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TMI Blog2012 (8) TMI 603X X X X Extracts X X X X X X X X Extracts X X X X ..... efinition in any ICAI standards that contingent liability on revenue account means on account of any amount of demand created by revenue authority such as Income Tax, Sales Tax, etc.- as on calculation of net worth has been supported by audit firm who have concluded that the evaluation of net worth is in accordance with the NIO. Any deviation from the said provisions would result in denial of level playing field to all bidders and could result in litigation, thus it is apparent that the minutes of Notice Inviting Tender meetings have recorded a stand which is against the one projected by the writ petitioner. As these are mere opinions and the final decision has to be taken by the Cabinet Committee on Economic Affairs - Since the Cabinet Committee on Economic Affairs is yet to take a decision we hold the writ petition to be premature. - W.P.(C) 4431/2012 - - - Dated:- 21-8-2012 - MR. PRADEEP NANDRAJOG MR. MANMOHAN SINGH JJ. Represented by: Mr.N.K.Kaul, Senior Advocate instructed by Mr.Vineet Malhotra and Mr.Aseem Chawla, Advocates. Represented by: Mr.Rajeeve Mehra, A.S.G. instructed by Mr.Jatan Singh, Mr.Ashish Virmani and Mr.Tushar Singh, Advocates. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make deferred payments when due. If, as a result of any such guarantees or undertakings given, an obligation has actually arisen, a provision should be made there against in the accounts e.g. if a company has guaranteed that a product manufactured and sold by it will give a certain performance, and the customer has claimed compensation because that level of performance has not been achieved, a provision for such liability should be made in the accounts. Again, if a company has guaranteed a loan given by bankers to a subsidiary company and the subsidiary has become insolvent, the company should make a provision in the accounts for the amount it may be called upon to pay. To take another example, it is customary for automobile manufacturers to guarantee the performance of the car for a period of time and to replace defective parts during that period. Such companies usually make a provision for contractual guarantee obligations in their accounts. supplemented with a Guidance Note as per Para 8.8.7.2 in the Revised Schedule to the Companies Act 1956, issued by ICAI (as per December 2011 Edition) which reads as follows:- 8.8.7.2 A contingent liability in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the general nature and amount of each such contingent liability if material shall also be specified. However, where a company undertakes to perform its own obligations and for this purpose issue guarantee, it is not to be shown as contingent liability for example counter guarantee given to bank by a company for payment of insurance premium, deferred payment to foreign supplier, letter of credit etc. 4. The petitioner contends that letters of credit are executory contracts for purchase under which neither party has performed it's part of the contract. Executory contracts such as L/C‟s do not fall within the scope of AS-29. There is no probability of a liability being incurred and thus no question of a loss being estimated. Therefore a Letter of Credit is neither a liability nor a contingent liability and there is no requirement to record the L/C‟s in the Balance Sheet. 5. The petitioner submits that as a matter of prudence discloser is made, by way of foot note, in the balance sheet which is in line with the prescription under Schedule-VI to the Companies Act, 1956. 6. Petitioner claims that Contingent Liability on Revenue Account is not defined in any Statute, Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as Contingent Liability, considering the provision has been made. The same is an ascertained liability and not Contingent Liabilty. The Supreme Court in Bharat Earth Movers Vs. Commissioner of Income Tax, Karnatak as reported in 2000 (6) SCC 645 relying upon its earlier decision rendered in the case of Metal Box Company Vs. Workmen held as under:- 4. The law is settled: if a business liability has definitely arisen in the accounting year; the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in present though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. (c) Further to explain the said distinction between the following examples have been illustrated hereinbelow: Contingent Liability on Capital Account: Suppose a company is in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t liability were deducted by DGH from equity and net worth was evaluated to be insufficient. Except contingent liability on account of Capital Commitments disclosed by the bidders in their Annual Reports, all other items of contingent liability reported by the bidders in their Annual Reports as per Accounting Standard (AS-29) issued by ICAI were considered for the purpose of net worth sufficiency. ECS was apprised that there has been no definition in any ICAI standards that contingent liability on revenue account means on account of any amount of demand created by revenue authority such as Income Tax, Sales Tax, etc. Further, Share Application Money, against which shares were not issued as on 31.03.2010, being not a part of Paid-up Capital as per Companies Act, 1956 Part- I, Schedule VI was not considered for evaluation of net worth and the same is in line with the method given in the NIO. Head (NELP) informed ECS that the view of DGH on calculation of net worth has been supported by audit firm M/s. SARC Associates who have concluded that the evaluation of net worth of M/s. Jay Polychem (India) Limited done by DGH is in accordance with the NIO. Any deviation from the said pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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