1.29 Query: Accounting for Pass Book Credit under the Duty Exemption Scheme.
1. The querist has stated that a company is eligible for deduction under section 80 HHC of the Income-tax Act, 1961, in respect of profits from goods exported as well as income by way of duty drawback, profits on sale of licence and cash assistance as specified in Section 28 (iiia), (iiib) and (iiic) of the Act. Under the proviso to Sub-Section 3 of Section 80HHC, the company is eligible for deduction of profits from exports of goods. However, Section 28 (iiic) refers to “ any duty of customs or excise repaid or repayable as drawback to any person against exports under Customs & Central Excise Duties Draw Back Rules, 1971”. The present pass book scheme, as per the querist, is an alternative to duty draw back, to which the exporter is entitled to and has the option of selecting the same. According to the querist, no specific reference of pass book credit has been made in the Income-tax Act, 1961.
2. The querist has informed that a company purposes to account for total credit received and receivable for exports made upto 31st March, 1997 as income from export benefits in the books of account of the company in the year 1996-97. For imports made upto 31st March, 1997, the amount debited in the pass book shall be accounted for as cost of materials imported and balance in the pass book will be carried forward to be utilised in the subsequent years.
3. In this regard, the querist has raised the following issues for the opinion of the Expert Advisory Committee:
(i) Whether the amount of export benefits by way of credits in the pass book under Duty Exemption Scheme will be eligible for deduction u/s 80 HHC of the Income- tax Act or not?
(ii) In case of non-company assessee which is maintaining books of account under mercantile basis, if it chooses to account for such credits only upon its utilisation on import of goods (by increasing the cost of goods imported and crediting the exports benefit account in the year of import) or not to account at all such credits and debits being only notional entries not entitled for encashment, will it amount to breach of Section 145(1) of the Income-tax Act?
(iii) In a situation where imports are not made within three years from the date of issue of pass book, the credits lying in the pass book will automatically lapse. Considering the uncertainly over the use of credit obtained for exports made in 1996-97, if the company chooses not to account for such credits and debits in its books of account of 1996-97, will it amount to contravention of the provisions of Section 209(3) (b) of the Companies Act, 1956?
Opinion January 7, 1998
1. The Committee wishes to state at the outset that it is prohibited to answer queries on matters involving interpretation of law only, as per the Advisory Service Rules. Accordingly, the opinion of the Committee given hereafter is primarily from the accounting point of view.
2. The Committee notes that Accounting Standard (AS) 4 on ‘Contingencies and Events Occurring After the Balance Sheet Date’, issued by the Institute of Chartered Accountants of India, defines the term ‘contingency’ as below:
“A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be known or determined only on the occurrence, or non-occurrence, of one or more uncertain future events.”
3. The Committee notes that utilisation of the Pass Book Credit is contingent upon the future event of making imports within three years, as per the Pass Book Credit scheme, which is uncertain. Although, the uncertainty is diminished due to Pass Book Credit being available for unrestricted imports of various types of inputs for self-use or for sale, the Committee is of the view that the Pass Book Credit is of the nature of a contingent gain.
4. The Committee further notes that para 12 of AS 4 requires that “contingent gains should not be recognised in the financial statements”. However, para 6 of AS 4, inter alia, states that “when the realisation of a gain is virtually certain, then such gain is not a contingency and accounting for the gain is appropriate”. Thus, in case the company is virtually certain that it would be in a position to utilise the Pass Book Credit, the credit may be considered as an income and an asset to the extent its utilisation is considered virtually certain. Where this criterion of recognition is not met, the Pass Book Credit outstanding should not be accounted for at the year-end. No notional entries in this regard should be made. Where the credit meets the criterion for its recognition in the books of account on the import of goods, it should be recognised as an income for the year concerned.
5. On the basis of the above, the opinion of the Committee on the issues raised by the querists is as below:
(i) No opinion in view of para 1 above.
(ii) Accounting treatment as per paras 3 and 4 above will be in accordance with mercantile basis of accounting for the purpose of section 145 of the Income-tax Act, 1961.
(iii) Accounting treatment as per paras 3 and 4 would be in accordance with section 209(3) (b) of the Companies Act, 1956. ____________________________
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