John J. Chackola v. Controller of Estate Duty — 1996 DIGILAW 172 (KER)

Judgment :- Sivarajan. J. In this reference application under, Section 64(1) of the Estate Duty Act, the Income Tax appellate Tribunal, Cochin Bench, Ernakulam, at the instance of the accountable person, has referred the following three questions of law for decision by this court: 1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in holding that the assessment has correctly been rectified u/s 61 of the Estate Duty Act, 1953? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in holding that in spite of the decision of the Supreme Court in CIT v. Vazir Sultan Tobacco Co. Ltd., 132 ITR 559, the decision of the Kerala High Court in C.W.T. v. K. Gopinathan Nair, 103 ITR 23 (Ker) was still to be followed? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that in the valuation of the shares the liability for gratuity shown in the balance-sheet which was less than the liability on actuarial valuation was not a debt owned which was deductible?" 2. The brief facts necessary for adjudication of questions referred are as follows:-The properties which devolved on the accountable person included certain shares in a company namely Chackolas Spinning and Weaving Mills. The said shares were not quoted in the market. The valuation of these unquoted shares is the subject matter of this reference. The Asst. Controller of Estate Duty originally valued the shares held by the deceased in Chackolas Spinning and Weaving Mills by accepting the method provided under Rule ID of the Wealth Tax Rules, 1957. While doing so, he treated the provision made by the company for gratuity as a liability. He valued the shares at the rate of Rs. 43.65 per share and the value of the shares were determined accordingly. 3. Subsequently, the Asst. Controller of Estate Duty initiated proceedings u/s 61 of the E.D. Act and rectified the assessment inter alia rejecting the claim of the accoutable person that the gratuity liability being an accured liability had been treated so at the time of the completion of the original assessment. 4. Aggrieved by the said rectification of the original assessment, the accountable person took up the matter in appeal before the appellate Controller of Estate Duty, Madras. 4. Aggrieved by the said rectification of the original assessment, the accountable person took up the matter in appeal before the appellate Controller of Estate Duty, Madras. Before the appellate Controller, the accountable person's representative inter alia, relying on the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. C.LT.(SC) (1981)132ITR559) and the decision of the Madras High Court in S.Ram & Co. v. Commissioner of Wealth-tax (147 ITR 278) contented that the provision for gratuity was not a contingent liability but a definite liability. The accountable person's representative has also produced a certificate regarding the actuarial valuation as per which the accrued gratuity liability of the company as on 30-6-1976 computed on actuarial basis was Rs. 21,40,613 and contented that the provision for gratuity made in the balance-sheet was only Rs. 17,32,822/- which is much less than the liability computed on actuarial basis. He further contented before the appellate Asst Commissioner mat in view of the Supreme Court's decision referred to above, it must be considered as settled law that gratuity liability is not a contingent liability but a definitely ascertained liability and therefore it has to be taken into consideration for arriving at the value of unquoted shares of the company. The appellate Controller accepted the said contentions of the accountable person and held that the value of shares was originally computed in accordance with law and there is no justification for rectifying the said order by resort to the provisions of Sec.61 of the Act. 5. Aggrieved by the said order, the Department lookup the matter in appeal before the Incometax appellate Tribunal, Cochin Bench. Before the Incometax appellate Tribunal, the Department contented that the view taken by the appellate Controller is erroneous and that the appellate Controller has totally disregarded the decision of the Kerala High Court in the case of C. W. T. v. K. Gopinathan Nair, 103 itr 23 (Ker). This decision according to the Department, supports the view taken by the Asst. Controller " in his order under Sec.61 of the Estate Duty Act and that the appellate Controller in fact took into consideration decisions which have no direct bearing while giving the impugned relief. This decision according to the Department, supports the view taken by the Asst. Controller " in his order under Sec.61 of the Estate Duty Act and that the appellate Controller in fact took into consideration decisions which have no direct bearing while giving the impugned relief. The Incometax appellate Tribunal also considered the contentions of the accountable person that the decision of the appellate