JUDGMENT
K.T. Desai, C.J.
1. This is a reference under section 27(1) of the Wealth-tax Act, 1957, at the instance of the Commissioner of Wealth-tax. The assessee in this case is Ajit Mills Limited, a company manufacturing cloth at Ahmedabad. The relevant assessment year is 1957-58, the valuation date for the purpose of wealth-tax assessment being 31st December, 1956. The assessee-company filed its return of wealth-tax showing the value of its fixed assets at Rs. 16,66,248. In the balance-sheet, however, the value of the fixed assets shown at Rs. 22,92,525. The sum of Rs. 6,26,277 represented the difference between the value of the assets. The assessee claimed before the Wealth-tax Officer that he was entitled to a deduction of this sum of Rs. 6,26,277 when the Wealth-tax Officer wanted to proceed to tax the assessee under the provisions contained in section 7(2) having regard to the balance-sheet of the company. The assessee also claimed a deduction in respect of a sum of Rs. 3,91,645 on account of provision for the tax payable up to and inclusive of the assessment year 1957-58. This sum has been subsequently reduced to Rs. 3,61,645 being the actual amount of income-tax and super-tax payable by the assessee after taking into account the amount paid by way of advance payment of tax. The assessee also claimed a deduction in respect of a sum of Rs. 4,78,853 on account of the alleged liability for gratuity based on certain awards and agreements. The assessee also preferred a claim for deduction on account of proposed dividends. As the question in relation to the proposed dividends has not been pressed before us, we will not advert to the facts in connection with the same. The Wealth-tax Officer came to the conclusion that the correct market value of the machinery was not only more than the value shown by the assessee in return but also exceeded the value shown in the books of account. He adopted the value as shown in the books of account for the purpose of assessment to tax. We may mention that the value as shown in the books of account was the same as the value mentioned in the balance-sheet. The Wealth-tax Officer applied the provisions of section 7(2)(a) of the Wealth-tax Act and determined the value of the fixed assets at Rs. 22,92,525. As regards the liability for tax, the Wealth-tax Officer took the view that the assessment for the year question could not only be made after 1st April, 1957, and that, unless the assessment proceedings were finalised, the amount of tax could not be treated as a debt due by the assessee and he disallowed the same. As regards the liability for gratuity, he held that as provision for gratuity in respect of the amount claimed had not been made in the books of account of the company and as the major portion of the provision related to gratuity payable to labourers in the event of certain contingencies and the award mentioning the gratuity scheme had come into force from September, 1957, the amount could not be regarded as a debt on the valuation date and he disallowed the same. The assessee preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner confirmed the decision of the Wealth-tax Officer as regards the value of the assets. As regards the claim for deduction on account of provision for taxation, he held that as a notice of demand had been issued under section 18 in the month of May, 1956, the last installment payable under the said notice of demand in the month of March, 1957, was outstanding on the valuation date and he reduced the amount of the net wealth by Rs. 8,387, being the amount of such last installment which had become due but which was not payable on the valuation date. As regards the liability for gratuity, he disallowed the same holding that no debt had come into being in connection therewith on the valuation date. The matter was carried further to the Appellate Tribunal. In connection with the claim for gratuity the Tribunal took the view that if the date of the award under which the same was payable was prior to the valuation date, then the liability arising therefrom had to be taken into account in ascertaining the assessee’s net wealth and directed the Wealth-tax Officer to verify the calculation made by the assessee in respect of such liability and to allow a deduction on account thereof, “in respect of gratuity ascertained in the case of each employee on the basis of the awards made prior to the valuation date”. As regards the claim made on account of taxes, the Tribunal, following the Full Bench Decision of the Tribunal in the case of Raipur Manufacturing Company Ltd. in Wealth-tax Applications Nos. 87 and 99 of 1958-59, held that the unpaid income-tax liability relating to the year of account should be taken into account in ascertaining the net wealth of the assessee-company on the valuation date. In connection with the claim made on the basis of the written down value of assets of the company following its decision in the case referred to above, it directed that ordinary depreciation should be allowed on the basis that an asset loses in value on account of use and wear and tear. At the instance of the Commissioner this reference has been made referring for our determination the questions following :
“(1) Whether, on the facts and circumstances of the case, in ascertaining the net wealth of the assessee as on the valuation date, the taxation liability of Rs. 3,61,645 up to and including the assessment year 1957-58 should be taken into account ?
