assessee-individual holds shares in certain private limited companies, one of which is Jagdish Oil Industries (P.) Ltd. In working out value of these shares, assessee deducted liability in respect of gratuity payable to employees amounting to Rs. 5,64,528. This amount was not provided for in balance sheet. Before WTO assessee claimed that even though gratuity liability was not provided for, it did exist and should be taken into account while computing break-up value of shares. On ground that this amount had not been provided in balance sheet, WTO did not accept assessee's case. On appeal, AAC confirmed order of WTO. Thus, appeal before Tribunal. AAC rejected assessee's claim partly because claim was not based on any proper scientific basis or actuarial valuation which was properly proved before him. 2. learned counsel for assessee has pointed out that amount payable by way of gratuity has been properly computed. people who were on list of employees of company were known. They were entitled to be paid gratuity on retirement, etc. amount of Rs. 5,64,528 was calculated on basis that all persons on list of company on valuation date, if retired, etc., would have to be paid this amount by way of gratuity. According to learned counsel, this was real liability and fact that it did not find place in balance sheet did not alter position with regard to value of shares. 3. After hearing learned counsel for department who laid stress on orders of authorities below, we see no reason to reject assessee's claim. Whether liability appears in balance sheet or not, if it were shown to exist, it has to be taken into account. prospective purchaser of shares is not likely to be blind to existing liability to extent of more than Rs. 5 lakhs which assessee has to discharge at any time, conditions for payment are satisfied. mere fact that employees do not retire immediately, but their retirement, discharge, etc. will take place over period does not make liability any less real as far as purchase of shares is concerned. purchaser has to take note of fact that overall assets of company stand depleted to extent of this liability. learned counsel for department has pointed out that at best this liability could be called contingent liability and so does not deserve deduction. We feel that this approach is erroneous. AAC has referred to Gujarat High Court's decision in case of Nagri Mills Co. Ltd. v. CIT [1981] 131 ITR 257 and distinguished it on ground that in income-tax matter of that company deduction was claimed on basis of actuarial valuation of liability. In our opinion, correct view in present matter would be not as to whether payment of gratuity would be contingent liability--which it could be if we understand it as contingent on happening of event like retirement of employee-but alternative question: whether company can under any circumstances get rid of statutory liability to pay gratuity to its retiring employees, etc. In law if gratuity is payable, it cannot be avoided. If that be so, it definitely becomes charge on company going to reduce its assets. purchaser would certainly not ignore this position. We have, therefore, no hesitation in coming to conclusion that in finding market value of shares existence of this liability whether recorded in balance sheet or not cannot be ignored. We find also merit in computation of liability on basis of actual amount payable if contingency happened in respect of all employees on rolls on valuation date of company since after all valuation is nominal process to be done on valuation date. 4. appeal is allowed. Per Shri R.L. Sangani, Judicial Member--With great respect to my learned brother, I am unable to agree. 2. assessee, who is appellant before us, is individual, who held shares in certain private limited companies, including Jagdish Oil Industries (P.) Ltd. valuation of shares of company held by assessee was done by WTO in accordance with rule 1D of Wealth-tax Rules, 1957 ('the Rules'). 3. contention of assessee before WTO was that liability of company to pay gratuity to its employees should be taken into account in process of determination of value of shares of company and this liability, according to him, was Rs. 5,64,528. 4. WTO rejected prayer on ground that this liability had not been mentioned in balance sheet of company, whereas rule 1D required t h t only those liabilities should be taken into account which have been mentioned in relevant balance sheet. 5. In appeal filed by assessee, AAC confirmed decision of WTO not only on ground that said liability had not been mentioned in balance sheet, but also on additional ground to effect that amount claimed did not represent actuarial valuation of liability to pay gratuity and that scientific method had not been employed to arrive at said figure. 6. In this appeal, it was stated before us that amount of Rs. 5,64,528 was amount which company would have been required to pay to all employees who were in employment of company on valuation date, if all those employees had retired on that date. This amount, according to learned counsel for assessee, represented real liability of company on valuation date and, as such, said amount was liable to be deducted under rule 1D. 7. learned departmental representative, on other hand, supported order of AAC on both grounds mentioned in impugned order and submitted that amount mentioned by assessee represented contingent liability to pay gratuity and not liability existing on date of valuation. As such, said amount could not be deducted. 8. It may be mentioned here that it is not contention of assessee that method under rule 1D should not be applied. Consequently, what we have to see is whether said amount is liable to be deducted if method under that rule is employed. 