Income Tax Appellate Tribunal - Chandigarh
Gulati Saree Centre vs Assistant Commissioner Of Income-Tax on 9 October, 1998
Equivalent citations: [1999]71ITD73(CHD)
ORDER
Per Saluja, JM.
The following question has been referred for the opinion of the Special Bench:
"Whether, after the introduction of the concept of block of assets an individual item in a block of assets loses its identity and the depreciation has to be allowed on the total block without considering whether an individual item comprised in the block has been used for business purposes or not, whether fully or partly?"
2. The Division Bench happened to refer the aforesaid question to the Special Bench because the learned counsel for the assessee had placed reliance on the decision of the Jabalpur Bench of the Tribunal in the case of Packwell Printers v. Assit. CIT (1996) 59 ITD 340 for the proposition that after the amendment in section 32 with effect from 1-4-1988 an individual asset loses its identity and for allowing depreciation the entire block has to be considered. On the other hand, the case of the Revenue was that such an interpretation would negate the provisions of section 38(2) of the Income Tax Act, 1961 (for short the Act). The Revenue had relied on the decision of the Chandigarh Bench of the Tribunal in the case of Singla Agencies v. Assistant Commissioner (1997) 60 ITD 410, which had taken the view that an asset did not lose its identity after introduction of the concept of block of assets and that the provisions of section 38(2) were still applicable.
3. We have heard Shri Brij Mohan Khanna, the learned counsel for the assessee and Shri Yog Raj Saini, Representative for the Revenue, at length for two days on 8-7-1999 and 9-7-1999.
4. Grounds Nos. 1 and 2 raised by the assessee are as follows:
" 1. That the ld. Commissioner (Appeals) has failed to appreciate the amended provisions, governing the allowance of depreciation and has thereby erred in upholding the disallowance of 1/4th depreciation on car.
2. That depreciation is permissible on block of assets and any particular item loses its identity by merging into the block. There is no separate w.d.v. for the assets. Even the w.d.v. varies with the purchase or sale of an asset."
4.1 The brief facts relating to the issue are that the assessing officer observed that the assessee has itself disallowed 1/4th of total vehicle repair and maintenance on account of personal and non-business use at Rs. 15,089. The assessing officer consequently disallowed 1/4th of total depreciation claimed by the assessee on the vehicles under the provisions of section 38(2). The disallowance was made at Rs. 9,940.
4.2 On first appeal, ld. counsel submitted that the assessing officer was not justified in making the disallowance from depreciation in view of the introduction of the system of block of assets where depreciation is allowed on the block and not an individual item as such. Ld Commissioner (Appeals) considered the submissions but did not find any force in them. He referred to the provisions of section 38(2), which are reproduced hereunder for the sake of convenience:-
"38(2) where any building, machinery, plant or furniture is not exclusively used for the purposes of the business or profession, the deduction under sub-clause (it) of clause (a) and clause (c) of section 30, clauses (i) and (it) of section 31 and clause (it) of sub-section (1) of section 32 shall be restricted to a fair proportionate part thereof which the assessing officer may determine, having regard to the user of such building, machinery, plant or furniture for the purposes of the business or profession.' Ld. Commissioner (Appeals) held that in view of the said provisions and in view of the fact that the assessee itself had disallowed expenditure to the extent 1/4th the action of assessing officer was justified. Ld. Commissioner (Appeals) also referred to the decision of Hon'ble Patna High Court in the case of CIT v. K.L. Bhasin & Co. (1986) 158 ITR 623/(1985) 22 Taxman 498 which observed that proportionate depreciation on motor car belonging to the firm and used by the partners for personal purposes could be disallowed.
5. Ld. counsel for the assessee Shri Khanna submitted before us that the aforesaid decision of Patna High Court relates to the provisions of section 32 before their amendment with effect from 1-4-1988. He further referred to the decision of Honble Madras High Court in the case of Waterfall Estates Ltd. v. CIT (1981) 131 ITR 223/4 Taxman 311 wherein it was held that section 38 was not applicable where the asset was wholly applied for the purpose of business. lt observed that the assessee had to maintain a head office and merely because HO also supervise coffee estates the income from which was not taxable, a bifurcation could not be made between the user of the assets towards taxable sources of income and non-taxable sources of income. The entire depreciation in respect of assets used in HO was deductible from the taxable income. Ld. counsel pointed out that even the said decision is with reference to the provisions of section 32, read with section 38, as they stood before there amendment with effect from 1-4-1998. Ld. counsel stressed that an individual item in a block of assets would lose its identity and that the depreciation has to be allowed w.r.t. a block of assets after amendment of section 32 by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, with effect from 1-4-1998. He, therefore, urged that the provision of section 38(2) have no application where one item out of block of assets is used for non-business purposes. Ld. counsel emphasised that the provisions of section 38(2) would apply to the entire block of assets and not to any particular asset comprised within the block of assets. Ld. counsel referred to the provisions of Appendix 1 to the Income-tax Rules and submitted that under item "III Machinery and Plant, sub-item (1), ie. "Machinery and Plant other that those covered by sub-items (2) and (3)" covers the car used by the assessee-firm for the purpose of business and machinery and that plant 'including car' were eligible for depreciation allowance @D 33.33%. He submitted that sub-item (IA) providing for depreciation in case of motor car C 20% was introduced in Appendix 1 with effect from 23-8-1990 and the said amendment would be applicable in relation to assessment year 91-92 and would be applicable in respect of car purchased after the date of the said amendment. On an observation made by the Bench that the provisions of section 38(2) were also amended by the Taxation Laws (Amendment and Misc. Provisions) Act with effect from 1-4-1998, so as to incorporate a reference to clause (it) of sub-section (1) of section 32 relating to block of assets and that no provision of an Act is redundant and that section 38(2) deals with user of the asset for business /non-business purposes, Id. counsel submitted that various amendments were made in sections 32, 41, 43 and 50 in order to simplify the procedure relating to grant of depreciation and that the provisions of section 38(2) have to be interpreted in the light of various amendments made in the Act in relation to grant of depreciation. He refer-red to the provision of section 43(6)(C) of the Act relating to the definition of 'written down value'. The relevant portion of the said provision is reproduced hereunder for the sake of convenience:
"43(6) 'written down value' means ** ** **
(c) in the case of any block of assets,
(i)in respect of any previous year relevant to the assessment year commencing on the Ist day of April, 1988, the aggregate of the written down value of all the assets falling within the block of assets at the beginning of the previous year and adjusted,-
(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year; and (B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and
(ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (t)."
