Business expenditure – A. Y. 1985-86 – Accrued or contingent liability – Mercantile system of accounting- Customs duty – Seller challenging increase in payment of customs duty before Supreme Court – Mere challenge to demand would not by itself lead to cessation of liability- Assessee cannot be denied deduction of amounts paid for purchase of goods

CIT vs. Monica India (No. 1); 386 ITR 608 (Bom):

The assessee was following
mercantile system of accounting. For the A. Y. 1985-86, the assessee had
claimed expenditure on accrual basis which included customs duty of Rs. 1.78
crore. The same was allowed by the Assessing Officer. The Commissioner in
exercise of his powers u/s. 263 of the income-tax act, 1961 held that the
amount of rs. 1.78 crore was a contingent liability as the assessee had
challenged it in the Supreme Court and the payment of it to the customs
department was postponed and thus could not be allowed as an expenditure for the  subject 
assessment  year.  The   tribunal
held that the assessee was following the mercantile system of accounting and
therefore, the liability was to be allowed as deduction on accrual basis and
further held that the liability to pay the customs duty by the assesee was a
part of the sale price to the two sellers, and consequently, ought to be
allowed as an expenditure for purchase of goods.

On appeal by the revenue, the
Bombay high Court upheld the decision of the tribunal and held as under:

“i)  The  
agreements  between  the 
parties  provided that the consideration
payable for the purchase of goods included within it, the duty of customspayable
on the imported goods as a part of the cost incurred by  the 
seller. Therefore,   the cost of
purchase of goods was not only the expenses incurred by the seller from the
opening of the letter of credit but continued to run till the execution of the
contract. The mere fact that the seller of the goods had obtained a stay, would
not by itself result in an unascertained or unqualified liability.