Deduction of Section 43B not allowed for contingent liability

By | November 3, 2015

Where import contract stated that after purchase liability in respect of customs duty, excise duty, penalty, sales tax, etc., would be paid by assessee, since liability, was contingent upon uncertain fact, deduction under section 43B was not permissible


Oswal Agro Mills Ltd.


Commissioner of Income-tax


IT APPEAL NO. 42 OF 2000

JANUARY  12, 2015

M. Prakash Kumar, Adv. for the Appellant. Rohit Madan and Ruchir Bhatia, Advs. for the Respondent.


S. Ravindra Bhat, J. – The following questions of law were framed in the present appeal by an order dated May 12, 2000.

“(i) Whether the Income-tax Appellate Tribunal is correct in law and on facts in upholding this disallowance of an amount of Rs. 1,60,00,064, being a contractual trading liability incurred in the nature of additional cost of material, holding the same to be a liability contingent on the happening of an event and, thus, not an allowable deduction while computing the income for the instant assessment year ?
(ii) Whether the Income-tax Appellate Tribunal is correct in law and on facts in holding that the liability of Rs. 1,60,33,064 claimed by the appellant was not allowable under section 43B of the Income-tax Act, 1961?
(iii) Whether the Income-tax Appellate Tribunal is correct in law and on facts in upholding the disallowance of a sum of Rs.1,19,07,989 being the loss incurred on account of devaluation of rupee against the US dollars, holding the same to be a fictitious and notional loss?”

2. The assessee is manufacturing and trading industrial hard oils, edible oils, marine products, emergency lighting units and soaps, etc., and entered into an agreement with overseas processors Shahji International Pvt. Ltd. and Oswal Soap and Allied Industrial Pvt. Ltd. for purchase of imported palm sterline fatty acid. These agreements with the said importers were identically worded. The imported material was to be purchased by the assessee and the CIF price, customs duty, clearance charges, etc., and 3 per cent. of the total cost. In terms of clause 11 any liability arising after the sale of imported materials in respect of customs, excise, penalty, sales tax, etc., was payable by the assessee-appellant and was to be included as landed cost of the imported material. The Revenue for the relevant years had disallowed sum of Rs. 1,60,33,064 on the ground that this was not permissible under section 43B of the Income-tax Act.

3. The matter was carried out before Income-tax Appellate Tribunal (“the ITAT”) which upheld the Revenue’s contentions. It is under these circumstances that the assessee appealed to this court. The first two questions pertain to the applicability of section 43B and the permissibility of the deduction claimed under the circumstances of the case.

4. At the outset, the learned counsel for the parties submitted that the question does not survive in view of the judgment titled as Oswal Agro Mills Ltd. v. CIT  363 ITR 486 (Delhi). This court had discussed the relevant case law on the subject and especially relied upon the judgment of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363, Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) and the judgment reported as Bharat Earth Movers v. CIT [2000] 245 ITR 428  (SC). It is held that the amount is not an ascertained liability. The court held that such liability is contingent upon an uncertain fact and, therefore, deduction claimed by the assessee was not permissible in view of section 43B of the Income-tax Act. This court is governed by the said precedent and, accordingly, answers questions Nos. 1 and 2 in the affirmative and against the assessee.

5. The third question, i.e., disallowance in respect of sum of Rs. 1,19,07,989 being a loss incurred on account of devaluation of rupee is governed by the ruling of this court in CIT v. Woodward Governor India (P.) Ltd.[2009] 312 ITR 254 . In accordance with the ruling of the Supreme Court in that judgment the loss incurred is clearly admissible and the disallowance made by the Revenue was not justified. The question has to be again answered in the negative but in favour of the assessee.

6. In view of the above, and for the foregoing reasons, the appeal is partly allowed.

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