Ld. counsel pointed out that in relation to the assessment year commencing on 1-4-1988, the aggregate of the w.d.v. of all the assets falling within any block of assets at the begining of the previous year has to be taken and then adjusted by increase at actual cost of any asset falling within that block acquired during the previous year and by reduction of moneys payable in respect of any asset falling within that block which is sold or discarded etc. during the previous year. He, therefore, emphasised that as on 1-4-1998, w.d.v. of the entire block of assets has to be taken and then further adjusted as provided in section 43(6)(c). In view of the said provisions, he submitted that non-business user of any particular asset falling within the block of assets could not be taken into account for determining the w.d.v. of the entire block of assets, as stipulated by the provisions of section 43(6)(c). He submitted that in the case of the assessee the block of assets comprised of machinery and plant (including car) and, therefore, personal user of car falling within that block 'machinery and plant' could not be segregated and the provisions of section 38(2) could not be applied in such a situation. On a query from the Bench as to whether there is any place for a single asset falling within a block of assets for being considered for depreciation, ld. counsel submitted that such a single asset must fall within a block of assets or the group within the block of assets and that keeping in view the provision of section 43(6)(c)(t), w.d.v. of all assets falling within a particular block of assets has to be taken at the beginning of the previous year relevant to the assessment year commencing on 1-4-1988 and then adjustments have to be made, as stipulated in that section. He submitted that where depreciation was allowable on car at 33.3 or 25 per cent, that percentage cannot be taken out of the previous year's w.d.v. so as to apply the new rates of depreciation in relation to such car. He submitted that the car was an independent asset before 1-4-1988 but merged in the block of assets under the head 'Machinery and Plant' with effect from 1-4-1988 till amendment of Appendix 1 in August, 1990. Ld. counsel submitted that in the case of the assessee the block 'machinery and plant' consists of equipment ie., Air conditioners having the w.d.v. as on 1-4-1989 at Rs. 8,775 and vehicles having the w.d.v. as on 1-4-1989 of Rs 1,19,290 - both eligible for deduction @) 33.33%. Ld. counsel further submitted that if out of block, for example, the equipment which had been purchased for Rs. 1 lakh is sold for Rs 1.30 lakhs and the car which had been purchased for Rs. 10,000 is not sold, w.d.v. of such block of assets would become 'nil' in terms of the provision of section 43(6)(c) and, in such a situation, capital gains may be attracted and may have to be determined under the provisions of section 50(2), which was also introduced by 1986 Act, with effect from 1-4-1988. Ld. counsel submitted that the Chandigarh Bench of the Tribunal did not consider that where w.d.v. in respect of any block of assets became nil and the assessee earned profit on sale of that block of assets, then capital gains would have to be determined under section 50(2). Ld. counsel emphasised that the w.d.v. is to be determined w.r.t. the depreciation actually allowed and, therefore, the assessee is liable to pay tax in one year or the other. Ld. counsel thus concluded that the provisions of section-'~8(2) would only apply to the entire block of assets and not to any particular asset comprised therein, as after the introduction of the concept of 'block of assets' in section 32, the individual asset comprised within the block of asset loses its identity. On a query from the Bench as to whether the provisions of Appendix 1, which is a piece of subordinate legislation, would override the provisions of section 38(2), ld. counsel submitted that the provisions of section 38(2) should be interpreted in the light of amendment made in section 32 and in the light of the entries in Appendix 1, wherein cars were included within 'Machinery and Plant' for the purpose of depreciation @ 33.33% ld. counsel relied on the decision in the case of Packwell Printer (supra). He further referred to the decision of the Delhi Bench of the Tribunal in the case of Miss Sushma Malik v. Income Tax Officer (1993) 47 ITD 358, wherein it was held that where the assessee did fulfil all the statutory conditions to claim depreciation, the same was allowable and quantum of income earned during the assessment year was totally immaterial for claim of depreciation. In the said case, professional receipt amounted to Rs. 6,000 and the assessee claimed depreciation of Rs. 40,622 on the car purchased for professional purposes.
