Commissioner of Wealth-tax vs K. Gopinathan Nair

Govindan Nair, C.J.—This is a reference u/s 27(1) of the Wealth-tax Act, 1957, for short, " the Act ", and the question referred is in these terms :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provision made by the assessee towards liability on account of gratuity payable to the workers is an allowable deduction while computing the assessee''s net wealth ? "

The year of assessment with which we are concerned is 1971-72. The assessee had claimed a sum of Rs. 8,60,690 as liability towards gratuity payable to its workmen as a deduction u/s 2(m) of the Act. Section 2(m) runs thus :

" '' Net wealth '' means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than......" .

We are not concerned in this case with the exclusions enumerated under Clauses (i), (ii) and (iii) and the only question is whether the claim made by the assessee was a " debt owed by the assessee on the valuation date ". The Wealth-tax Officer rejected the claim. The appeal before the Appellate Assistant Commissioner was dismissed. In further appeal by the assessee the Tribunal, relying on an earlier decision of the Tribunal in W.T.As. Nos. 7 & 8/Coch/72-73 dated March 11, 1974, allowed the appeal and upheld the modified claim of the assessee for the deduction of a sum of Rs. 6,22,459 which it was urged represented on an actuarial calculation the extent of the debt on the valuation date. The relevant part of the order of the Tribunal in W.T.As. Nos. 7 and 8/Coch/72-73 has been extracted in paragragh 4 of the statement of case. And in the order passed in appeal relating to the assessment year 1971-72 in W.T.A. No. 3/72-73, the Tribunal observed thus :

" 5. We have had an occasion to consider the provisions of the Kerala Industrial Employees'' Payment of Gratuity Act in our order in W.T.As. Nos. 7 & 8/Coch/72-73 dated 11-3-1974 and we have held that there is an accrued liability and a perfected debt and, therefore, the assessee is entitled to claim these amounts as a deduction. We have pointed out in our above-said order that the gratuity provisions of the Kerala Industrial Employees'' Payment of Gratuity Act are different from the provisions which the Supreme Court had considered in the Standard Mills'' case. We have held that under the Kerala Gratuity Act, at the end of a 5 year period, the employee gets absolute right for the gratuity and only the payment of such gratuity, is postponed to a later date. Under no circumstances can an employee who had completed 5 years of service be denied the gratuity. In the Standard Mills'' case, the payment of gratuity depended on the good behaviour of the employee till the date of his retirement, dismissal, etc. Therefore, in that case, the payment was entirely contingent, whereas in the assessee''s case, it is clearly an accrued liability."

This reference has come to us at the instance of the Commissioner of Wealth-tax. The section in the Kerala Industrial Employees'' Payment of Gratuity Act, 1970, for short, "the Gratuity Act", which imposes the liability to pay gratuity is Section 4 and we shall extract that section."

"4. Payment of gratuity.--(1) Gratuity shall be payable to an employee-

(a) on his superannuation ;

(b) on his retirement, resignation, retrenchment, discharge or dismissal from service after completion of a minimum period of five years of continuous service;

(c) on his death or total disablement due to accident or disease.

Explanation.--For the purpose of this section, total disablement means such disablement, whether of temporary or permanent nature, as incapacitates an employee for all work which he was capable of performing at the time of accident resulting in such disablement.

(2) In case of death of an employee, the gratuity shall be payable to the nominee of the employee or in the absence of a nominee to the family of the employee.

(3) In the cases referred to in Clauses (a), (b) and (c) of Sub-section (1), the employer shall pay gratuity to each of his employees at the rate of fifteen days'' wages based on the last drawn wages for every completed year of service or part thereof in excess of six months :

Provided that the maximum amount of gratuity payable to an employee shall not exceed fifteen months'' wages :

Provided further that nothing in this section shall affect the right of any better terms of gratuity or retirement benefits under any award or agreement or contract with the employer :

Provided also that in the case of voluntary retirement or resignation from service in any particular year, not more than five per cent. of the total number of employees in the factory, plantation, establishment or undertaking shall be entitled to payment of gratuity and if the number of employees who voluntarily retire or resign from service exceeds five percent, of the total number of employees, the eligibility of an employee for payment of gratuity shall be determined on the basis of the strength of the service of the employee in the factory, plantation, establishment or undertaking :

Provided further that an employee who voluntarily retires or resigns from service shall be eligible to claim gratuity only if one month''s notice in writing of his intention so to retire or resign had been given to the employer."

In Standard Mills Co. Ltd. v. Commissioner of Wealth-tax, the Supreme Court had to consider the effect of the terms of an award passed by, an Industrial Tribunal. The question whether the award had created a liabi lity in praesenti for payment of gratuity which could be claimed to be a debts u/s 2(m) of the Act, owed by the assessee for the purpose of determining the value of his assets on the valuation date was answered by the Supreme Court in the negative. We shall extract the relevant pro visions of that award which are referred to in the judgment of the Supreme Court at page 474 :

"Gratuity should be paid...........................on the following scales :

On the death of an employee, while in service of the company or on his becoming physically or mentally incapacitated for further service--one months'' salary for each year of service...............

On voluntary retirement or resignation of an employee--After 15 years'' continuous service in the company--15 months'' salary.

On termination of, his service by the company-

(a) After 10 years'' continuous service but less than 15 years'' service in the company--3/4ths of one month''s salary for each year of service.

