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Commissioner of Wealth-tax Vs. Ranganayaki Gopalan and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 263 and 271 of 1967 (Reference Nos. 84 and 92 of 1967)
Judge
Reported in[1973]92ITR529(Mad)
ActsWealth Tax Act, 1957 - Sections 2 and 27(1)
AppellantCommissioner of Wealth-tax
RespondentRanganayaki Gopalan and ors.
Appellant AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Respondent AdvocateV.K. Thiruvenkatachari, Adv. for ;T. Raghavan and ;T.K. Seshadri, Advs.
Cases ReferredStandard Mills Co. Ltd. v. Commissioner of Wealth
Excerpt:
direct taxation - valuation of shares - sections 2 and 27 (1) of wealth tax act, 1957 - assessee deducted sum allocated for employee's gratuity from gross assets while computing valuation of shares - whether aforesaid sum on account of contribution deductible for purpose of ascertaining value of equity shares - liability to pay gratuity was not contingent liability - held, sum deductible for purpose of ascertaining valuation of equity shares. - - 19,50,000 was concerned with a liability to pay future yearly contributions as well......executed providing for vesting of the fund in the trustees and for administration of the trust fund. on december 18, 1960, the board of directors of the company passed the following resolution:'resolved that the initial contribution of rs. 19,50,000 as ascertained by the actuary in his report dated october 4, 1960, be paid in instalments to the trust without interest and the question of interest be considered after the next valuation.'3. in the report to the shareholders on the account for the year ended 30th june, 1961, the directors stated :'the gratuity trust referred to in our last report has been created and the rules thereunder have been approved by the income-tax department. the company proposes to pay off the backlog of initial contribution amounting to rs. 19,50,000 in.....
Judgment:

Ramaswami, J.

1. On the 18th March, 1960, an agreement was executed between the Hindu Office and the National Press Employees Union and M/s. Kasturi and Sons Ltd. (hereinafter called 'the company'), the proprietors of Hindu and Sports and Pastime, for payment of gratuity. Under the scheme of this agreement, every employee who had been in service or continues in service after 1st January, 1957, would be entitled to the payment of gratuity on retirement, death or termination otherwise than as punishment on the basis and conditions referred to therein. In order to give effect to this agreement, an actuary was appointed to report on the financial arrangements needed for starting and maintaining the gratuity scheme. The two principal questions on which the actuary's advice was sought were regarding the amounts that have to be set apart for each year after the inception of the gratuity fund as and from 1st July, 1960, and regarding the liability that has already arisen in respect of the existing employees for services rendered prior to 1960.

2. In his report, on the first question, the actuary reported that the 'contribution to the fund shall be made every year at 4 per cent. of the wagebills but it is open to revision upward or downward in accordance with the results which the actuarial valuation conducted at any subsequent date may require. Regarding the second question, he said that the total amount of liability on this account was Rs. 19,46,192 and adding Rs. 3,808 towards certain incidental expenses he determined the liability at Rs. 19,50,000. The proposed trust deed, however, contained a clause that the company may at its option pay to the fund either the entire sum so estimated in one lump sum or in such instalments and at such times as the board of directors of the company may determine. The report further stated that if the board decided to exercise this option the balance outstanding should be treated as loan and interest payment at 31/2 per cent. per annum with yearly rests be contributed by the company. The company in its meeting held on December 16, 1960, considered this question on constitution of the funds and the terms of the trust deed and approved the same by a resolution of the same date. A deed of trust was accordingly executed providing for vesting of the fund in the trustees and for administration of the trust fund. On December 18, 1960, the board of directors of the company passed the following resolution:

'Resolved that the initial contribution of Rs. 19,50,000 as ascertained by the actuary in his report dated October 4, 1960, be paid in instalments to the trust without interest and the question of interest be considered after the next valuation.'

3. In the report to the shareholders on the account for the year ended 30th June, 1961, the directors stated :

'The gratuity trust referred to in our last report has been created and the rules thereunder have been approved by the income-tax department. The company proposes to pay off the backlog of initial contribution amounting to Rs. 19,50,000 in convenient instalments. To start with a sum of Rs. 38,880 was paid on this account during the year under report.'

4. In the balance-sheet of the company as on June 30, 1961, the following note was appended:

'Actuarial liability for employees' gratuity; as at 30th June, 1960.--Balance outstanding as on 30th June, 1961, Rs. 19,11,620.'

5. The respondent in T. C. No. 263/67 held 1,208 shares of the face value of Rs. 100 each in the company. The respondent in T. C. No. 271/67 held 3,306 shares of the face value of Rs, 100 each in the company. For the assessment year 1962-63, these respondents submitted their wealth-tax returns, the valuation date being March 31, 1962. For the purpose Of the valuation of the shares held by these respondent-assessees, the balance-sheet of the company as on 30th June, 1961, was adopted. The assessees valued the shares at Rs. 101.30 per share. The method adopted for ascertaining the value is the break-up value of the shares in the company.There is no dispute about the method of valuation. In arriving at the valuation of shares at Rs. 101.30 per share the assessee deducted the sum of Rs. 19,11,620 as liability for employees' gratuity from the gross assets of the company as on June 30, 1961. The Wealth-tax Officer rejected the claim of the assessee for deduction of Rs. 19,11,620. According to him, there was no actual liability and whatever liability was there was only of a contingent nature. The Appellate Assistant Commissioner confirmed this order of the Wealth-tax Officer. On a further appeal, the Tribunal was of the view that a real liability existed in the sum of Rs. 19,50,000, that this liability was not a contingent one and that it represented a liability that had already arisen in respect of the existing employees for services rendered prior to 1960. In this view, the Tribunal allowed the appeals filed by the assessees and directed to modify the assessment and rework the value of the shares after taking into account the sum of Rs. 19,11,620. At the instance of the Commissioner of Wealth-tax, identical questions have been referred to us under Section 27(1) of the Wealth-tax Act, 1957 (hereinafter called 'the Act'). The question reads as follows:

