2002 (9) TMI 34 - HC - Income Tax

Whether on the facts and circumstances of the case, the assessee is entitled to deduction of the sum of Rs. 51,18,950 being the amount debited to its account by United Exports and allocated to the assessee ? When the assessee bona fide thought that there was no prospect of recovery of value of the goods which had sunk in the sea for which the bank had already made payment and debit entry was made by United Exports against the assessee, the loss arose during the previous year relevant to the assessment year in question. The mere fact that United Exports contested the liability is not a ground to hold that there was no accrual of liability. - we are satisfied that the loss occurred because of the loss of goods said to have exported by the foreign seller in the foreign soil. Accordingly, we do not approve the view of the Tribunal that the assessee is not entitled to claim the deduction of the amount as a business loss.

Issues Involved:
1. Whether the assessee is entitled to deduction of the sum of Rs. 51,18,950 being the amount debited to its account by United Exports and allocated to the assessee.
2. Whether the loss occurred during the previous year relevant to the assessment year in question.
3. Whether the loss was a trading loss deductible in the computation of the assessee's total income.
4. The role and liability of United Exports as an agent for the constituent units.
5. The impact of the C.B.I. report and subsequent events on the assessment.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction:
The assessee, a firm with five partners, formed a consortium with another firm, George Maijo Associates, to constitute United Exports. United Exports entered into a c.i.f. contract for importing P.V.C. resin from Palmex Enterprises, Singapore. The goods were lost at sea, and the assessee claimed Rs. 51,18,950 as business expenditure. The Income-tax Officer rejected this claim, stating that the loss could only be claimed by United Exports. The Commissioner of Income-tax (Appeals) allowed the claim, but the Income-tax Appellate Tribunal reversed this decision, concluding that the liability did not accrue in the relevant year. The High Court, however, held that the assessee was entitled to the deduction as the loss was incurred during the previous year relevant to the assessment year.

2. Occurrence of Loss During the Relevant Year:
The High Court found that the loss occurred during the previous year ending June 30, 1980, as the ship sank in high seas, and the bank had made payment to the foreign seller. The court emphasized that the subsequent C.B.I. report, which was filed much later, should not affect the assessee's right to claim the loss in the relevant year. The court also noted that the liability was not contingent but had crystallized during the relevant year.

3. Trading Loss Deductibility:
The court held that the loss was a trading loss deductible in the computation of the assessee's total income. It emphasized that the loss was incidental to the carrying on of the business and had a direct and proximate connection with the business operations of the assessee. The court rejected the Revenue's argument that the loss was not actual and certain, noting that the bank had honored the letter of credit, and the goods were lost at sea.

4. Role and Liability of United Exports:
The court agreed with the Appellate Tribunal's finding that United Exports acted as an agent for the constituent units and that the loss incurred by United Exports should be borne by the principals, i.e., the constituent units. The court noted that the Revenue had not challenged this finding and that it had become final. The court emphasized that the loss should be apportioned between the constituent units and allowed in the hands of the assessee.

5. Impact of C.B.I. Report and Subsequent Events:
The court held that the subsequent C.B.I. report, which found that the ship sank under mysterious circumstances, should not affect the assessee's right to claim the loss in the relevant year. The court noted that the report did not indict the assessee or United Exports and that the assessee was not a party to the fraud committed by the foreign seller. The court also emphasized that the assessee should not wait for the finalization of its accounts until the C.B.I. investigation was over.

Conclusion:
The High Court concluded that the assessee was entitled to the deduction of Rs. 51,18,950 as a trading loss in the relevant assessment year. The court emphasized that the loss was incurred during the previous year, had a direct and proximate connection with the business operations, and was not contingent. The court also noted that the subsequent C.B.I. report and the fact that United Exports resisted the suit filed by the bank should not affect the assessee's right to claim the loss. The court answered the question referred to it in the negative, in favor of the assessee, and against the Revenue.

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