Provision for interest on goods held in customs

warehouses beyond three months/one year

1.Note no. 8 (b) of Schedule—19 to the Balance Sheet for 1983-84 of a public sector company reads as follows:

“Estimated liability not provided for customs duty on goods (including for capital work) lying in bonded warehouses and else where for excise duty on manufactured items held in stock amount to Rs. 1561.50 lakhs and Rs. 327. 23 lakhs (previous year Rs. 2786.72 lakhs and Rs. 597.81 lakhs) respectively. Estimated liability for excise duty for excisable scrap and semi-finished stock amounts to Rs. 21.01 lakhs (previous year Rs. 9.82 lakhs).”

2.The querist has pointed out that the above practice has been followed by the company for the last several years and that it is in conformity with the opinion of the Expert Advisory Committee, published at page 69 of the Compendium of Opinions, Volume I (No. 1.37).

3.The querist has drawn the attention of the Expert Advisory Committee to the following amendment in Section 61 of the Customs Act, 1962 through Finance Act, 1984:

“Where any warehoused goods remain in the warehouse beyond the period of one year or three months specified in clause (a) or clause (h) of sub-section(i) by reason of the extension of the aforesaid period or otherwise, interest of such rate, not exceeding eighteen per cent per annum, as is for the time being fixed by the Board, shall be payable on the amount of duty on the warehoused goods for the period from the expiry of the period of one year or as the case may be three months, till the date of the clearance of the goods from the warehouse.”

4.The company is following the practice of making provision for interest on customs duty for holding goods in bonded warehouses on the ground that interest is a period cost and is therefore rightly chargeable to the profit and loss account of the year to which it pertains whereas in respect of customs duty the provision may or may not be made as per the aforesaid opinion of the Expert Advisory Committee. In case the customs duty is provided for, the amount will automatically get added to inventory and thus there will be no effect on the profit and loss account. On the other hand, if interest thereon is not provided, the profit will be overstated since interest accrues over a period of time. In view of this, according to the querist, there is a fundamental distinction between provision and non-provision of customs duty and provision and non-provision of interest. While the former will have no effect on the profit or loss of the relevant period, the latter will vitally affect it.

5.The company has now been advised that as the customs duty payable itself has not been accounted for and had only been disclosed by way of a note, no provision was required for interest thereon.

6.The querist has sought the opinion of the Expert Advisory Committee on whether the practice followed by the company with regard to provision for interest on customs duty is in order.

Opinion 1^st April, 1985

1.The Committee is of the view that the liability in respect of payment of interest on customs duty arises on the expiry of three months or one year, as the case may be, and not at the point of removal of the goods from the warehouse.

2.The Committee is therefore of the opinion that it would be necessary to make a provision for interest on customs duty in respect of goods in bonded warehouse irrespective of whether provision has been or has not been made in respect of customs duty on such goods, which is a separate question altogether.

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