9911796707
TMI Blog2002 (9) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... court was delivered by N. V. BALASUBRAMANIAN J. -The assessee is a firm consisting of five partners. The assessee with another firm, by name, George Maijo Associates, formed a consortium and constituted a partnership firm, called United Exports. The United Exports is also a firm consisting of two partners, viz., Andrew G. Pattamana and Rita Joseph, representing the assessee herein. The assessment year with which we are concerned is 1981-82 and the relevant previous year for the said assessment year ended on June 30, 1980. In the accounts of the consortium, United Exports for the year ending June 30, 1980, the assessee was debited with the share of expenditure incurred which included the cost of certain goods which was claimed to have been lost at high sea. The transaction relating to the loss of goods arose out of the import of P. V. C. resin suspension grade. United Exports entered into a c.i.f. (cost, insurance, freight) contract on June 11, 1979 with Palmex Enterprises, Singapore, for the import of 800 metric tonnes (M. T.) of P. V. C. resin at the rate of 780 U.S. dollars per M. T. The shipment was to be made by September 30, 1979, and payment was to be made by way of an irre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvance by Imperial Industrial Corporation was taken into account by United Exports, since it was not demanded back by Imperial Industrial Corporation. The report of the C. B. I. revealed that the accused had conspired to obtain a second-hand vessel in which they had loaded drums containing coloured water to pass it off as oil and packed ricebran as other goods such as cloves and arranged with the captain to scuttle the ship in the high seas. In other words, in pursuance of the conspiracy, United Exports was induced on behalf of a dummy firm, Imperial Industrial Corporation showing it to be the actual user of P. V. C. resin for opening the letter of credit in favour of the Singapore firm. There were a number of parties who were victims of the conspiracy and one of them was United Exports. The assessee, on the basis of debit entry made by United Exports, claimed that a sum of Rs. 51,18,232 should be allowed as business expenditure. The Income-tax Officer rejected the claim of the assessee on the ground that United Exports obtained the licence and it was only United Exports who entered into an agreement with Orient Enterprises, New Delhi, and Siraj and Co., Bombay, for the import o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount covered by the letter of credit and thereafter made a claim against United Exports for full value despite the fact that the goods did not reach United Exports. He held that the loss in the transit has to be borne by the importer. He held that the fact that the goods never reached the assessee showed that the assessee could be deemed to have sustained the loss. As far as the liability of the Bank of India is concerned, the reason for non-arrival of the goods is immaterial. He also found that the insurance claim was rejected and therefore he held that the entire sum of Rs. 55,06,706 would be allowed as a deduction. The Commissioner of Income-tax (Appeals) allowed the appeal preferred by the assessee on this point. The Revenue preferred an appeal challenging the order of the Commissioner of Income-tax (Appeals) before the Income-tax Appellate Tribunal. The Appellate Tribunal found that the report of the C. B. I. could not be ignored and the goods contracted to be purchased by United Exports were not actually put on board "Averilla". The Appellate Tribunal held that the bill of lading did not refer to the actual goods and hence it is not possible to accept the claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consortium is entitled to the allowance of the amount debited to its account by United Exports, that is, the share of expenditure incurred towards the goods which were lost at high sea. His submission was that the goods were stock-in-trade of the assessee and so long as the assessee was not a party to the conspiracy that might have been entertained between the foreign seller, viz., Palmex Enterprises, Singapore, and another concern, by name, Orient Enterprises, the assessee is entitled to get deduction of the share of expenses incurred in relation to the loss of the goods. His submission was that the bank has already paid money and though the liability to the bank is disputed, the liability was incurred by the assessee during the previous year in question and therefore the assessee is entitled to deduction. Learned counsel relied upon the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 and submitted that the liability does not cease to be a liability because the assessee had taken proceedings before the higher authorities for getting it reduced or wiped out. Learned counsel also submitted that during the previous year, the bank paid the money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placing any reliance on the said letter as the letter was not considered and could not have been considered by the Appellate Tribunal as the settlement seems to have taken place subsequent to the order of the Appellate Tribunal. We are of the view that in view of the decision in Associated Clothiers Ltd. v. CIT [1967] 63 ITR 224 (SC) this court in a reference under section 256 of the Income-tax Act has no power to admit or record additional evidence which has not been placed before the Tribunal and to consider that evidence. Hence, we ignore the letter produced by learned counsel for the assessee. We also like to clear another matter also before proceeding further. The submission of Mr. T. C. A. Ramanujam, learned counsel for the Revenue, is that the Department has committed an error in not proceeding against United Exports and the assessee herein as well as the other constituent unit, and should have made an assessment on the consortium as an association of persons. We are not expressing any opinion as to what the Department should have done. We are also not expressing any opinion on the submission of learned counsel for the Revenue and we are not inclined to give any directio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al the Revenue lost its case on the question whether the business loss was allowable in the hands of the assessee or not, and it is an independent question. Though the Appellate Tribunal decided that the loss is not a business loss in the previous year relevant to the assessment year in question, the Revenue could have asked for a reference on the question whether it was a loss of the assessee or that of United Exports. Further, there was no application at all by the Revenue requesting the Appellate Tribunal to refer a question on the issue whether the loss is that of the assessee or that of United Exports. In the absence of any such question of law referred by the Appellate Tribunal, we hold that it is impermissible for the Revenue to raise the question that the loss could not be claimed by the assessee at all and that the finding rendered by the Appellate Tribunal that it is open to the constituent units to claim the loss has become final. In this connection, we would also like to mention that there were two transactions and the Appellate Tribunal held that as regards one transaction the loss was allowable in the hands of the assessee and in the case of other transaction, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of