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TMI Blog2003 (6) TMI 181X X X X Extracts X X X X X X X X Extracts X X X X ..... in allowing the claim of loss of Rs. 51,02,069 debited as insurance claim rejected in the P L a/c. 5. Briefly stated, the relevant and material facts for the disposal of the issue involved in the grounds of appeals of the Revenue are that in response to the notice under s. 148 of the Act, issued on 11th Feb., 1993, the assessee filed its return declaring Nil income. The assessee derived income from manufacturing and sale of shoddy yarn and from trading of M.S. rounds and also from the job work done on account of drawing and straightening of M.S. round and bright steel bars. 5.1. A search and seizure operation was carried out under s. 132 of the Act at the business premises of the assessee on 18th Dec., 1990 and certain books of accounts and other papers were seized. From the consolidated P L a/c, the AO noticed that sales and labour earned have increased suitably but the GP for the year under consideration has fallen by more than 6 per cent. The AO requested the assessee to substantiate reasons for fall in the GP. In reply, the assessee submitted that at the beginning of the manufacturing season, there had been a theft at the factory premises of the assessee on 17th/18th Sep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us persons including enquiries from chowkidar Shri Dharam Singh of the factory, namely M/s Narang Metagraphics located just opposite the assessee's mill across the road and after considering whether such huge material can be loaded in those trucks by the thieves during, that short period within which the alleged theft is said to have been committed by practically carrying out exercise of loading of trucks with the material which was alleged to have been stolen. The result of that exercise has been mentioned in detail in the order of the AO on the basis of which the surveyors reached the conclusion that this kind of material involved in the theft cannot be loaded by the thieves in the trucks and stolen away form the premises of the assessee. Thereafter, in the order of the AO, the observations of the surveyors and investigators on the basis of which they rejected the claim of the assessee has been summarised as under: (i) That the insured have not produced the documents/records even after the repeated requests meaning thereby that the records are not proper and they are hiding the facts for the reasons best known to them. (ii) No clue about this theft was available i.e., where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either convincing nor tenable and on the basis of surveyor's report, it has been held that no theft of stock has taken place and the entry with regard to claim receivable is fictitious entry and this represents cash available with the assessee. According to the AO that since the assessee has not debited this amount of Rs. 51,02,069 in the P L a/c for the year under consideration but has shown as its claim receivable in the balance sheet, no allowance on account of this entry of Rs. 51,02,069 was made in the assessment order for the year under consideration. 5.5. So far as the assessee's contention that GP rate of 5 per cent should be applied on the wholesale basis of his turnover is concerned, the same cannot be accepted as according to the AO, the assessee is not dealing with the item on a wholesale basis but on retail basis and thus the AO has worked out the accretion on account of GP earned on the sale of alleged stock of Rs. 51,03,069 outside the books of account, as under: Rs. 'Opening stock of M/s Shivalik Woollen Mills (P) Ltd. 1,00,63,830 Add : Purchases 85,31,181 1,85,95,011 Less : Closing stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee dt. 4th Feb., 1995, the AO observed that the assessee in its letter has not replied anything regarding the rejection of the claim of the assessee by the insurance company, treating it as fraudulent. However, in the last para of its letter, the assessee has stated that no doubt insurance company had rejected the assessee's claim vide its letter dt. 3rd Jan., 1991, but on the receipt of letter of the AO, the assessee approached the Dy. Finance Minister and also made a separate representation to the Chairman, United India Insurance Co., on 9th Jan., 1991, to reconsider the assessee's claim. It was also mentioned by the assessee that the assessee's representation was rejected by the Dy. Finance Minister vide its letter dt. 3rd May, 1991 and on the basis of communication and loosing all hopes of this insurance claim being allowed at the administrative level, the assessee debited it to the P L a/c and simultaneously the assessee has challenged the order of the United India Insurance Co. in the Court of law and in the event of insurance claim being allowed by the Department and paid by the insurance company, it would be shown as income in the relevant period. The AO after considering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debited this amount of Rs. 51,02,069 in the P L a/c for the assessment year under consideration but has shown as its claim receivable in the balance sheet, no disallowance on account of this entry of Rs. 51,02,069 can be made in the assessment order for the year under consideration when the same is being disallowed in the assessment of the assessee for the year 1992-93 in which the assessee has debited the same in its P L a/c. 5.8. Regarding theft, the assessee submitted before the CIT(A) that theft came to the notice of the management in the morning of 18th Sept., 1989 and