2014 (11) TMI 800 - HC - Income Tax

Eligibility of deduction on loss of goods in transit - Trading of importing timber logs in bulk quantity - Reserve Bank of India did not permit the remittance of sale consideration by way of foreign exchange on the ground that the goods never reached the Indian source Held that - Once the title of goods has passed to the assessee and the goods was transported at his risk and when he accepted the document negotiated through the bank and acknowledged the liability and when the goods did not reach him, he did sustain loss of the value of goods which he has purchased. In the books of account of the assessee, necessary entries were made though loss was not claimed - The assessee banker approached the RBI for permission to make payment by way of foreign exchange which was refused by RBI - The assesee approached the Insurance company to settle the claim, to which they declined - The assessee was constrained to file the Civil Suit in Mangalore Court against the ship owners, charterers, Insurance company claiming the amount - the assessee did not make entry in the book of accounts for the year 1994-95 showing the loss - However, for the subsequent year, necessary entries were made showing loss and in the return filed and also claimed deduction - When it was not allowed in the subsequent year after writing off the losses, deduction was claimed - both the Appellate Authorities were justified in upholding the claim of assessee and in allowing the deduction there was no error or infirmity in the order passed by the Appellate Authorities Decided against revenue.

Issues:
1. Claim of loss due to non-delivery of goods in transit.
2. Disallowance of loss claim by assessing authority.
3. Appeal to Commissioner of Income Tax Appeals.
4. Appeal to Tribunal.
5. Substantial question of law regarding treatment of loss as expenditure.
6. Fluctuation in foreign exchange rates.

Detailed Analysis:

Issue 1: Claim of loss due to non-delivery of goods in transit
The assessee, engaged in timber trade, entered into a contract for importing teak logs, but the goods were diverted by the ship owner due to a dispute. The assessee filed a suit seeking recovery of the loss. The loss was recognized in the financial year relevant to the assessment year 1995-96, and the claim was made in subsequent years.

Issue 2: Disallowance of loss claim by assessing authority
The assessing authority disallowed the loss claim, stating that as the title in goods was not transferred, the assessee cannot claim the loss. It was considered an uncrystallized liability and contingent. The authority also raised concerns about the nature of the transaction and lack of legal action by the seller.

Issue 3: Appeal to Commissioner of Income Tax Appeals
The Appellate Authority held that the loss was valid, as the title in goods passed to the assessee upon inspection and loading. The liability was considered crystallized upon accepting the bill of exchange, and the loss was reflected in the books of accounts for the relevant period.

Issue 4: Appeal to Tribunal
The Tribunal upheld the Appellate Authority's findings, stating that the loss accrued during the relevant assessment year, making the assessee eligible for deduction. The revenue appealed against this decision.

Issue 5: Substantial question of law regarding treatment of loss as expenditure
The substantial question of law was whether the Tribunal was correct in treating the amount as an expenditure and loss incurred by the assessee, considering the non-receipt of goods and lack of RBI clearance for remittance.

Issue 6: Fluctuation in foreign exchange rates
The appeals related to fluctuation in foreign exchange rates were dismissed as academic due to the outcome of the main appeal. The High Court upheld the decisions of the lower authorities, finding no error in allowing the deduction for the loss incurred by the assessee.

In conclusion, the High Court dismissed all appeals, upholding the deduction of the loss claimed by the assessee due to non-delivery of goods in transit, as the liability was considered crystallized and reflected in the books of accounts. The Court found no error in treating the amount as an expenditure and loss incurred by the assessee, rejecting the revenue's appeal.

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