1.59     Query

Inclusion of excise duty and freight in the depiction

of capital commitments in balance sheet.

Part-I of Schedule VI to the Companies Act, 1956 requires that a foot note to the Balance Sheet may be given to show separately ‘estimated amount of contracts remaining to be executed on capital account and not provided for’.

At the time of calculation of the above amount it is clear that any amount paid as an advance to the parties should be treated as provided and the same should be deducted out of the total amount of contracts remaining to be executed on capital account.  But a difficulty arises, when a contract has been given for purchase of capital items and there is a clause that excise duty and sales tax will be paid extra and freight will also be borne by the purchaser.

It is our opinion that there is no commitment towards the payment of excise duty, sales tax and freight until and unless materials have been ascertained as per the Sale of Goods Act.  Therefore, only contracted price, without excise, sales tax, freight, should be shown as the capital commitments.  Please advise whether our view is correct.

                                                Opinion                               March 26, 1980                               

Part I of Schedule VI of the Companies Act, 1956 requires that contingent liability in respect of “estimated amount of contracts remaining to be executed on capital account and not provided for” should be exhibited as a foot-note to the balance sheet of a company.

 Computation of estimated amount of contract has not been defined or described in the Act.  Under these circumstances the contract value for which commitment is made under the contract is taken for the purpose of the note.  If the value mentioned in the contract is inclusive of sales tax and excise duty, the same total value including sales tax and excise duty should be taken for the purpose of the note.  If the contract provides that the purchaser will have to pay a particular price plus prevailing excise duty and sales tax, the estimated of excise duty and sales tax at the current rates should be included in the estimated amount of the commitment made.  Taxes, duties, freight and other expenses not mentioned in the contract are not required to be included from the strict legal point of view.  However, if a company wants to include expenses required to be incurred as a consequence of purchase of capital items, such consequential expenses may be included.

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