THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 07.02.2014
+ ITA 41/2000
OSWAL AGRO MILLS LTD ..... Appellant
versus
COMMISSIONER OF INCOME TAX ..... Respondent
Advocates who appeared in this case:
For the Appellant : Mr C.S. Aggarwal, Sr. Advocate with
Mr Prakash Kumar and Mr Sheel Vardhan.
For the Respondent : Mr Sanjeev Sabharwal, Sr. Standing Counsel.
CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE VIBHU BAKHRU
JUDGMENT
VIBHU BAKHRU, J
1. The present appeal has filed by the appellant under section 260A(1)
of the Income Tax Act, 1961 (hereinafter referred to as the ,,Act)
challenging the order dated 16.09.1999 passed by the Income Tax
Appellate Tribunal, Delhi (hereinafter referred to as the ,,Tribunal) in
I.T.A. No.2722/De1/91 relating to assessment year 1987-88. The order
dated 16.09.1999 is hereinafter referred to as the ,,impugned order.
2. The impugned order is a common order whereby the Tribunal
disposed of the appeals relating to the Assessment Years 1986-87 and
1987-88 being ITA Nos. 2271/91 and 2272/91 respectively.
ITA No.41/2000 Page 1 of 24
3. By the impugned order, the Tribunal has rejected the claim of the
appellant (hereinafter also referred to as the assessee) for deduction of an
amount equivalent to the additional custom duty which is disputed by the
sellers (importers) and, consequently, not paid to the custom authorities.
The appellant claimed that the additional custom duty demanded by the
customs department was a part of the landed cost of the goods that were
imported and as such was an ascertained trading liability which had accrued
during the course of business. And therefore, the appellant was entitled to
deduct the same from its trading revenue for the relevant Previous Year.
The said deduction was disallowed as the additional customs duty (which
was the statutory liability of the importers- sellers) was disputed by the
importers and in terms of the contract between the appellant and the
importers the same would be payable only when the custom authorities
prevailed in the proceedings pending before the Supreme Court and the
importers were called upon to pay the said duty.
4. The Tribunal further disallowed the deduction claimed by the
assessee for loss on account of fluctuation in the rate of foreign exchange in
respect of an advance received by the assessee in foreign currency. The said
advance was received by the assessee for export of certain goods and the
same was to be adjusted from amounts receivable for supply of goods to be
made over a period of five years.
5. This court by an order dated 22.05.2000 admitted the present appeal
and framed the following questions of law:-
"1. Whether the Income Tax Appellate Tribunal is correct in
law and on facts in upholding the disallowance of an amount of
ITA No.41/2000 Page 2 of 24
Rs.1,60,33,064. It being a contractual trading liability incurred
in the nature of additional cost of material, holding the same to
be a liability contingent on the happening of an event and thus
not an allowable deduction while computing the income for the
instant assessment year?
2. Whether the Income Tax Appellate Tribunal is correct in
law and on facts in holding that the liability of Rs.1,60,33,064
claimed by the appellant was not allowable u/s 43B of the I.T.
Act.
3. Whether the Income Tax Appellate Tribunal is correct in
law and on facts in upholding the disallowance of a sum of
Rs.1,19,07,989/- being the loss incurred on account of
devaluation of rupee against US Dollars, holding the same to be
a fictitious and notional loss?"
6. The figures as stated in the above questions framed by this court
relate to the assessment year 1986-87. The present appeal relates to the
assessment year 1987-88 and thus the figures referred to in the questions as
framed are required to be corrected and replaced by the amounts disallowed
in the previous year ended 30.06.1986 (which would be relevant to the
Assessment Year 1987-88). Accordingly, the questions of law that are to be
considered in the present appeals are re-stated as under:-
"1. Whether the Income Tax Appellate Tribunal is correct in law
and on facts in upholding the disallowance of an amount of
`1,64,87,375/- It being a contractual trading liability incurred in
the nature of additional cost of material, holding the same to be a
liability contingent on the happening of an event and thus not an
allowable deduction while computing the income for the instant
assessment year?
2. Whether the Income Tax Appellate Tribunal is correct in law
and on facts in holding that the liability of `1,64,87,375/- claimed
by the appellant was not allowable u/s 43B of the I.T. Act.
