1990 (5) TMI 77 - AT - Income Tax

Summary

Issues Involved:

1. Whether the loss claimed by the assessee amounting to Rs. 8,28,780 is a speculative loss.
2. The disallowance of a loss of Rs. 34,635 incurred by the assessee in Veraval (Gujarat) branch.
3. The disallowance of a claim under Section 35B of the IT Act on the expenditure incurred by the assessee on foreign travel.
4. The disallowance of a deduction under Section 37 and Section 35B of the IT Act on foreign travel amounting to Rs. 7,917.
5. The deletion of the disallowance of Rs. 1,47,250 by the Revenue.

Detailed Analysis:

1. Speculative Loss:

The primary issue was whether the loss of Rs. 8,28,780 claimed by the assessee should be treated as a speculative loss. The assessee, a registered firm dealing in the import and sale of edible oils, entered into a contract for the import of 500 MTs of palm stearin oil. The foreign supplier did not honor the contract, causing the assessee to pay damages to local buyers. The IAC instructed the ITO to disallow the loss as a speculative loss, citing a lack of evidence that the contracts were settled after the breach. The CIT(A) disallowed the loss for three parties but allowed it for Tata Oil Mills Ltd., considering it a business loss. The Tribunal upheld the assessee's contention, finding that the loss was a bona fide business loss and not speculative. The Tribunal noted that the assessee had made substantial efforts to procure the oil and that the inability to deliver was due to the foreign supplier's default, not speculation.

2. Loss in Veraval Branch:

The assessee claimed a loss of Rs. 34,635 incurred in its Veraval (Gujarat) branch. The ITO disallowed the loss, arguing that the transactions were imprudent as goods were sold at prices lower than the purchase cost. The CIT(A) sustained the disallowance, questioning why the assessee did not recover transportation and gunny bag costs. The Tribunal deleted the disallowance, stating that there was no material to show that the assessee recovered more than the stated sale price or that the transactions were with related parties. The Tribunal accepted the assessee's explanation that the losses were incurred to maintain market presence in the Saurashtra region.

3. Claim under Section 35B:

The assessee's claim for weighted deduction under Section 35B of the IT Act on foreign travel expenditure of Rs. 15,000 was disallowed by the CIT(A). The Tribunal restored the matter to the CIT(A) for determination in accordance with the law, as the CIT(A) had not examined the claim.

4. Disallowance of Foreign Travel Deduction:

For the assessment year 1982-83, the assessee's claim for deduction under Section 37 and Section 35B on foreign travel expenditure of Rs. 7,917 was disallowed. The CIT(A) sustained the disallowance, noting that the travel was undertaken by the son of one of the partners, who was neither a partner nor an employee. The Tribunal upheld this disallowance, agreeing that the expenditure was not a business expense.

5. Deletion of Disallowance by Revenue:

The Revenue objected to the deletion of the disallowance of Rs. 1,47,250. The assessee had entered into a forward contract to supply oil but had to purchase at a higher rate due to price increases. The ITO initially viewed the purchase as bogus, but the IAC accepted it as genuine, treating the loss as speculative. The CIT(A) held that the loss was not speculative as the goods were delivered to the purchaser. The Tribunal found no infirmity in the CIT(A)'s order and rejected the Revenue's objection.

Conclusion:

The Tribunal allowed the assessee's appeal for the assessment year 1981-82, partly allowed the appeal for 1982-83, and dismissed the Revenue's appeal for 1981-82. The Tribunal concluded that the losses were bona fide business losses and not speculative, and the disallowances were not justified based on the evidence presented.