2019 (8) TMI 571 - HC - Income Tax

Disallowance of business loss - fire incident causing the loss and the payment of the amount of loss - HELD THAT - The Court is of the view that the plea of the Assessee ought to have been accepted in the first instance by the AO. Assessee placed on record the agreement under which it was obliged to bear the loss for shortage of stock. Assessee also placed on record the statement of account in terms of which it had to pay the company ₹ 2 lakhs towards shortage of stock. It is not as if the Assessee did not make an effort to ascertain the details. It was informed that on account of fire, those details could not be provided as the records had been destroyed. This was not something in the control of the Assessee. On its part it gave the full details to the AO including the FIR number reporting the loss of records due to the fire. The Court fails to appreciate how the Assessee could have done anything more to substantiate the fact that it had to pay ₹ 2 lakhs to the company towards the shortage of stock. The fact of the Assessee having actually paid the company the said amount is also not in dispute. Revenue submitted that even in earlier AYs deductions have been claimed by the Assessee on account of shortage of stock for the varying amounts. The Court fails to see how this could be a factor that works against the Assessee. Being in the business of running a showroom for wearing apparels, shortage of stock is not an unusual phenomenon. This Court answers the question of law framed in the affirmative i.e. in favour of the Assessee and against the Revenue. The impugned orders of the AO, CIT (A) and ITAT are accordingly set aside. The appeal effect will be given after permitting deduction of ₹ 2 lakhs in computing the income for the AY in question.- Decided in favour of assessee.

Summary

Issues:
Appeal against ITAT order disallowing business loss deduction of ?2 lakhs for AY 2001-2002.

Detailed Analysis:

Issue 1: Disallowance of Business Loss
The Assessee, a Franchisee of a company, faced a loss of ?2 lakhs due to stock shortage after the franchise agreement was canceled. The Assessee claimed this loss as a deduction in the return filed for AY 2001-2002. Despite producing a certificate from the company stating a fire incident at the premises of the company's agents caused the stock shortage, the AO disallowed the deduction. The CIT (A) dismissed the Assessee's appeal, stating the Assessee should have disputed the loss recovery by the company instead of claiming it as a deduction. The ITAT upheld the disallowance, citing lack of substantiation of the loss details by the Assessee.

Analysis:
The Court noted that the Assessee was contractually obligated to bear the loss for stock shortage as per the franchise agreement. The Assessee provided the agreement and a statement of account showing the payment of ?2 lakhs towards the stock shortage. Despite efforts to obtain details, the company could not provide them due to a fire incident. The Court found the Assessee had done enough to substantiate the payment, including providing the FIR number for the lost records. The fact that the Assessee had paid the amount was also undisputed.

Issue 2: Previous Deductions and Unusual Phenomenon
The Revenue argued that the Assessee had claimed deductions for stock shortage in previous AYs for varying amounts. The Court dismissed this argument, stating that as a business dealing with wearing apparels, stock shortage is not uncommon. The Court found this history of deductions irrelevant to the current case.

Judgment:
The Court ruled in favor of the Assessee, setting aside the orders of the AO, CIT (A), and ITAT. The question of law was answered in favor of the Assessee, allowing the deduction of ?2 lakhs in computing the income for the relevant AY. The appeal was allowed accordingly.