ITA No.41/2000 Page 3 of 24
3. Whether the Income Tax Appellate Tribunal is correct in law
and on facts in upholding the disallowance of a sum of
`9,37,669.81 being the loss incurred on account of devaluation of
rupee against US Dollars, holding the same to be a fictitious and
notional loss?"
7. At the outset, it was submitted by the learned counsel for the parties
that the issue involved in question no. 3 was covered, in favour of the
assessee and against the revenue, by the decision of Supreme Court in the
case of CIT v. Woodward Governor India Private Limited: (2009) 312
ITR 254 (SC). Accordingly, the said question is answered in the negative
and in favour of the assessee.
Brief facts relevant to the disallowance of `1,64,87,375 - disputed
additional customs duty claimed by the assessee as a part of the
landed cost of goods.
8. The facts, relevant to the question of deduction on account of
additional customs duty, briefly stated are as follows: The appellant is,
interalia, engaged in manufacturing and trading of products like de-oiled
meals, industrial hard oils, edible oils, marine products, emergency lighting
units and soaps, etc. The appellant entered into agreements dated
18.01.1983, 14.04.1983 and 16.05.1983 with Overseas Processors Pvt. Ltd.,
Shahji International Pvt. Ltd. and Oswal Soap & Allied Industries Pvt. Ltd.
respectively for purchase of imported Palm Stearine Fatty Acid (hereinafter
referred to as the ,,imported material). All the three parties as mentioned
above are collectively referred to as the ,,importers. The agreements
entered into between the assessee and the importers were similarly worded.
As per clauses 8 of the agreements, the imported material was to be
purchased by the appellant at landed cost i.e. CIF price, custom duty,
ITA No.41/2000 Page 4 of 24
clearing charges, etc. and 3% of the total cost. As per clause 11 of the
agreements, any liability arising after the sale of the imported material, in
respect of custom duty, excise duty, penalty, sales tax, etc., would be paid
by the appellant and included in the landed cost of imported material.
Clauses 8 & 11 of the agreements read as under:-
"8. We will sell to you the above imported material as it is
for actual use by you as per the agreement at landed cost
i.e. CIF price, custom duty, clearing charges, etc. and 3%
of the total cost. We will also sell to you the
manufactured products in our factories as per this
agreement at landed cost i.e., cost price, custom duty,
clearing charges, etc. plus manufacturing expenses plus
3% of the total cost.
xxxx xxxx xxxx xxxx xxxx
11. In case of any disputed amount like custom duty, excise
duty, penalty, sales-tax, etc., which may arise during the
transactions the same will be taken as part of the landed
cost by you but we shall provide Bank Guarantee, etc. for
which the counter guarantee in our favor for the same
amounts shall be given by you. You will be required to
pay the disputed amount on our behalf as and when we
are called upon to make the payment and shall be taken as
part of the landed cost by you. Any liability arising after
the sale of the goods to you, shall be on your account
only and you shall arrange payment for the same and
entitled for refund of any duty, penalty, etc. paid if any, is
refunded to us. This amount so refunded shall be paid to
you on actual receipt of the amount."
(emphasis supplied)
9. At the time of actual import of material by the importers, the Custom
Department demanded 100% of the applicable custom duty as additional
ITA No.41/2000 Page 5 of 24
customs duty on the CIF value of imported material. The said additional
demand was challenged by the importers before the Supreme Court in Writ
Petition (Civil) No.15220-22/1984. The Supreme Court allowed the
clearance of imported material on payment of 15% of the disputed
additional custom duty and granted stay for balance 85% of the said duty,
pending the final decision in the writ petition. The stay granted by the
Supreme Court was subject to furnishing of bank guarantees by the
importers in favour of the department for the unpaid amount of disputed
duty. In terms of the agreement between the assessee and the importers, the
assessee provided counter guarantees for the bank guarantees provided by
the importers for the unpaid disputed amount of customs duty i.e. 85% of
the additional customs duty.
10. The unpaid additional custom duty pertaining to the Previous Year
relevant to the Assessment Year 1987-88 was `1,64,87,375. The appellant,
who follows the mercantile system of accounting, claimed deduction on
account of the said additional custom duty, in as much as, the same was
included in the landed cost of imported material. The Assessing Officer, by
an order dated 28.09.1989 (relating to Assessment Year 1987-88), rejected
the claim of the appellant on the ground that the assessee had failed to
produce evidence by which it could be ascertained that the liability had
arisen or was crystallized during the period relevant to the Assessment Year
1987-88. Accordingly, the Assessing Officer held that the claim on account
of the unpaid additional custom duty could not be allowed as admissible
expenditure during the period relevant to the Assessment year 1987-88.
