COMMISSIONER OF GIFT TAX VS K. MAHESH
1997 P T D 1277
[223 ITR 765]
[Madras High Court (India)]
Before Thanikkachalam and Balasubramanian, JJ
COMMISSIONER OF GIFT TAX
Versus
K. MAHESH and others
Tax Cases Nos.884 to 886 and References Nos.586 to 588 of 1982, decided on 23/02/1996.
Wealth tax ---
----Valuation---Unquoted equity shares---Valuation under R.1-D of Indian Wealth Tax Rules---Provision for gratuity deductible---Discount of 30 per cent allowable---Indian Wealth Tax Rules, 1957, R.1-D.
The assessees who held certain shares in companies T & S gifted them to three individuals. The assessees valued the shares in company S at the rate of Rs. 151.11 per share and the shares in company T at Rs.124.62 per share. The original assessments were completed accepting the gifts as returned by the assessees. However, the Gifts Tax Officer later noticed that while arriving at the above figures, the assessees had taken into account the provision for gratuity as a liability. He also noticed that the assessees had taken up the balance-sheets of the companies as on March 31, 1971, which were the latest available balance-sheets for arriving at the share value by break-up value method. He, therefore, reopened the assessments and arrived at the value of the shares gifted afresh. In doing so, he took into account the balance-sheets of the companies as on March 31, 1972, which were the balance-sheets nearest to the dates of gifts and disallowed the assessees' claim for treating the provision for gratuity as a liability. He thus arrived at the value of the shares at an enhanced rate and adopted the same for the purpose of gift-tax assessment. On appeal, the Commissioner of Income-tax (Appeals) held that the adoption of the balances-sheets as on March 31, 1972, being the one nearest to the date of gifts was justified, that the provision for gratuity should be allowed as a liability while working out the break-up value and that a discount of 30 per cent should be allowed on the break-up value instead of 15 per cent allowed by the Gift Tax Officer. This was upheld by the Tribunal On a reference:
Held, (i) that the Tribunal was right in holding that while valuing the unquoted equity shares under rule 1-D of the Wealth Tax Rules, 1957 read with Explanation II(ii)(f) to rule 1-D, provision for gratuity is deductible while ascertaining the value on the basis of the break-up method;
Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559 (SC) and Shree Sajjan Mills Ltd. v. CIT (1985) 156 ITR 585 (SC) applied.
(ii) That the Tribunal was justified in giving a discount of 30 per cent while valuing the unquoted equity shares under the break-up method, in accordance with the provisions contained in rule 1-D of the Wealth Tax Rules, 1957.
CGT v. Sundaram Industries Ltd. (1996) 222 ITR, 710 (Mad.) fol
Bharat Hari Singhania v. CWT (1994) 207 ITR 1 (SC) and CWT v. Ram (S.) (1984) 147 ITR 278 (Mad.) ref:
C.V Rajan for the Commissioner.
Nemo for the Assessee.
JUDGMENT
THANIKKACHALAM, J.---At the instance of the Department, the Tribunal referred the following two common questions in the cases of there assessees for the assessment year 1972-73 for the opinion of this Court under section 26(1) of the Gift Tax Act, 1958:
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal 'was right in holding that for the purpose of ascertaining the break-up value of the unquoted shares, the provision for gratuity should be treated as a 'liability' and should accordingly be allowed as a deduction?
(2) Whether the Appellate Tribunal was justified in holding that a discount of 30 per cent should be allowed from the break-up value as against 15 per cent. stipulated in rule 1-D of the Wealth Tax Rules; 1957?"
