2020 (11) TMI 732 - AT - Income Tax

Disallowance of goods lost due to fire - addition invoking section 29 - assessee has claimed that the impugned loss of stock is revenue loss which occurred during the year and was thus ascertained and confirmed loss and therefore same should be allowed as a deduction - as per AO assessee stocks were insured against damages including damage by fire by the National insurance Co Ltd and therefore the loss incurred by the assessee on account of fire is recoverable under a contract of indemnity i.e. insurance, against the damage from insurance Co and the claim of the assessee has not been decided till date by the insurance Co. Therefore the loss claimed by the assessee is a contingent loss - HELD THAT - Merely because the assessee has an insurance, it does not mean that assessee has not incurred the loss during the year. Moment the insurance Co determines the loss in terms of the insurance policy obtained by the assessee from the insurance company, naturally the assessee would be reimbursed or compensated for the same. It does not mean that assessee has not incurred the losses. The accident of fire at the premises of the assessee in which it has lost goods due to the fire is one incident. The action of the assessee of obtaining the insurance is altogether a different act to mitigate the loss incurred by the assessee. The claim of the insurance of the assessee from insurance Co would also be subject to many conditions. Merely because the goods of the assessee are insured against the accident of fire, it cannot be said that assessee has not lost goods due to fire - loss of the assessee would be compensated in subsequent year later on, at that particular time such insurance claim received would be chargeable to tax under section 41 (1) of the act as it is against the traded goods. Even otherwise, the trading loss incurred by the assessee is allowable to the assessee in the year in which it is incurred. The case of the assessee is also supported by the decision of MOTAMAL JETHUMAL 1946 (12) TMI 2 - PATNA HIGH COURT wherein it has been held that loss of/in trade or to fire is allowable as a trading loss irrespective of fact whether any sum is received from insurance Co or not - Decided in favour of assessee.

Summary

Issues Involved:
- Disallowance of loss due to fire under section 29 of the Income Tax Act, 1961
- Charging of interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act, 1961

Analysis:

Issue 1: Disallowance of Loss Due to Fire
The appeal was filed against the order of the ld CIT(A)-37, New Delhi for the Assessment Year 2015-16, challenging the disallowance of ?5,24,06,053 on account of loss due to fire under section 29 of the Income Tax Act, 1961. The assessee contended that the loss should be allowed as a deduction since it was a confirmed revenue loss incurred during the year. The assessing officer argued that the loss was contingent as the insurance claim had not been settled by the insurance company. The CIT(A) upheld the disallowance, stating lack of evidence regarding seriousness of the claim and no formalized claim with the insurance company. The tribunal, after considering the facts, ruled in favor of the assessee. It held that even though the goods were insured, the loss was incurred during the year and should be allowed as a deduction in the computation of profits and gains of the business. The tribunal referred to judicial precedents supporting the allowance of trading losses due to fire, irrespective of insurance compensation. The assessing officer was directed to grant the deduction of the loss due to fire to the assessee.

Issue 2: Charging of Interest
The order did not delve into detailed analysis or adjudication of the issue related to charging interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act, 1961. No arguments were advanced on this ground, and hence, it was deemed consequential in nature and did not require further adjudication. Consequently, the appeal filed by the assessee was allowed.

In conclusion, the tribunal reversed the orders of the lower authorities and directed the assessing officer to grant the deduction of the loss due to fire to the assessee. The decision was based on the principle that the trading loss incurred by the assessee was allowable in the year it was incurred, regardless of insurance compensation. The judgment highlighted the distinction between incurring a loss and seeking insurance compensation, emphasizing that the insurance claim receipt would be taxable income in a subsequent year.