TaxTMI 
TaxTMI 
2014 (2) TMI 378
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....see) 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 asses....
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....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 Rs. 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. respectiv....
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....aterial 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 Rs. 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 t....
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.... 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 Hon"ble 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 i....
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.... 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 t....
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.... 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." 23. This definition would also be relevant for the purposes of the Income Tax Act as it clearly indicates the liabilities which can....
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....essee 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 ....
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.... 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 assesseecompany. 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 stat....
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....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 assessee"s 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 appella....
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....ccumulated 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 rea....
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....alled 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 pa....