The assessees held certain shares in the following companies and gifted them away as detailed below:
| Name of the assessee | Shares held in | No. of shares gifted | date of gift |
| 1. K. Mahesh | T. V. S & Sons (P.) Ltd. | 3,000 | 28-3-1972 |
| 2.K. Ramesh | (1) Sundaram Industries | 800 | do. |
| | (2) T. V. S. & Sons(P.) Ltd. | 3,000 | do. |
| 3. Suresh | (1) Sundaram Industries | 800????? | Do. |
| | (2) T. V. S. & Sons(P.) Ltd. | 3,000 | Do. |
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All the assessees as above value the shares in Sundaram Industries at the rate of Rs.151.11 per share and the shares in T.V.S. & Sons at Rs.124.62 per share. The original assessments were completed accepting the gifts as returned by the assessees. However, the Gift Tax Officer later noticed that while arriving at the above figures, the assessees had taken into account the provisions for gratuity as a liability. He also noticed that the assessees had taken up the balance-sheets of the companies as on March 31, 1971, which were the latest available balance-sheets for arriving at the share value by break-up value method. He, therefore, reopened the assessments and arrived at the value of the shares gifted afresh. In doing so, he took into account the balance-sheets of the companies as on March 31, 1972, which was the nearest balance-sheet to the dates of gifts and disallowed the assessees' claim for treating the provisions for gratuity as liability. He thus arrived at the value of the shares at an enhanced rate and adopted the same for the purpose of gift-tax assessments.
On appeal, the Commissioner of Income-tax (Appeals) held that the adoption of the balance-sheet as on March 31, 1972, being the nearest one to the date of gifts was justified, that the provision for gratuity should be allowed as a liability while working out the break-up value and that a discount of 30 per cent should be allowed on the break-up value instead of 15 per cent allowed by the Gift Tax Officer. Aggrieved by the orders of the Commissioner of Income-tax (Appeals), the Department took up the matter in appeals to the Appellate Tribunal. The Tribunal held that the issues under appeal have already been considered by it in the case of T.S. Srinivasan in G.T.A. No.6/Mds of 1977-78, dated March 4, 1978, and as the orders of the Commissioner of Income-tax (Appeals) are germane to its earlier order cited, there was no force in the appeals filed by the Department. The Tribunal has accordingly dismissed all the appeals filed by the Department.
Question No: 1 relates to the value of unquoted equity shares according to rule I-D of the Wealth Tax Rules. While valuing the unquoted equity shares, the break-up method should be adopted. In adopting the break ?up method, the point for consideration is, whether the provision for gratuity made in the balance-sheet should be treated as a liability or not. The assessees while adopting the break-up method for valuing the unquoted equity shares deducted the provision made for gratuity as a liability in the nearest balance-sheet.
In CWT v. S. Ram (1984147 ITR 278 (Mad.) while construing the valuation of unquoted shares under the Wealth Tax Act, 1957, and the Gift Tax Act, 1958, this Court held "that the payment of gratuity from the point of view of the liability to a workman may be a contingent liability, but when on a scientific and actuarial basis, an employer makes a provision for gratuity, such a provision must be regarded as a present, direct and minimum liability of the company for the reason that it represents the present discounted value of the employer's commitment as a whole to pay the workmen gratuity as and when it becomes liable and, consequently, the provisions of Explanation II(ii)(f) to rule 1-D of the Wealth Tax Rules, 1957, will not apply and for determining the value of unquoted shares for purposes of wealth tax, gift tax and estate duty, their value will have to be ascertained under the break-up value method after deducting the provision for gratuity based on actuarial valuation from the value of the assets of the company". On the basis of this decision, the Tribunal held that while valuing the unquoted equity shares in the break-up method, the provision made in the balance-sheet for payment of gratuity liability should be deducted for arriving at the net value of the company's assets". The special leave petition filed against the decision of this Court in S. Ram's case (1984) 147 ITR 278 was rejected by the Supreme Court by the decision reported in (1990) 181 ITR (St.) 227.