5.1 Learned D.R. Shri Saini submitted that the relevance of the provisions of section 38(2) of the Act was not affected by the Legislature even after the amendment made in various sections by the 1986 Act for simplifying the procedure for allowing depreciation to the assessee. He emphasised that the provisions of section 38(2) continue to apply as they applied before the amendment with effect from 1-4-1988. He submitted that if there was any intention that personal usage of any asset failing within a block of assets was to be ignored, then the provisions of section 38(2) would have been amended suitably by the Legislature. He further submitted that the provisions of Appendix 1 framed by subordinate authority cannot override the provisions of section 38(2). Ld. D.R. then referred to the provisions of Appendix land submitted that there are different sub-blocks within the block of assets and that such sub-blocks are entitled for depreciation at different rates. He, therefore, submitted that the real issue is whether excess depreciation should be allowed so as to reduce the incidence of tax payable by the assessee during the" year under consideration. Ld. D.R further submitted that even after the amendments made by 1986 Act, the assessees are required to maintain depreciation chart to claim depreciation/higher depreciation. He submitted that even in the case of assessee, Schedule C reflects the w.d.v. of equipment at Rs. 8,775 and of vehicles at Rs. 1,19,290. He therefore submitted that the vehicles are identifiable within the block of assets i.e.,'Machinery and Plant'. He, therefore, urged that the provisions of sections 32 and 38(2) have to be read together to work out depreciation admissible to the assessee. Ld. D.R relied on the decision in the case of Singla Agencies (supra) and pointed out that the Tribunal observed that '. . . it is very much possible to compute the disallowance in suitable cases of a fair proportion of depreciation as visualised b ' v section 38(2). The exercise may be lime consuming or difficult but it cannot be said that in the changed scheme of things, disallowance under section 38(2) is not capable of computation'. He further submitted that the decision in the case of Packwell Printers (supra) is on different facts and that no personal usage was involved and that the present issue was not before the Tribunal. Similarly, he submitted that tile decision in the case Ms. Sushma Malik (supra) is also distinguishable on facts as the car was used f or business purposes and the issue of personal usage was not there. He pointed out that even the decision in the case of Waterfall Estates Ltd. (supra) was on different facts and the issue therein was that assets had been used for business purposes and not for personal purposes of the assessee.
5.2 Ld. counsel, in his reply, reiterated that the provisions of section 38(2) <ire applicable only to block of assets and not to individual item comprised therein. He submitted that in the case of the assessee two items, i.e., equipment and vehicle constitute a block of assets which is entitled to depreciation at 33.3%. At this stage, attention of Id. counsel was drawn to the decision of Hon'ble Madras High Court in the case of CIT v. Chilram & Co.(P.) Ltd. (1991) 191 1TR 96/55 Taxman 70 wherein it was held as under:-
"Section 32(1) provides for depreciation on building, plant, machinery or furniture owned by the assessee and used exclusively for purposes of business or profession, while section 38(2) provides for depreciation with reference to user of building, plant, machinery or furniture not exclusively for the purposes of business or profession. In a case ill which the building, machinery, plant or furniture, owned by the assessee is not exclusively used for purposes of business or profession, section 38(2) restricts the depreciation to a fair proportionate part thereof to be determined by the Income Tax Officer, after taking into account the user of the building, machinery, plant or furniture, for purpose of business or profession. In the case of a mixed user of the building, machinery, plant or furniture, the claim for depreciation has to be considered under section 38(2) and not under section 32(1). While section 38(2) provides for depreciation with reference to user of building, plant and machinery not exclusively for the purposes of business or profession, rule 5 of the Income-tax Rules, 1962, contemplates and applies to a case falling under section 32 which deals with the use of the plant and machinery exclusively for the purpose of the business. Rule 5 would apply to cases falling under section 32 and not to a cases falling under section 38(2)."
Ld. counsel submitted that even the aforesaid decision was relevant w.r.t. old provisions of depreciation, ie., before their amendment with effect from 1-41988. He submitted that after the amendment made with effect from 1-4-1988, section 38(2) would be applicable to the whole of block of assets and not to any individual item falling within that block and, therefore, the provisions of section 38(2) should be interpreted in the light of changes made in relation to block of assets. On a query from the Bench as to whether there was any case law in favour of the assesses on this issue or any commentary, Id. counsel submitted that he was not aware of any such case law.
6. Believe carefully considered the submissions made by both the parties oil this issue and have perused the order of the departmental authorities. We have also perused the relevant documents field by Id. counsel in the paper book to which our attention was invited during the course of hearing. We have also seen the case law relied upon by both parties. It is observed that the issue before the Jabalpur Bench in the case of Packwell Printers (supra) was as to whether the assessing officers was right in disallowing the claim of depreciation on the truck which was damaged in an accident and could not be used during the year under consideration.
It was urged before the Tribunal that there was thorough change in the. system of allowing depreciation from assessment year 1988-89 and that depreciation was to be allowed on the block of assets and not upon the individual asset. The Tribunal observed as under:-
"In the instant case when the two trucks out of the three in the block were used for the purpose of business, the depreciation had to be allowed on the w.d.v. of the said block of assets, as per the percentage of depreciation prescribed in respect of the block of assets."
It held that the depreciation was allowable on all the trucks of the assessee. In the process, the Tribunal also observed as under :-
".. . . after the amendment with effect from 1-4-1988, the individual asset has lost its identity and for the purpose of allowing of depreciation, only the block of assets has to be considered. If a block of assets is owned by the assessee and used for the purpose of business, depreciation will be allowed. Therefore, the test of user has to be applied upon the block as a whole instead of upon an individual asset."