'Whether, on the facts and in the circumstances of the case, the sum of Rs. 19,11,620 on account of contribution to Kasturi and Sons Ltd. Employees' Gratuity Fund was deductible for purposes of ascertaining the value of equity shares in Kasturi and Sons Ltd. '

6. The learned counsel for the revenue submitted that the liability toprovide the sum of Rs. 19,11,620 was a contingent liability and in fact itwas treated as such in the company's balance-sheet as on June 30, 1961, andthat, therefore, this amount cannot be deducted from the total value of theassets for the purpose of finding out the break-up value of the shares. Inthis connection, the learned counsel also relied on the decision of theSupreme Court in Standard Mills Co. Ltd. v. Commissioner of Wealth-tax, : [1967]63ITR470(SC) . That was a case where the assessee-company in proceedings for assessmentof wealth-tax claimed deduction, among other things, in respect of a sum ofRs. 25,02,675 on account of accrued liability for gratuity to workmen andstaff as per the award of the Industrial Court and the Labour AppellateTribunal. The Supreme Court held that on the plain terms of the awardthe liability to pay gratuity to the employees of the appellant-company ondetermination of employment is a mere contingent liability which arisesonly when the employment of the employee is determined by death,incapacity, retirement or resignation and that the amount claimed cannotbe deducted as a debt in computing the net wealth of the assessee. But,in the present case, in our opinion, the interposition of a trust and vestingthe gratuity fund in the trustees makes a difference.

7. One of the two questions referred to the actuary for advice was as to the amount of liability that has already arisen in respect of the existing employees for services rendered prior to 1960. The actuary determined this amount at Rs. 19,50,000. The trust deed provided that the company shall pay to the trustees every year commencing from July 1, 1960, such sum or sums as may from time to time be determined in accordance with the provisions of the rules and regulations of the trust fund. The entire fund shall vest in the trustees who shall administer the same in accordance with and for the purposes set out in the trust deed. The trustees are obliged to invest all monies which are not immediately required for any of the purposes of the scheme in accordance with Section 20 of the Indian Trusts Act. The interest or other income accrued or earned from the said funds or any investments thereof shall form part of the fund. In respect of the liability that had already arisen in respect of the existing employees for services rendered prior to 1960, Clause 14 of the rules and regulations of the trust fund states that the company had covenanted with the trustees that it will make such payments to the fund in accordance therewith. Sub-clause (c) of Clause 14 reads as follows :

'The actuary shall also estimate, by actuarial calculation, in respect of the gratuities appropriate to and arising out of the past services of the employees of the company now in service, the consolidated payment necessary to cover future liabilities in respect thereof. The company may, at its option, pay into the fund either the entire sum as estimated in one lump sum or in such instalments and at such times as the board of directors of the company may determine.'

8. The actuary's report stated that if the board decides to exercise this option, the balance outstanding should be treated as loan and interest paid at 31/2 per cent. per annum net with yearly rests be contributed direct by the company. The trust deed and the rules and regulations for administration of the trust fund was approved by the board on December 16, 1960, and executed by the company. On execution the company became a debtor to the trust so far as the initial contribution of Rs. 19,50,000 was concerned with a liability to pay future yearly contributions as well. It is true that the board by its resolution dated December 18, 1960, resolved not to pay interest but the liability to pay the initial contribution had been confirmed. Clause 14(c) extracted above does not leave any option to the company not to pay the initial deposit but only provides payment of that liability in instalments. In Kesoram Industries and Cotton Mills' case, : [1966]59ITR767(SC) the Supreme Court pointed out that 'a debt is a sum of money which is now payable or will become payable in future by reason of a present obligation debitwn in praesenti, solvendum in futuro'. This passage was quoted with approval by the Supreme Court in Standard Mills Co. Ltd. v. Commissioner of Wealth-tax and the court further observed :

'The said decisions also accept the legal position that a liability depending upon a contingency is not a debt in praesenti or in future till the contingency happened. But if there is a debt the fact that the amount is to be ascertained does not make it any the less a dsbt if the liability is certain and what remains is only a quantification of the amount. In short, a debt owed within the meaning of Section 2(m) of the Wealth-tax Act can be defined as a liability to pay in praesenti or in futuro an ascertainable sum of money.'

9. In the present case, the company was liable to pay the sum of Rs. 19,50,000 under the trust deed to the trustees. The only option that was given to the company was that it could either pay the amount in one lump sum or in instalments. The liability is thus not a contingent liability. It is a definite, ascertained and present liability.

10. It is true that in the balance-sheet of the company as on June 30, 1961, this fact is shown only as a note but that, in our opinion, does not detract or change the character of the liability itself. The company has chosen to prepare the balance-sheet in that form and the trustees of the gratuity funds were not concerned with that. Probably, as pointed out by the Tribunal, proper accounting would require this liability to be brought into account and not shown by way of a note to the balance-sheet. But that cannot affect the real position. We are, therefore, of opinion that the sum of Rs. 19,11,620 was deductible for the purpose of ascertaining the value of equity shares and we, accordingly, answer the question referred in the affirmative and against the revenue. The counsel for the respondents will be entitled to his costs in T.C. No. 263/67. Counsel's fee Rs. 250. There will be no order as to costs in T.C. No. 271/67.


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