account: (a) the rate of return expected to be earned on the funds, if separately invested, so as to arrive at the discounted present value; (f) any other matter which may be considered relevant or appropriate.
Para 3.1.3 deals with gratuity fund and the relevant portion reads as under: Under this method a separate gratuity fund administered by trustees is set up by a trust deed and the contributions are handed over to the trustees. The computation of the contributions may be made in any of the methods described in 3.1.2.
The computation of the contribution is to be made according to the methods prescribed in 3. 1. 2. That includes the actuarial method. The constitution of the fund is, therefore, just one stage after computing the liability by the actuarial method. Where funds itself has been constituted the Madras High Court in the case of CWT v. Ranganayaki Gopalan  92 ITR 529 has held that the liability to pay an amount under the trust deed for providing for gratuity was not a contingent liability but was a present liability even where the amount was payable only in instalments. The Court had held that the liability had accrued and payment alone was postponed. The Court distinguished the judgment of the Supreme Court in Standard Mills Co. Ltd.'s case (supra) by stating that the interposition of a trust and the vesting of the gratuity fund in the trustees made difference because the company became debtor to the trust. We are, as already stated in the position, just anterior to the creation of the fund. The fund itself in the present case was created by trust deed dated 27-3-1975 which speaks of the payments having to be made to all permanent employees since 31-3-1971.
17. In para 3.2 of the monograph of the Institute of Chartered Accountants in India referred to, it has been stated: The need to provide for the liability on account of gratuity is based on sound accounting considerations and exists regardless of whether in the computation of the taxable profits, such a provision is or is not allowed as a deduction.
18. If we now come to the Companies Act, 1956, we find that Section 211 of the said Act deals with the form and contents of the balance sheet and it is provided that the form of balance sheet shall be as set out in Part I of Schedule VI. When we come to Schedule VI we find that Part I deals with on the liability side, (v) Current Liabilities and Provisions divided into Part (A) Current Liabilities and Part (B) Provisions.
Item B(12) requires that the provisions for insurance, pension and similar staff benefit schemes is to be exhibited. Hence, in conformity with the form of balance sheet the provision for gratuity has to be exhibited under the aforesaid item. In Part III Clause 7(1)(a) relating to 'Interpretation' states as under: 7. (1) for the purposes of Parts I and II of this Schedule, unless the context otherwise requires,-- (a) the expression 'provision' shall, subject to Sub-clause (2) of the clause, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy; It is clear from the aforesaid that the provision for gratuity is for a known liability. In the present case because there is an actuarial valuation, it can be said that it has been determined also with substantial accuracy. At this stage we may state that the Government of India, Ministry of Law, Justice and Company Affairs, has issued a Circular No. 13/77 [8/31/211/77-CL. V], dated 21-11-1977 addressed to all Chambers of Commerce, wherein they have stressed the importance for providing the gratuity liability in the accounts to satisfy the requirements of Schedule VI to the Companies Act. This circular reads as under: I am directed to say that it has been observed that some Companies which do not make any provision for 'Gratuity Liability' in their accounts do not even add a suitable note to the balance sheet disclosing the extent of the company's liability on this count. Some companies make a bald statement by way of a note to accounts, saying that the gratuity liability has not been ascertained or the 'gratuity liability' is being accounted for on 'cash basis'. The plea of the companies that 'gratuity liability' has not been ascertained or could not be ascertained does not meet with the requirements in this regard of Schedule VI to the Act. It is essential that the gratuity liability is ascertained in accordance with the normally accepted methods, as recommended by the Institute of Chartered Accountants of India in paras 4.1 to 4.1-3. (para 2.2 of the Revised Statement) of 'Statement on Treatment of Retirement Gratuity in Accounts' (Annex) issued by it, and if a suitable provision is not made in the accounts, or there is an under-provision, the amount of gratuity liability so estimated or left unprovided, as the case may be, should be indicated by way of a note to the accounts.
In case the company does not provide for the 'gratuity liability' or does not state the quantum of 'gratuity liability' by way of a note, the balance-sheet and profits and loss accounts cannot be regarded as disclosing a true and fair view of state of affairs. It is hence the duty of the auditors to qualify their reports to this effect and specifically state that the requirements of the Schedule VI have not been complied with properly. This has also been made clear in paras 8.7 and 8.8 (paras 9.12 and 9.13 of the new edition) of the 'Statement on Auditing Practices' issued by the Institute of Chartered Accountants of India.
