Calcutta High Court
Calcutta Iron & Engineering Co. Pvt. ... vs Commissioner Of Income Tax. on 2 May, 1990
Equivalent citations: (1993)110CTR(CAL)40
Author: Suhas Chandra Sen
Bench: Suhas Chandra Sen
JUDGMENT
SUHAS CHANDRA SEN, J. :
The Tribunal has referred the following questions of law under s. 256(1) of the IT Act, 1961 to this Court :
In R.A. No. 147 (Cal) of 1984 (filed by the Assessee) :
"Whether, on the facts and in the circumstances of the case the Tribunal was correct in law in holding that the loss of Rs. 2,42,245 was a capital loss and as such could not be claimed as a business loss by the assessee ?"
In R.A. No. 166 (Cal) of 1984 (filed by the Department) :
"Whether, on the facts and in the circumstances of the case the Tribunal was justified in law in holding that the assessee was entitled to claim the loss in respect of burglary which took place during the period between 30th November, 1969 to 3rd May, 1970 during the relevant accounting year ?"
2. In this proceeding the assessment year involved is 1977-78 for which the relevant accounting year is the year ended on 31st March, 1977.
3. The facts found by the Tribunal have been stated in the Statement of case :
"The dispute in this appeal related to the assessees claim for Rs. 6,21,660 on account of loss of Rs. 6,21,660 alleged to have been incurred by it during the relevant accounting year. According to the assessee in the accounting year relevant to the asst. yr. 1971-72 there was a burglary in its factory at 77A, Benaras Road, Howrah, when there was some labour trouble. Due to this burglary, loss of raw materials to the tune of Rs. 3,94,415 and other assets valued at Rs. 2,42,245 occurred. The assessee had deducted the total value of raw materials from the opening stock and the value of other assets from the total assets in its balance sheet. A claim for Rs. 6,36,660 was put up before the insurance company. During the relevant accounting year the assessee settled the claim for a paltry sum of Rs. 6,21,660 in its P&L Account. The ITO, however, was of the opinion that the insurance company had not accepted the assessees claim and there was no reason as to why the assessee could not produce its entire evidence relating to the theft and recover the said claim. The report about the theft made to the police was inordinately delayed inasmuch as the period of burglary mentioned therein was stated to be between 26th Dec., 1969 and 12th February, 1970. The stock and other assets had been verified between 4th May, 1970 and 11th May, 1970 but even then no report was made till 25th May, 1970. There were discrepancies in the statement made by the assessee and the insurance company itself was not satisfied with the genuineness of the assessees claim. What the insurance company had given to the assessee was only by way of consolation. He, therefore, held that the claim was not genuine and disallowed the same.
The assessee went up in appeal before the CIT(A) who did not think it necessary to go into the genuineness or otherwise of the claim but was of the opinion that the loss on account of theft could only be allowed in the asst. yr. 1971-72, and could not be considered during the relevant assessment year. She accordingly rejected the assessees ground raised in this behalf.
The assessee came up in second appeal before the Tribunal which was of the opinion that the claim of the assessee could be considered during the relevant accounting year. However, the same could be considered only to the extent of Rs. 3,94,415 which had been shown as price of the stocks stolen from the factory. The balance of the claim for Rs. 2,42,245 related to the theft of fixed assets which should be considered to be loss of a capital nature only. The relevant discussion of the Tribunal is contained in paras 3, 4 and 5 of the order which read as under :
"We have heard the representatives of the parties at length in this appeal. The assessees representative drew our attention to the assessment order for the year 1971-72 from which it transpires that the assessee got lesser depreciation on its fixed assets because assets worth Rs. 2,42,245 were excluded being the loss due to burglary. Similarly our attention was drawn to the balance sheet of the assessee as on 28th of October, 1970 where among the fixed assets some items have been excluded which valued at Rs. 2,42,245. In the current assets of loans and advances a sum of Rs. 6,36,660 had been shown as the amount recoverable from the insurance company and a sum of Rs. 3,94,415 had been shown as the price of the stocks stolen from the factory in the P&L Account. According to the assessees representative, these figures and allegations were accepted by the IT Department and, therefore, it was not open for the ITO now to say that there was no loss or that the loss occurred to the assessee in that year because in the balance sheet for that year, the claim of the assessee payable by the insurance company had been disclosed as an asset and the income of the assessee had been disclosed as an asset and the income of the assessee had been assessed on that basis. Reliance was placed upon some commentaries in which there is a reference to Rangamma vs. Atchama (1846) R.M.I.A. 1 and observations by Lord Chelmsford in Shah Mukhun Lall vs. Baboo Sree Kishan Singh 12 M.I.A. 157 that no person shall be entitled to approbate and reprobate the same deed. It was argued that the Department having accepted that the assessee had business assets in the form of claim against the insurance company, it was not open for it how to say that the assets were not lost during the year or they were not business assets and were of only capital nature.
