Facts of the Case

Oswal Agro Mills Ltd. entered into agreements with certain importers for the purchase of imported Palm Stearine Fatty Acid. Under the agreements, the assessee agreed to purchase the imported material at landed cost including CIF value, customs duty, clearing charges and related expenses along with a specified margin. The agreements further provided that any disputed amount of customs duty, excise duty, penalty, sales tax, or similar liability arising during transactions would be treated as part of landed cost and paid by the assessee as and when the importers became liable for such payment.

The Customs Department demanded additional customs duty from the importers. The importers challenged the demand before the Supreme Court and obtained interim relief allowing clearance of goods on partial payment and bank guarantees for the remaining disputed amount. The assessee furnished counter guarantees in respect of such bank guarantees.

For Assessment Year 1987–88, the assessee claimed deduction of ₹1,64,87,375 relating to unpaid additional customs duty and also claimed deduction for loss arising from foreign exchange fluctuation.

The Assessing Officer disallowed the claims and the appellate authorities upheld the disallowance, leading to the present appeal before the Delhi High Court.

 Issues Involved

  1. Whether disputed additional customs duty claimed by the assessee constituted an accrued trading liability or a contingent liability.
  2. Whether such liability was allowable as deduction under Section 43B of the Income Tax Act.
  3. Whether furnishing a bank guarantee amounted to actual payment for purposes of Section 43B.
  4. Whether foreign exchange fluctuation loss constituted a notional loss or an allowable business loss.

 Petitioner’s Arguments

The assessee contended that:

  • The additional customs duty formed part of landed cost of imported goods and was therefore a trading liability.
  • The liability had accrued pursuant to contractual obligations and could not be characterized as contingent merely because the importers had challenged the customs demand.
  • The uncertainty related only to quantification and not to the existence of liability.
  • Under mercantile accounting principles, accrued liabilities are allowable deductions even if discharged at a later date.
  • The amount deposited as margin money for obtaining bank guarantees effectively resulted in funds moving out of the assessee’s control and therefore should be regarded as actual payment.
  • The assessee relied upon judicial precedents including: 

Respondent’s Arguments

The Revenue contended that:

  • The liability was contingent because the importers themselves had disputed the customs duty demand before the Supreme Court.
  • The assessee's obligation would arise only if the importers ultimately became liable to pay the additional customs duty.
  • A contingent liability cannot be allowed as expenditure under the mercantile system.
  • Furnishing bank guarantees does not amount to actual payment.
  • Section 43B applies only when there is actual payment of statutory dues.

 Court Findings / Order

The Delhi High Court held:

On Disputed Additional Customs Duty

The Court held that the assessee's liability was contingent in nature and had not crystallized during the relevant assessment year.

The Court observed that the contractual arrangement specifically stated that the assessee would become liable only if and when the importers were called upon to pay the disputed customs duty.

Since the importers' challenge before the Supreme Court was still pending, the liability depended upon the happening of an uncertain future event.

Therefore, the liability had not accrued and could not be claimed as a deduction.

 Important Clarification

The Court clarified that:

  • Mere uncertainty in quantification does not make a liability contingent.
  • However, where the existence of liability itself depends on occurrence of a future uncertain event, such liability remains contingent.
  • Contractual liability and statutory liability are distinct concepts.
  • A bank guarantee is not equivalent to actual payment for purposes of deduction under Section 43B.

 Sections Involved

  • Section 260A – Appeal to High Court
  • Section 43B – Certain deductions to be allowed only on actual payment
  • Mercantile System of Accounting Principles
  • Accounting Standard–29 relating to Contingent Liabilities

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2014:DHC:738-DB/VIB07022014ITA412000.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.