It is quite clear that the facts in the said case were entirely different and the decision of the Tribunal was based on the ownership of the block of assets by the assessee and its user for the purpose of business, as provided in section 32. The issue regarding user of any particular asset falling within the block of assets for personal purposes and proportionate disallowance of depreciation was thus not before the Jabalpur Bench and the said case is, therefore, of no help to the assessee. It is also observed that the decision of the Delhi Bench in the case of Ms. Sushma Malik (supra) is also on different facts, as in that case the assessee has shown professional receipt w.r.t. legal practice during the period 19-2-1990 to 31-3-1990 at Rs. 6,000, while the assessee claimed depreciation of Rs. 40,622 on the car purchased for professional purposes. The assessing officer disallowed 7/8th of depreciation as not relating to professional purposes. The Tribunal held that the quantum of income earned during the period was totally immaterial for determining the claim of depreciation and that the scheme of the Act was to encourage investment in machinery and other capital assets including motorcar. It also held that where the assessee had fulfilled all the statutory conditions to claim depreciation, the same had to be allowed. As against the said decisions, Hon'ble Madras High Court in the case of Chitram & Co (P.) Ltd (supra) has examined the provisions of sections 32(1) and 38(2). It held that rule 5 and Appendix 1 of Income-tax Rules applied to a case failing under section 32, which deals with the use of plant and machinery exclusively for the purposes of business. It further held that section 38(2) provides for depreciation w.r.t. user of building, plant, machinery or furniture not exclusively for the purpose of business or profession and that the provisions of section 38(2) restrict the depreciation to a fair proportionate part thereof, to be determined by the Income Tax Officer, after taking into account the user of the building, plant, machinery or furniture for the purpose of business or profession. It also held that in case of a mixed user of the buildings etc, the claim for depreciation has to be considered under section 38(2) and not under section 32(1). Though the said decision, as mentioned by learned counsel for the assessee, pertains to assessment years 1971-72 and 72-73, we feel that the underlying ratio thereof is valid even after the amendments made by 1986 Act with effect from 1-4-1988 in sections 32, 38(2) and other related provisions of the Act. We feel that even after introduction of the concept of block of assets, the provisions of section 38(2) would continue to apply and the assessing officer is empowered to restrict depreciation to a fair proportionate part thereof, having regard to the user of the building, machinery, plant or furniture for the purposes of business or profession. Here, we may refer to the decision of the Tribunal in the case of Singla Agencies (supra), wherein it was held that identity of an asset is not lost on entering the block of assets. In that case, the Tribunal observed that 'block of assets is subdivided into four classes and in each class there are sub-clauses and different rates of depreciation for the block of assets have been prescribed in "the Table of rates given in Appendix-1 under rule 5 of the IT Rules. The Tribunal further held that even within the block of assets, different identities have been kept in respect of different items and therefore, it does not mean that the identity of the assets entering the block of assets had been lost altogether or all assets have been merged in the block of assets. It also observed that if machinery or plant consisted of four different items, then the block of assets has to be kept in respect of each such item. It also observed that the law has attempted simplification of the provision relating to depreciation allowance but that does not mean that the provisions of section 38(2) have been done away with or have ceased to exist. Section 38(2) continues to be the part of the statute book and the principle contained in that section is that if an asset being building, machinery, plant or furniture is not exclusively used for the purposes of business or profession, then depreciation allowance shall be restricted to a fair proportionate part thereof having regard to the user of such building, machinery, etc., for the purposes of business or profession. The Tribunal further observed that the provisions contained in section 38(2) deal with a different situation which has nothing to do with the simplification of depreciation rates. The Tribunal observed that :-
". . . In spite of the fact that depreciation is allowable in respect of block of assets, it is very much possible to compute the disallowance in suitable cases of a fair proportion of depreciation as visualised by section 38(2). The exercise may be time consuming or difficult but it cannot be said that in the changed scheme of things, disallowance under section 38(2) is not capable of computation. Difficulties apart, the disallowance under section 38(2) is certainly capable of computation."
