1.22     Query

Treatment of “Outstanding

Amounts” in Accounts.

Under a scheme formulated by the Industrial Development Bank of India (“IDBI”), industrial units purchase capital goods from suppliers under a scheme permitting payment in respect of the purchase price in installments, for which one of the two possible modes is adopted:

(a)The purchasing unit draws a Bill of Exchange payable on a specified date, on the Bank of the purchaser, directing the latter to pay to the specified supplier the amount of the instalment. The Bill is discounted by the seller of the capital goods with his banker, who in turn, may discount it with the IDBI. At maturity, the purchasing unit makes available to the drawee (namely, the purchasing unit’s Bank) funds to enable the Bank to honour the acceptance. Pending maturity, the purchasing unit gives undertaking to the Bank to hold the banker fully indemnified. The purchasing unit also gives security to its Bank, generally in the form of a charge on all the assets of the company.

(b)The seller of the capital goods draws a Bill of Exchange on the purchasing unit’s Bank, and then discounts the bill with his own Bank, who, in turn, may discount it with the IDBI. An undertaking on the lines similar to the above is given by the purchasing unit to its banker.

It may be added that in either case the amount of the bill is indicated to be the specified amount plus interest at a certain rate.

In the books of the purchasing unit, the relevant Capital Goods Account is debited and the account of the seller is credited.  Periodically, accruing interest is adjusted in the account of the supplier by debit to Interest Account.

On the above facts, the question arises as to the correct treatment of the amount lying to the credit of the supplier’s account in the Balance Sheet of the purchasing unit. We have noticed four different treatments in the Balance Sheets of various companies:

(i)         To show the outstanding amounts as a separate item under the title “Deferred Payment Credits” and not classifying it under any of the broad heads specified in Part I of Schedule VI to the Companies Act, 1956.

(ii)        To show the outstanding amounts under the head “Secured Loans”.

(iii)       To show the outstanding amounts under the head  “Unsecured Loans”.

(iv)       To show the outstanding amounts under the head “Current Liabilities”.

Apart from the first mode which treats the outstanding amounts as a class by itself, the other three modes involve treating the outstanding amounts either as a loan or as an item of current liability.  It may, perhaps, appear that an amount can be shown under the head “Loans” only if it represents a borrowing by the concerned company. It may also appear that in the transactions narrated above, all that happens it that, through the intervention of bankers and a financial institution, credit is given by the suppliers of the capital goods of the purchasing unit.  It may, perhaps, appear that such a transaction cannot be construed as a loan.  Reference, in this connection, may be had to the decision of the Supreme court in Bombay Steam Navigation Co. (1953) Private Ltd. Vs. C.I.T. (56 I.T.R. 52) in which the Supreme Court held that, where the price of an asset supplied by one company to another is kept outstanding, there is no loan from the former to the latter.  On the other hand, it can be argued that the substance of the transaction is that the purchasing unit, through the intervention of the Bankers and a financial institution, raises a loan to finance the cost of capital goods purchased by it.  Of course, the question whether the loan should be shown as secured loan or unsecured loan, would wholly depend on the question whether securities have been given.  In the case under reference, securities have been given.

The Querist, therefore, seeks the advice of the Expert Advisory Committee as to whether the outstanding amounts under the aforesaid arrangement should be shown as “Loans” or under the head “Current Liabilities”.

Opinion                                                                                                           February 13, 1974

The Unit purchases capital goods from suppliers under a scheme permitting payment in respect of purchase price to be paid by instalments.  The instalments are agreed between the supplier and the purchaser.  The purchaser then draws a Bill of Exchange payable on a specified date, on the Bank of the purchaser, directing the latter to pay the supplier the amount of specified instalments.  The seller of the capital goods then discounts this Bill with his banker, whom in turn, may discount with the IDBI.  On due date, the purchasing unit makes available to the drawee the funds to enable the Bank to honour the acceptance.

In some other cases, the seller of goods draws a Bill of Exchange on the purchasing unit’s Bank which is then discounted with his own Bank, who, in turn, may discount it within the IDBI.  The purchasing unit gives security to the Bank and honours the Bill on due date.

As the amount due to be paid is not a loan or a borrowing but is the amount due towards the purchase price, the same should not be shown under the head ‘Loans’ either secured or unsecured. Again the outstanding amount is not a current liability. Strictly speaking, it is a term liability and it would be possible to show it under a specific head as ‘Term liability’, or as suggested by you as ‘Deferred Payment Credits’ with suitable disclosure.

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