I am to request that the contents of this Circular may be brought to the notice of your constituents for due and proper compliance. [See Taxmann's Circulars and Clarifications on Company Law (Sl. No. 487).] In the Companies Act, after item B(13) in Schedule VI, i.e., other provisions, there is the following statements: (4) Estimated amount of contracts remaining to be executed on capital account and not provided for.
*The amount of any guarantees given by the company on behalf of directors or other officers of the company shall be stated and where practicable, the general nature and amount of each such contingent liability, if material, shall also be specified.
19. If we now come to the 'Statement on Auditing Practices' issued by the Research Committee of the Institute of Chartered Accountants of India, 1977 edition (the former edition was referred to by the Supreme Court in the course of its judgment in the case of Challapalli Sugars Ltd. v. CIT  98 ITR 167) the following appears regarding contingent liabilities: 9.16 These refer to possible liabilities arising from past circumstances or actions, which may or may not crystallise into actual liabilities and which, if they do become actual liabilities, give rise to a loss or an expense or an asset of doubtful value. The uncertainty as to whether there will be any legal obligation differentiating a contingent liability from an actual liability.
The following general procedures will be found useful in discovering contingent liabilities: Regarding gratuities it has been stated in para 9.9 under the head 'estimated liabilities' as under: Liabilities whose existence is certain, but whose value is to be estimated, are to be regarded as 'Provisions', as defined in Schedule VI of the Companies Act, 1956. Under this head may be included the estimated liabilities in respect of The last two items are usually material in amount and are, therefore, considered separately. In paras 9.12 and 9.13 the position regarding gratuity is dealt with as below: 9.12 Where there exists an accruing liability for gratuity, it has to be ascertained that adequate provision on the basis of figures supplied by the management is made. The computation of the accruing liability should be test checked. An exact computation of this liability is dependent on determination of various factors like life expectancy of employees, rate of staff turnover, the prevailing rate of interest, etc. In this connection, attention of members is invited to the institute's statement on the treatment of retirement gratuity in accounts.
9.13 If no gratuity is provided for, a note should be made on the balance sheet indicating the total amount arrived at as above. If no information is furnished by the company the fact should be disclosed in the auditor's report.
20. There is an elaborate discussion of the judgments of the Supreme Court in the case of Standard Mills Co. Ltd. (supra) and the subsequent decision in the case of Metal Box Co. of India Ltd. v. Their Workmen  73 ITR 53 in the case of the Bombay High Court in Tata Iron & Steel Co. Ltd. v. D.V. Bapat, ITO  101 ITR 292. It is clear, therefore, that the concept of a contingent liability has to be determined with reference to the particular aspect which is under consideration. What may be in strict legal terms, a contingent liability for the purposes of certain enactments may not be a contingent liability from accountancy or commercial point of view in every instance. Having regard to the circulars of the Board set out in the judgment issued in income-tax matters on the same point the Bombay High Court in Tata Iron & Steel Co. Ltd.'s case (supra) observed as under: ... A proper review of the Supreme Court decisions to which we have adverted during the course of this judgment would seem to indicate that permissible deductions are not restricted to those indicated in Sections 30 to 37, that such a provision is not for a contingent liability in the sense of the liability similar to that of the assessee-company in Indian Molasses Co.'s case  37 ITR 66 (SC) but must be properly regarded as, if scientifically estimated, a provision for a present liability which is allowable in the case of an assessee which keeps its accounts on the mercantile system: it must be further held that there is no bar against such provision being allowable as a deduction by reason of Section 36 or 37 which are mentioned in paragraph 3 of the second circular. It appears to us that the first circular issued by the Board had been issued on a proper consideration of the law laid clown by the Supreme Court of India in Metal Box Company's case  73 ITR 53, which law was in accord with its earlier decisions, and that the second circular which withdrew the first circular was clearly based on erroneous and untenable footings as we have indicated above. In this connection, it would be open to the Board to issue circulars granting relief and withdraw such circulars subsequently; but the difficulty in the instant case appears to be caused by the fact that the withdrawal of the first circular which is mentioned in the second circular is on a certain footing, which appears to us to be untenable and based on an incorrect view of the provisions of the Income-tax Act and the Supreme Court decisions.