We feel that the conclusions arrived at by Chandigarh Bench in the case of Singla Agencies (supra) are based on proper appreciation of amended provisions of sections 2(11),32(1)(ii), 38(2) etc. and are legally correct. We may mention that the expression 'block of assets' used in section 32(1)(ii) has been defined in section 2(11) of the Act as meaning a group of assets falling within a class of assets being buildings, machinery, plant or furniture in respect of which the same percentage of depreciation is prescribed. Further the provisions of section 38(2) were also amended by 1986 Act with effect from 1-4-1988 so as to retain reference to only clause (ii) of subsection (1) of section 32. Obviously, the purpose of the said amendment was to syncronise the provisions of section 38(2) with the concept of block of assets as introduced in clause (it) of sub-section (1) of section 32. We, therefore, feel that the provisions of section 38(2) have to be read harmoniously with the amendments made in section 32(1)(ii) and other related provisions and that the said provisions of section 38(2), which are very much part of the statute book, cannot be so construed as to do violence to the intention underlying the said provisions, which is to enable the assessing officer to restrict the depreciation allowance under section 32(1)(ii) to a fair proportionate part thereof in case a building, machinery, plant or furniture is not exclusively used for the purpose of business or profession. We thus agree with the ld. D.R. that if the intention was otherwise, the provisions of section 38(2) would have been suitably amended. We may also mention that the provisions of Appendix 1, as amended from time to time, clearly depict the situation where the main block of assets, for example, machinery and plant, contains various sub blocks of assets which are entitled to different rates of depreciation and are identifiable w.r.t. such rates also. We, therefore, feel that so far as any asset falling within a block of assets is identifiable, the provisions of section 38(2) can be invoked for the purpose of disallowing a fair proportionate part of the depreciation having regard to the user of such asset for the purposes of business of profession. We have also examined the provisions of section 43(6)(c) and we feel that the same do not present any difficulty in the application of the provisions of section 38(2). The provisions of section 43(6)(c)(z)(A) and (B) stipulate the aggregation of w.d.v. of the assets, falling within a block of assets in respect of the previous year relevant to the assessment year commencing on 1-4-1988 and then adjusting the said w.d.v. by increase by the actual cost of any asset, falling within that block, acquired during the previous year and then also reducing from w.d.v. so arrived at the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished during that previous year, provided the amount of such reduction does not exceed the w.d.v. as so increased. Similarly, under item (ii) of sub-clause (c) of section 43(6), the w.d.v. of the block of assets in the immediately preceding previous Year relevant to assessment Years 89-90 is to be reduced by the depreciation actually allowed in respect of that block of assets during the preceding previous year and is to be further adjusted by increase or reduction, mentioned above. Thus the w.d.v. of all the assets within a block of assets is to be taken as on the Ist day of the previous year and then adjusted w.r.t. the actual cost of acquisition or value of disposal of any particular asset falling within the block, during the year. These provisions thus also stipulate the concept of various individual assets entering or going out of the block of assets. The individual assets within a block of assets thus retain their identity, though the w.d.v. of the block of assets keeps on changing in terms of the provisions of section 43(6)(c). Further the provisions of section 50(2) deal with a situation where the w.d.v. of any block of assets may be reduced to nil as such block may cease to exist for the reason that all assets in that block are transferred during the previous year. Thus, the said provisions deal with computation of capital gains arising in such a situation as gains from short term capital assets. We feel that the said provisions also do not come in the way of applying the provisions of section 38(2) in case of an asset which is otherwise identifiable within the resisting block of assets. The provisions of section 50(1) would apply where block of asset does not cease to exist. We may also mention that in the case of the assessee, w.d.v. of vehicles is separately worked out at Rs. 1, 19,290 and details of vehicles are also given in Annexure C- 1. Thus, in view of the foregoing discussion we hold that the provisions of section 38(2) of the Act have been rightly invoked by the Commissioner (Appeals) and lie was right in sustaining the disallowance out of depreciation as made by the assessing officer. Since the assessee did not agitate that the disallowance of 1/4th of car depreciation was on high side, we are not going into that question. Accordingly, we uphold the order of the Commissioner (Appeals) on this issue.
7. Grounds Nos. 3 and 4 are as under :-
"3. That the Id. Commissioner (Appeals) has also failed to appreciate the facts and circumstances of the case and has thereby erred in upholding the addition of Rs. 95,901. The writing off the claim against the Insurance Company, is an admissible deduction during the accounting period, as the claim was rejected by the Insurance Company during the accounting period.
4. That the Commissioner (Appeals) has come to an erroneous conclusion by terming the writing off of the claim against the Insurance Company as 'with a view to circumvent the provisions of Income-tax and debiting the amount of Rs. 95,901 in the disguise of a claim or a bad debt written off."
7.1 The assessing officer observed that the assessee had debited an amount of Rs. 95,901 to the profit and loss account on account of loss on theft. It is mentioned in the assessment order that details were called for and examined. assessing officer observed that the FIR filed showed that the theft took place on 4-9-1987. He held that the loss on account of theft did not relate to the previous year relevant to the assessment year under consideration. He, therefore, disallowed the claim of Rs. 95,901.
7.2 On first appeal, Id. counsel submitted that the assessing officer disallowed the loss without appreciating the facts of the case. He submitted that though the theft took place on 4-9-1987, the assessee had claimed the amount with the New India Assurance Co. and the claim was rejected vide their letter dated 22-2-1990 and, therefore, it debited the loss of Rs. 95,901 in the year under consideration. Ld. Commissioner (Appeals) considered the submissions and observed that the FIR was filed on 4-9-1987 and it was contended before the Police that a parcel of sarees was brought from the Indian Airlines office and kept in the verandah outside the shop and that the weight of the said parcel was 50-60 kg. He further observed that 2-3 other parcels were also left in the verandah. He also observed that at 1.30 p.m. when the shop was being closed for lunch and the parcels were being taken inside, the assessee found that the parcel of sarees weighing 50-60 kg. was not traceable and despite considerable efforts the same could not be traced. Ld. Commissioner (Appeals) further. observed that the assessee was supposed to have made a claim of Rs. 96,000 with New India Assurance Co. in respect of the goods allegedly stolen, although no documents in respect of claim initially made in September, 1987, were furnished. He noted that nothing happened till 22-2-1990, when in response to a letter from the assessee dated 19-5-1989 New India Assurance Company informed that "the package of sarees was stolen from the verandah of the shop and the claim had been filed as 'no claim," since there was no visible/ forcible entry, which was beyond the scope of the shopkeeper's burglary policy. Ld. Commissioner (Appeals) observed that the assessee was a popular dealer of sarees and was having sufficient staff for security under it own employment and it was difficult to believe that a parcel could be removed from just outside the shop without being noticed. He also mentioned that it was even more difficult to believe that when more parcels were not lifted by the thief, a huge parcel of 50-60 kg. could be removed by them without being noticed by anybody in the shop and that too in full day light as the missing parcel was noted at 1.30 p.m. He also observed that the assessee has not been able to furnish any evidence except copy of FIR to establish that it incurred a loss of Rs. 95,901 on account of alleged theft on 4-9-1987. Ld. C1T(A), therefore, held that it was unbelievable that such as theft took place. He further observed that if, for the sake of argument, it was presumed that the assessee incurred a loss of Rs. 95,90 1, the same should be allowed in the year when the loss occurred. He referred to the decision of the Chandigarh Bench of the Tribunal in the case of Chandigarh Industrial & General Development Corpn. Ltd. (IT Appeal No. 28/86, dated 6-12-1990) for assessment year 1982-83. Ld. Commissioner (Appeals) observed that the ' assessee is in business f or a very long time and was fully conversant with the rules of Insurance and that burglary insurance covered only theft taking place inside the premises of the shop and could not be extended to the premises outside the shop. He therefore, held that if the assessee had made a claim it had been made with clear intention of somehow persuading the Insurance Company to pay the same. He held that the claim was rightly rejected by the Insurance Co. as it was not covered under the burglary policy. He, therefore, held that the assessee knew that the Insurance claim was not maintainable and with a view to circumvent the provisions of the Act, the assessee debited the amount of Rs. 95,901 in the disguise of a claim for bad debt written off. He, therefore, rejected the claim and upheld the impugned addition.