Controller is supported by the decision of the Supreme Court in the case of Vazir Sultan (1981)132 ITR 559 and S. Ram & Co. v. Commissioner of Wealth-tax (147 ITR 278). Thereafter, the appellate Tribunal observed that the Kerala High Court in the decision reported in 103 ITR 23 has clearly held that provision for gratuity is a contingent liability and that the Tribunal in E.D. A No. 15 (Coch) -1985 dated 29.8.1989 had taken a similar view after considering the decision of the Supreme Court in the case of Vazir Sultan and also the decision of the Madras High Court in S.Ram & Co. v. C. W. T. and since the order originally passed by the Asst. Controller of Estate Duty was without taking into consideration the decision of the jurisdictional High Court, there is a clear mistake apparent from the records. Accordingly, the order of the Asst. Controller of Estate Duty passed under Sec.61 of the Act was restored. It is against this order of the Incometax appellate Tribunal, Cochin Bench that the account able person has come up in reference. 6. As we have already stated the company in which the deceased was holding the shares, namely, M/s. Chackolas Spinning and Weaving Mills Ltd. made a provision for gratuity liability to employees in its balance-sheet prepared as on 30.6,1975, a sum of Rs. 17,32,822/-, as could be seen from item 5(e) under the current liabilities and provisions of the balance-sheet available at page 26 of the paper book and that the liability for payment of gratuity as computed on actuarial valuation amounted to Rs. 21,40,630/-, as could be seen from paragraph 2 of the order of the appellate Controller of Estate Duty, which is annexure B in the paper book and that the provision so made is far less than the liability as computed on actuarial basis. 21,40,630/-, as could be seen from paragraph 2 of the order of the appellate Controller of Estate Duty, which is annexure B in the paper book and that the provision so made is far less than the liability as computed on actuarial basis. The accountable person's contention before the appellate authorities as well as before this court is that the Supreme Court in Vazir Sultan's case and other cases has taken the view that if the company has worked out its estimated liability on an actuarial valuation (i.e., discounted present value of the liability under the scheme on a scientific basis ) and make a provision for such liability, the appropriation will constitute a provision representing fairly accurately a known and existing liability for the year in question and therefore it is clear that the liability is not a contingent one. On the other hand, the submission of the Department before the authorities and before this court is that the liability for gratuity is only a contingent liability and therefore it is not liable to be taken into account for determining the market value of the shares by applying Rule ID of the Rules. 7. In view of these submissions, it is necessary for us to refer to the provisions of Rule ID of the Wealth Tax Rules under which admittedly, these shares have been valued by the Asst.Controller of Estate Duty. The relevant portion of Wealth Tax Rules, 1957 is extracted below: " ID. Market value of unquoted equity shares of companies other than investment companies and managing agency companies:- 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 capital as shown in the balance -sheet. The net amount so arrived at shall be divided by the total amount of its paid-up equity 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 market value of each such share shall be 85 percent 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 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. Explanation II: For the purpose of this rule - (ii) the following amount 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". 8. It is evident from Explanation II(ii) (f) of Rule ID extracted above that for the purpose of Rule ID any amount representing 'contingent liabilities' other than arrears of dividends payable in respect of cumulative preference shares though shown as liabilities in the Balance sheet shall not be treated as liabilities. So, the only question for our consideration is as to whether the amount of Rs. 17,32,822/-shown by the Chackolas Spinning and Weaving Mills Ltd., Kalamassery in its balance-sheet as gratuity liability to employees is a 'contingent liability", which is not to be taken into consideration for the purpose of computation of the market value of shares by resort to the provisions of Rule ID of the Rules, 1957. This is a matter which should be considered independent of the provisions of the Wealth Tax Act, Income tax Act, or any other allied enactments even if that question arises under any of the said enactments. For those enactments have no application in deciding the question as to whether the provision for gratuity is a contingent liability or not. 9. The Department's consistent case is that provision