Contingent liabilities and commitments under Schedule III and AS 29

Contingent liabilities are the one note no trial balance can produce: a tax demand under appeal, a guarantee or a pending suit sits in no ledger, so the note is often copied from last year. Contingent liabilities under Schedule III have a fixed classification, AS 29 decides what goes in and what does not, and two lines of the audit report — Rule 11(a) and CARO 3(vii)(b) — have to agree with it. This guide gives the Division I headings, the AS 29 test, tax demands, guarantees and commitments, and a worked example classifying eight items. It is part of our Schedule III guide; Ind AS companies follow Division II and Ind AS 37, which are not covered here.

Contingent liabilities and commitments under Schedule III: the headings

Schedule III Division I, General Instruction 6T for the Balance Sheet, is headed "Contingent liabilities and commitments (to the extent not provided for)". The words in brackets matter: whatever part of an obligation has been provided for is in provisions, and only the balance is disclosed here. The classification is:

The note sits with the other disclosures after the line-item notes — see the notes to accounts format under Schedule III for where it falls in the sequence. ICAI's Guidance Note on Division I (Revised January 2022, para 6.12) explains that General Instruction 3 makes the notes carry information about items that do not qualify for recognition, and names contingent liabilities and commitments as the main example. Contingent assets are not disclosed in the financial statements (AS 29 para 33); where an inflow is probable they are usually mentioned in the Board's report.

Provision, contingent liability or remote: the AS 29 test

Guidance Note para 8.8.7.1 says AS 29 is to be applied in deciding what is a contingent liability. The definitions do the work:

• Provision (AS 29 para 10.1) — a liability that can be measured only by using a substantial degree of estimation. It is recognised (para 14) when there is a present obligation from a past event, an outflow is probable, and a reliable estimate can be made.
• Contingent liability (para 10.4) — either a possible obligation whose existence will be confirmed only by uncertain future events not wholly within the company's control, or a present obligation that is not recognised because an outflow is not probable or the amount cannot be reliably estimated.
• Probable means more likely than not (paras 10.6 and 22). A possible obligation is one whose existence at the balance sheet date is, on the evidence, not probable (para 10.7).
• Remote — no disclosure at all. A contingent liability is disclosed unless the possibility of an outflow is remote (para 27).

Contingent liabilities are reassessed every year; when an outflow becomes probable, a provision is recognised in that year (para 29). Where a provision and a contingent liability arise from the same circumstances, the disclosure shows the link (para 70).

For each class of contingent liability, para 68 asks for a brief description of its nature and, where practicable, an estimate of the financial effect, an indication of the uncertainties and the possibility of any reimbursement; if that is not practicable, say so (para 71). Small and Medium-sized Companies, as defined in the Companies (Accounting Standards) Rules, 2021, may omit the provision disclosures in paras 66 and 67, but para 68 has no such relaxation. Provisions themselves are covered in short term provisions under Schedule III.

Tax demands under appeal and claims not acknowledged as debts

In a small company's note, tax demands are often the main entries. Each one needs an AS 29 judgement, not a default:

• Demand under appeal. If the company's grounds are strong — the same issue decided in its favour in an earlier year, or settled by a higher appellate forum — the demand is a contingent liability. If the addition is likely to be sustained, it is a provision, even though an appeal is pending. Record the basis (counsel's view, the earlier order) in the file.
• Amount paid under protest. Disclose the full demand and state the amount already paid; the payment itself is usually carried as a recoverable, not expensed.
• Show cause notices. A notice is normally not yet a demand — ICAI's CARO Guidance Note takes this view for clause 3(vii), while noting that a notice combined with a demand needs case-by-case evaluation — but the underlying exposure still needs an AS 29 assessment. Where the possibility of outflow is not remote, practice is to disclose it under claims not acknowledged as debt.
• Interest and penalty. Include what has actually been demanded; describe further interest as an uncertainty.
• Civil claims. Same sub-head, at the amount claimed less any part provided for.

Disclose by class — income-tax, GST, civil suits — not one "claims" figure (AS 29 para 69); in practice each line also gives the period and the forum.

Guarantees: corporate guarantees, bank guarantees and counter-guarantees

Guidance Note para 8.8.7.2 draws a clear line. A contingent liability in respect of guarantees arises when a company guarantees an obligation of a third party — a loan given to a subsidiary or another company, or another company's performance of a contract. Where the company issues a so-called guarantee to perform its own obligations, the Guidance Note says it is not a contingent liability and showing it as one is misleading. It applies this expressly to the counter-guarantee a company gives its bankers when the bank issues a guarantee on the company's behalf — for insurance premium, deferred payments to suppliers or letters of credit: such performance guarantees and counter-guarantees should not be disclosed as contingent liabilities.

Small-company notes often list every bank guarantee simply because the bank's statement shows them. Read each one: a guarantee to a customer that the company will perform its own contract is its own obligation.