ITA No.41/2000 Page 6 of 24
11. Aggrieved by the assessment order passed by the Assessing Officer,
the appellant challenged the same before the CIT (Appeals). The CIT
(Appeals) also rejected the claim of the appellant, by an order dated
28.02.1991, on the ground that the custom duty was a statutory liability and
in terms of section 43B of the Act the same was deductible only if the
actual payment was made. The CIT(Appeals) also held that the liability of
the appellant would arise only when the Supreme Court gave a verdict in
favour of the Custom Department.
12. The appellant challenged the order passed by CIT (Appeals) before
the Tribunal. The Tribunal, by the impugned order dated 16.09.1999
rejected the appeal and held as under:-
"14. ...... The custom duty demanded by the Custom Department
from the importers was disputed by the importers and the
matter is still pending with the Honble Supreme Court. There
was no actual payment and the liability was covered only by
bank guarantee. The bank guarantee has not been appropriated
nor encashed and the same is still in the ownership of the
assessee. In such a case the claim of deduction cannot be
allowed. Law is well settled that expenditure which is
deductible for income-tax purpose is towards liability actually
existing in the year of account. Contingent liabilities do not
constitute expenditure and cannot be subject matter of
deduction even under the mercantile system of accounting as
held by the Honble Bombay High Court in the case of Standard
Mills Co. vs. CIT (1998) 229 ITR 336 and in the case of CIT
vs. Indian Smelting & Refining Co. Ltd. (1998) 230 ITR 194.
The Honble Supreme Court in the case of Indian Molases Co.
vs. CIT (1959) 37 ITR 666 held that expenditure which is
deducted from income-tax purposes is one which is towards
liability actually existing at the time but the putting aside of
money which may become expenditure on the happening of an
ITA No.41/2000 Page 7 of 24
event is not expenditure. The Honble Supreme Court f urther
explained the meaning of expenditure and it was held that
expenditure is what is paid out or away and is something which
is gone irretrievably. If the case of the assessee is examined in
the light of the above, it is seen that the liability is contingent
upon the happening of an event that is decision of the Honble
Supreme Court where the dispute is pending. Secondly, the
bank guarantee provided by the assessee cannot be said to be an
expenditure as the same has not been encashed nor appropriated
by the customs authorities. The ownership remains with the
assessee though the operation may be suspended temporarily.
Therefore, the bank guarantee cannot fulfil the requirements of
expenditure so as to qualify for deduction from the total income.
We hold accordingly.
15. With regard to the claim of the assessee in regard to
deduction u/s 43B, we are of the view that this claim also
cannot be accepted. Even assuming that it is a statutory liability
as the liability is eventually fasten upon the assessee, even then
the provision of bank guarantee in itself cannot be treated as
payment as the same has not been adjusted towards the
custom duty. On this ground also, the CIT is fully justified and
no interference is called for in this regard."
Aggrieved by the impugned order, the appellant has filed the present
appeal.
Submissions
13. It is contended by the senior counsel appearing for the appellant that
the appellant was under a contractual obligation to make the payment for
the imported material at the landed cost including the duty payable under
the law. It was contended that the liability of the appellant would arise as
soon as the ownership of the imported material was transferred from the
importers to the appellant. On such transfer of ownership of imported
ITA No.41/2000 Page 8 of 24
material, the appellant became obliged to make payment for the same to the
importers. It was submitted that the additional custom duty is an incident
of import and the said statutory liability is to be discharged by the importers
only. It is submitted that the liability of the appellant is contractual and
accrued by virtue of the agreement between the appellant and the importers.
14. It is further contended that the liability of the appellant is ascertained
as the appellant is obliged to pay the additional custom duty in terms of the
agreement and, therefore, the same cannot be considered as a contingent
liability. The mere fact that the importers have disputed the liability and
have not paid the same, would not characterize it as a contingent liability.
The liability is ascertained even though the quantification is not final.
