1.9       Query

Whether the amounts involved in show-case notices received from various

Government authorities should be considered as contingent liabilities.

1.A public sector corporation receives various show-cause notices from certain government authorities like Excise & Customs Department, Electricity Board etc. In most of the cases the proceedings under the show-cause notices are dropped by the authorities on the furnishing of a suitable reply/facts by the corporation. However, in some cases, the demand may be confirmed by the authorities which normally relate to disputes of facts or interpretation. Such issues are contested before the relevant appellate authorities.

2.The querist has sought the opinion of the Expert Advisory Committee on whether the demands raised in the show-case notices should be shown as contingent liability by the corporation.

3.The querist is of the view that since the show-cause notices received are of very preliminary nature and in most of the cases the demands are dropped by the authorities, the amount demanded does not constitute a contingent liability. In the view of the querist, contingent liability will arise at the next stage, i.e., when the authorities have raised a demand and the same has been contested.

4.The querist has particularly drawn the attention of the Committee to the fact that some show-cause notices do not even indicate the amount.

                                                                      Opinion                                      May 15, 1987

1. The Committee notes that the term ‘contingent liability’ has been defined in the guidance note on Terms used in Financial Statements as * “an obligation relating to an existing condition or situation which may arise in future depending on the occurrence or non-occurrence of one or more uncertain future events”.

2. On the basis of above, the Committee is of the view that on receipt of a show-cause notice a situation arises which may create an obligation in future. The Committee is therefore of the opinion that the demands raised by various authorities in the show-cause notices should be considered as contingent liabilities and the same should be appropriately disclosed.

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  * Issued by the Institute of Chartered Accountants of India