A corporate guarantee also needs the section 186(4) particulars (including the purpose), a related party disclosure under AS 18 where applicable and, where CARO applies, a CARO 3(iv) answer on sections 185 and 186 — and a 3(iii) answer if the guarantee was given during the year. Margin money or fixed deposits held against guarantees are shown separately in the bank balances note — see other bank balances under Schedule III.

Commitments disclosure under Schedule III

Schedule III does not define "commitment". The Guidance Note (para 8.8.7.4) takes ICAI's glossary definition of capital commitment — future liability for capital expenditure for which contracts have been made — and reads commitment generally as future liability for contractual expenditure. Read literally that covers every purchase order, so the Guidance Note limits it:

• Capital commitments — the estimated amount of capital contracts still to be executed and not provided for. In practice this is shown net of capital advances already paid, with the advances themselves under capital advances in long-term loans and advances.
• Uncalled liability on partly paid shares and investments — the unpaid amount per share times the number of partly paid shares held.
• Other commitments — only non-cancellable contracts (cancellation would bring a disproportionate penalty) that management judges material and relevant (para 8.8.7.6), such as buy-back arrangements or commitments to fund subsidiaries. Non-cancellable lease commitments are disclosed under AS 19 (para 8.8.7.5).

A "Nil" line is common practice where there are none, provided it has been checked against open capital orders and board minutes.

Contingent liabilities format: worked example classifying 8 items

Example Pvt Ltd (FY 2025-26, figures illustrative) lists eight matters at the year end. The classification:

The resulting note:

Item 3 shows AS 29 para 29 at work: last year the whole claim was contingent; this year part of it became probable and moved to provisions. Item 5 does not appear in the note at all. In practice each line also carries a short description of the matter, so that para 68 is met.

Pending litigations: Rule 11(a), CARO 3(vii)(b) and SA 501

Three other documents must agree with this note (see also the Rule 11 lines in the auditor's report).

• Rule 11(a) of the Companies (Audit and Auditors) Rules, 2014 asks whether the company has disclosed the impact, if any, of pending litigations on its financial position. ICAI's illustrative report under SA 700 (Revised) answers it by referring to the note — or by stating that the company has no pending litigations that would impact its financial position. The reference should be to this note (and the provisions note, if part is provided).
• CARO 2020 clause 3(vii)(b) asks for statutory dues not deposited on account of a dispute, with the amounts and the forum where the dispute is pending; a mere representation to the department is not a dispute. The CARO Guidance Note (Revised 2022) says the amount is reportable whether or not it has been provided for, that stayed demands remain disputed dues, that an amount deposited under protest should be mentioned, and that a show cause notice is normally not a demand. In the example, the income-tax demand appears in CARO at ₹15,40,000 not deposited, with the ₹3,00,000 paid under protest mentioned; the GST notice does not appear yet.
• SA 501 (paras 9–12) requires procedures to identify litigation and claims — inquiry, board minutes, legal correspondence and legal expense accounts — a letter to external counsel where there is a risk of material misstatement, and a written representation on litigation and claims.

A useful tie-out: every disputed due in the CARO 3(vii)(b) list should be either provided for or in the contingent liabilities note, and the litigation list in the management representation letter should cover both. Inconsistencies between the note and the report are among the CARO 2020 clauses that are easy to get wrong.

Before you sign: contingent liabilities checklist

• Every item assessed under AS 29 this year — provision, contingent liability or remote — with the basis on file.
• Amounts shown only to the extent not provided for; the link to any related provision stated.
• Demands disclosed by tax and period, with the forum and any amount paid under protest.
• Performance bank guarantees and counter-guarantees removed; corporate guarantees for third parties included, with section 186(4) and related party disclosures.
• Capital commitments agree to open orders, net of advances; uncalled liability agrees to the investment register.
• Note agrees with Rule 11(a), CARO 3(vii)(b), the legal expense ledger and the management representation letter.

Under Schedule 3 this note is short, but it deserves a fresh look every year rather than last year's text with new dates.

Frequently asked questions

Sources

• Companies Act, 2013 — Schedule III, Division I, Part I, General Instructions 3 and 6T, and section 186(4) (India Code, amended text)
• ICAI — Guidance Note on Division I – Non Ind AS Schedule III to the Companies Act, 2013 (Revised January 2022), paras 6.12 and 8.8.7–8.8.7.6
• AS 29, Provisions, Contingent Liabilities and Contingent Assets, paras 10, 14, 22, 25–30 and 66–71 — Companies (Accounting Standards) Rules, 2021 (G.S.R. 432(E))
• ICAI — Guidance Note on the Companies (Auditor's Report) Order, 2020 (Revised 2022 Edition), paragraph 3(vii)(b)
• Companies (Audit and Auditors) Rules, 2014 — Rule 11(a)
• ICAI — SA 501, Audit Evidence — Specific Considerations for Selected Items, paras 9–12
• ICAI — SA 700 (Revised), Forming an Opinion and Reporting on Financial Statements (illustrative report)

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