15. It is contended that the non-quantification of the sum, does not
convert an ascertained liability into a contingent liability. The appellant has
to discharge its contractual obligation as per the terms of the contract
irrespective of the fact that the importer/supplier has challenged the levy of
additional custom duty and the amount is not quantified. In support of this
contention, the appellant has relied on decisions in Kedarnath Jute
Manufacturing Co. Ltd. v. CIT: (1971)82 ITR 363 (SC), Calcutta Co. ltd.
v. CIT: (1959) 37 ITR 1 (SC), ACIT v. Rattan Chand Kapoor: (1984) 149
ITR 1 (Del.), CIT v. Kwality Ice Cream: (2008) 304 ITR 384 (Del.) and
Bharat Earth Movers v. CIT: (2000) 245 ITR 428 (SC).
16. It was submitted that since the subject liability was in the nature of a
trading liability which had accrued, the same could not be treated as a
contingent liability. It was contended by the appellant that the subject
ITA No.41/2000 Page 9 of 24
obligation was an actual liability in praesenti and not a liability de futuro. It
was submitted that the total amount of consideration for the purchase of any
goods would include not only the price charged but also other amounts
which were payable by the purchaser and were required for completing the
purchase.
17. It was further contended that the appellant had paid the requisite
funds as margin money to the bank for arranging the bank guarantee. The
said money could, thus, be utilised towards the payment of custom duty if
the writ petition was decided against the importers. It was emphasized that
the funds had gone out from the coffers of the assessee and, therefore,
providing bank guarantee would have to be treated as making actual
payment. Thus, even if the provisions of section 43B of the Act were held
to be applicable, the deduction on account of the disputed additional
customs duty would be allowable. For this proposition, reliance was placed
by the learned counsel for the appellant on the decision of the Tribunal in
the case of Nuchem Plastics v. Dy. CIT :ITA No. 1040/Del/89 and ITA
No. 5914/De1/91.
18. It is contended by the respondent that the liability on account of
additional customs duty was contingent in nature and was dependent on the
outcome of the matter pending with the Supreme Court. In terms of the
contract, the assessee would be required to pay the disputed amount of
additional customs duty only when the importers were called upon to pay
the same. Since that event had not happened, the contractual liability to pay
the additional customs duty by the assessee had not arisen in the relevant
period. It was submitted that a liability actually existing in the relevant
ITA No.41/2000 Page 10 of 24
accounting year could be deductible as expenditure for the purposes of
Income Tax, however, contingent liabilities did not constitute expenditure
and could not be the subject matter of deduction even under the mercantile
system of accounting.
19. The respondent also contended that there was no actual payment and
the liability was covered only by bank guarantees. The bank guarantees
provided by the assessee could not be construed as expenditure as the same
had not been encashed nor appropriated by the customs authorities. It was
contended that the ownership of the bank guarantees remained with the
assessee, therefore, the amount covered by the bank guarantees would not
qualify for deduction from the total income.
20. The learned counsel for the revenue contended that, in terms of
clause 11 of the agreement, the assessee would be required to pay the
disputed amount on behalf of the importers as and when they were called
upon to make the payment and the same could not be taken as part of the
landed cost of imported material by the assessee. It was argued by the
learned counsel for the revenue that the claim of the assessee that the
subject liability was a trading liability which had accrued and crystalised
during the year was liable to be rejected in view of the settled law that an
assessee would incur a liability only when a claim, if made, is settled
amicably or through adjudication. The learned counsel relied upon the
decision of the Supreme Court in CIT v. Swadeshi Cotton & Flour Mills
Pvt. Ltd.: (1964) 53 ITR 134 (SC) in support of this contention.
Reasons and conclusion
ITA No.41/2000 Page 11 of 24
21. It is now well settled that it is only an extant liability, which has
arisen in the relevant accounting period, that is permissible as a deduction
for the purposes of determining the taxable income of an assessee. It is,
thus, necessary for a liability to have accrued for the same to be taken into
account for the purposes of determining the taxable income of an assessee.
A liability which is contingent and which may arise in future on happening
of an event cannot be deducted as expenditure. The substratal controversy
that needs to be addressed is whether in the facts of the present case, a
liability in praesenti can be stated to have accrued in the relevant previous
year or whether the subject liability is a contingent one. While the former is
allowed as a deduction, the latter is not.
