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SUPREME COURT OF INDIA
J.C. SHAH, V. RAMASWAMI, AND V. BHARGAVA JJ.
Standard Mills Co., Ltd., Bombay, Appellant
Versus
Commissioner of Wealth Tax, Bombay, Respondent.
Civil Appeal No. 1129 of 1965, D/-6-10-1966.
Advocates appeared
M/s. K. J. Kolah and N.D. Karkhanis Advocates, and Mr. O. C. Mathur, Advocate of M/s. J. B. Dadachanji and Co., for Appellant; Mr. B. Sen, Senior Advocate, (M/s. R. Ganapathy Iyer and R. N. Sachthey, Advocates, with him) for Respondent.
WEALTH TAX - Net wealth - Deductions - Liability for gratuity to workmen and staff as per the award of Industrial Court and Labour Appellate Tribunal - Whether allowable as a deduction in determining the net wealth of the assessee under S. 7 (2) read with S. 2 (m) of the Wealth-tax Act - Held, No.
Fact of the Case:
The appellant Company claimed, in proceedings for assessment of wealth-tax, that the following four amounts be deducted in the computation of its net wealth: (1) Rs. 29,44,421 in respect of income-tax liability relating to the assessment year 1957-58. (2) Rs. 3, 70,083 in respect of business profits tax liability. (3) Rs. 20,23,500 in respect of proposed dividend. (4) Rs. 25,02,675 on account of accrued liability for gratuity to workmen and staff as per the award of Industrial Court and Labour Appellate Tribunal.
Finding of the Court:
The claim was rejected by the Wealth-tax Officer. The Appellate Assistant Commissioner accepted the claim of the appellant Company in respect of the last instalment of the advance tax for which a notice of demand had been issued, and rejected the claim in respect of the rest. The Income-tax Appellate Tribunal upheld the claim of the appellant Company in respect of the 1st, 2nd and the 4th items and rejected the claim in respect of the 3rd item.
Issues: Whether on the facts and circumstances of the case the liability in the sum of Rs. 25,02,675 which arose as a result of the awards, dated 28th October 1948, 28th November 1956 and 17th October 1954 before the valuation date or any part thereof is allowable as a deduction in determining the net wealth of the assessee under S. 7 (2) read with S. 2 (m) of the Wealth-tax Act ?
Ratio Decidendi: The liability to pay gratuity to the employees of the appellant Company on determination of employment is a mere contingent liability which arises only when the employment of the employee is determined by death, incapacity, retirement or resignation. The relevant terms of the awards, dated October 28, 1948. November 28, 1956 and October 17, 1954 are as follows : "Gratuity should be paid * * *on the following scale :- 1. On the death of an employee, while in service of the company or on his becoming physically or mentally incapacitated for further service - one month s salary for each year of service. * * * 2. On voluntary retirement or resignation of an employee- After 15 years continuous service in the compoany-15 month s salary. 3. On termination of his service by the company - (a) After 10 years continuous service but less than 15 years service in the comapny-3/4 the of one month s salary for each year of service. (b) After 15 years continuous service in the company-15 months salary. 4. A gratuity will not be paid any employee who is dismissed for dishonesty or misconduct." The right to obtain gratuity under the awards arises only when there is determination of employment and not before. The liability does not exist in praesenti: it is contingent upon the determination of employment.
Final Decision: Appeal partially allowed.
Judgment
SHAH, J. : For the assessment year 1957-58 the appellant Company claimed, in proceedings for assessment of wealth-tax, that the following four amounts be deducted in the computation of its net wealth :
(1) Rs. 29,44,421 in respect of income-tax liability relating to the assessment year 1957-58. This amount included Rs. 2,95,869 representing the last instalment of advance tax under S. 18A in respect of which a notice of demand had been issued.
(2) Rs. 3, 70,083 in respect of business profits tax liability.
(3) Rs. 20,23,500 in respect of proposed dividend.
(4) Rs. 25,02,675 on account of accrued liability for gratuity to workmen and staff as per the award of Industrial Court and Labour Appellate Tribunal.
The claim was rejected by the Wealth-tax Officer. The Appellate Assistant Commissioner accepted the claim of the appellant Company in respect of the last instalment of the advance tax for which a notice of demand had been issued, and rejected the claim in respect of the rest. The Income-tax Appellate Tribunal upheld the claim of the appellant Company in respect of the 1st, 2nd and the 4th items and rejected the claim in respect of the 3rd item.
2. At the instance of the Commissioner, the following four questions were referred to the High Court of Judicature at Bombay under S. 27 (1) of the Wealth-tax Act 27 of 1957:
"(1) Whether on the facts and circumstances of this case the last instalment of advance tax in the sum of Rs. 2,95,869 paid by the assessee after the valuation date in accordance with the notice of demand, dated 20th October 1956 is an admissible deduction under Ss. 7 (2) and 2 (m) of the Wealth-tax Act for the purpose of computation of the net wealth of the assessee for the assessment year 1957-58?
(2) Whether on the facts and circumstances of the case in computing the net wealth of the assessee under S. 7 (2) read with S. 2 (m) of the Wealth-tax Act the liability for income-tax and business profits tax could be allowed as a dedication ?
(3) Whether on the facts and circumstances of the case the liability in the sum of Rs. 25,02,675 which arose as a result of the awards, dated 28th October 1948, 28th November 1956 and 17th October 1954 before the valuation date or any part thereof is allowable as a deduction in determining the net wealth of the assessee under S. 7 (2) read with S. 2 (m) of the Wealth-tax Act ?
(4) Whether on the facts and circumstances of the case the sum of Rs. 20, 23,500 being the provision made for dividends and shown as a liability in the balance sheet of the assessee company could be allowed as a deduction in computing the net wealth of the assessee company ?"
At the hearing before the High Court, the fourth question was not pressed by the appellant Company. The High Court answered the first question in the affirmative, the second question in the affirmative insofar as it related to the estimated liability of business profits tax subject to verification by the Wealth-tax Officer, and in the negative insofar as it related to the estimated liability of income-tax. The third question was answered in the negative. In this appeal the Company challenges the correctness of the answers to the second part of the second question and the third question.
3. The second question insofar as it relates to estimated liability for payment of income-tax needs no detailed consideration, for the answer thereto will be governed by the judgment of this Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax (Central), Calcutta, (1966) 59 ITR 767: It was held by this Court in that case that liability to pay income-tax was a present liability though the tax because payable after it was quantified in accordance with ascertainable data: there was, therefore, a perfected debt at any rate on the last day of the accounting year and not a contingency liability, and the amount of the provision for payment of income-tax in respect of the veal of account was a "debt owed" within the meaning of S. 2 (m) on
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