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Issues Involved:
1. Sustention of the disallowance of Rs. 1,67,586 made by the ITO on account of loss due to confiscation of woollen rags by the customs department. Issue-wise Detailed Analysis: 1. Sustention of the Disallowance of Rs. 1,67,586: Factual Background: The assessee, a registered firm named International Woollen Mills, maintained its books on a mercantile system of accounting. During the assessment year 1974-75, the ITO found a debit of Rs. 1,67,586 representing the value of woollen rags confiscated by customs authorities. The assessee claimed this as a business loss, arguing that the loss was incurred during ordinary business transactions and was debited in the books as per mercantile accounting principles. The ITO rejected this claim, stating that the confiscation was due to an infringement of the Customs Act and thus constituted illegal expenditure. The Commissioner (Appeals) upheld the ITO's decision, citing the Punjab and Haryana High Court judgment in Cineramas v. CIT [1977] 110 ITR 762. Assessee's Arguments: The assessee contended that the loss was incurred in the ordinary course of business and should be allowed as a business loss. They cited a judgment by the Assistant Director of Enforcement, which clarified the term "rags" and noted that the customs authorities had withdrawn their appeal against this judgment. The assessee also argued that even if the loss was due to an infringement of law, it should still be admissible based on the Supreme Court judgment in CIT v. Piara Singh [1980] 3 Taxman 67/[1980] 124 ITR 40. Revenue's Arguments: The revenue countered that the judgment of the Assistant Director of Enforcement was not relevant and that the infringement of the Customs Act was clear. They cited the Supreme Court judgment in Haji Aziz & Abdulshakoor Bros. v. CIT [1961] 41 ITR 350, arguing that the loss was not deductible. They also referenced the Calcutta High Court judgment in Raghubir Prasad Gupta v. CIT [1979] 120 ITR 789, which held that fines paid in lieu of confiscation were not deductible under section 37(1) of the Income-tax Act, 1961. Tribunal's Findings: The Tribunal found that the assessee's claim had been erroneously rejected. The assessee had placed orders for woollen rags on valid import licences through the State Trading Corporation. The goods were certified as woollen rags by the Japanese exporters. The customs authorities' confiscation was based on a different interpretation of "woollen rags," and there was no evidence that the assessee had ordered goods not covered by the import licence. The Tribunal noted that the confiscation orders were made during the previous year relevant to the assessment year under appeal. Since the assessee maintained books on a mercantile system, the loss had to be accounted for in the year it occurred. The Tribunal referenced Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), which held that a liability does not cease to be a liability merely because the assessee is contesting it. The Tribunal concluded that the loss was incurred in the ordinary course of business and was not due to any penal infringement of law. The confiscation was a venial breach of law, and the loss should be allowed as revenue expenditure. The Tribunal directed that the disallowance be reversed and the expenditure allowed. Conclusion: The appeal was allowed in part, with the Tribunal directing that the disallowance of Rs. 1,67,586 be reversed and the expenditure allowed as revenue expenditure.
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