22. The expression ,,contingent liability has been defined under
Accounting Standard 29 as issued by the Institute of Chartered Accountants
of India as under:-
"A contingent liability is:
(a) A possible obligation that arises from past events and the
existence of which will be confirmed only by the occurrence or
non-occurrence of one or more uncertain future events not
wholly within the control of the enterprise; or
(b) A present obligation that arises from past events but is
not recognized because:
(i) It is not probable that an outflow of resources
embodying economic benefits will be required to
settle the obligation; or
(ii) A reliable estimate of the amount of the obligation
cannot be made."
ITA No.41/2000 Page 12 of 24
23. This definition would also be relevant for the purposes of the Income
Tax Act as it clearly indicates the liabilities which cannot be considered as
deductible for the purposes of determining the taxable income of an
assessee. The Supreme Court in the case of Rotork Controls India P. Ltd.
v. CIT: (2009) 314 ITR 62 while considering whether a provision made for
future claims against warrantees was allowable as a deduction, held that;
"a provision is recognised when : (a) an enterprise has a
present obligation as a result of a past event; (b) it is
probable that an outflow of resources will be required to
settle the obligation; and (c) a reliable estimate can be made
of the amount of the obligation. If these conditions are not
met, no provision can be recognised."
24. A plain reading of the above three conditions as articulated by the
Supreme Court indicate that the same are an antithesis of the definition of
,,contingent liability as provided under the Accounting Standard 29. A
contingent liability cannot be allowed as a deduction for the purpose of
calculating the taxable income of an assessee. And, a provision can only be
recognised when the obligation has already fructified and is not contingent
upon an occurrence of any uncertain event in the future. It is not necessary
that the obligation must result in a minimum outflow of resources. It is
sufficient, if the liability has arisen although the outflow in respect of the
same may result later. It is also not essential that an accurate quantum of
the outflow of resources required for settling the liability is ascertained.
Even in cases where the entire quantum of outflow of resources to settle a
liability has not been ascertained, a deduction on the basis of a reliable
estimate of the outflow of resources would be allowed in the year in which
the liability so arises.
ITA No.41/2000 Page 13 of 24
25. In the present case, the language of clause 11 of the agreement
between the assessee and the importers is the key to determine whether a
present obligation has fructified or whether the subject liability is a
contingent one. In our view, a plain reading of clause 11 of the agreement
indicates that the assessee would be required to pay the disputed amount of
duty on behalf of the importers as and when they are called upon to make
such payment. In other words, the assessee has agreed that as and when the
importers would be called upon to pay the amount of additional customs
duty, the assessee would pay the same on their behalf. Therefore, the
liability of the assessee to pay the disputed amount would arise only when
the importers are called upon to pay the same. In the event, the importers
were to succeed in the writ petition filed before the Supreme Court then the
demand of additional customs duty against them would be quashed and
they would be not called upon to pay the amount of duty disputed by them.
And in this scenario, the appellant would have no obligation to pay any
amount as the condition precedent for the assessee to pay disputed amount
would not be satisfied. In other words, the liability of the assessee to pay
the additional customs duty is contingent upon the importers being called
upon to pay the same. Unless and until, the importers are called upon to
pay the disputed amount of tax, the assessee has no obligation to pay the
same either to the importers or on their behalf to the customs authorities.
There is no certainty whether the importers would succeed or fail in the
writ petition filed by them before the Supreme Court. Undoubtedly, there
is a possibility that the importers may fail before the Supreme Court and the
writ petition may be rejected. In the event of such an occurrence, the
importers may be called upon to pay the disputed amount of tax as a
ITA No.41/2000 Page 14 of 24
consequence of which the assessee may become liable to pay the same on
behalf of the importers. Thus, in our view, the subject liability is clearly a
contingent liability and squarely falls within the definition of the expression
contingent liability as defined under the Accounting Standard 29 issued by
the Institute of Chartered Accountant of India and as is generally
understood.