The aforesaid discussion would show that looking to the concept of contingent liability from an accountancy point of view provision for gratuity particularly that arrived at on the basis of actuarial valuations would not fall under the head 'Contingent liabilities' as understood with reference to the proforma balance sheet prescribed under the Companies Act and generally accepted accountancy principles.
If we may say so Rule 1D speaks of non-allowance of contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares. If we come to the proforma balance sheet of which we have set out details earlier, it is seen that other money for which the company is contingently liable is to be exhibited as a footnote (see item 5 of proposed footnote) and arrears of fixed cumulative dividends appears as, item 3 of the proposed footnote. The deduction of contingent liability envisaged would, therefore, be only those types of contingent liabilities which under the proforma balance sheet are to be shown by way of footnotes and not under any of the particular specific provisions enumerated under item B(8) to B(12) unless there is compelling evidence to show that there has been an improper classification.
21. The term 'contingent liabilities' is not defined under the Act. It occurs in the rules framed for the purposes of valuation of shares. We have already pointed out that under the general principles for valuing a share by the break-up method even liabilities which are completely contingent can be deducted. The 1957 Rules provide that contingent liabilities should be excluded. We consider that the term 'contingent liabilities' here has to be interpreted to mean those liabilities considered to be contingent liabilities from an accountancy point of view, i.e., where there is an uncertainty as to whether there would be legal obligation to pay the money or not. Any other interpretation would make the rules, which are intended for arriving at the break-up value of shares by a rough and ready method unrealistic. in the case of gratuity under an agreement or scheme, the collective liability is certain to arise and only the extent of the liability would vary in any particular year. The liability towards a particular employee may be contingent but the cumulative or collective liability of the company towards the employees in general is a liability which is certain and the extent of the liability will depend upon contingencies that will take place in respect of each employee in a particular year. Hence, though as far as the computation of net wealth is concerned provision for gratuity will not be a debt owed, nevertheless since on the folding up of a company the money would not come back to the shareholders since it would have to be paid out to the employees under a legal obligation a prospective buyer would not consider provision for gratuity as a contingent liability from the point of view of valuation of shares. We, therefore, hold that the liability is not to be excluded in making a computation under Rule 1D since in the present case it has been arrived at by the actuarial principles with reference to an agreement which had effect from 31-3-1971 and had been duly provided, accordingly, in the balance sheet and would, therefore, not be a contingent liability within the meaning of the 1957 Rules.
22. We have elaborated upon the true concept of a provision for gratuity inasmuch as parties had canvassed their rival submissions before us at some length. It is only sufficient to state that on a due consideration of all the aspects the only conclusion we can come to is to tread the same path and come to the same finding as in WT Appeal No.533 of 1976-77, dated 26-11-1977 which is the case relied on, on behalf of the assessee and which according to the learned departmental representative, required to be reviewed.
23. In conformity with our aforesaid conclusions, we hold that the shares in T.V. Sundaram Iyengar & Sons Ltd. did not call for a revaluation and the addition made of Rs. 22,143 is deleted.
24. Coming to the shares of Sundaram Textiles Ltd., the gratuity scheme was in terms of the settlement dated 9-7-1970 under the Industrial Disputes Act, 1947, and in the directors' report for the year ended 31-3-1971, it was pointed out that gratuity as per actuarial valuation amounting to Rs. 1,68,159 had been provided in the profit and loss accounts (exhibited in the balance sheet explicitly as a provision as per actuarial valuation and so also in the profit and loss account).
The decision as in the case of T.V.S. and Sons Ltd. would hold good here also and the aforesaid provision is not a contingent liability on the facts of the case. Consequently, a revaluation was not called for of the shares in this company and we direct exclusion of the amount added of Rs. 118 brought to tax in the revised assessment.
25. We, therefore, agree with the conclusion of the AAC that the revaluation was not in order and hence the appeal of the department on this point fails.