TMI Blog2005 (8) TMI 286X X X X Extracts X X X X X X X X Extracts X X X X ..... rms 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 the assessment years 1997-98 and 1999-2000. It may be mentioned that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 debenture was redeemable. AR argued that similar consideration must preva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcises 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: ----------------------------------------------------------- A.Number of bonds 10008 10008 10008 Ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 issued by other financial institutions including Government companies like GNFC, IDBI, ICICI, etc. It is also an admitted fact that the amount has been borrowed by the assessee by issue of bonds. The amount repayable on maturity or on early redemption is also fixed. Thus by discounting the interest at present rate, the liability is ascertained and not contingent. He accordingly submitted that the order of learned CIT(A) is to be upheld. 6. We have carefully considered rival submissions and relevant facts of the case. The Institute of Chartered Accountants of India (ICAI) is the premier Institute regulating the accountancy profession in India establishe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 obligation, or a present obligation. Situation I: A contingent liability is: 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 future uncertain events, . Not wholly within the control of the enterprise. Situation II: A contingent liability is: . A Present obligation that arises from past events . But is not recognized because- (a) It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or (b) A reliable estimate of the amount of the Act the obligation cannot be made. 6.2 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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) Just as receipts though not actual receipts but accrued due are brought in for Income Tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business; (iii) A condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability; (iv) A trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a subsequent year if i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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