(2) Whether, on the facts and circumstances of the case, in ascertaining the net wealth of the assessee, the accrued liability for gratuity payable to the labourers and workers in accordance with the labour awards and agreements effective as on the valuation date should be taken into account ?
(3) Whether, on facts and circumstances of the case, in ascertaining the net value of the depreciable assets of the assessee-company, adjustments should be made in accordance with section 7(2) in the balance-sheet by substituting the written down value completed under the Indian Income-tax Act for the value of the block assets as shown in the balance-sheet ?
(4) Whether, on the facts and circumstances of the case, in ascertaining the net wealth of the assessee as on the valuation date the liability for proposed dividends of Rs. 2,00,625 should be taken into account ?”
2. We have discussed at considerable length the question whether taxation liability should be deducted in ascertaining the net wealth of the assets on the valuation date in Wealth-tax Reference No. 1 of 1961 in the case of Commissioner of Wealth-tax v. Raipur Manufacturing Co. Ltd. Following that decision, we answer question No. 1 in the affirmative.
3. As regards the second question relating for gratuity, a demand has been made for a deduction of a sum of Rs. 4,78,852-14-0 in connection therewith. The liability for payment of gratuity has arisen under certain agreements and awards. By an agreement dated 22nd June, 1949, entered into between the Ahmedabad Mill Owners’ Association, Ahmedabad, and Textile Labour Association, a representative union under the Bombay Industrial Relations Act, it was provided that gratuity should be paid to all clerks employed in the textile mills in the City of Ahmedabad covered by the agreement on the following basis :
“(1) On the death of an employee while in the service of the company one month’s salary for each year of service subject to a maximum of 15 month’s salary to be paid to his heirs or executors or nominees.
(2) On voluntary retirement or resignation of an employee after 15 years’ continuos service in the company : 15 months’ salary.
(3) On termination of his service by the company –
(a) after 10 years’ continuous service but less than 15 years’ service in the company 3/4th of one month’s salary for each year of service.
(b) After 15 years’ continuous service in the company : 15 months’s salary.
(4) A gratuity will not be paid to any employee who is dismissed for dishonesty or misconduct, but will be paid to the employees who have been discharged between 4-5-1949 and the date of the registration of this agreement.
Salary for the purpose of calculating gratuity shall mean substantive salary (exclusive of allowance of an employment of the mill). The mills may at their discretion grant gratuity in excess of the above.”
4. A statement has been filed before us showing that under this agreement the amount payable to the members of the clerical staff of the company who had on the valuation date completed 15 years of service in the company would be Rs. 57,217-8-0 on the basis of the substantive salary of the said employees on the valuation date if the said employees would cease to be in the employment of mills otherwise than on account of dismissal for dishonesty or misconduct on the valuation date. The statement further shows that a sum of Rs. 10,167-8-0 would be payable by the assessee to the members of the clerical staff of the company who had put in 10 years of continuous service or more but less than 15 years’ continuous service in the company on the basis that they all cease to be in the employment of the company on the valuation date. These sums have been reduced by ten per cent. in order to arrive at the valuation date. On 21st April, 1958, Board of Arbitrators, Ahmedabad, consisting of Shri Shantilal Mangaldas and Shri Somnath P. Dave made and award in connection with the demand made by the Textile Labour Association, Ahmedabad, for salary grades, etc., of the technical and supervisory staff employed in Ahmedabad Mills. Amongst various matters provided in that award is a provision relating to gratuity. The award itself provides relating to gratuity would come into force from 1st January, 1957, i.e., after the valuation date. There is another award bearing date 16th September, 1957, made by the Industrial Court, Bombay, whereunder provision has been made for gratuity. This award came into force from 16th September, 1957. The sums of Rs. 2,59,152-15-0 and Rs. 2,05,519-15-0 less 10 per cent. thereof have been claimed by the assessee on account of the liability incurred by the assessee under the said awards dated 21st April, 1958, and 16th September, 1957. As the liability under these two awards was in existence on the valuation date and was enforceable on the assessee in respect of a period subsequent thereto, the same can under no circumstances be taken into account and Mr. Kaji, the learned advocate for the respondent, has not pressed for any relief in connection with the amounts payable under the said two awards and has confined his claim to the sums of Rs. 57,217-8-0 and Rs. 10,167-8-0 less 10 per cent. thereof.
