TMI Blog2016 (9) TMI 157X X X X Extracts X X X X X X X X Extracts X X X X ..... hat sum will have to be incurred and accordingly in his view the liability has not accrued. We do not find any rationale for holding such view. As noted, the obligation for repayment of enhanced liability corresponding to the financial charges has crystallized with the efflux of time. Thus, the facts of the case clearly indicates that enhanced liability and consequential differential costs i.e. finance charges is accrued indeed. In our considered view, the liability has definitely accrued in presenti against future outflow of resources which obligation in the present case can be determined with great reliability. Therefore, we find considerable merit in the arguments propounded on behalf of the assessee. - Decided in favour of assessee - ITA No.1372/PN/2014 - - - Dated:- 26-8-2016 - SHRI VIKAS AWASTHY, JM AND SHRI PRADIP KUMAR KEDIA, AM For The Appellant : Shri P. I. Patwa For The Respondent : Shri P. L. Kureel ORDER PER PRADIP KUMAR KEDIA, AM : The captioned appeal filed by the assessee is against the order of CIT(A)-I, Pune dated 03.02.2014 relating to assessment year 2007-08 passed under section 143(3) of the Income-tax Act, 1961 (in short the Act ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not interest within the meaning of section 2(28) of the Act and SICOM is the payee who will receive the installments of the part payment of loan and not as interest income. It was contented that the difference between consideration (NPV amount on the date of assignments) and actual liability is the expenditure of the business and not interest and therefore no TDS has been deducted from the payment. The Assessing Officer, however, was not impressed with the claim of the assessee towards finance charges. The Assessing Officer was of the opinion that the expenditure is not a revenue expenditure and liability does not exist in presenti but is a contingent liability. The Assessing Officer, in conclusion, disallowed the claim of finance charges of ₹ 44,71,126/- and added to the total income of the assessee. 4. The assessee carried the matter before the CIT(A). The assessee once again reiterated the facts before CIT(A) and submitted that the expenditure in question is neither a contingent liability nor a capital expense and therefore fully deductible as in the earlier years. The CIT(A), however, endorsed the action of the Assessing Officer on the ground that the liability i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . years from 31/03/01 10 11 12 13 14 Total NPV on 31/03/2001 @ 10% 31.03.2001 (Rs. in lacs) 64.46 58.60 53.27 48.43 44.03 268.79 4.5.1 Thus, by virtue of the said agreement the appellant has taken over the deferred sales tax liability of ₹ 835.98 lacs of ISSAL payable in five installments commencing from 30.04.2011 for a consideration of ₹ 268.79 lacs which is stated to be the Net Present Value (NPV) of the deferral liability as on 31.03.2001. This net present liability of 268.79 lacs as on 31.03.2001, which got enhanced to 288.63 lacs as on 31.03.2002 was shown under the head 'unsecured loans' for the first time in the balance sheet of the appellant company as on 31.03.2002. The NPV of liability gets increased every year till the repayment commences in the year 2011-12 and the difference in NPV at the end of a particular financial year and the immediately preceding year is be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges for which the provision was made in the books of account. The amount was not payable to ISSAL as under the agreement it has assigned the entire liability to the appellant in the year 2001 itself. As on 31.03.2007 the amount was also not payable to the sales tax department or its agency SICOM. Therefore, the impugned liability for which provision was made in the books of account of the appellant is not a liability in praesenti. The following clauses in the agreement with ISSAL also indicate that the liability is contingent upon certain happenings and it is not a liability in praesenti. ..... The loan amount is subject to assessment by sales tax authorities and would become final only on completion of assessment. The Assignee hereby assures that in consideration of ₹ 268.79 lacs NPV the Assignee hereby takes over the 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 differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile that the liability has accrued in the year 2001 and the appellant has made a provision based on NPV of the deferred liability every year, it is now examined whether it is an allowable deduction under the I.T. Act. As clearly spelt out in the said agreement, though the amount is charged to the P L account under the head 'finance charges', yet it actually represents amount of sales tax payable to SICOM or the sales tax department from the year 2011. The terms and conditions of the agreement and the Eligibility Certificate clearly show that the amount payable is nothing but sales tax to the sales tax department after the deferral period of ten years and it is not repayment of loan as claimed by the appellant. When the liability taken over represents the sales tax payable, whether as part of financing business or