9. I shall assume, for purpose of present appeal, that mere non- mention of liability to pay gratuity in balance sheet of company would not, ipso facto, render that liability ineligible for deduction under rule 1D, although words used in said rule make pointed reference to only those liabilities which find mention in balance sheet. However it cannot be gainsaid that before any amount is deducted as liability under rule 1D, that amount should represent value of liability in praesenti as on valuation date. liability to pay gratuity to employees, arising under Payment of Gratuity Act, 1972, is such, as cannot be avoided by company, as and when it arises. Generally speaking, gratuity would be payable to those employees who retire after completing qualifying period of service. It would not be payable to those who are dismissed or removed or who leave service under other circumstances. liability is, thus, dependent upon large number of contingencies and is spread over number of years. We are concerned with value of this liability on valuation date. In circumstances, when business of company is running business and has not come to end, contingencies on which this liability is dependent are to be taken into account and then its value, as on valuation date, is to be determined. actuarial method of calculation takes into account all this and, as such, unless actuarial valuation is done, or present value of said liability as on valuation date is otherwise scientifically determined, no deduction on that account can be claimed. In fact, without such ascertainment, said liability would remain contingent liability as far as valuation date is concerned. 10. It is true that break-up value method is, normally, appropriate when company is ripe for winding up. However, break-up method (or asset- backing method, as it is sometimes called) has been prescribed as method for valuation under rule 1D and, as such, when this method is applied in cases of companies, which are not ripe for winding up, what we have to take into account is present value of future liability ascertained on actuarial valuation or on scientific basis and not amount payable to all employees who are in employment on valuation date on hypothesis that they all retired on that date. 11. Reliance was placed before us on decision of Tribunal in case of ITO v. Charandas Vallabhdas [WT Appeal Nos. 218 to 220 (Bom.) of 1976-77] pertaining to assessment years 1973-74 and 1974-75. In that case, provision for gratuity had been made in balance sheet itself and it was not revenue's case that said provision was on scientific basis. In present case, it is revenue's case that amount claimed has not been calculated case, it is revenue's case that amount claimed has not been calculated on scientific basis. It was observed in that case that intending purchaser would look into balance sheet to find out liability and would assume that liability, which finds place therein, has been properly evaluated and, as such, said liability should be taken into account. In present case, as already stated, liability does not find mention in balance sheet. Moreover, it has not been calculated on actuarial or scientific basis. In that case, amount claimed as deduction did not represent amount which company would have been required to pay if all employees had happened to retire on, valuation date, as is case now before us. In that case, it was assumed that amount represented value in praesenti, as on valuation date, of liability to pay gratuity arising in future. In present case, no such assumption can be made, in view of method disclosed by assessee. ratio of that decision, consequently, does not support present case of assessee. 12. For reasons given above, appeal fails and is dismissed. REFERENCE UNDER SECTION 25(11) OF WEALTH-TAX ACT, 1957 -On 7-6-1983 we heard aforesaid appeal [WT Appeal No. 1405 (Bom.) of 1981 decided on 21-7-1983]. As we have differed in our conclusion about disposal of aforesaid appeal, we hereby refer following question to President for being referred to Third Member under section 25(11 of Wealth- tax Act, 1957: " Whether, on facts and in circumstances of case, sum of R s . 5,64,528 representing gratuity liability would be proper liability deductible in working out value of shares? " THIRD MEMBER ORDER Per Shri Ch. G. Krishnamurthy, Senior Vice President--This is case allotted to me as Third Member by President under section 24(11) of Wealth-tax Act, 1957 ('the Act') to resolve, rather to express my opinion on following point of difference of opinion that arose between my learned brothers: " Whether, on facts and in circumstances of case, sum of R s . 5,64,528 representing gratuity liability would be proper liability deductible in working out value of shares? " 2. assessee is shareholder in company called Shree Jagdish Oil Industries (P.) Ltd. In working out value of shares for purpose of wealth-tax assessment, assessee deducted liability in respect of gratuity payable to employees which was worked out at Rs. 5,64,528. It has to be noted that this amount was not provided for in balance sheet, i.e., in accounts. However, this was pointed out by way of note in Schedule 'B' attached to balance sheet. auditors also qualified their report by referring to non-provision for gratuity, among others and subject to non-provision, they certified that balance sheet as giving true and fair view of state of affairs of company as on 30-9-1978. In other words, auditors of company considered non-provision for gratuity as point worthy of being brought to notice of shareholders, meaning thereby that if provision had been made for gratuity in accounts position of state of affairs as then disclosed would be more truer and fairer. 3. In course of assessment proceedings, assessee contended that even though liability for gratuity was not provided for in accounts, nonetheless liability did exist and should be taken into account while computing break-up value of shares. WTO rejected this claim mainly on ground that this amount was not provided for in balance sheet and that assessee would not be entitled to claim this liability as deduction. On appeal, AAC confirmed order of WTO. Thus, matter came up on appeal before Tribunal. One of reasons which weighed with AAC was that even though liability was not provided for in accounts and exhibited as such in balance sheet, liability itself was not arrived at on any proper scientific basis or actuarial valuation, conveying thereby that liability was not ascertained liability but only vague liability, contingent liability. On hearing matter, learned Vice President, who is party to order, opined that on facts of case it could not be