5. As regards the liability in respect of the sum of Rs. 10,167-8-0 less 10 per cent. thereof, a deduction in respect of the same is claimed on the footing that there was an existing accrued liability in connection with the same. Under clause 3 of the agreement, the company is under an obligation to the employees of the company after 10 years’ continuous service but less than 15 years’ service, to pay 3/4th of one month’s salary for each year of service on termination of the service by the company. The condition precedent to the attachment of any obligation to pay under these provisions is the termination of the service by the company. If the company does not terminate the service but before completion of 15 years’ continuous service the employee voluntarily retires or resigns, then the company would be under no obligation to pay any sum of money whatsoever to the employee by way of gratuity. It is not a liability which would be said to have ripened into a debt. It could not be said to be an existing obligation. It is an obligation which would attach on the condition precedent, namely, the termination of the service by the company being fulfilled. It is a contingent liability and a liability in connection therewith cannot be regarded as a debt owing by the company.
6. As regards the liability which it is said has accrued in connection with the employees who have put in 15 years’ continuous service, it was very strongly urged that the obligation in connection with the same was an existing obligation. It was said that the termination of the service of the employees may be brought either by the voluntary retirement or resignation of the employees or by the termination of the service by the company. In both the events the company would be under an obligation to pay the amount due in connection with gratuity. If the termination of service was brought about by reason of the death of the employee, even then the company would be under an obligation to pay gratuity to the employee. The only circumstances under which the company would not be under an obligation to pay gratuity would be where an employee after completing 15 years’ service had been dismissed for dishonesty or misconduct. If a liability could be said to have accrued and the company could be said to be under an obligation to discharge that liability, then the fact that by reason of subsequent events, namely, dismissal for dishonesty or misconduct, the liability would cease, would not make any difference in the situation. A company which has employees in its service and is under an obligation to pay to the employees a retirement benefit like gratuity incurs certain liability in connection therewith which might ripen into an obligation to pay a sum of money to the employees on certain events occurring, and the company would have the right to make a provision in its balance-sheet in connection with such liability. In fact, when we turn to the balance-sheet of this very company for the year 1956, we find that the company has created a staff gratuity, that the balance in that account as per previous years’ balance-sheet was Rs. 10,000 and that a further sum of Rs. 7,936 has been appropriated by the company from the profits of year 1956 to augment this fund and the amount of that fund as on 31st December, 1956, came to Rs. 17,936. The company has, in fact, during the year under consideration paid monies on account of gratuity to its employees and in the profit and loss account there is an item of Rs. 27,25,437 in respect of salaries, wages, retrenchment compensation, bonus and gratuity “including the sum of Rs. 7,936 appropriated from the year’s profit to the staff gratuity fund. In the balance-sheet of the company there is another interesting item on the liabilities side under the heading “Contingent Liability”. No amount is mentioned as against this liability; but it is stated as under :
“Gratuity payable to clerical staff of the company, no adequate provision is made as amount cannot be determined.”
7. In this case the Wealth-tax Officer has proceeded under section 7(2) of the Wealth-tax Act. In doing so, he is under an obligation to determine the net value of the assets of the business as a whole having regard to the balance-sheet of such business as on the valuation date. He is no doubt entitled to make adjustments as the circumstances of the case may require. What we have to consider in this case is whether there are any circumstances which require the Wealth-tax Officer to make any adjustments in the balance-sheet in the manner submitted by the company. As has been held by the Supreme Court in the case of Indian Hume Pipe Co. Ltd. v. Workmen.
