2002 (8) TMI 90 - HC - Income Tax

Business Expenditure - Whether the loss of Rs. 1,10,534 has to be allowed as deduction from the total income for the assessment year 1974-75? - In view of the ratio laid down by the Supreme Court in the decision in Haji Aziz and Abdul Shakoor Bros. v. CIT and in the facts and circumstances of the case, we have no hesitation to say that the loss sustained by the assessee as a result of the confiscation of the rice, which was confirmed by the Supreme Court, is not a commercial loss arising out of trade and it is only due to infraction of law by the assessee, therefore, such loss cannot be allowed as a deduction under the provisions of the Income-tax Act. - Accordingly, we answer the reference in favour of the Revenue and against the assessee.

Summary

Issues:
1. Disallowance of deduction for loss arising from confiscation of rice by Civil Supplies Department.
2. Interpretation of whether the loss can be considered a commercial loss for deduction.

Issue 1: Disallowance of deduction for loss arising from confiscation of rice by Civil Supplies Department
The case involved an assessee, a registered firm engaged in milling paddy and selling rice, mainly through export. The firm debited an amount representing the value of rice seized by the Civil Supplies Department to its profit and loss account. The Income-tax Officer disallowed the deduction claim as the assessee failed to provide evidence of the stock's value appropriated by the government. The Appellate Assistant Commissioner upheld the disallowance, citing violations of regulations by the firm. The Tribunal, through a third Member, allowed the appeal, stating the firm was entitled to a deduction for the loss due to the confiscation of rice.

Issue 2: Interpretation of whether the loss can be considered a commercial loss for deduction
The Tribunal referred the question of law to the High Court regarding whether the loss amount should be allowed as a deduction from the total income for the relevant assessment year. The High Court noted the confirmed confiscation of rice by the Civil Supplies Department due to infractions of the law by the assessee. The Revenue contended that losses due to legal violations should not be considered commercial losses eligible for deduction, citing a Supreme Court decision. The High Court agreed, stating that the loss arising from the confiscation of rice was not a commercial loss but a result of legal infractions by the assessee. Relying on the Supreme Court's precedent, the High Court ruled in favor of the Revenue, denying the deduction to the assessee.

In conclusion, the High Court upheld the disallowance of the deduction for the loss incurred by the assessee due to the confiscation of rice by the Civil Supplies Department, determining that such loss, resulting from legal violations, could not be considered a commercial loss eligible for deduction under the Income-tax Act.