1986 (9) TMI 96 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of provision for stolen jeeps as a business loss.
2. Levy of interest under sections 139(8) and 217(1A).

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Stolen Jeeps as a Business Loss:

The assessee challenged the action of the CIT(A) for not allowing Rs. 2,87,516, being the provision made for stolen jeeps. The assessee contended that under the mercantile system of accounting, the loss should be allowable in computing total income. The IAC (Assessment) disallowed the claim, reasoning that the loss was not mature since the jeeps were recovered and in the custody of the assessee. The IAC cited several legal precedents indicating that a trading loss cannot be deemed to have resulted as long as there is a reasonable prospect of recovery.

The CIT(A) upheld the IAC's decision, agreeing that the liability was not certain and the loss had not yet occurred. The CIT(A) emphasized that only a liability in praesenti can be allowed, not a liability de futuro, and cited relevant case law to support this stance.

In appeal before the Tribunal, the assessee argued that the loss was detected in the relevant year and should be allowable under the mercantile system. The assessee referred to a Board Circular and case law to support the claim that losses due to embezzlement should be allowed as deductions in the year they are discovered.

The Tribunal noted the undisputed facts, including the theft, the FIR, the recovery of the jeeps, and the ongoing legal proceedings. The Tribunal observed that the jeeps were not the company's property and were deteriorating. Given the uncertainty of recovery and the facts surrounding the claim, the Tribunal allowed the provision for the stolen jeeps as a business loss. The Tribunal cited the judgments of the Punjab and Haryana High Court and the Bombay High Court, which supported the allowance of such losses even during the pendency of litigation.

2. Levy of Interest under Sections 139(8) and 217(1A):

The assessee also challenged the levy of interest under sections 139(8) and 217(1A). The CIT(A) had held that interest under both provisions was chargeable but left the option for the company to apply for a waiver of interest. The assessee argued that the levy of interest was consequential to the disallowance of the loss for the stolen jeeps. The Tribunal, after hearing the rival contentions, held that consequential relief should be allowed to the assessee as a result of the decision to allow the loss for the stolen jeeps.

Conclusion:

The appeal was partly allowed, with the Tribunal directing that the claim of Rs. 2,87,516 for the stolen jeeps be allowed and that consequential relief be provided concerning the levy of interest under sections 139(8) and 217(1A).