“Gratuity is a kind of retirement benefit like the provident fund or pension. At one time it was treated as payment gratuitously made by the employer to his employee at his pleasure, but as a result of a long series of decisions of industrial tribunals gratuity has now come to be regarded as of legitimate claim which workmen can make and which, in a proper case, can give rise to an industrial dispute. Gratuity paid to workmen is intended to help them after retirement, whether the retirement is the result of the rules of superannuation or of physical disability. The general principle underlying such gratuity schemes is that their length of service workmen are entitled to claim a certain amount as a retiral benefit.”
8. A company undertakes a liability or a burden when it is under an obligation to pay gratuity to its employees under the terms of an agreement or an award or as a condition of service. As observed by the House of Lords in the case of Southern Railway of Peru Ltd. v. Owen (Inspector of Taxes), at page 753 :
“…… One way, which is certainly the simplest one, is to let the payments made fall entirely as expenses of the year of payment and ignore any question of making provision for the maturing obligation during the years of service that precede it….. It has one considerable advantage : no element of estimate or valuation appears in the profit assessment and nothing is charged to profits except the actual cash outgoing. But, when this has been conceded, I think that there is the very serious disadvantage to be set against the cash basis that it affords a comparatively inefficient method of arriving at the true profits of any one year. The retirement benefit is not, obviously, paid to obtain the services given in the year of retirement. The incidence of retirement payments must be variable from year to year, and they may inordinately depress the profits of one year just as they may inordinately inflate the profits of another. It is true that the company carries on business from one year to another, but it is not charged on the average of its annual profits.”
9. If a company makes a provision for this liability it would be a provision liable to be taken into account in arriving at the true profits of the company for a given year under section 10(1) of the Income-tax Act. What we have to consider here is not a case under the Income-tax Act but we have to consider the matter under the Wealth-tax Act. In the present case, we have to consider the matter under section 7(2)(a) as the Wealth-tax Officer has proceeded to determine the net value of the assets of the business as a whole having regard to the balance-sheet of such business on the valuation date. In connection with this obligation the company itself has not been able to put any value thereon. In fact, it has been stated in the balance-sheet that the liability being contingent, no adequate provision was made as the amount could not be determined. On the facts of the present case, we find that no material has been placed before the wealth-tax authorities which would enable the wealth-tax authorities to place any valuation on this liability. No evidence has been led of any circumstances which necessitate the making of any adjustment in the balance-sheet. In our view, on the facts and in the circumstances of the present case, the sums of Rs. 57,217-8-0 and Rs. 10,167-8-0 less 10 per cent. are not liable to be deducted in determining the net wealth of the assessee.
10. As regards the question of substituting the written down value computed under the Income-tax Act for the value of the block assets as shown in the balance-sheet, we have dealt with a similar question in Wealth-tax Reference No. 1 of 1960. There is no invariable rule that the written down value computed under the Income-tax Act should be taken to be the value of the block assets as shown in the balance-sheet. In our view no circumstances exist which require the making of any adjustment in the value of the block assets as shown in the balance-sheet.
Our answers to question are the following :
(1) Our answer to question No. 1 is in the affirmative.
(2) As regards question No. 2, apart from the agreement dated 22nd June 1949, there was no other agreement and there were no awards whereunder any liability would accrue to the assessee on the valuation date. In our view the amounts for which deduction is claimed on the basis of the foresaid agreement dated 22nd June, 1949, are not liable to be deducted. In order to bring out the real dispute between the parties in connection therewith, we would reframe the question as under :
“Whether, on the facts and in the circumstances of the case, in ascertaining the net wealth of the assessee, the liability for the sum of Rs. 57,217-8-0 less 10 per cent. thereof claimed by the assessee should be taken into account ?”
Our answer to the question is in the negative.
(3) Our answer to question No. 3 is in the negative.
(4) Question No. 4 is not pressed and is not answered.
11. Having regard to all the circumstances of the case, we consider that the fair order to make as regards costs would be that the respondent should pay to the Commissioner of Wealth-tax Rs. 364 by way of costs and we order accordingly. There will be No. 8 of 1962, filed for altering the form of the questions. No order in the civil application.