1990 (3) TMI 104 - AT - Income Tax

Summary

Issues Involved:
1. Allowance of the assessee's claim for loss on account of transactions with M/s. Madura Coats Ltd.
2. Determination of whether the claim for deduction was premature.
3. Examination of the accounting treatment of the transactions.
4. Consideration of the potential future liabilities and their treatment.

Detailed Analysis:

1. Allowance of the Assessee's Claim for Loss:
The core issue revolves around the assessee's claim for a loss of Rs. 47,49,530 due to transactions with M/s. Madura Coats Ltd. The CIT (Appeals) had directed the ITO to allow this claim, which the department contested. The assessee had obtained import licenses from M/s. Madura Coats Ltd. by paying a guarantee margin of profit and incurred various expenses for importing pharmaceuticals and chemicals. The Chief Controller of Imports & Exports later confiscated the goods, suspecting the import licenses to be forged. Despite obtaining an interim stay from the Bombay High Court, the assessee incurred substantial expenses and claimed these as a loss. The CIT (Appeals) found the claim to be justified as the expenses were part of the assessee's business operations and had been actually incurred.

2. Determination of Whether the Claim for Deduction Was Premature:
The department's representative argued that the deduction claim was premature since the transaction was incomplete, and the sale of goods had not been effected. The case against the limited company was still pending in the High Court, and it was unclear who had forged the import licenses. The Tribunal noted that the assessee had done all it could to rectify the situation, including filing a Writ Petition and furnishing a bank guarantee to clear the goods. However, the Tribunal found that the claim for deduction could only be partially allowed, as the assessee had already realized sale proceeds from some imported goods.

3. Examination of the Accounting Treatment of the Transactions:
The Tribunal scrutinized the accounting treatment of the transactions. It was revealed that the assessee credited the sale proceeds of imported goods to the account of M/s. Madura Coats Ltd., rather than reflecting these in its trading account. The Tribunal found that the assessee had realized Rs. 28,28,791 from the sale of imported goods, which was not accounted for in the deduction claim. Consequently, the Tribunal determined that the allowable deduction should be reduced to Rs. 19,20,237, the difference between the claimed amount and the realized sale proceeds.

4. Consideration of Potential Future Liabilities and Their Treatment:
The Tribunal also considered the potential future liabilities, including penalties that might arise if the import licenses were found to be forged. It was noted that any reduction in liability due to the outcome of the litigation would be assessable under section 41(1) of the Income Tax Act. Future liabilities, such as penalties, would be admissible in the year in which they arise, subject to examination on merits.

Conclusion:
The Tribunal concluded that the CIT (Appeals) had erred in allowing the entire claim of Rs. 47,49,530 without considering the realized sale proceeds. The allowable deduction was restricted to Rs. 19,20,237, subject to verification of the accounts. The department's appeal was thus allowed in part, with specific directions for future assessment of liabilities based on the outcome of ongoing litigation and potential penalties.