7.3 Ld. counsel invited our attention to page 6 or the paperbook, where a copy of reply given by the assessee to notice under section 142(1) is placed. It is mentioned in paragraph 3 that the evidence regarding loss of theft was enclosed. It was also mentioned that the assessee lodged an FIR with the Police Station and necessary document in support of the correspondence with the Insurance Company, the Indian Airlines and the Police were enclosed. He further referred to page 10 of the paper book, where a copy of letter dated 18-9-1987 from the Indian Airlines to the assessee is placed. It is mentioned therein that one parcel booked by Ws. Kala Udyog, Varanasi, has been delivered to Gulati Saree Centre, Sector 22-R Chandigarh, and the weight shown was 47.500 kg. and the value declared was Rs. 95,000. It is also mentioned that the same is entered in the delivery register at page 129 and it was delivered on 4-9-1987. He further referred to page 12 of the paperbook, where copy of letter dated 22-2-1990 from New India Assurance Co. Ltd. is placed, whereby the claim was rejected and filed as 'no claim'. He further referred to pages 13-14 of the paperbook, where a copy of reply dated 11-7-1991 given to the CIT is placed. The assessee mentioned at page 2 of the said reply that the "amount of claim Rs. 95,901 duly appeared in the balance sheet for the years ending 31-3-1988 and 31-3-1989. The amount was due to it in connection with its business and had become bad during the accounting period due to the claim having been turned down by the Insurance Company and, therefore, it had been rightly claimed as a deduction during the year under consideration". The assessee also mentioned that photocopies of relevant documents were being enclosed. Ld. counsel further invited our attention to page 4 of the paperbook, where in the list of sundry debtors as on 3 1 -3-1988 attached to the balance sheet, an entry of Rs. 95,901.25 is shown against New India Assurance Company on account of the claim. He submitted that the assessee had debited the claim against the Insurance Company. I.d. counsel was fare enough to mention that the claim of theft was not made in the assessment year relevant to the accounting period when the theft occurred. He, however, hastened to add that the claim against the Insurance Company has been written off in the year under consideration. On a query, Id. counsel submitted that the sarees lost on account of theft amounting to Rs. 95,901 were not shown as part of closing stock. He submitted that the assessee credited the purchase account and debited the amount as an Insurance claim against New India Assurance Co. He relied on the following decisions :-
(i) CIT v. Pallavan Transport Corpn. Ltd, (1998) 230 ITR 288/(1997) 91 Taxman 132 (Mad.). In the said case, the assessee claimed depreciation on certain assets on the ground that it became the owner of those properties as per G.O. No. 86, Transport department, dated 8-11-1971, and notification dated 22-12-1971. The latter notification vested those properties with the assessee and suitable entries were made in the assessee's books in respect of the consideration from capital contribution and loan advanced by the Government. A formal sale deed was not executed in view of the provisions under the Government Grants Act, 1895. The 1TO was of the view that the assessee had not become the legal owner and could not claim depreciation on those assets. The Appellate Assistant Commissioner deleted the disallowance and directed the allowance of depreciation and the Tribunal confirmed the order passed by the Appellate Assistant Commissioner. On a reference, the Hon'ble High Court held that there was nothing in the language of section 2 of the Government Grants Act, 1895, to restrict the meaning of the term 'other transfers' only to grant~ and other transfer akin to grants made by the Government and for holding that the expression 'other transfers' will not cover other forms of transfer by the Government for consideration It, therefore, held that the Tribunal was right in holding that the assessees was entitled to deprecation on the assets transferred by the Government;
(ii) CIT v. Agarwal Gudaku Factory (1998) 232 ITR 584 (MP). In the said case, the assessee claimed deduction of Rs. 40,935 towards payment of entry tax for assessment year 1983-84. There was no dispute that the expenditure pertained to earlier years. The assessee claimed deduction during the year on two grounds, namely, that the clarification as to the liability of the assessee for payment of entry tax of Gudaku was issued by the Commissioner of Sales Tax on 2-11-198 1, which was the date falling during the accounting period relevant to the present assessment year. The assessee also contended that the entry tax pertained to Diwali years 1977-78 and 1978-79 and the assessments to entry tax in respect of the said two years were made on 30-12-1981 and 28-6-1982 and these two dates fell during the accounting period relevant to assessment year 1983-84. The assessing officer disallowed the claim because the assessec was maintaining accounts on mercantile basis. The Commissioner (Appeals) and the Tribunal allowed the claim. On a reference, the Honble High Court held that the deduction was rightly allowed to the assessee during assessment year 1983-84, taking a pragmatic approach in the matter;