August, 1941. The assessee claimed deduction of the amount embezzled in the assessment proceedings for the assessment year 1942-43. This court held that though the misappropriation was found in 1941, the amount was entered in the accounts as a debit against the clerk at the end of the previous accounting year and until the settlement of the case by way of compromise, there was no loss at all. Mr. T. C. A. Ramanujam, learned counsel also referred to the decision of the Supreme Court in Associated Banking Corporation of India Ltd. v. CIT [1965] 56 ITR 1 wherein it was held that so long as there is a prospect of recovery of the moneys embezzled, trading loss in the commercial sense cannot be deemed to have resulted. In this connection, he also relied on the decision of the Kerala High Court in Hopkin and Williams (Travancore) Ltd. v. CIT [1967] 64 ITR 76 and the decision of the Allahabad High Court in U. P. Vatiaspati Agency v. CIT [1968] 68 ITR 120 wherein it was held that if the assessee made necessary attempts to recover the loss from the persons, but failed or if the assessee did not make such attempts because it was useless to make them in view of the financial position of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The court however observed that the opening of a confirmed letter of credit constituted a bargain between the banker and the seller of the goods which imposed on the banker an absolute obligation to pay. The banker was not bound or entitled to honour the bills of exchange drawn by the seller unless they and such accompanying documents as might be required thereunder, were in exact compliance with the terms of the credit.... The modern documentary credit had its origin from letters of credit. We may, therefore, begin the discussion with the traditional letter of credit. Paul R. Verkuil in an article (Bank Solvency and Guaranty Letters of Credit, Stanford Law Review, volume 25 [1972-73]) explains the salient features of a letter of credit in these terms : The letter of credit is a contract. The issuing party-usually a bank promises to pay the 'beneficiary'- traditionally a seller of goods -on demand if the beneficiary presents whatever documents may be required by the letter. They are normally the only two parties involved in the contract. The bank which issues a letter of credit acts as a principal, not as agent for its customer, and engages its own credit. The letter of cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to honour the credit in such cases. But it may be very difficult for the bank to take a decision on the alleged fraudulent action. In such cases, it would be proper for the bank to ask the buyer to approach the court for an injunction." We have quoted the judgment in extenso to clarify the role of a bank in honouring a letter of credit. The Bank of India has duly made payment on presentation of the documents. The bank has also informed United Exports about the arrival of the documents. Though the ship sank in high seas, the consortium, United Exports claimed the amount on the basis of the accounts maintained by it wherein the assessee was debited with the share in the expenditure which includes the cost of the goods which had been claimed as lost in high seas. The report of the C. B. I. is dated August 6, 1994, and the assessment year with which we are concerned is 1981-82 with the relevant previous year ending June 30, 1980. We are of the view that the fact that the bank had made payment to the foreign seller in honouring the letter of credit taken out by United Exports and the fact that the ship sank in high seas during the relevant previous year and the further fact that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essel which carried the goods sank in the high seas. In such a situation, it is not expected that the assessee should file a suit against the foreign seller and depend upon the outcome of the suit whether the amount should be written off or not. Equally, it cannot be stated that the loss would occur in the year in which the final decree was passed in the suit. The fact that the goods loaded in the ship had been lost in the high seas for which the assessee had to make payment to the bank would show that the liability to make payment had fallen on the assessee and in the absence of any possibility for the assessee to get back the stock-in-trade lost in the high seas, the assessee would be justified in claiming the same as a trading loss in the year in which the ship had sunk in the high sea. Therefore, the mere fact that United Exports acting on behalf of the assessee resisted the suit instituted by the bank is not relevant when the ship had sunk in the high seas. Further, neither the assessee, nor United Exports was a party to the fraud committed by the foreign seller. We are of the view that it is also permissible to look at the matter from another angle. The assessee was a memb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess. Applying the tests laid down by the Supreme Court, we are of the view that when there is a direct intimate connection between the business operation of the assessee and the loss that has fallen on the assessee, though the loss was occasioned by the act done by the seller, since the assessee is not stated to be a party to the fraud committed by the foreign seller, the loss would be allowable as deduction as the loss is incidental to the business carried on by the assessee. As observed by the Supreme Court in Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802, where the liability was incurred which has to be discharged in a future date, it will be a liability, but however, a contingent liability which may have to be discharged in future cannot be considered as expenditure. In our view, it is not a case of contingent liability as the liability has arisen during the previous year relevant to the assessment year in question. The Tribunal disallowed the loss only on the ground that the loss did not arise during the previous year relevant to the assessment year. In our view, the Tribunal has misdirected itself in this matter as it has focussed its attention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s entitled to deduction. The difficulty in this case has arisen because the seller had not exported the goods contracted to be purchased, but cheated the assessee. The position would have been different if the liability of the assessee to pay the value of the goods had arisen on the sight of the goods. However, on the facts of the case, since the letter of credit was opened and the bank made payment on the presentation of the documents, the assessee was obliged to pay for the value of the goods. We therefore hold that the loss had fallen on the assessee, and, hence, it is deductible in the computation of the assessee's total income. In other words, the loss was incidental to the carrying on of the business of the assessee and there is a direct and proximate connection between the business operations of the assessee and the loss that occurred. We are of the view that the debit entry made by United Exports is a honest and bonafide one and so long as the debit entry is existing at the time of finalisation of accounts of the assessee, the assessee was justified in claiming the same as a business loss. Though United Exports pursued the matter against the insurance company and resiste ..... X X X X Extracts X X X X X X X X Extracts X X X X
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