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TMI Blog2016 (9) TMI 157X X X X Extracts X X X X X X X X Extracts X X X X ..... a sum of Rs. 44,71,126/- as finance charges to the profit and loss account. On being asked about the nature of payment towards finance charges, the assessee submitted that Indian Seamless Steels and Alloys Ltd. (ISSAL) had availed interest free sales tax Deferral loans (STL) from Government of Maharashtra under Package scheme of incentives-1988 (The scheme). As per the scheme, ISSAL had collected the sales tax from its customers and retained as an interest free sales tax loan. It was stated that as per the scheme, the STL is required to be paid in 5 installments to SICOM being the agency appointed by the Government of Maharashtra. As a part of financing activity, the company took over and accepted sales tax liability (gross) of Rs. 864.05 lakhs against discounted receipts of Rs. 268.79 lakhs from ISSAL computed Net Present Value (NPV) applying 10% discounting rate. It was further stated that the loan was taken over by way of assignment and it is payable in five equal installments starting from F.Y. 2011-12 and ending on F.Y.2015-16. In the books of accounts of the assessee company, the loan was accounted for at NPV at the time of assignment. It was claimed that the loan liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of its business; the said company appears to have availed interest free sales tax deferral Certificate of Entitlement from the Government of Maharashtra under the Package scheme of Incentives, 1988. As per the Package scheme of Incentives, 1988, sales tax liability of each year is required to be paid by ISSAL to the Sales Tax Department of Government of Maharashtra in five equal annual installments upon expiry of ten years from the date of availment i.e. to say the sales tax collected for the financial year 1994-95 would have to be repaid in five equal annual installments beginning with financial year 2005- 06 and so on. As stated in the agreement dated 09.04.2001 claimed to have been entered into by the appellant ISAAL during the period from 01.04.2001 to 31.03.2001, ISSAL had availed of sales tax deferral of Rs. 835.98 lacs and the repayment schedule of which is as follows: Sales Tax Deferred During 2000-01 Repayment Schedule Total Rs. in lacs Year ending on Rs. In lacs 30.04.11 30.04.12 30.04.13 30.04.14 30.04.15 31.03.01 835.98 167.20 167.20 167.20 167.20 167.20 835.98 It is also noticed from Annexure-I of the said agreement t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e present case are whether the liability in question i.e. the difference in NPV of Rs. 44,71,126/- is liability in praesenti as claimed by the appellant. If it is liability in praesenti, whether the same is an allowable deduction u/s 37 of the I T Act. (i) whether the impugned liability is liability in praesenti: 4.5.2 In the present case, assignor ISAAL was liable to pay sales tax amounts collected from 01.04.2000 to 31.03.2001 to the sales tax department. However, payments were deferred under the Incentive Scheme, 1988 and the amounts were payable after ten years in five equal annual installments commencing from 30.04.2011, which means that the actual liability arises in future. The claim of the appellant is that it has taken over the said deferral sales tax liability in the year 2001 and though the liability was payable to the sales tax department after a period of 10 years as per the scheme of incentives, provisions is being made every year based on the difference in NPV at the end of the every year and the expenditure is claimed under the head finance charges. But, the fundamental question that arises is as on 31.03.2007 to whom the appellant was liable to pay the so call ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the agreement without any interest." 4.5.3 Further, the appellant has not placed on record any evidence in the present proceedings to show that the sales tax department has acknowledged or approved the said agreement of ISSAL with the appellant or transfer of the deferred liability to the appellant. Therefore, contention of the appellant that the liability has accrued when it was taken over in the year 2001 though it is to be discharged from the year 2011 is not tenable. Needless to emphasize that there is a distinction between the actual liability in praesenti and a liability de futuro which for the time being is only contingent. In the present case, as on 31.03.2007 there was no liability in praesenti and the appellant has made a provision for a liability de futuro. In such circumstances, the decision of Apex Court in the case of Bharat Earth Movers (112 Taxman 61) and prudence as per AS- 1 read with sec. 145, relied upon by the appellant, do not render any assistance to the case of the appellant. (ii) If it is liability in praesenti as claimed by the appellant whether the same is otherwise an allowable deduction: 4.5.4 Even presuming for a while that the liability h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition of Rs. 44,71,126/- made by the Assessing Officer on this ground does not call for any interference and the same is upheld. Grounds of appeal No. 1 to 4 fail." 5. Aggrieved by the order of the CIT(A), the assessee is in appeal before the Tribunal. 