said that liability was not properly ascertained on scientific basis, that liability of Rs. 5,64,528 was calculated on basis of employees then existing in accordance with rules provided for in Payment of Gratuity Act, as well as rules governing scheme of payment of gratuity. learned Vice President held that whether liability payment of gratuity. learned Vice President held that whether liability appeared in balance sheet or not if it were shown to exist on valuation date, it has to be taken into account in arriving at true and fair value of shares because what was to be ascertained under Act was market value of shares as on valuation date and prospective buyer of shares was not likely to be ignorant of existing liability to extent of more than Rs. 5 lakhs on account of gratuity which has to be discharged at any given point of time. Therefore, question that employees do not retire immediately or assumption that employees would retire on valuation date is not material. Retirement of employees is bound to take place one day or other. Thus, company could never get rid of its obligation to pay gratuity and since amount was payable, question was only about ascertainment of liability. If liability was properly ascertained then it has to be taken into account and it is not necessary that liability should be ascertained always on actuarial valuation. But, learned Judicial Member was of different opinion. Dealing with argument whether for purpose of rule 1D, liability to pay gratuity should be provided for in accounts or not, it was also one of reasons why department did not allow assessee's claim, he assumed that mere non-mention of liability to pay gratuity in balance sheet of company would not ipso facto render that liability ineligible for deduction under rule 1D although words used in said rule make reference only to those liabilities which find mention in balance sheet. Thus, Judicial Member proceeded on assumption that it was not necessary for mention o f liability to pay gratuity in accounts of company provided it is liability. He, therefore, concentrated on issue whether on facts of this case that amount could be termed as liability. For amount to represent liability in praesenti as on particular valuation date, amount must be such that it is ascertained liability either by actuarial valuation or some other scientifically determined method. He was of opinion that in case of running business which has not come to end liability to pay gratuity does not arise all by itself unless certain contingency happens, like retirement of employees satisfying requirements of law. Since there is provision in law that dismissed or removed employees or employees who left service under certain circumstances, would not be eligible for gratuity, liability to pay gratuity cannot be said to be certain, ascertained and, therefore, contingency, i.e., possibility of expecting non-payment of gratuity under certain circumstances, in his opinion, made liability to pay gratuity contingent liability and for it to become ascertained liability, there should be actuarial valuation or any other scientifically determined valuation. Since rule 1D provided for valuation of shares on what is generally recognised as break-up value method, this method takes into its sweep present value of future liabilities ascertained on actuarial valuation and since gratuity in this case that was being sought for deduction as liability, is present value of future liability, it should have been ascertained on actuarial or on scientific basis. case decided by Tribunal, Bombay Bench, in case of another shareholder who happens to be assessee's brother was brought to notice of Bench [WT Appeal No. 315 (Bom.) of 1983 dated 27-9-1983]. While learned Vice President did not make reference to this decision, learned Judicial Member, however, discussed decision in his order and distinguished it, by pointing out that in that case provision for gratuity was made in balance sheet and that it was not case of revenue that that was not on scientific lines. 4. Thus, difference of opinion mentioned above arose which was referred to me for my opinion. I have heard parties before me at great length. I am of opinion that view expressed by learned Vice President should prevail. It has to be borne in mind that what we are concerned here is market value of shares to find out proper wealth-tax liability. How do we ascertain market value of shares? There are several methods of ascertaining market value of shares. In case of quoted shares, there is no difficulty in ascertaining value because stock exchange quotations are available. difficulty will arise only in case of unquoted shares. Even here, there are several accepted methods to arrive at market value of shares of which two have assumed sort of universal acceptance and judicial recognition; one is yield method and other is break-up value method or intrinsic value method. income method is method which is generally accepted and adopted by almost all dealings where shares are concerned. intrinsic value method or break-up value method is general and so accepted in commercial world all because even if intrinsic value of shares is more, if yield from shares is less than expected, low potentiality of yield would bring down market value of shares even if intrinsic value happens to be more. There are several difficulties in arriving at intrinsic value o f shares because that would depend upon realisable value of various assets in balance sheet which is often very difficult to ascertain which, again, will depend upon market value of assets. Similarly, liability also. Though it is well settled that most rational method of valuing shares is yield method, of Rules, by rule 1D, gives preference to valuation of shares by break-up value method by providing in specific terms way in which that value has to be worked out, kinds of assets that should be taken into account and kinds of liabilities that should be excluded. Though rule 1D speaks of liabilities referred to in balance sheet for purpose of consideration it does not, in terms, specifically prohibit inclusion of liabilities not provided for in accounts from being taken into consideration once they are shown to exist as