26. A Division Bench of the Calcutta High Court has also taken a similar
view in Peico Electronics and Chemicals Ltd. v. Commissioner of Income
Tax: (1993) 201 ITR 477. In that case, the assessee had purchased certain
goods from its manufacturers and had agreed to pay the excise duty that
was levied on the said manufacturers. The excise authorities levied excise
on the said manufactures on the basis of the assessees selling price. This
was disputed by the manufactures who claimed that excise duty was
leviable with reference to their selling price and not the selling price of the
assessee. The dispute as to the differential duty that was raised by the said
manufactures was pending consideration before a High Court at the
material time. The assessee made a provision in its accounts with respect
to the said differential duty. The Court held that the liability in the hands
of the assessee was not a statutory liability but a contractual one as the levy
of excise was on the manufacturers from whom the assessee had purchased
the goods. The Court further held that the liability being a contingent
liability in the hands of the assessee, was not allowable as an expense. The
relevant extract from the said decision reads as under:-
"28. .....Having regard to the facts and circumstances of this
case, we are of the view that no statutory liability existed as far
ITA No.41/2000 Page 15 of 24
as the assessee-company is concerned, and if there is any
liability that was between the manufacturer and the Excise
Department. The assessee had no legal liability in so far as the
levy of excise duty was concerned at the material time. Even if
it is assumed that there is an agreement on the part of the
assessee to share the liability, it was only when it will be
levied upon the manufacturer that the excise duty can be
recovered from the assessee-company. There was no liability
or obligation of the assessee-company to the Excise
Department for the excise duty. It is not a statutory liability of
the assessee. Unless the liability for differential excise duty
was co-existent with that of the manufacturer, it cannot be
treated as accrued liability of the assessee. Even if it is a
contractual liability of the assessee arising out of the
transactions which the assessee had with the aforesaid two
manufacturers, such contractual obligation will be
dischargeable by the assessee only if the manufacturers are
liable to bear the liability and demand it from the assessee-
company. The manufacturers are responsible to the Excise
Department for payment of differential excise duty, if any,
levied. That is precisely the reason why the High Court
directed the manufacturers to furnish bonds to the satisfaction
of the Excise Department till the matter was decided.
However, in the case of Electric Lamp Manufacturing Co.
(India) Ltd., it did not claim such disputed liability as an
accrued liability in its balance-sheet and had shown it as a
contingent liability. In the event the liability actually
materialises, depending upon the outcome of the writ
proceeding, the amount would be paid by the manufacturers
and thereafter it may be recovered from the customers. It is,
therefore, clear that the statutory liability was of the
manufacturers and it is recoverable only from the assessee-
company. Liability of such nature can be the liability of the
assessee-company only when the manufacturers serve notices
upon the assessee to pay the additional duty consequent upon
the payment of such additional duty by the manufacturers to
the credit of the Excise Department. The matter is still pending
before the High Court and, accordingly, no liability has
ITA No.41/2000 Page 16 of 24
accrued so far as the assessee is concerned in respect of the
additional excise duty."
27. The learned counsel for the appellant had contended that the
appellant has a present obligation to pay the disputed amount of duty and
the only uncertainty is regarding the final quantum of the duty. And, the
same would be ascertained based on the outcome of the writ petition. It is
contended that in the event the importers were to succeeded in the writ
petition, the quantum of duty payable by the assessee would be nil and in
the event the writ petition filed by the importers was rejected then the
additional customs duty demanded by the authorities would be the amount
payable by the assessee. We are not in agreement with this contention of
the assessee as the quantification of how much is to be paid by the assessee
is not the subject matter of the controversy in the present case. The
contention advanced by the appellant is premised on an erroneous
assumption that the only contingency is with regard to the quantum of
additional customs duty while the obligation to pay the same is a present
obligation. This is clearly not the case as the assessee has no obligation to
pay the disputed amount at present. The obligation of the assessee would
arise only in the event the importer is called upon to pay the same.
28. The reliance placed by the counsel for the appellant on the decision
of the Supreme Court in the case of Calcutta Company Ltd. (supra) is also
misplaced. The controversy in that case was whether the estimated amount
of expenditure required to develop the plots sold by the assessee should be
deducted for the purposes of determining the taxable income of the
assessee. In that case, the assessee was in the business of developing and
ITA No.41/2000 Page 17 of 24
selling plots of land. The assessee had sold some plots and even though
had received only part of the sale proceeds, the assessee had accounted for
the total sale consideration as its income. Since the assessee was following
the mercantile system of accountancy, the assessee estimated the amount of
expenditure required to carry out certain development work on the plots
sold, which the assessee was obliged to do, and this expenditure was
claimed as a deduction. This was justified since the assessee had accounted
for the total consideration of the plots as income and this expenditure was
necessary for earning the said income. This was not a case where there was
any dispute as to the assessees liability or obligation to develop the plots
that had been sold. The only controversy was whether the expenditure
necessary for developing the plots could be allowed on the basis of a
reliable estimate made by the assessee. The Supreme Court explained that
under the mercantile system of accounting, not only the accrued income but
also accrued expenditure was liable to be accounted for in order to
determine the real income of an assessee. The ratio decidendi of this case
has no application to the facts of the present case.