6. The Ld. Authorized Representative (AR) for the assessee Shri P. I. Patwa submitted at the outset that as per mutual agreement with Indian Seamless Steels and Alloys Ltd. (ISSAL), the assessee had agreed to take over their Differed Sales Tax Loan of Rs. 835.98 lakhs (outflow at a future date) for a consideration (inflow) of a sum of Rs. 268.79 lakhs arrived at by applying Net Present Value (NPV) method at the discount rate of 10% based on the repayment schedule. Thus, present value of net inflow of funds received was computed at a discount rate identified at 10%. It was submitted that the loan is returnable in five equal installments starting from financial year 2011-12 and ending on financial year 2015-16 and in the books of the company, the loan was accounted for at NPV at the time of assignment and as such the loan liability so taken over is an integral part of business of financing for an agreed consideration. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid notification. He submitted that the liability is in existence at the end of the previous year and can be determined with reasonable certainty and therefore recognized as per well established accounting practices. He finally contended that the impugned finance charges in question is neither a contingent liability nor a capital expenses and therefore the action of the Revenue in rejecting the claim of the assessee is unwarranted and requires to be set-aside. 7. The Ld. Departmental Representative (DR) Shri P. L. Kureel, on the other hand, relied upon the order of the CIT(A) and submitted that no actual liability in presenti has been incurred by the assessee. The liability, if any, will arise in future based on the events which are not certain and therefore the liability is wholly contingent and expenses debited on this count cannot be entertained. He, thus, pleaded that no interference with the order of the CIT(A) is called for. 8. We have carefully considered the rival submissions and orders of the authorities below. The assessee has entered into an assignment agreement with one M/s Indian Seamless Steels and Alloys Ltd. (ISSAL) whereby the liability of the assignor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y sales tax authorities and would become final only on completion of assessment. The Assignee hereby assures that in consideration of Rs. 268.79 lacs NPV the Assignee hereby takes over tile said loans of the assignor and agrees to pay the said loans to sales tax department as per the payment terms. In case the liability for payment of sales tax increases during the assessment, the differential liability would be paid by the assignor on respective due dates. In case such liability reduces during the assessment, the differential liability would be paid by the assignee to the assignor on respective due dates. In the event of any default by the Assignee, in making the payment on or before due date, the Assignor will make payment of Sales Tax in which case the Assignee shall be liable to pay the amount thus paid and interest thereon @ 18% p.a. from the date of default and the Assignee shall also be liable to reimburse the penal interest payable on account of delayed payment of Sales tax." 8.2 It is the case of the assessee that in terms of the agreement, the assessee has debited the difference between NAV of the loan acquired from the assignor at the end of this year vis-à- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng computed. On the other hand, if a liability has not accrued during the relevant year, same is actually known as contingent liability. Therefore, the short question is whether the liability towards impugned finance charges is an accrued liability or is a contingent liability in the instant case. Needless to say, an accrued liability is allowable whereas a contingent liability is not allowable deduction for the purposes of determination of taxable income. 8.5 The judicial opinion of the various courts is that a liability depending upon a contingency is not a debt in presenti or in futuro till the contingency happens. But if it is debt, the fact that the amount has to be ascertained does not make it any the less a debt if the liability is certain and what remains is only a quantification of the amount. A reference in this regard may be made to the decision of the Hon'ble Supreme Court in the case of CIT vs. Shri Goverdhan Ltd. (1968) 69 ITR 675 (SC). The word 'contingent' in contrast, refers to possibility of an obligation or liability to arise on occurrence or nonoccurrence of one or more uncertain future events. As per Mercantile System of Accounting, an accrued liability is req ..... X X X X Extracts X X X X X X X X Extracts X X X X
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