1995 (1) TMI 119 - AT - Income Tax

Issues Involved:
1. Deduction claim for shortage in stores and raw materials.
2. Assessing Officer's disallowance of the claim.
3. CIT (Appeals) sustaining the disallowance.
4. Tribunal's evaluation of the case and final judgment.

Detailed Analysis:

1. Deduction Claim for Shortage in Stores and Raw Materials:
The appellant, a company with significant public interest, claimed a deduction for a shortage in stores and raw materials amounting to Rs. 39,93,075 for the assessment year 1986-87. The shortage was identified in the following categories:
- Central stores: Rs. 38,68,695
- Lab stores: Rs. 1,41,123
- Raw materials: Rs. 5,83,257

2. Assessing Officer's Disallowance of the Claim:
The Assessing Officer disallowed the claim, arguing that the shortage resulted from "wilful negligence" on the part of the assessee. He questioned the company's failure to rectify the detected flaws in its accounting system over several years, implying that such negligence could not constitute a valid business loss. The officer held that since the consumption of stores directly impacted the profit and loss account, the shortage should be considered a capital loss.

3. CIT (Appeals) Sustaining the Disallowance:
The CIT (Appeals) upheld the disallowance, noting that the company's accounts were regularly audited, making it unreasonable to attribute the alleged shortage to the previous year relevant to the assessment year 1986-87. He concluded that the loss had likely been accounted for through actual consumption in earlier years.

4. Tribunal's Evaluation of the Case and Final Judgment:
The Tribunal reviewed the case, including various documents and previous judgments. It noted that up to the assessment year 1980-81, shortages identified through periodic physical verification (every three to four years) were allowed. The Tribunal cited a previous case where the method of determining shortages at periodic intervals was accepted by the department.

The Tribunal found that the company had been aware of shortages and excesses in its stock since 1980, though their value was not quantified annually. The physical inventory was carried out each year, but the value of shortages was not recognized in the accounts, leading to an "accumulated shortage over a period of years."

The Tribunal concluded that the assessee's claim for deduction was for accumulated losses in stock, not just for the current year. It rejected the CIT (Appeals)'s inference that the loss was due to actual consumption in previous years and disagreed with the notion that the loss was a capital loss. The Tribunal recognized the loss as a business loss, incidental to the company's operations.

Finally, the Tribunal held that the shortage of Rs. 39,93,075 represented the net accumulated shortage over the years from 1982-83 to 1986-87. Due to the lack of specific details for each year, the Tribunal deemed it fair to allow a deduction of Rs. 10 lakhs on an estimated basis for the assessment year 1986-87. Thus, the appeal was partly allowed.

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