However, learned standing counsel for the Department while making the submissions drew our attention to the decision of the Supreme Court in Bharat Hari Singhania v. CWT (1994) 207 ITR 1, wherein while summarising the conclusions arrived at therein, their Lordships of the Supreme Court pointed out that while valuing the unquoted equity shares under rule 1-D, no deduction on account of capital gains tar which would have been payable in case the said shares were sold on the valuation date can be made and similarly, no other deductions including provision for taxation, provident fund and gratuity are admissible and that rule 1-D is exhaustive on the subject. According to Explanation II (ii)(f) to rule 1-D of the Wealth Tax Rules, any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares shown as liability in the balance-sheet shall not be treated as liabilities. In Vazir Sultan Tobacco Co. Ltd. v.. CIT (1981) 132 ITR 559, the Supreme Court while considering the Companies (Profits) Surtax Act, 1964, Schedule II, rule-1, Super Profits Tax Act, 1963, Schedule II, rule 1, Companies Act, 1956, section 217, Schedule, I, Table "A", Regulation 87, Schedule VI, Part III, clause (7), held as hereunder (head-note):
"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; if, however, an ad hoc sum is appropriated without resorting to any scientific basis such appropriation would also be a provision intended to meet a known liability, though a contingent one, for, the. expression 'liability' occurring in clause 7(1)(a) of Part III of the Sixth Schedule to the Companies Act includes any expenditure contracted for and arising under a contingent liability; but if the sum so appropriated is shown to be in excess of the sum requires to meet the estimated liability (discounted present value on a scientific basis) it is only the excess that will have to be regarded as a reserve under clause 7(2) of Part III of Schedule VI to the Companies Act, 1956. "
Similarly, the Supreme Court in Shree Sajjan Mills Ltd. v. CIT (1985) 156 ITR 585, while considering the provisions of sections 28, 37, and 40-A(7) of the Income Tax Act, 1961, held that the provision made in the profit and loss account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis as falling on the assessee in the year of account could be deducted either under section 28 or section 37 of the Act. Further, under Explanation II (ii)(f) to rule 1-D, any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares, shall not be treated as liability. As per the earlier decisions, the provision for gratuity liability ascertained on actuarial basis is not a contingent liability. Consequently, Explanation II (ii) (f) to rule 1-D of the Wealth Tax Rules, 1957, will not apply and for determining the value of unquoted shares for the purpose of wealth tax, their value will have to be ascertained under the break-up method after deducting the provision for gratuity based on actuarial valuation from the value, of the assets of the company.
In the decision in Bharat Hari Singhania v. CWT (1994) 207 ITR 1, the Supreme Court was concerned with Explanation II (i)(e) to rule 1-D of the Rules read with section 7(l) of the Wealth Tax Act in the matter of deducting capital gains tax while valuing the unquoted equity shares under rule 1-D while ascertaining the value according to the break-up method. But, according to the facts of this case, we are concerned with the provision contained in Explanation II (ii) (f) to rule 1-D in the matter of deducting the provision for gratuity liability while ascertaining the value of unquoted equity shares under, the break-up method.
Thus, considering the facts arising in this case in the light of the judicial pronouncements cited (supra), especially the decisions of the Supreme Court in Vazir Sultan Tabacco Co. Ltd.'s case (1981) 132 ITR 559 and Shree Sajjan Mills' case (1985) 156 ITR 585, we consider that there is no infirmity in the order passed by the Tribunal in holding that while valuing the unquoted equity shares under rule 1-D of the Wealth Tax Rules read with Explanation II (ii) (f) to rule 1-D, the provision of gratuity is deductible while ascertaining the value on the basis of the break-up method.
So far as the second question is concerned, it relates to discount of 30 per cent allowed by the Tribunal while valuing the unquoted equity shares under the break-up method, as per the provisions contained in rule 1-D of the Wealth Tax Rules. A similar question came up for consideration before this Court in Tax Cases Nos.1150 and 1151 of 1982 CGT v. Sundaram Industries Ltd. (1996) 222 ITR 710, dated February 1, 1996, and this Court held that the discount of 30 per cent given is in order for the reasons stated therein. Accordingly, the issue arising under question No.2 is covered by the above decision of this Court in favour of the assessee. In that view of the matter, we answer the questions referred to us in the affirmative and against the Department. There will be no order as to costs.
A.A./1349/FC ??????????????????????????????????????????????????????????? Order accordingly.