TaxTMI 
TaxTMI 
2005 (8) TMI 286
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....under head 'unsecured loans' in its balance sheet. As per the terms of the Bonds which are tenable for a period of 25 years on maturing over and above the issue price of Rs. 10,000 a bond fetches a total value of Rs. 6,70,000. The amounts borrowed under the bond scheme are admittedly used for the purpose of business of the assessee. The bonds which are en cashable by the Bond Holder at the end of the maturity period can be redeemed of its option by the assessee at the end of every 5 years. The redemption value of these bonds at intervals is as below: (a) at the end of 5 years for Rs. 23,200 (b) at the end of 10 years for Rs. 55,200 (c) at the end of 15 years for Rs. 1,27,000 (d) at the end of 20 years for Rs. 2,89,000. The incremental amount available to the Bond Holder works out to yearly compounding at the rate of 18.33%. Having regard to the permissible redemption at the end of 5 years period the assessee had provided in its books for the incremental amount payable and relating to the year. The claim for the assessment year in question amounting to Rs. 2,79,76,080 was rejected on the ground that it is a contingent liability. Similar disallowance has been made for ....
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....iability which is accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered. The Supreme Court observed that the expenditure also covers a liability which the assessee has incurred in the present although it is payable in future. A contingent liability that may arise in future is however not expenditure. It would also cover not just one time payment but a liability spread out over a number of years. In this judgment the Supreme Court specifically approved the decision of the Madhya Pradesh High Court in 165 ITR 765. In that case the MP High Court has held that the term 'expenditure' includes discount on bonds issued by it. The High Court has held that the amount of discount in effect represents deferred interest and an assessee would not be justified in claiming deduction of the entire amount of discount in the accounting year in question. But it would be entitled to proportionate deduction spread over a period for which the bonds remained outstanding. The Supreme Court have held that discount amount may be equally spread over the years during which the de....
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....the bonds at the end of 5 years, 10 years, etc., and till the assessee exercises that option there is no liability to pay any amount to the bond holders. The liability claimed by the assessee is therefore a contingent liability. He further submitted that only such expenditure are allowable in respect of which the liability is crystallized or ascertained and not a contingent one. He, therefore, pleaded that the interest is not allowable." 5. Learned counsel for assessee Shri Sanjay Dave relied upon the appellate order. He submitted that as per the terms of borrowal and considering the total length of period for which the bond is issued, the assessee has to pay Rs. 6.60 lakhs towards interest. Such interest has been computed on the face of the bond itself. If the amount is redeemed at the end of 5th year, the assessee has to pay Rs. 13,200 towards interest. If such amount is equally spread, Rs. 2,640 becomes the interest payable for every year. The assessee has provided only such amount payable at the end of 10th, 15th, 20th and 25th year. He also filed before us the basis of computation of interest which is as under: ----------------------------------------------------------- ....
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.... 1,170,936,000 Incremental interest 3,903,120,000 1,531,224,000 720,576,000 ----------------------------------------------------------- ------------------------------- 10008 10008 10 5 10,000 10,000 55,000 23,200 100,080,000 100,080,000 550,440,000 232,185,600 450,360,000 132,105,600 63,650,880 26,421,120 45,000 13,200 21,800 13,200 4,500 2,640 6,360 2,640 450,360,000 132,1....
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....nbsp; 780,624,000 3,903,120,000 ------------- 6,605,280,000 On full term - Annual Charges 264,211,200 Average Rate of Return 18.32% -------------------------------------------------- He, thereafter submitted that if the total interest payable is considered, the annual interest payable comes to at the rate of 18.31 per cent. This was the prevailing market rate of borrowal at the relevant time. Similar bonds were....
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....tandard 29 issued by ICAI and as defined in the Companies Act. A provision is defined in Part ill of Schedule VI to the Companies Act, as any amount written off, or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. AS 29 presents a slimmed down version of this definition and states that a provision is a liability, which can be measured only by using a substantial degree of estimation. The Standard prescribes three conditions, all of which are required to be cumulatively met, if a provision is to be recognized. These are: a. An enterprise has a present obligation as a result of a past event. b. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and c. A reliable estimate can be made of the amount of the obligation. 6.1 It is also necessary to understand what is contingent liability. As per the Accounting Standard 4 and Accounting Standard 29, a contingent liability is defined to include two separate situations, of it being either a possible obliga....
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....deducted from the gross receipts in the Profit & Loss Account. The company had worked out on an actuarial valuation its estimated liability and made provision for such liability not all at once but spread over a number of years. The practice followed by the company was that every year the company worked out the additional liability incurred by it on the employees putting in every additional year of service. The gratuity was payable on the termination of an employee's service either due to retirement, death or termination of service - the exact time of occurrence of the latter two events being not determinable with exactitude before hand. A few principles were laid down by this Court, the relevant of which for our purpose are extracted and reproduced as under: (i) For an assessee maintaining his accounts on the mercantile system, accrued liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in the case of amounts actually expended or paid; (ii) J....