COMMISSIONER OF WEALTH TAX Vs. AJIT MILLS LIMITED

JUDGEMENT

(1.) THESE questions are referred to us for opinion in this reference, two at the instance of the Commissioner and one at the instance of the assessee. The third question which has been referred to us at the instance of the assessee has not been presed by Mr. Kaji, learned advocate appearing on behalf of the assessee, and it is, therefore, not necessary to state any facts relating to the same. So far as the other two questions are concerned, the answers to them are concluded by two decisions given by this court, one in Commissioner of Wealth -tax v. Raipur . and the other in Wealth -tax Reference No. 3 of 1961, Commissioner of Wealth -tax v. Ajit Mills Ltd., the latter being an unreported decision given on 18th October, 1962. However, in order to understand how the questions arise, it is necessary to state briefly a few facts. The assessee is a limited company carrying on business of manufacturing textile goods and it is common ground between the parties that the accounts of the business are maintained regularly by the assessee. The assessee was assessed to wealth -tax for the assessment year 1957 -58, the relevant valuation date being 31st March, 1957, and the assessment was made by the Wealth -tax Officer under section 7(2)(a) of the Wealth -tax Act. The method adopted was what is commonly known as the global method of valuation and what the Wealth -tax Officer did was to determine the net value of the assets of the business as a whole having regard to the balance -sheet of the business as on the valuation date, namely, 31st March, 1957. One of the items in dispute relates to the valuation of the fixed assets and it is, therefore, necessary to know how the fixed assets were shown in the balance -sheet and what was the claim in regard to valuation made on behalf of the assessee. On the fixed assets the revenue allowed normal depreciation, initial depreciation and extra -shift allowance in computing the assessable income of the assessee for the purpose of income -tax. Development rebate was also allowed but it is not necessary to refer to the same since no claim for deduction of the amount allowed by way of development rebate in ascertaining the net value of the fixed assets was made by the assessee. Though the revenue allowed normal depreciation, initial depreciation and extra -shift allowance to the assessee at the rates permissible under the Income -tax Act, the assessee did not depreciate the value of its fixed assets correspondingly in its books of account, but provided depreciation on a different basis and showed the value of the fixed assets after taking into account such depreciation. The result was that, on the valuation date, the written down value of the fixed assets, after taking into account normal depreciation, initial depreciation and extra -shift allowance allowed for the purpose of income -tax assessment, was Rs. 9,92,192, but in the books of account of the assessee the fixed assets were valued at Rs. 23,21,726 and the balance -sheet as at 31st March, 1957, also therefore showed the fixed assets at Rs. 23,21,726. The assessee returned its total wealth on the basis of the fixed assets being valued at Rs. 9,92,192 and the contention of the assessee was that though the balance -sheet showed the fixed assets at the value of Rs. 23,21,726, that figure was liable to be adjusted and brought in line with the written down value of the fixed assets according to the income -tax records. The contention was rejected by the Wealth -tax Officer who took the view that, for the purpose of computing the total wealth of the assessee under section 7(2)(a), the value of the fixed assets was liable to be taken as Rs. 23,21,726, being the figure appearing in the balance -sheet of the assessee. The assessee also claimed deduction of an amount of Rs. 4,11,570, being the estimated value of the liability for gratuity payable by the assessee to its clerks, technicians and workers on the basis of two agreements dated 22nd June, 1949, and 2nd July, 1952, and the award of the Industrial Tribunal dated 16th September, 1957. This deduction was also disallowed by the Wealth -tax Officer on the ground that the provision for gratuity was not made in the books of account of the assessee and, moreover, the major portion of the provision was relating to gratuity payable to the employees in the event of certain contingencies and the amount claimed could not, therefore, be regarded as a debt owing by the assessee on the valuation date. The assessee thereupon carried the matter in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner also took the view that the depreciated value of the fixed assets as shown in the balance -sheet of the assessee was the right value to be taken into account for the purpose of computation of the total wealth of the assessee and, so far as the claim for deduction in respect of the amount by way of gratuity was concerned, the Appellate Assistant Commissioner held that until such time as the amount payable to an employee by way of gratuity was determined and an intimation was sent to that person, no debt would come into being and it could not, therefore, be said that on the valuation date any debt with regard to gratuity was owing by the assessee to the employees. The Appellate Assistant Commissioner accordingly rejected both the contentions of the assessee. The matter was carried further by way of appeal to the Tribunal. The Tribunal held that the value of the fixed assets of the business should be taken to be the cost of the fixed assets less normal depreciation and extra -shift allowance allowed by the income -tax authorities and accordingly decided this question partly in favour of the assessee. In regard to the claim for deduction of the amount in respect of gratuity, the Tribunal took the view that, since the agreements dated 22nd June, 1949, and 2nd July, 1932, were made prior to the valuation date, there was accrued liability of the assessee in respect of gratuity on the valuation date and the assessee was entitled to treat the liability accrued under the two agreements as the liability of the business on the valuation date. The Tribunal observed that the liability created by the award dated 16th September, 1957, could not be taken into consideration in ascertaining the net wealth of the assessee on the valuation date since the award came into existence subsequent to the valuation date. Taking this view in regard to the two contentions which were urged before it, the Tribunal directed the assessment of the assessee to modified on the lines indicated by it. We are told by the assessee that, pursuant to this order of the Tribunal, the Income -tax Officer carried out the necessary modifications in the assessment of the assessee. The Commissioner was obviously dissatisfied with the view taken by the Tribunal on these two questions and he accordingly made an application for a reference and on that application the following two questions were referred to this court for its opinion :

(2.) AS we have pointed out earlier, a third question was also referred to us at the instance of the assessee; but that question does not survive for consideration in view of the statement made by Mr. Kaji on behalf of the assessee that he does not press that question.

(3.) THAT takes us to the second question and that relates to the amount claimed by the assessee in respect of gratuity payable by the assessee to the clerks and the technicians in the employment of the assessee. The amount claimed in respect of gratuity payable to the workers under the award dated 16th September, 1957, having been disallowed by the Tribunal, no question arises in regard to it. he only question which survives now is in regard to the amount relating to gratuity payable by the assessee to the clerks under the agreement dated 22nd June, 1949, and to the technicians under the agreement dated 2nd July, 1952. The assessee estimated the liability for payment of gratuity to the clerks and technicians as on the valuation date at Rs. 66,000 and Rs. 11,820 respectively and the total claim for deduction on this account, therefore, amounted to Rs. 77,820, which is the amount referred to in the second question. Now it is clear that the amount claimed by the assessee by way of deduction in respect of gratuity payable to the clerks and technicians under these two agreements could not be said to be a debt owing by the assessee on the valuation date but was payable only on fulfilment of contingencies set out in those agreements. The Wealth -tax Officer and the Appellate Assistant Commissioner were, therefore, certainly right in taking the view that the amount claimed by the assessee did not constitute a debt owing by the assessee on the valuation date. But that would not conclude the matter against the assessee. As we have pointed out in Commissioner of Wealth -tax v. Ajit Mills Ltd., even a contingent liability can be taken into account while computing the net wealth of the assessee under section 7(2)(a). The contingent liability would have to be estimated and the estimated value of the contingent liability would be a permissible deduction in computing the net wealth of the assessee. The Wealth -tax Officer and the Appellate Assistant Commissioner overlooked this aspect of the question and did not, therefore, have any occasion to examine whether the estimate of the liability for payment of gratuity as on the valuation date made by the assessee was correct or not. When the matter came before the Tribunal, the Tribunal took the view and we will here quote its own words :