2014 (2) TMI 378 - HC - Income Tax

Whether additional custom duty is contingent liability - litigation is pending - Held that - The liability of the assessee to pay the additional customs duty is contingent upon the importers being called upon to pay the same - There is a possibility that the importers may fail before the Supreme Court and the writ petition may be rejected - In such event, the importers may be called upon to pay the disputed amount of tax as a consequence of which the assessee may become liable to pay the same on behalf of the importers - The subject liability is clearly a contingent liability and squarely falls within the definition of the expression contingent liability as defined under the Accounting Standard 29 issued by the Institute of Chartered Accountant of India - Decided against assessee. Whether providing a bank guarantee would amount to payment of a liability u/s 43B - Held that - Although, the assessee is obliged to pay the additional customs duty as and when the importers are called upon to pay the same, nonetheless, it cannot be considered as a statutory liability 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.

Issues Involved:
1. Disallowance of an amount of Rs. 1,64,87,375/- as a contractual trading liability.
2. Applicability of Section 43B of the Income Tax Act to the liability of Rs. 1,64,87,375/-.
3. Disallowance of a sum of Rs. 9,37,669.81 due to foreign exchange fluctuation loss.

Detailed Analysis:

Issue 1: Disallowance of Rs. 1,64,87,375/- as a Contractual Trading Liability

The appellant claimed a deduction for additional customs duty as part of the landed cost of imported materials. This duty was disputed by the importers and not paid to customs authorities. The Tribunal disallowed this deduction, considering it a contingent liability, as the duty would only be payable if the customs authorities prevailed in the Supreme Court.

The court examined whether the liability was contingent or had accrued. According to the agreement, the appellant was to pay the disputed amount only if the importers were called upon to pay it. The court held that the liability was contingent upon the importers being called upon to pay the duty, making it a contingent liability and not deductible.

The court referred to Accounting Standard 29 and the Supreme Court's decision in Rotork Controls India P. Ltd. v. CIT, which stated that a provision could only be recognized if a present obligation existed, it was probable that an outflow of resources would be required, and a reliable estimate could be made. The court concluded that the liability was contingent and not allowable as expenditure.

Issue 2: Applicability of Section 43B of the Income Tax Act

The court considered whether the liability could be deducted under Section 43B, which allows deduction of statutory liabilities only upon actual payment. The court held that the liability was contractual, not statutory, as it arose from the agreement between the appellant and the importers, not from any statute.

The court also addressed whether providing a bank guarantee amounted to actual payment. Citing the Supreme Court's decision in CIT v. Mcdowell and Co. Ltd., the court held that furnishing a bank guarantee did not equate to actual payment, as it did not involve a cash outflow to the public exchequer.

Issue 3: Disallowance of Foreign Exchange Fluctuation Loss

The court noted that both parties agreed that the issue of foreign exchange fluctuation loss was covered in favor of the assessee by the Supreme Court's decision in CIT v. Woodward Governor India Private Limited. Accordingly, the court answered this question in favor of the assessee.

Conclusion:

The court affirmed the Tribunal's decision on the first two issues, holding that the liability of Rs. 1,64,87,375/- was a contingent liability and not deductible, and that Section 43B did not apply as the liability was contractual, not statutory. The court ruled in favor of the assessee on the third issue, allowing the deduction for foreign exchange fluctuation loss. The appeal was disposed of with no order as to costs.

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