liabilities. It is, perhaps, for this reason that my learned brother, Judicial Member, had assumed that even though liability was not provided for in accounts still it required to be considered even as per rule 1D. Proceeding from this premises on which there is no disagreement between my learned brothers, I am now to address myself as to whether sum in question is liability ascertained on scientific method because since it is not liability ascertained on actuarial valuation which is not point in dispute while learned Vice President had expressed that since rules governing payment of gratuity as well as requirement of law of Payment of Gratuity Act are complied with, this amount can be said to be amount ascertained on scientific lines Judicial Member was not prepared to accept this view. In opinion of learned Judicial Member as I recapitulate, sum in question is contingent liability only because this was not ascertained on scientific lines and payment of gratuity was not immediate and depended upon happening of event which may or may not take place. What happening of this event would result in is cash payment. Since liability was not to be paid immediately and payment is to depend upon happening of event this situation is considered by learned Judicial Member as creating at worst contingent liability. This, in my opinion, may not be proper and fair. liability may exist; payability may be postponed. Merely on ground that payability is postponed, liability that has accrued does not cease to be liability. Thus, payment of gratuity is certainty because each member of staff is entitled to gratuity if he had fulfilled conditions entitling him to gratuity. Ascertainment of amount payable by way of gratuity is thus liability which comes upon assessee-company as certainty. What remains to be seen is whether liability was properly ascertained or not. liability for payment of gratuity is to be ascertained as per provisions of Payment of Gratuity Act and rules made by assessee-company governing payment of gratuity. If as per these provisions and rules amount now claimed as liability was arrived at, that amount has to be allowed as deduction. In allowing said amount as liability issue that payment is postponed cannot enter into calculation. As already observed earlier, liability can accrue but payment may be postponed and yet liability subsists. contingent liability is liability payment of which has to depend upon happening of particular event. In this case retirement of employees is event which will certainly take place. If under Payment of Gratuity Act and rules made by assessee-company for payment of gratuity, it is to be assumed that employees would retire on balance sheet day and if provision for payment of gratuity is required to be made on those lines, then amount provided for to meet that eventuality is nontheless liability although employees do not retire on that day. question that dismissed employees or employees who left services will not be entitled to payment of gratuity will not then be point for reckoning amount of liability that had accrued to company for discharge of liability towards gratuity. Thus, matter is one of calculation and mere fact there is difficulty in quantification should not detract it from being liability or should make it contingent liability. On proper verification and scrutiny amount now claimed as liability may vary. But that does not mean that no liability at all accrued. Therefore, it is incorrect, in my view, to say that because of possibility of incorrectness of amount now claimed as liability, amount claimed ceased to be liability. buyer of shares in company now after passing of legislation providing for welfare of employees for several amenities including payment of gratuity and payment of bonus more or less on compulsory and permanent basis, liability for which is not inconsiderable, will not ignore effect of social welfare legislation on quantum of profitability and consequent depression in value of shares. This would mean ignoring effect of liabilities in toto, which cannot be considered as proper particularly in matter of arriving at market value of share of company. fact that auditors of assessee-company found it necessary to mention in their report that provision for gratuity was not made shows how important and significant making of provision for gratuity assumed in matter of presenting true and fair view by balance sheet. auditors felt and rightly too that non-provision for gratuity did not reflect true and fair view of state of affairs of company which would also suggest that inclusion of this liability into calculation of value of shares is necessity and is not capable of being ignored. 5. For aforesaid reasons and for reasons advanced by learned Vice President, I am inclined to agree with view that sum in question cannot be said to be contingent liability and, therefore, not entitled to be taken into consideration in valuation of shares. It is, therefore, proper liability deductible in working out value of shares. 6. Before I part with this order, I would also like to mention that view expressed by another Bench, Bombay Bench, in case of Charandas Vallabhdas, another shareholder of same company that gratuity should be allowed as deduction and that it was in nature of liability in praesenti is correct and I would agree with it. distinction learned Judicial Member brought about between that case and present case does not, in my opinion, really matter for simple reason that having proceeded on assumption that even if liability is not provided for in accounts, still it can be considered as liability provided it is liability, fact that that liability was provided for in books for that year in that case would not really make difference. position would have been different if assumption of Judicial Member had been that it was necessary to provide for liability in accounts. If it is considered that provision in books is not necessary for amount to be claimed as liability, fact that no provision was made in accounts could not be distinguishing feature. 7. Now matter will go before regular Bench for deciding it in accordance with majority opinion. *** HANSRAJ VALLABHDAS v. TENTH WEALTH TAX OFFICER