immediately an FIR was lodged with the police and intimation was sent to the Divisional Manager, United India Insurance Co. and the State Bank of India, because the assessee was enjoying hypothecation limit from the State Bank of India. The assessee also brought to the notice of the CIT(A) that initially the Police Department registered a case against the assessee under s. 182 of the IPC and when the action of the police was challenged in the Court of Judicial Magistrate Ludhiana, the Judicial Magistrate vide its order dt. 20th March, 1990, held that "as a result of my above discussions, no case under s. 182 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was a theft and consequent to the theft, there was huge loss to the assessee, hence according to the assessee, its claim has been wrongly rejected by the insurance company. The assessee also placed reliance on the decision of the Punjab Haryana High Court in the case of Punjab Steel Stock Holders Syndicate Ltd. vs. CIT (1980) Tax 58(3)-31 wherein the Punjab Haryana High Court has held that it is not essential that there should be culmination of proceedings in conviction of the accused for claim of loss in theft. Further, it has been held that even if the accused is acquitted, still if proper evidence is led before the police authorities, the loss had to be allowed. It was further stated that as per the decision of the Third Member in the case of CIT vs. S.S. Ratanchand Bholachand (HUF) (1992) 102 CTR (MP) 72 : (1994) 206 ITR 72 (MP) (Tribunal's supplement) wherein there was difference of opinion among the Members of the Bench and the case was referred to Third Member and the Hon'ble President of Tribunal observed that until or unless the FIR was false, it could not be said that the loss has not taken place. In the present case, the police authorities have not held that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y stock value on account of alleged theft. Therefore, even while holding that the stock has been sold outside the books of account, the AO has not reduced the addition as worked out at Rs. 21,39,950 by amount of stock value so shown at Rs. 51,02,069 as included in the closing stock by the assessee. If such stock is alleged to have been sold, the same could not be available in the closing stock and, therefore, the figure to that extent would need to be reduced and to that extent, profit of the assessee would also get reduced. He further observed that the gross rate of profit at 29.15 per cent has been taken by the AO but it was not clear whether the said rate of profit was in respect of the yarn trading account or it includes profit in respect of trading of M.S. rounds as well as the job work receipts because as per the details given by the assessee, loss of stock was only in respect of the raw material as also the goods manufactured from the raw material as required for shoddy yarn. Therefore, apparently valuation made by the AO does not appear to be correct. 5.10. Regarding the theft, the CIT(A) after taking all the facts and circumstances of the case into consideration, and al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the amounts, trading loss in a commercial sense cannot be deemed to have resulted, and the same view was taken by the Bombay High Court in Jokhiram Ramchandra vs. CIT (1966) 61 ITR 693 (Bom) and also by the Calcutta High Court in an identical case of Calcutta Iron Engineering Co. (P) Ltd. vs. CIT (1993) 110 CTR (Cal) 40 : (1993) 69 Taxman 546 (Cal). In that case there was even delay in lodging the report with the police and insurance company had not accepted the claim of the assessee but the Hon'ble High Court had allowed the claim following the decision of the Hon'ble Supreme Court in Calcutta Iron Engineering Co. (P) Ltd. vs. CIT, and so the loss claimed by the assessee in the asst. yr. 1992-93 should have been allowed. 5.12. After considering these submissions of the assessee, the CIT(A) observed that it was not clear from the order of the AO as to how and on what basis he came to the conclusion that the alleged fictitious entries in respect made in the balance sheet for the asst. yr. 1990-91 represented the cash available with the assessee because apparently the entries suggest that it represented the amount receivable and certainly not the cash available with the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee because even the details of the stolen goods supplied by the assessee could not be verified from his books. On the contrary, first police report was against the assessee due to which case under s. 182 of IPC for lodging a false complaint with the police was registered against the assessee though, of course, in the same case the assessee was discharged by the Judicial Magistrate and laster on, the police also registered a FIR on the basis of the complaint of the assessee regarding the theft but again in its ultimate report, no clues of the theft were available with the police, so, ultimately the police closed the case. But the fact remains that even from the enquiries/investigations conducted by the police, no positive evidence of theft or recovery of theft articles was made by the police. Similarly, two independent surveyors of insurance company in their independent reports, after making independent inquiries, have clearly mentioned that no theft has taken place from the premises of the assessee and the claim of the assessee was fraudulent. Thus, after accepting these reports, the insurance company rejected the claim of the assessee vide letter dt. 3rd Jan., 1991. Learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Finance