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TMI Blog2005 (8) TMI 286X X X X Extracts X X X X X X X X Extracts X X X X ..... loans' in its balance sheet. As per the terms 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been incurred although it may have 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , etc., and till the assessee exercises 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 Terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 established under an Act of Parliament, has prescribed certain Accounting Standards. Section 145(2) of the Income-tax Act empowers the Central Government to notify the Accounting Standards. However, till date the Central Government has notified the Accounting Standards only relating to disclosure of accounting policies and relating to disclosure of prior period and extraordinary items. Under the Companies Act, 1956, the Central Government is authorised to issue Accounting Standards in consultation with the ICAI. Under the Companies Act, 1956, it is also provided that if no Accounting Standard has been prescribed by the Central Government, the Accounting Standards prescribed by the ICAI shall prevail. Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 has accepted the accounting principles and standards laid down by the ICAI as bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility 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 above principle can be applied here. In the present case, the amount has been borrowed by issue of deep discount bonds. The amount has been utilized for the purpose of business. As per the terms of issue, if the bonds are redeemed at the end of 5 years, the assessee is obliged to pay interest of Rs. 13,200. Dividing equally the sum, the liability for the year is Rs. 2,640 per bond. Even considering the total liability payable on maturity, the liability comes very near to the provisions made by the assessee. We also find that the provisions made is scientific and acceptable. The liability is not contingent upon happening or not happening of an event. Hon'ble Supreme Court in the case of BEML v. CIT [2000] 245 ITR 428 analyzed the difference between the accrued liability and contingent liability. At page 431, Hon'ble Supreme Court held thus: "The law is settled: if a busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 it can be satisfactorily estimated. So is the view taken in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) wherein this Court has held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case." 6.3 The decision referred by Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd relied by learned CIT(A) will also apply to the present set of facts. In the said case, the discount though ultimately accruing at the end of maturity, was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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