for gratuity is only a contingent liability and therefore it is not liable to be taken into account for the purpose of Rule ID of the W.T. Rules. For those enactments have no application in deciding the question as to whether the provision for gratuity is a contingent liability or not. 9. The Department's consistent case is that provision for gratuity is only a contingent liability and therefore it is not liable to be taken into account for the purpose of Rule ID of the W.T. Rules. In support of the said contention, the Department relied on the decision of this court in CWT. v. K. Gopinathan Nair (W3 ITR 23 (Ker.). That was a case where this court was concerned with the question as to whether the provision for payment of gratuity payable under the statute to an employee on his retirement, death, etc. was a 'debt' within the meaning of Sec. 2(m) of the Wealth Tax Act. In that context, this court relied on the decision of the Supreme Court in Standard Mills Co. Ltd v. Commissioner of Wealth Tax (63 ITR 470 (SC). The facts of the said case, according to this court was similar to the facts in the case concerned and held that the provision for payment of gratuity is not a 'debt' within the meaning of Sec. 2(m) of the Wealth Tax Act. On the other hand, the counsel for the accountable person relied on the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. C.I.T. (1981) 132 ITR 559). That was a case arising under the Super Profits Tax Act, 1963. There the questions raised are whether amounts retained or appropriated or set apart by the concerned company by way of making provision (a) for taxation, (b) for retirement gratuity (underlining ours) and (c) for proposed dividends from out of the profits and other surpluses could be considered as other reserves within the meaning of Rule 1 of the Second Schedule to Super Profits Tax Act, 1963 for inclusion* in the capital computation of the company for the purpose of levying super profit tax? In that context, the Supreme Court considered the distinction between the two concepts "reserve" and "provision" and observed that whereas a provision is a charge against the profits to be taken into account against gross receipts in the profit and loss account, a reserve is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business. Dealing with such a situation, the Supreme Court considered the question regarding appropriation made for gratuity as to whether it is a provision or a reserve on the relevant date. In that context, the Supreme Court noted the contention of the counsel for the assessee that no actuarial valuation had been undertaken but an adhoc amount was appropriated or transferred to gratuity reserve and as such the same should have been treated as a reserve and included in capital computation. The Supreme Court also observed that whereas the assessee- company did urge a contention before the lower authorities that different treatments for the same item could not be given for purposes of income-tax assessment and super profits tax assessment, the assessee-company did not clarify by placing material on record as to whether the appropriation of the amount was based on any actuarial valuation or whether it was an appropriation of an ad hoc amount-an aspect which has a vital bearing on the question whether the appropriation could be treated as a provision or a reserve. It is in that context, the Supreme Court observed that ordinarily, an appropriation to gratuity reserve will have to be regarded as a provision made for a contingent liability, for, under a scheme framed by a company, the liability to pay gratuity to its employees on determination of employment arises only when the employment of the employee is determined by death, incapacity, retirement or resignation-an event (cessation of employment) certain to happen in the service career of every employee. It was also observed that the amount of gratuity payable is usually dependent on the employee's wages at the time of determination of his employment and the number of years of service put in by him and the liability accrues and enhances with the completion of every year of service; but the company can work out on an actuarial valuation its estimated liability and make a provision for such liability not all at once but spread over a number of years. Then the Supreme Court observed that "it is clear that if by adopting such scientific method any appropriation is made, such appropriation will constitute a provision representing fairly accurately a known and existing liability for the year in question". Then the Supreme Court observed that "it is clear that if by adopting such scientific method any appropriation is made, such appropriation will constitute a provision representing fairly accurately a known and existing liability for the year in question". As could be seen from the above the Supreme Court has noted these settled principles for the consideration by the Tribunal of the question