Minister, etc., statements of different persons recorded by the surveyors, affidavit, copy of the stock statement, etc. demanded by the surveyors and supplied by the assessee, details of vouchers, letter to S.S.P., discharge report of the Judicial Magistrate, the letter on the basis of which FIR was registered, letter of the chairman on the basis of which another surveyor was appointed by the insurance company and letter dt. 3rd Jan., 1991, written by the insurance company to the assessee rejecting its claim, affidavit given by the assessee in the Court and also the proof that the assessee while approaching the Court has affixed the Court fee, the submissions made to the CIT as well as the written submissions filed by the assessee in response to those filed by the learned Departmental Representative before the Tribunal. Learned authorised representative for the assessee also placed reliance on Associated Banking Corpn. of India Ltd. vs. CIT, order of the Tribunal passed in the case of this very assessee in CIT vs. Durga Jewellers, Jokhiram Ramchandra vs. CIT, Calcutta Iron Engineering Co. (P) Ltd vs. CIT, CIT vs. Carbon Industries (P) Ltd. (2003) 259 ITR 373 (Mad), Laxm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate, the case was subsequently ordered to be registered with police regarding the commission of theft and ultimately the police submitted a report that the theft was 'untraceable'. In order to show the genuineness of his claim, the assessee has placed reliance on various correspondence either with the Police Department or with the other higher authorities even despite rejection of the claim of the assessee by the insurance company. In support of its contention that once the claim of the assessee by any of the authorities of the police is not found to be false despite lodging of report of the assessee with the police, the allegation of commission of theft of the assessee cannot be treated as false. In this regard, in support of its contention, it placed reliance on the decision of the Punjab Haryana High Court in the case of the Punjab Steel Stock Holders Syndicate Ltd. vs. CIT wherein their Lordships observed that: "In a given case, even if the person, who is accused of embezzlement is acquitted, still if proper evidence is led before the authorities, the authorities are bound to consider the material with a view to find out if the loss is proved or not. The observation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of the assessee was fraudulent. It mean that the Department has placed strong reliance on the final report of the insurance company whereby coming to the conclusion that no theft has taken place in the premises of the assessee, they have rejected the claim of the assessee by informing the assessee vide their letter dt. 3rd Jan., 1991. 5.17. The cases relied upon by the learned Departmental Representative for the assessee are distinguishable on facts because in all those cases relied upon by the learned authorised representative for the assessee, there was only one set of evidence i.e., there was allegation of commission of theft, lodging of report of the theft with the police and lastly, the police not finally reporting that the assessee has lodged false FIR or that the alleged claim of commission of theft of the assessee was false. Whereas in the instant case of the assessee, in addition to defects mentioned hereinabove and appearing in the cited cases, there is another set of evidence wherein the insurance company, on the claim of loss lodged by the assessee before them, after conducting detailed enquiries through two surveyors, reached a positive conclusion that no alleged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rification and so they were of the opinion that the records were not properly maintained by the assessee or they were hiding the facts for the reasons best known to them. 5.19. Thereafter, the second surveyors M/s Mehta Padamsey (P) Ltd. conducted second enquiry and recorded the statements of various persons. They enquired from Shri Dharam Singh, chowkidar of the factory namely M/s Narang Petragra-phic located just opposite the assessee across the road which is only 40 ft wide and in his statement, he informed the surveyors that he was on duty in the night of 17th Sept., 1989, from 8 P.M. onwards. He was not slept before 10 P.M. He did not see any unusual movement of trucks when he was awake between 8 P.M. and 10 P.M. He did not hear any noise of opening of the gate of the assessee, movement of trucks though the distance from the assessee's factory and the place of duty of Shri Dharam Singh, chowkidar, was hardly 50 ft. He further stated that in the stillness of night i.e., Sunday when it was an industrial holiday, in case there had been any movement of trucks, he would have definitely heard the sound. But he neither heard any noise nor any such sound. These surveyors also tried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conclusion that no theft has taken place from the premises of the assessee. 