JOSEPH J. CHAKOLA VS COMMISSIONER OF WEALTH TAX
1998 P T D 3547
[231 I T R 239]
[Kerala High Court (India)]
Present: V. V. Kamat and P.A. Mohammed, JJ
JOSEPH J. CHAKOLA
versus
COMMISSIONER OF WEALTH TAX
I.T.Rs. Nos. 167 and 168 of 1991, decided on 07/08/1996.
Wealth tax-- ---
---- Valuation of assets ---Unquoted equity shares of company---Gratuity liability shown in balance-sheet less than that ascertained by actuarial valuation---Deductible in valuing share---Wealth Tax Rules, 1957, R.1-D.
Provision for payment of gratuity made on the basis of actuarial valuation is an existing liability, though the payment of the amount is at a future date.
Where the gratuity liability shown in the balance-sheet of the company in question was less than that ascertained on actuarial valuation:
Held, that the gratuity liability shown in the balance-sheet was admissible as a deduction in the valuation of the shares of the company under rule 1-D of the Wealth Tax Rules, 1957.
John J. Chackola v. CED (1997) 224 ITR 34 (Ker.) fol.
CWT v. Gopinathan Nair (K.) (1976) 103 ITR 23 (Ker.); Shree Sajjan Mills Ltd. v. CIT (1985) 156 ITR 585 (SC).; Standard Mills Co. Ltd. v. CWT (1967) 63 ITR 470 (SC) and Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559 (SC) ref.
M.C. Sen, Parvathy Menon and A. Prakash Thomas for the Assessee.
P.K.R. Menon and N.R.K. Nair for the Commissioner.
JUDGMENT
V.V. KAMAT, J. ---These references relate to the assessment years 1979-80 and 1980-81 in the context of wealth tax proceedings. We are expected to answer the following two questions:
"(1)Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that in view of the decision of the Kerala High Court in CWT v. Gopinathan Nair (K.) (1976) 103 ITR 23 the claim that the gratuity liability shown in the balance-sheet was not an admissible deduction for valuation of the shares of a company under rule 1-D of the Wealth Tax Rules?
(2)Whether, in view of the decisions of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559 and Shree Sajjan Mills Ltd. v. CIT (1985) 156. ITR 585, the Tribunal ought to have held that the decision of the Kerala High Court stood overruled and gratuity liability actuarially determined is a 'debt owed' and was an admissible deduction?"
Reading these questions it would be clear that the first one relates to the gratuity liability shown in the balance-sheet whether it is admissible deduction for valuation of the shares of the company under rule 1-D of the Wealth Tax Rules and second one, has a facet dealing with the determination of the situation of law.
The references relate to the claim of deduction of liability for gratuity in computing the value of the shares of Chackolas Spinning and Weaving Mills. The deduction is rejected by the Wealth Tax Officer and the first appellate authority, the Appellate Assistant Commissioner, held that the gratuity liability cannot be treated as liability of the company in working out the value of shares under rule 1-D. This decision was taken up before the Tribunal and the questions referred arise in regard thereto. Learned counsel, Shri M.C. Sen, brought to our notice the decision of this Court in I.T:R. Nos. 166 of 1991, John J. Chackola v. CED (1997) 224 ITR 34, decided on March 29, 1996 (to which one of us---myself was a party). The proceedings in the said ITR No. 166 of 1991, John J. Chackola v. CED (1997) 224 ITR 34, relate to the same company ---Chackolas Spinning and Weaving Mills, and also to the claim for deduction of the amount of the same character shown in the balance-sheet. The amount is also less than the liability on actuarial valuation, the said reference related to proceedings under the Estate Duty Act but posing the same problem.
The company in which the shares were held by the concerned parties had made a provision for gratuity liability in the balance-sheet.
This Court has held, in paragraph 8 thereof, that the amount concerned in regard to which deduction is claimed will have to be ascertained as to whether it represents a contingent liability or whether it represents an existing ascertained liability. We have taken the view that this is a matter which should be considered independent of the provisions of the concerned taxation statute, whether it is the Wealth Tax Act, Income-tax Act or any other allied enactments, even if that question arises under any, of the said enactments.
We have taken into consideration all the reported decisions. Illustratively, we have referred to the decision of this Court in CWT v. K. Gopinathan Nair. (1976) 103 ITR 23. We have also considered the decisions of the Supreme Court in Standard Mills Co. Ltd. v. CWT (1967) 63 ITR.470 and Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559.
We have observed that the setting apart of amounts gets reflected with reference to certain situations. The amounts are retained/appropriated or set apart by the company and shown in the balance-sheet. It is for making provision for taxation for retirement gratuity and also for proposed dividends out of the profits and other surplus sometimes shown as other resources. The situation becomes the concern of various taxation statutes. We have on analysis referred to two concepts emerging out of the position of law in regard thereto. They are "reserve" and "provision", respectively. A provision is a charge against the profits to be taken into account whereas a reserve is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital to be employed in the business. On the basis of analysis of the situation we have reached the conclusion that if in the balance-sheet the provision for gratuity is much less than the liability which has been ascertained on actuarial valuation which is seen in the proceedings evident from the certificates produced in regard thereto, the problem of determination of the value of unquoted shares is solved. Ultimately, we have observed that the essential question for determination is as to whether the liability is a contingent or existing one because if the liability is contingent, it cannot be considered for deduction. However, at the other end, if it is an existing and ascertained liability, it can form part of an item for the consequential benefit. In fact, following the decision of the apex Court in Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559, a definite view is expressed that the provision for payment of gratuity made on the basis of actuarial valuation is an existing liability and that it is a liability in praesenti, though the payment of the said amount is at a future date.
The factual matrix leading to the questions referred is the same although the earlier decision dated March 29, 1996 (see (1997) 224 ITR 34) related to the proceedings under the Estate Duty Act whereas the present proceedings relate to the Wealth Tax Act. We have considered and held that the problem of determination of the character of the liability is irrespective of the statutes concerned in regard to advantages as a result thereof.
Learned senior standing counsel for taxes contended that the statutory provisions of the enactment in question for application made difference in the situation of application. In fact learned counsel placed reliance on the decision of the Supreme Court in Standard Mills Co. Ltd. v. CWT (1967) 63 ITR 470 in support of the contention, particularly the observations at page 476 in regard thereto. This Court has already considered the said decision and pointedly observed that the real question for determination is the character of the liability as to whether the liability is contingent or existing. We have held that this determination would reflect its application to various taxation statutes. It is not possible to consider the submission in view of the judgment in I.T.R. No.166 of 1991, John J. Chackola v . CED (1997) 224 ITR 34 (Ker.) For all the above reasons we answer question No. l in the negative---in favour of the assessee and against the Revenue and question No.2 need not be answered in view of the judgment of this Court in I.T.R. No. 166 of 1991, John J. Chackola v. CED (1997) 224 ITR 34 (Ker.).
A copy of the judgment under the seal of this Court and the signature of the Registrar shall be sent to the Income-tax Appellate Tribunal, Chochin Bench, for passing consequential orders.
M.B.A./1857/FCOrder accordingly.