The main legal point established in the judgment is that a liability which is contingent and dependent on the occurrence of an uncertain event cannot be deducted as expenditure. Additionally, providing a bank guarantee does not amount to actual payment of a liability under Section 43B of the Income Tax Act.

Vibhu Bakhru, J.

1. The present appeal has filed by the appellant under section 260A(1) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) challenging the order dated 16.09.1999 passed by the Income Tax Appellate Tribunal, Delhi (hereinafter referred to as the ‘Tribunal’) in I.T.A. No.2722/De1/91 relating to assessment year 1987-88. The order dated 16.09.1999 is hereinafter referred to as the ‘impugned order’.

2. The impugned order is a common order whereby the Tribunal disposed of the appeals relating to the Assessment Years 1986-87 and 1987-88 being ITA Nos. 2271/91 and 2272/91 respectively.

3. By the impugned order, the Tribunal has rejected the claim of the appellant (hereinafter also referred to as the assessee) for deduction of an amount equivalent to the additional custom duty which is disputed by the sellers (importers) and, consequently, not paid to the custom authorities. The appellant claimed that the additional custom duty demanded by the customs department was a part of the landed cost of the goods that were imported and as such was an ascertained trading liability which had accrued during the course of business. And therefore, the appellant was entitled to deduct the same from its trading revenue for the relevant Previous Year. The said deduction was disallowed as the additional customs duty (which was the statutory liability of the importers- sellers) was disputed by the importers and in terms of the contract between the appellant and the importers the same would be payable only when the custom authorities prevailed in the proceedings pending before the Supreme Court and the importers were called upon to pay the said duty.

4. The Tribunal further disallowed the deduction claimed by the assessee for loss on account of fluctuation in the rate of foreign exchange in respect of an advance received by the assessee in foreign currency. The said advance was received by the assessee for export of certain goods and the same was to be adjusted from amounts receivable for supply of goods to be made over a period of five years.

5. This court by an order dated 22.05.2000 admitted the present appeal and framed the following questions of law:-

“1. Whether the Income Tax Appellate Tribunal is correct in law and on facts in upholding the disallowance of an amount of Rs.1,60,33,064. It 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?

2. 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 u/s 43B of the I.T. Act.

3. 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 US Dollars, holding the same to be a fictitious and notional loss?”

6. The figures as stated in the above questions framed by this court relate to the assessment year 1986-87. The present appeal relates to the assessment year 1987-88 and thus the figures referred to in the questions as framed are required to be corrected and replaced by the amounts disallowed in the previous year ended 30.06.1986 (which would be relevant to the Assessment Year 1987-88). Accordingly, the questions of law that are to be considered in the present appeals are re-stated as under:-

“1. Whether the Income Tax Appellate Tribunal is correct in law and on facts in upholding the disallowance of an amount of Rs.1,64,87,375/- It 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?

2. Whether the Income Tax Appe