1991 (1) TMI 198 - AT - Income Tax

Summary

Issues Involved:
1. Exemption under Section 11 of the Income-tax Act, 1961.
2. Disallowance of Rs. 28,70,786 due to misappropriation by storage agents.
3. Addition of Rs. 19,90,207 under the head 'Shortage'.

Issue-wise Detailed Analysis:

1. Exemption under Section 11 of the Income-tax Act, 1961:

The primary issue was whether the assessee, a State Government undertaking, was entitled to exemption under Section 11 of the Income-tax Act, 1961. The assessee's claim was based on the argument that it was not a trust but was covered by Explanation 1 to Section 13(4), which includes any other legal obligation under the definition of "trust." The assessee argued that its activities were aimed at the relief of the poor and serving the general public utility, thus qualifying as "charitable purposes" under Section 2(15). However, the Tribunal rejected this claim, emphasizing that the assessee's object clause did not specifically include charitable purposes and that the assessee had the power to lend money, which disqualified it from exemption under Section 11. The Tribunal also noted that the assessee's activities were commercial in nature and not incidental to the ordinary functions of the Government, thus failing to meet the requirements for exemption under Article 289 of the Constitution of India.

2. Disallowance of Rs. 28,70,786 due to Misappropriation by Storage Agents:

The second issue involved the disallowance of Rs. 28,70,786 claimed by the assessee as a trading loss due to misappropriation by storage agents. The Income-tax Officer disallowed this claim on the grounds that the matter was sub judice and the stock could still be realizable. The Commissioner of Income-tax (Appeals) confirmed this disallowance, citing the absence of a conscious action by the management to write off the amount as irrecoverable. However, the Tribunal allowed the assessee's claim, noting that the realization of dues in such cases is doubtful and would involve a long time. The Tribunal held that if any amount is recovered in the future, it can be taxed in that year.

3. Addition of Rs. 19,90,207 under the head 'Shortage':

The third issue was the addition of Rs. 19,90,207 made by the Income-tax Officer under the head 'Shortage' on the grounds that the assessee failed to provide evidence of steps taken to realize the shortage. The Commissioner of Income-tax (Appeals) deleted this addition, observing that the shortage constituted a negligible percentage of the total turnover and was usual in the process of transportation and handling of bulk goods. The Tribunal confirmed this decision, noting that the assessee had taken steps to recover the shortage and that the loss was within the normal limit.

Conclusion:

In conclusion, the Tribunal partly allowed the assessee's appeal by permitting the trading loss due to misappropriation but dismissed the claim for exemption under Section 11 and confirmed the deletion of the addition under the head 'Shortage.' The Department's appeal and the assessee's cross objection were dismissed.