5.23. We have already mentioned that learned authorised representative for the assessee has neither pointed out any serious defects in the reports of these surveyors nor gave any reasons for rejecting the reports of these surveyors/investigators and so, in these circumstances, we are of the opinion that there is no point with us to reject the detailed reports of these surveyors/investigators wherein they have come to the conclusion that no theft has taken place from the premises of the assessee. We are further of the opinion that since the assessee has not led any positive evidence to prove contrary to the enquiry reports of these two independent surveyors/investigators, it is not possible for us to reject the enquiry reports of these surveyors submitted to the insurance company merely because the assessee had lodged an FIR regarding the commission of theft which has not been found to be false by the police authorities or because the assessee has been seriously persuing this matter with the higher authorities or has filed a civil suit against the rejection of claim of the assessee by the insurance c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not been accepted by us, inclusion of a sum of Rs. 51,02,069 in the closing stock as 'claim receivable' is not correct. Therefore, the presumption is that the assessee has manufactured goods out of such raw materials and sold the same in the open market. On the basis of purchases and the opening stock, the AO has come to the conclusion that the assessee must have manufactured goods worth Rs. 73,41,165 out of stock of Rs. 51,02,069 and accordingly he has worked out the addition by applying the GP rate of 29.15 per cent on the value of the goods manufactured worth Rs. 73,41,165 without analysing its effect on the trading account. We feel that the value of the goods manufactured should be worked out by applying the same ratio of goods manufactured out of the raw materials accounted for in the books of account of the assessee. Out of such value of manufactured goods, the amount of Rs. 51,02,069 shown in the closing stock should be reduced. The balance amount will be liable to be included for addition. In addition to the same, the GP on the sales is also required to be added. The AO has adopted the GP rate of 29.15 per cent which, in our opinion, is not correct. In this case, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given a finding that no theft has been committed at the premises of the assessee in respect of the alleged stock worth Rs. 51,02,069 and we have also raised a presumption against the assessee in this very order that the assessee has manufactured goods out of such raw material and sold the same in the open market and thus sustained the addition of Rs. 21,39,950 against the assessee and so, on the basis of these findings, the loss claimed by the assessee does not survive and on the face of it, this issue is required to be decided against the assessee. However, we would also like to consider in this order that even if it is presumed that the assessee's claim of loss was genuine, then whether the same is allowable in the asst. yr. 1992-93 as claimed by the assessee because it has not been disputed by the assessee that the insurance company has rejected the insurance claim of the assessee against this loss suffered by the assessee on 3rd Jan., 1991. 5.30. On going through the facts of the case, it is clear that in fact the United India Insurance Co. has finally rejected the claim of the assessee on 3rd Jan., 1991 and so, the pursuance of the matter by the assessee against the reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year under reference. In the case of CIT vs. Mysore Spinning Manufactured Co. Ltd. and replied upon by the learned Departmental Representative for the Revenue, the Hon'ble Supreme Court has held that the amount spent and incurred in the accounting year was allowable in that year if the expenditure was incurred for the purpose of the assessee's business. In the case of Mysore Spinning Manufacturing Co. Ltd. vs. CIT and relied upon by the learned Departmental Representative for the Revenue, Bombay High Court has held that in order that an expenditure may be allowable in a particular year, it is not necessary that the expenditure must be one required for the purpose of carrying on business or earning of the profits of that year. The expenditure incurred to meet the liability of the business accruing to that year, is allowable. These judgments are with reference to allowance of expenditure in the year in which liability is either accrued or crystallised, though these do not relate to the issue of loss as claimed by the assessee. Their Lordships of Punjab Haryana High Court in the case of CIT vs. Tulsi Ram Karam Chand (1964) 52 ITR 180 (P H) have held that loss suffer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same can be raised before us. Therefore, we reject such submissions. As regards the reliance of the assessee on the decision of the Tribunal, Chandigarh Bench, in the case of Gulabi Sarees Centre, the same is distinguishable from the facts of the present case as the AO had not recorded any finding about the genuineness of the loss by the assessee. Therefore, the ratio of the decision would not be applicable to the present case." 5.31. The facts of the case decided by the Tribunal are somewhat identical to the facts of the instant case of the assessee and so in order to maintain the consistency in the approach of the Bench, we are required to follow our own decisions which are on identical facts and on identical issue. In this case, the Tribunal has placed reliance on various decisions of the jurisdictional High Court of Punjab Haryana and has also distinguished the case in North Arcot Distt. Co-operative Supply Marketing Society Ltd. vs. CIT relied upon by the assessee before us and have also considered in the case of CIT vs. Tulsi Ram Karam Chand (1964) 52 ITR 180 (P H), in the case of Laxmi Ginning Oil Mills vs. CIT, in this very order while deciding the issue under cons ..... X X X X Extracts X X X X X X X X Extracts X X X X
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