29. The decision of the Supreme Court in the case of Kedarnath Jute
Manufacturing Co. Ltd. (supra) also does not support the contentions
advanced by the appellant. The controversy in that case related to allowing
a deduction on account of sales tax on the sales made during the previous
year. There was no dispute that the assessee was obliged to pay sales tax
on the sales effected by the assessee and demands in this respect had been
made by the sales tax authorities. These demands were challenged by the
assessee by filing appeals which ultimately did not succeed. The Supreme
ITA No.41/2000 Page 18 of 24
Court held that the assessee was entitled to deduct the amount of sales tax
which the assessee was liable to pay in respect of the sales during the
relevant accounting year. The Court further held that the liability to pay
sales tax did not cease because the assessee had initiated proceedings for
having the same reduced or wiped out. Indisputably, the taxable event for
the purposes of levy of sales tax is a transaction of sale and purchase. This
having occurred in the relevant accounting year, admittedly, the liability to
pay the sales tax had also arisen in the same period. The Supreme Court
held that merely because the quantification of the sales tax was subject
matter of further proceedings the same would not imply that the liability
had not accrued or arisen in the relevant year. There can be no quarrel with
this proposition of law. However, in the present case, the appellant has
contracted to make payment of the disputed customs duty only in the event
the importers are called upon to pay the same. As discussed earlier, the
present case is not a case of quantification of liability but a case where the
liability would arise only on happening of an uncertain event.
30. The Supreme Court in the case of Bharat Earth Movers (supra)
following its earlier decision in Calcutta Co. Ltd. (supra) reiterated the
view that merely because an accrued liability was to be discharged at a
future date, the same would not convert the liability into a conditional one.
In cases where the liability had accrued, the same would not be considered
as contingent only because the actual quantification may not be possible.
In that case the controversy was with regard to the provision made by the
assessee company for meeting its liability arising on account of
accumulated earned/vacation leave. While the officers of the assessee were
ITA No.41/2000 Page 19 of 24
entitled to earned leave, the other staff of the assessee were entitled to
vacation leave. The earned leave and vacation leave could be accumulated
to a maximum period of 240 days and 126 days respectively. The said
leaves could also be encashed subject to the specified ceiling. The assessee
company had made a provision for the same. The High Court held that the
liability on account of encashment of the accrued leave was a contingent
liability. The Supreme Court set aside the decision of the High Court and
held that merely because the quantification of the liability was uncertain,
the same did not render the liability as a contingent one. Indisputably, the
employees acquired a right to encash their earned leave. Correspondingly,
the assessee company incurred a liability to pay for the same. A reliable
estimate of the liability could be made, however, the exact quantification
would not be possible unless the accumulated leave was encashed. The
relevant passage from the said decision is quoted below:-
"4. The law is settled: if a business liability has definitely
arisen in the accounting year, the deduction should be allowed
although the liability may have to be quantified and
discharged at a future date. What should be certain is the
incurring of the liability. It should also be capable of being
estimated with reasonable certainty though the actual
quantification may not be possible. If these requirements are
satisfied the liability is not a contingent one. The liability is in
praesenti though it will be discharged at a future date. It does
not make any difference if the future date on which the
liability shall have to be discharged is not certain."
It is apparent that this decision is wholly inapplicable to the facts of the
present case. In the case of Bharat Earth Movers (supra), there was no
doubt or uncertainty with respect to the liability of the assessee to pay its
ITA No.41/2000 Page 20 of 24
employees their earned leave. Although, reliable estimates could be made,
the actual quantification was uncertain. Indisputably, in cases where a
liability has arisen and a reliable estimate of the same can be made, the
assessee would be entitled to a deduction in respect of the subject liability,
if otherwise permissible. An accrued liability would not be considered as a
contingent liability only because the exact quantification of the same was
not possible at the material time. And, this is precisely what the Supreme
Court has held in Bharat Earth Movers (supra).
31. In the present case, the controversy is not with regard to the
quantification but whether the liability itself has accrued/arisen or is
contingent upon the importers been called upon to pay the disputed amount.
