TMI Blog2014 (2) TMI 378X X X X Extracts X X X X X X X X Extracts X X X X ..... because the same is not imposed on the assessee by virtue of any statute - Section 43B applies only in cases of statutory liability - A deduction with respect to a statutory liability is allowed only on payment of the same - Provisions of section 43B are not applicable here. Relying upon the decision in CIT v. Mcdowell and Co. Ltd [2009 (5) TMI 28 - SUPREME COURT] - The requirement of Section 43B of the Act is the actual payment and not deemed payment - As per section 43B - The amount payable must be by way of tax, duty and cess under any law for the time being in force - The bank guarantee is nothing but a guarantee for payment on some happening and that cannot be actual payment which requires that money must flow from the assessee to the public exchequer as required under Section 43B - Decided against assessee. - ITA 41/2000 - - - Dated:- 7-2-2014 - Badar Durrez Ahmed And Vibhu Bakhru,JJ. 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. Vibhu Bakhru, J 1. The present appeal has filed by the appellant under section 260A(1) of the Income Tax Act, 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 Rs. 1,64, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Hon ble 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 Hon ble Bombay High Court in the case of Standard Mills Co. vs. CIT (1998) 229 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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. 25. In the present case, the language of clause 11 of the agreement between the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad 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 assessee s 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 as the assessee-company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mates 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 Rs. 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... swers 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X
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