which was being remitted by the Supreme Court in that appeal. Therefore, it is clear from the above observations of the Supreme Court that if the company, namely, Chackolas Spinning and Weaving Mills Ltd., Kalamassery had set apart a sum of Rs. 17,32,822 by adopting the method of actuarial valuation, it has to be regarded as a provision for a known and existing liability, the quantification' thereon has to be made later. If the said provision is towards a known and existing liability though it is payable at a future date, it can never be characterised as a contingent liability. It is only a liability, which has already been accrued for the year in question. As we have already noticed, the decision of this court in Gopinathan Nair's case was not concerned with the situation like the present one where the question of estimation of liability for gratuity on actuarial valuation was in issue. In other words, this court was not concerned with a situation where the provision is made in respect of gratuity computed on the basis of actuarial valuation. On the other hand, the Supreme Court in Vazir Sultan's case was directly concerned with the question for the purpose of deciding as to whether a provision for gratuity made on the basis of actuarial valuation is a provision or a reserve. The Supreme Court held that if the provision for gratuity liability is made on the basis of actuarial valuation, it is taken out of the purview of contingent liability and will be placed in the category of known and existing liability. 10. In view of the decision of the Supreme Court in Vazir Sultan's case (supra), we are of the view that the provision for gratuity made by M/s. Chackolas Spinning and Weaving Mills Ltd., Kalamassery in the balance-sheet being much less than the liability, which has been ascertained on actuarial valuation, as is evident from the certificate produced before the appellate Controller, is not towards a contingent liability and therefore the Asst. Controller of Estate Duty was not justified in thinking that he had committed a mistake while determining the market value of unquoted shares in the said company by taking into account the provision for gratuity also. In other words, we are of the view that there was no mistake in the original order of assessment warranting invocation of the provisions of Sec.61 of the Estate Duty Act and rectifying the said assessment on this ground. 11. Learned counsel appearing for the department very strenuously contended relying on the decision of the Supreme Court in Standard Mills Co. Ltd. v. CWT (63 ITR 470), Bombay Dyeing & Mfg. Co. Ltd. v. CWT (93 ITR 603) and also the decision in P. Sathrughan Filial v. Commissioner of Wealth Tax (1993) 199 ITR 7), all in support of the position that the liability for payment of gratuity is a contingent liability and that the decision rendered in the context of the Incometax Act have no relevance for consideration of the question under the Wealth Tax Act. 12. As we have already stated at the outset, for the consideration of the question involved in this case, namely, whether the provision for payment of gratuity is a contingent liability, it is no matter whether the question has arisen under the Income tax Act, Wealth Tax Act or any other allied enactments. 13. In view of the categoric finding of the Supreme Court in Vazir Sultan's case mentioned supra, we are of the definite view that provision for payment of gratuity made on the basis of actuarial valuation is an existing liability and that it is a liability in present!, though the payment of the said amount is at a future date. In view of the categoric finding by the Supreme Court, it is unnecessary for us to dwell on the various decisions relied on by the counsel for the Revenue. 14. Another contention taken by the senior counsel appearing for the department is that, at any rate, in view of the provisions of section 40A(7) of the Income tax Act, which is applicable for the period from 1-4-1973, provision for gratuity liability even if it is an accrued liability still it is not an allowable deduction under the Income tax Act since the company did not satisfy the three conditions specified in sub-clause (b) thereof. As already stated provisions of the Incometax Act has no relevance in determining the question whether the provision for gratuity is a contingent liability or not. For the above reasons, this contention also has no merit. 15. We accordingly answer the questions referred to us in the following manner. We answer the first question in the negative, i.e., against the Revenue and in favour of the accountable person. In view of our answer to question No. 1, we decline to answer question Nos.2 and 3, which according to us, are unnecessary for the purpose of this case. A copy of this judgment under the seal of this court and the signature of the Registrar shall be sent to the Incometax appellate Tribunal, Cochin Bench for passing consequential orders.