(b) After 15 years'' continuous service in the company--15 months'' salary.

A gratuity will not be paid to any employee who is dismissed for dishonesty or misconduct."

It will be noticed that the provisions in the award construed by the Supreme Court are on very similar terms to Section 4 though there are differences which we consider to be immaterial. Dealing with the provi sion, the Supreme Court had no hesitation to state :

" The right to obtain gratuity under the awards arises only when there is determination employment and not before. The liability does not exist in praesenti ; it is contingent upon the determination of employment. This court pointed out in Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Wealth Tax, (Central) Calcutta, :

".......................the following definition is unanimously accepted :

'' a debt is a sum of money -which is now payable or will become payable in future by reason of a present obligation : debitum in praesenti, solvendum in futuro''. "

Under the award, as u/s 4, certain events have to happen when gratuity would become payable. That is clear from the terms of the award. The terms of the award started with death and the terms of the section ended with death. But this makes no difference. The circumstances under which services can end or terminate such as superannuation, resignation, retirement, retrenchment or dismissal are there in the section and the award. What is to be noted is that the liability would arise only on the happening of any of those events. The fact that if one of those events occurred before the qualifying period expired, five years under the Act, no liability at all would arise, would also indicate that there was no present liability. No distinction can, therefore, be sought on the basis of the different periods provided under the Act and the award we have referred to for making out a case that under the Act a liability in praesenti arose on the coming into force of the Act. The fact that the contingent liabilities are taken into account for the purpose of calculating, on the basis of commercial expediency, the profits and gains of a business for the purpose of Income Tax rests on a different principle. For the purpose of the Wealth-tax Act there must be actual debt owing on the valuation date. The ruling of the Supreme Court which we have referred to and which has been followed by the Supreme Court in the decision in Bombay Dyeing and Manufacturing Co. Ltd. Vs. Commissioner of Wealth Tax, Bombay, we think, concludes the matter.

We shall now refer to certain decisions relied on by counsel on behalf of the assessee. Those decisions are in Commissioner of Wealth-tax Vs. Ranganayaki Gopalan and Others, and Commissioner of Wealth Tax Vs. Phipson and Company Private Ltd., the former decision being that of the Madras High. Court and the latter of the Calcutta High Court. In the case before the Madras High Court, the question arose from the terms of a trust deed which provided that the company should transfer to a proposed trust a sum of Rs. 19,50,000 towards the liability for gratuity up to a particular date on the basis of an actuarial valuation. The proposed trust deed contained a clause that the company had the option to pay to the fund either the entire sum in one lump sum or in such instalments and at such times as the board of directors of the company may determine subject to payment of interest at 31/2 per cent. per annum with yearly rests. During the year ended June 30, 1961, the company paid Rs. 38,880 to the fund leaving a balance of Rs. 19,11,620. In valuing the equity shares of the company for the purposes of wealth-tax in the hands of its shareholders, this liability of Rs. 19,11,620 was held to be deductible by the Tribunal. The view taken by the Tribunal has been upheld by the High Court. The High Court referred to the decision of the Supreme Court in Standard Mills Co. Ltd. v. Commissioner of Wealth-tax and observed :

" But, in the present case, in our opinion, the interposition of a trust and vesting the gratuity fund in the trustees makes a difference."

Thereafter, reference was made to the terms of the trust deed and the court was able to spell out that the "company was liable to pay the sum of Rs. 19,50,000 under the trust deed to the trustees ". The court observed that " the only option that was given to the company was that it could either pay the amount in one lump sum or in instalments. The liability is thus not a contingent liability. It is a definite, ascertained and present liability". It was, therefore, possible to hold that a present liability had accrued on the valuation date. We are not called upon in this case to examine the correctness or otherwise of the view which was taken by the Madras High Court on the terms of the trust deed. In the case before us, there is no provision for funding amounts towards gratuity to a trust fund. We, therefore, express no opinion on that aspect. The decision is not helpful in construing the effect of Section 4 of the Act. Counsel invited our attention to the decision of the Gujarat High Court in Commissioner of Wealth Tax, Gujarat-II Vs. Sayaji Mills Ltd., , wherein the view seems to have been:taken that a debt would arise from the mere fact of the liability under statute unlike in the case of a settlement or of an award. We do not think that on principle there can be any distinction between the liability under an award and that created by a statute. If the liability created either by the award or the Act is only a contingent liability, then Section 2(m) would not be attracted.

The Calcutta High Court in the decision in Commissioner of Wealth-tax v. Phipson and Company Private Ltd. had to deal with the matter which is not germane to the issue before us. The question there was whether amounts that have been funded as payable to certain ex-employees of the asscssce as pension and funded after the employees had retired have to be taken into account as a debt for the purpose of Section 2(m) of the Act. If we may say so with respect the court was right in holding that the liability was a debt within the section. The liability for payment, of pension had arisen on the retirement of a person. The fact that it was payable in future does not touch the question as to the present nature of the liability. The decision is not useful for our purpose in the present case.

We consider that this matter is concluded by the pronouncement of the Supreme Court in Standard Mills Co. Ltd. v. Commissioner of Wealth- tax. We accordingly, answer the question referred to us in the negative, that is, in favour of the revenue and against the assessee. We direct the parties to bear their respective costs.

A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.