Ad-hoc provision for transit breakage is contingent liability & not required to be recognised as per AS- 29 of ICAI

Brief of the Case

Delhi High Court held In the case of Seagram Distilleries Pvt. Ltd. vs. CIT that in the current case there is no reasonable scientific method adopted by the Assessee to estimate the transit breakages to justify such provision. The provision would, in the circumstances, be a provision for a contingent liability and, therefore, in terms of the AS- 29 ought not be recognised. The actual transit breakages as and when they occur are allowable as revenue expenditure in the accounting year in which such breakages occur.

 Facts of the Case

The Seagram Distilleries Private Limited was a 100% subsidiary of Seagram India Private Limited engaged in the business of manufacture and sale of Grain Neutral Spirit (GNS) and India Made Foreign Liquor (IMFL) from its Nasik plant. The parent company, originally incorporated under the Companies Act, 1956 on 3rd September, 1993 under the name and style of Seagram India Private Limited, changed its name to Pernod Ricard India Private Limited (PRIPL) and obtained a fresh certificate of incorporation on 23rd April, 2007. Thereafter, Seagram Distilleries Private Limited was merged into the parent company, PRIPL by a scheme of amalgamation which received sanction from this Court vide an order dated 8th October 2010.

Assessee’s products are transported in glass bottles by roads to various states in the country. According to him, since the bottles are prone to breakages, he while dispatching the goods make a provision for breakages on the basis of the past history of the region to which the goods are transported. Once the goods reach their intended destination he reverses the provision and debits the actual breakages to the profit and loss account. The AO held that in case of breakage and pilferage the liability is not certain. Consequently, the provision made was treated as a contingent liability and, therefore, not allowable. It was added back to the total income of the Assessee.

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