As explained earlier, the liability in the present case is itself contingent
upon happening of an uncertain event. Accordingly, in our view, the first
question must be answered in the affirmative and against the assessee. In
our view, the Tribunal was correct in holding that the amount of
`1,64,87,375/- represented a contingent liability and was thus, not
allowable as expenditure in the relevant assessment year.
32. The question whether providing a bank guarantee would amount to
payment of a liability for the purposes of Section 43B of the Act is
premised on an assumption that the subject liability of the assessee to pay
the unpaid additional customs duty is a statutory liability of the assessee. It
is thus necessary to consider the controversy whether the obligation of the
assessee to pay the additional custom duty, in terms of clause 11 of the
Agreement with the importers, can be considered as a statutory liability.
Although, the assessee is obliged to pay the additional customs duty as and
ITA No.41/2000 Page 21 of 24
when the importers are called upon to pay the same, nonetheless, it cannot
be considered as a statutory liability because the same is not imposed on the
assessee by virtue of any statute. Customs duty is an incident of import of
goods and an importer is obliged to pay the same under the Customs Act.
Therefore, the liability to pay the additional customs duty is a statutory
liability of the importers. However, in the hands of the assessee, the
liability to pay the quantum of custom duty imposed on the importers,
either directly to them or on their behalf, cannot be considered as a
statutory liability as this obligation is not imposed by any statute but from
the contracts entered into between the assessee and the importers. The
liability in question is thus, clearly a contractual liability insofar as the
assessee is concerned.
33. Section 43B applies only in cases of statutory liability. By virtue of
the said section, a statutory liability is not deductable in the year in which it
accrues if the same remains unpaid. A deduction with respect to a statutory
liability is allowed only on payment of the same. This provision would
have no application insofar as the assessee is concerned, as the liability to
pay the amount of additional customs duty on behalf of the importers as
and when they are called upon to discharge the same is, clearly, a
contractual liability and not a statutory liability as discussed earlier.
Therefore, in our view, the question whether the said liability should be
considered as deductible under Section 43B of the Income Tax Act does
not arise.
34. The Tribunal held that even assuming that Section 43B was
applicable, the arranging a bank guarantee would not amount to actual
ITA No.41/2000 Page 22 of 24
payment of the said liability. The decision of the Supreme Court in CIT v.
Mcdowell and Co. Ltd.: (2009) 10 SCC 755, squarely answers the point in
issue against the assessee. In that case the Supreme Court held as under:-
"15. We shall first deal with the question whether
furnishing of bank guarantee amounts to actual payment and
fulfils the conditions stipulated in Section 43-B of the Act.
16. The requirement of Section 43-B of the Act is the
actual payment and not deemed payment as condition precedent
for making the claim for deduction in respect of any of the
expenditure incurred by the assessee during the relevant
previous year specified in Section 43-B. The furnishing of bank
guarantee cannot be equated with actual payment which
requires that money must flow from the assessee to the public
exchequer as required under Section 43-B. By no stretch of
imagination it can be said that furnishing of bank guarantee is
actual payment of tax or duty in cash. The bank guarantee is
nothing but a guarantee for payment on some happening and
that cannot be actual payment as required under Section 43-B of
the Act for allowance as deduction in the computation of
profits.
17. Section 43-B after amendment w.e.f. 1-4-1989 refers
to any sum payable by the assessee by way of tax, duty or fee
by whatever name called under any law for the time being in
force. The basic requirement, therefore, is that the amount
payable must be by way of tax, duty and cess under any law for
the time being in force. The bottling fees for acquiring a right of
bottling of IMFL which is determined under the Excise Act and
Rule 69 of the Rules is payable by the assessee as consideration
for acquiring the exclusive privilege. It is neither fee nor tax but
the consideration for grant of approval by the Government as
terms of contract in exercise of its rights to enter a contract in
respect of the exclusive right to deal in bottling liquor in all its
manifestations."
ITA No.41/2000 Page 23 of 24
35. We are also unable to accept the contention that arranging a bank
guarantee would amount to actual payment.
36. Accordingly, the question no. 2 is also answered in the affirmative
and against the assessee. The appeal stands disposed of with no order as to
costs.
VIBHU BAKHRU, J
BADAR DURREZ AHMED, J
FEBRUARY 07, 2014
RK
ITA No.41/2000 Page 24 of 24
|