otherwise, the same can be allowed as deduction under sec. 43B of the I.T. Act only in the year in which the said sales tax deferral amount is actually paid to SICOM or sales tax department. In the present case it is not in dispute that as on 31.03.2007, only a provision was made for the liability and the amount was not actually paid to SICOM or sales tax departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of financing for an agreed consideration. It was stated that in the process, the company took over not only the liability to the extent of consideration received but also even the future liability. The difference between the NPV determined as on 31.03.2007 and 31.03.2006 by applying 10% discounting factor has been debited in the Profit Loss Account as finance charges. The Ld. AR for the assessee submitted that the expenditure was booked on accrual basis as per Accounting Standards for prudence and matching principles notified under section 145 of the Act. The liability is to be discharged in favour of SICOM being an agent appointed by the Government of Maharashtra, who will receive the installment of part payment of loan and not as interest income. The difference between the consideration and the liability determined at NPV is claimed to be accrued expenditure of business. It was contended by the Ld. AR that this is not a case of exchange of loan on better repayment terms but a case of receipt of loan at pre-determined costs, which cost gets crystallized with the efflux of time and is an actual liability which ought to be allowed as an expenditure regardless of the fact that n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lloys Ltd. (ISSAL) whereby the liability of the assignor for repayment of the sales-tax deferral loan amounting to ₹ 835.98 lakhs as noted above was acquired by the assessee for a consideration of ₹ 268.79 lakhs. The liability of the assignor was accepted by the assessee for a sum of ₹ 268.79 lakhs received from the assignor stated to be determined by applying discounting factor of 10% as per Net Present Value method based on repayment schedule. 8.1 The relevant extract of the assignment agreement is reproduced hereunder :- 3. In the course of its business, the Assignor has availed interest-free sales tax deferral loan from the Government of Maharashtra under the Package Scheme of Incentives, 1988 ( the Scheme'). As per the deferral scheme, the Assignor has, every year beginning with the financial year 1994-95, collected sales tax from its customers, etc .. 4. As per the Scheme, sales tax liability of each year is required to be paid by the Assignor 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 yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has debited the difference between NAV of the loan acquired from the assignor at the end of this year vis- -vis NAV determined at the end of the last year towards finance charges in the Profit Loss Account. It is the case of the Revenue that the impugned finance charges are contingent in nature and is not a liability in presenti . Therefore, the pertinent question that arises for our adjudication is whether the additional liability determined at the end of the financial year relevant to the assessment year as per Net Present Value method and consequential finance charges debited to the Profit Loss Account is an accrued liability or a contingent liability ? 8.3 In terms of section 145 of the Income Tax Act read with section 211 of the Companies Act, a company has to mandatorily prepare its account on accrual basis. The term Accrual has been defined in the Accounting Standard 1 prescribed by the Institute of Chartered Accountants of India as well as by the Central Government under section 145 of the Income Tax Act as under :- Accrual refers to the assumptions that revenues and costs are accrued, that is, recognized as they are earned or incurred (and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... occurrence or nonoccurrence of one or more uncertain future events. As per Mercantile System of Accounting, an accrued liability is required to be accounted for in the books of account. In respect of the liability, which has accrued, but quantification for which is still pending, a provision is required to be made in the books of account. 9. In the present case, the assessee by virtue of assignment agreement has received certain amount which is to be replenished and repaid by higher sum computed by applying Net Present Value method at a discounting factor of 10%. The corresponding finance costs debited to Profit Loss Account during the year represents incremental increase in the liability with the efflux of time where the liability gets accrued as it inches towards maturity. Thus, it is manifest that the incremental liability has accrued to the assessee in presenti with the efflux of time notwithstanding the fact that increase in the liability is required to be actually discharged on a future date. The gradual increase liability is dependent on the time horizon that has elapsed and therefore not an uncertain event by any stretch of imagination. The Assessing Officer has disa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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