BALASUBRAHMANYAN J.

This judgment will dispose of all these tax cases since they raise an identical question of law on identical facts Shri Ramalinga Mills Private Ltd. and Aruppukkottai Shri Jayavilas Private Ltd. are two private limited companies in which all the assessees who figure in these references are holding equity shares. Some of the assessees are partners in "Shri Jayajothi and Company", which is a partnership firm. Each of these concerns is carrying on business with the aid of employees who have had a number of years of service to their credit. The management in each of these concerns took a decision to create gratuity fund in terms of the scheme in Pt. C of Sch. IV to the I.T. Act, 1961. In each of these concerns a gratuity fund was established with effect from January 1, 1973. They also applied to the Commissioner for the approval of the gratuity funds so created. The approval by the Commissioner was granted on March 9, 1976, but with effect from January 1, 1973

The common question in all these references relates to the valuation of shares in the two companies and the valuation of the partnership interest in the firm held by the assessees on all valuation dates which fall subsequent to January 1, 1973. It is needless to say that the shares held by the assessees in Shri Ramalinga Mills Private Ltd. and Aruppukkottai Shri Jayavilas Private Ltd. are not shares quoted in the share market. The W.T. Rules, 1957, make provision for ascertaining the value of unquoted equity shares. The relevant rule is r. ID. The rule merely incorporates what goes by the name of "break-up method of valuation" of shares. Under this system, the surplus of the assets of a company over the liabilities, which leaves us with the net worth of the company, is regarded as the first step in the valuation of the shares in the company. The individual market value of a share, under this method, is to be regarded as a fraction of the net worth of the company, arrived at by dividing the company's net worth by the number of shares in the company. Rule ID, however, lays down that for the purposes of reckoning, in the first instance, the assets and liabilities of the company, certain liabilities should not be taken into account and must be excluded. One such exclusion relates to any amount representing contingent liabilitiesA similar provision is found in the W.T. Rules as respects the valuation of a partner's share. The relevant provisions are to be found in rr. 2, 2A, 2C, 2D and 2E. Under r. 2, for ascertaining the market value of the partner's share, the net wealth of the firm as a whole as on the valuation date must first be reckoned. The share of the partner must, thereafter, be derived from the net wealth of the partnership. Rule 2A provides for the method by which the net wealth of the firm should be ascertained. Rule 2A provides that the net wealth of the firm's business as a whole has to be ascertained by taking the balance-sheet of the business, ' but subject to the adjustments specified in rr. 2D and 2E. Rule 2E names certain liabilities of the firm which should not be taken into account in ascertaining the firm's net worth. One such exclusion relates to any provision made in the balance-sheet for meeting any future or contingent liability

We had earlier observed that, in the case of the two companies, Shri Ramalinga Mills Private Ltd. and Aruppukkottai Shri Jayavilas Private Ltd., as well as in the case of the partnership firm, Shri Jayajothi and Company, approved gratuity funds had been created for the benefit of the respective employees of the three concerns in accordance with the provisions of Pt. C of Sch. IV to the I.T. Act 1961. The Commissioner had granted his approval to the gratuity funds so created. Under r. 104 of the I.T. Rules, 1962, the employer who has created an approved gratuity fund will have to make an initial contribution to the fund in respect of the past services of the employees admitted to the benefits of the f