(iii) CIT v. Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. (1999) 237 ITR 253/102 Taxman 433 (Bom.). In the said case, the assessee acquired import entitlement, by paying premium, for purchase of spare parts. The assessee approached the Textile Commissioner for a clarification whether import entitlement under the scheme issued by the Government could be transferred by a textile mill to rayon textile industries. The Commissioner agreed that such a transfer, could be made. The assessee-company acquired import entitlement worth Rs. 10 lakhs and necessary permission was granted by the Textile Commissioner to use these import entitlements for the purchase of the required spare parts for the textile machinery. The assessee had paid a premium of Rs. 2,95,000. However, when the assessee approached for permission to import spare parts, the Government advised it that except for a small amount towards import of reprocess spinners, it would not be possible for them to allow import of essential spares of rayon plant under that scheme. The import entitlement purchased by the assessee thus became useless. The assessee, therefore, wrote off the premium of Rs. 2,95,000 paid in the previous year relevant to the assessment year 1970-71 and claimed deduction of this amount in computing its income. The Tribunal held that the loss had to be allowed as deduction in the year in which the loss was written off. On a reference, the Hon'ble High Court affirmed the decision of the Tribunal that the loss had to be allowed as deduction in the assessment year in which the loss was written off.
Ld. counsel urged that the ratio of the aforesaid decisions supported the case of the assessee for allowing loss of Rs. 95,901 during the year under consideration.
7.4 Ld. D.R. relied heavily on orders of tax authorities. He submitted that the Commissioner (Appeals) has held that the claim of loss itself was not genuine. He further submitted that it was difficult to believe that such a heavy package weighing more than 47 kg. could be removed without the same being noticed by the assessee. He further submitted that the loss took place on 4-9-1987, i.e., in assessment year 1988-89 and that the loss was allowable in the year in which it occurred/ crystallised. Ld. D.R. referred to the order dated 6-12-1990 (supra), wherein the Tribunal observed in paragraph 3 that'... We must observe that loss arising out of the trade of the assessees is admissible in the year in which the loss occurred'. He pointed out that the order of the Commissioner (Appeals) on this issued was set aside by the Tribunal and the issue was restored to the file of the assessing officer for deciding afresh, taking into consideration the above observations Ld. D.R. further submitted that the cases relied upon by ld. counsel are distinguishable on facts. He submitted that the decision in the case of Agrawal Gudaku Factory (supra) relates to claim of payment of entry tax. He submitted that similarly the decision in the case of Gwalior Rayon Silk Mfs. (Mvg.) Co. Ltd (supra) related to claim of loss on purchase of import entitlement in view of the clarification given by the Textile Commissioner and ultimately the Government refusing permission to the assessee to import essential spares of rayon plant under the said scheme. Ld. D.R. relied on the following decisions :-
(a) CIT v. East India Hotels Ltd. (1994) 207 ITR 881 (Cal.), wherein it was held that royalty for previous year relevant to assessment year 1971-72 was not allowable in assessment year 1972-73. In the said case, the Hon'ble High Court observed that the agreement was effective from 1-4-1970;
(b) Vanaja Textile Ltd. v. CIT (1994) 208 ITR 161 (Ker.), wherein it was held that in view of the mercantile system of accounting electrical surcharge payable under order passed in 1968 was not deductible in assessment year 1979-80.
7.5 Ld. counsel, in his reply, submitted that the assessee had put for the claim of loss before the New India Assurance Company and, therefore, it did not make a claim of loss in assessment year 88-89, as it was trying to exhaust the remedy of recovering the amount from the Insurance Company. He submitted that since the claim was rejected by the Insurance Company, the assessee wrote off the amount in its books and made the claim. He, therefore, urged that the claim of loss ought to be allowed during the year under consideration.
8. We have carefully considered the rival submissions on this issue and have perused the orders of the departmental authorities as also the relevant documents placed in the paperbook to which our attention was invited during the course of hearing. We have also seen the case law relied upon by both the parties. It is observed that the assessing officer did not give any finding that the claim of loss of Rs. 95,901 made by the assessee was not genuine. He disallowed the same on the basis that the claim did not relate to the previous year relevant to the assessment year under consideration. It is also observed that the Commissioner (Appeals) held that the claim filed by the assessee was unbelievable, impliedly holding that it was not genuine.
