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Issues Involved:
1. Whether the sum of Rs. 4,803 representing the reserve for deficit in jail stock was includible in the income of the assessee society for the assessment year 1967-68. 2. Whether the sum of Rs. 1,13,589 or any part thereof, representing a reserve for deficit stock was includible in the income of the society for its assessment year 1967-68. Issue-wise Detailed Analysis: 1. Inclusion of Rs. 4,803 for Deficit in Jail Stock: The assessee, a co-operative society, claimed a deduction for Rs. 4,803 as a reserve for deficit in jail supply. The Tribunal found that the nature and timing of the loss were not established. The assessee had not shown the sum as a loss during the year of account or written off the deficiency. The Revenue contended that without writing off the deficiency as a loss, it could not be treated as an outgoing for the accounting year. The Tribunal agreed, stating that the deduction could not be allowed without the deficiency being written off and treated as a loss. 2. Inclusion of Rs. 1,13,589 for Deficit Stock: The assessee also claimed a deduction for Rs. 1,13,589 as a reserve for deficit stock. The Tribunal found that goods worth this sum were treated as stocks but were shown as not available, and the nature of the loss was not proved. The Tribunal held that the deficiency had not been written off and treated as a loss, and thus, no deduction could be claimed. The Tribunal further stated that the loss could only be claimed when it was established that it occurred during the accounting year. Arguments and Legal References: The assessee argued that in a co-operative society, the sanction of higher authorities is required to write off the loss, which causes delays. Therefore, creating a reserve should suffice for claiming a deduction. The assessee referred to the Tamil Nadu Co-operative Audit Manual, which suggests creating non-statutory reserves to prevent inflation of divisible profits and provide for irrecoverable assets or doubtful cases. The Tribunal, however, maintained that the legal position requires the loss to be shown in the year of account for the deduction to be claimed. The Tribunal cited the Supreme Court decision in Associated Banking Corporation of India Ltd. v. CIT [1965] 56 ITR 1 (SC), which held that a loss from embezzlement could only be claimed when it was realized that the amounts could not be recovered. This principle was applied to the case, concluding that the deficiency in stocks could not be claimed as a loss until it was written off. Conclusion: The High Court agreed with the Tribunal's findings, stating that without writing off the deficiency in the year of account, it could not be treated as a loss, and thus, no deduction could be claimed. The questions referred were answered in the affirmative and against the assessee. The court also rejected the oral request for leave to appeal to the Supreme Court, as the decision was based on the specific facts and findings of the Tribunal. The assessee was ordered to pay the costs of the Revenue, with counsel's fee set at Rs. 500.
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