He disallowed the claim al ' so on the ground that the same was allowable in the year in which the loss occurred. Ld. Commissioner (Appeals) relied on the decision of the Tribunal in the case of Chandigarh Industrial& General Development Corpn. Ltd. (supra). It is observed that while restoring the matter to the file of the assessing officer, in view of the decision of the Sub-Judge 1st Class, in Civil Suit No. 11 of 1984, dated 13 -2-1985, the Tribunal observed t hat the 'loss arising out of the trade of the assessee is admissible in the year in which the loss occurred'. It also directed the assessing officer for deciding the issue afresh after taking into consideration the above observations. We are not going into the question as to whether the aforesaid observations made by the Tribunal were necessary while restoring the issue to the assessing officer, in view of the decision of the Sub-Judge in the civil suit. In so far as the question of genuineness of the loss in the present case is concerned, it is observed that the assessee filed an FIR on the date when the loss occurred, ie., 4-9-1987. Further, Indian Airlines vide letter dated 18-9-1987 confirmed that a parcel booked by M/s Kala Udyog had been delivered to the assessee and that the weight of the said parcel was 47.500 kg. and the value declared was Rs. 95,000. They also certified that the said parcel is entered in their delivery register at page 129 and it was delivered to the assessee on 4-9-1987. This letter has not been discussed by the Id. Commissioner (Appeals) while holding that the loss was unbelievable. We feel that in view of the documents on file, ie. FIR dated 4-9-1987, letter of Indian Airlines dated 18-9-1987, the list of sundry debtors attached to the balance sheet as on 31-3-1988 and the letter of Insurance (Assurance) Company dated 22-2-1990, it is difficult to hold that the loss did not occur. The only issue is as to during which year the loss is allowable. Each case is to be seen in the light of the facts of that case. It is observed from the commentary Law of Income Tax' by Sampath lyengar, Vol. 2, 9th edition, pages 1716-1717 that Hon'ble Madhya Pradesh High Court held in the case of CIT v. Durga Jewellers (1988) 172 ITR 134/37 Taxman 261 that where theft in business premises had taken place on 13-8-1974 and part of articles were recovered and final report; was made to the Police on 21-11-1974, the accounting year of the assessee being from 14-11-1974 to 3-11-1975, the loss was allowable in assessment years 76-77. Hon'ble Supreme Court in the case of Associated Ban king Corpn. of India Ltd v. CIT (1965) 56 ITR 1, while dealing with a loss resulting from embezzlement by an employee of a bank, observed as under:-
"It is wrong to say that irrespective of other considerations, as soon as an embezzlement of the employer's funds takes place, whether the employer is aware or not of the embezzlement, there results a trading loss. So long as there is a reasonable prospect of recovery of the amounts embezzled, trading loss in a commercial sense cannot be deemed to have resulted. Embezzlement of funds by an agent, like a speculative adventure, does not necessarily result in loss immediately when the embezzlement takes place, or the adventure is commenced. Embezzlement may remain unknown to the principal, and the assets embezzled may be restored by the agent or servant. In such a case in the commercial sense no real loss has occurred. Again it cannot be said that in all cases when the principal obtains knowledge of the embezzlement loss results. The erring servant may be persuaded or compelled by process of law or otherwise to restore wholly or partially his ill-gotten gains.
Therefore, so long as a reasonable chance of obtaining restitution exists, loss may not in a commercial sense be said to have resulted."
In the present case, the assessee filed FIR on 4-9-1987 regarding loss of sarees valued at Rs. 95,901 but did not claim the loss in assessment year 1988-89 and instead made an entry in the list of sundry debtors showing an amount of Rs. 95,901 against New Indian Assurance Company Ltd. with which the assessee had filed the claim. Though the assessee did not route the said amount of loss through purchases and then the closing stock, yet the assessee continued to show the said amount as due from the Insurance Company in the subsequent years and on receipt of letter dated 22-2-1990, whereby the claim of the assessee was rejected, it claimed the loss during the year under consideration. We feel that the ratio of the above decisions, particularly that of Hon'ble Supreme Court in the case of Associaled Banking Corpn. of India Ltd. (supra) to the extent that 'so long as a reasonable chance of obtaining restitution exists, loss may not in a commercial sense be said to have resulted', applies in the present case as the assessee was trying to exhaust the remedy of recovering the money from the Insurance Company. We cannot rule out that the assessee had entertained a reasonable belief that the claim was allowable by the Insurance Company in relation to the goods lifted from verandah just outside the shop of the assessee and, therefore, did not make a claim in the year in which the loss occurred. L.d. Commissioner (Appeals) has rejected this contention on mere assumption that the assessee ought to have known the terms of the burglary policy. It is not disputed that the assessee was making efforts to recover the loss from the Insurance Company and reflected the amount of loss as due from that company and it wrote off the amount of loss when its claim was rejected by the Insurance Company. We also feel that the ratio of the decision of Hon'ble Bombay High Court in the case of Gwalior Rayon Silk Mfg. Wvg. Co. Ltd. (supra) also supports the assessee's case that the loss is allowable when it was written off by the assessee, after rejection by the Insurance Company. We may mention that the case law relied upon by the ld. D.R, is distinguishable on facts. In the case of East India Hotels Ltd. (supra), the issue related to allowability of expenditure regarding payment of royalty w.r.t. date of execution of agreement. Similarly, in the case of Vanaja Textile Ltd. (supra), the issue again related to allowability of expenditure regarding electrical surcharge payable under order passed in 1968. Thus, on the facts and circumstances of the case, we feel that the loss of Rs. 95,901 suffered by the assessee was in the course of business and the same was allowable during the year under consideration. The assessing officer is directed to allow appropriate relief to the assessee on the said basis.
9. In the result, the appeal is allowed in part.