After carefully considering the facts and circumstances of the case we are of the opinion that the nature of assets did not change because the assessee claimed the loss from the insurance company and showed the claim as part of its assets. The fact that the assessee did not claim rehabilitation allowance under s. 33B which it might have done does not mean that the Department accepted the position, that the capital assets had been transformed into a business one, merely because the assessee showed the same as an asset in the balance sheet. Even if the insurance company had paid for the loss, the assessee would have purchased the requisite moulds and it would have added to the assessees invested capital on which the assessee could again start claiming depreciation. What we are trying to point out is that the nature of the loss is not altered by the fact that the assessee did not choose to claim it in the first insurance and debited the amount to the account of the insurance company. The cause of loss is still the theft and not rejection of the claim by the insurance company because if it were so then it would be a simple case of a bad debt. What the assessee showed in its accounts was the liability of the insurance company as if it were its debtor. Even then for the purpose of claiming bad debt, the assessee would have to show that the debt was taken into consideration while computing its income but the debt incurred in relation to capital asset would not fall in this category. We, therefore, are of the opinion that the loss would not change its nature so far as the assets are concerned and the loss of Rs. 2,42,245 would be loss of the capital, which the assessee would not be entitled to claim as business loss.
This conclusion, however, would not be true in case of the loss of stocks stolen from the assessees factory. A perusal of the P&L Account for the year ending on 28th October, 1970 would show that the stock shown to have depleted to the tune of Rs. 3,94,415 but corresponding loss was not claimed by the assessee as business loss because the current assets included a sum of Rs. 6,36,660 on account of insurance claim as being still recoverable. According to the assessee this claim was finalised in the relevant year and, therefore, the loss should be deemed to have crystallised in this year. There appears to be force in this contention. In M. P. Venkatachalapathy Iyer & Anr. vs. CIT (1951) 20 ITR 363 (Mad) there had been an embazzlement by an employee which continued for a pretty long period. The question arose whether the loss should have been claimed in the year when the misappropriation took place or when the loss became actual and certain. It was held that although the embazzlement took place between 17th October, 1939 and 24th October, 1940 the assessees claim for the same in the asst. yr. 1942-43 (accounting year ending on 12th April, 1942) could be admitted as such because the matter was ultimately compromised in August, 1941, when the clerk paid some amount to the assessee in full settlement of its claim. Same is the ultimate conclusion arrived at by the Punjab and Haryana High Court in CIT vs. Pretty Cycle Industries (1980) 123 ITR 227 (P&H) where the loss had been incurred in an earlier year but since the amount had not been transferred to the P & L Account in that year as import entitlement against export was yet to be received, the assessee was held entitled to set off the actual loss in a later year. A decision of the Calcutta High Court in this behalf is CIT vs. Shew Bux Jahurilal (1962) 46 ITR 688 (Cal) wherein it was held that the assessee was not bound to show all anticipated loss and was entitled to have the matter re-adjusted when the loss was actually quantified. Nearly same are the observations of the Honble Supreme Court at page 13 in the decision in the case of Associated Banking Corporation of India Ltd. vs. CIT (1965) 56 ITR 1 (SC). We are, therefore, of the opinion that the CIT (A) was wrong in holding that the assessee was not entitled to claim the loss in this year at all."
4. The first question relates to loss of capital assets of the company.
5. The Tribunal has pointed out that the nature of the assets did not change because there was a claim of loss from the assessee to the insurance company and the claim was showed as a part of its assets. The Tribunal has also pointed out that even if the insurance company had paid for the loss, the assessee would have purchased the requisite moulds and it would have added to the assessees invested capital on which the assessee could again start claiming depreciation. It may also be pointed out that had the insurance company accepted the assessees claim and paid compensation to the company or loss of capital assets, the compensation amount would have been of capital nature. Therefore, we fail to see how the Tribunal could have come to any other decision in the facts and circumstances of this case.
6. Mr. Bajoria appearing for the assessee invited our attention to s. 32(1)(iii) of the IT Act and argued that even in case of capital asset where such capital asset was sold, discarded, demolished or destroyed in the previous year the assessee could claim any loss as business loss. It has been contended that although building plant and machinery were the capital assets the allowance may be on revenue in certain circumstances. Sec. 32(1) (iii) is a special provision providing for a special contingency. Depreciation is allowed only on capital assets and unless the assets are of capital nature, no question of depreciation can arise. But if there is a total loss of a capital assets then that loss has to be treated as capital loss.
7. The assessee also invited our attention to s. 28 of the IT Act under which the profits and gains of business or profession carried on by the assessee has to be taxed. It has been argued that this can only be done on the basis of commercial principle. But even on commercial principle, if there is loss of capital assets the same would be treated as capital loss. We are of the view that the question has been correctly answered by the Tribunal so far as the question raised in R.A. No. 166 (Cal) of 1984 is concerned.
8. The Tribunal has remanded the case back to the CIT(A) for taking fresh decision on the merits of the assessees claim. In other words, whether the assessee had actually suffered loss claimed by it will have to be decided by the CIT(A). Assuming that assessee has suffered loss, the question is, in which year the loss is allowable. The fact found by the Tribunal indicates that the loss took place during the accounting year relevant to the asst. yr. 1971-72. The Tribunal also found that the assessee in that year of account did show depletion of stock in its balance-sheet and/or P & L account but the corresponding loss was not claimed by the assessee as business loss because the current assets included a sum of Rs. 6,36,660 on account of insurance claim, which was made in respect of the alleged loss as being recoverable. The claim was finalised only in the year of account relevant to this assessment year. The insurance company accepted a small part of the claim and rejected the rest and that is why irrecoverable amount has been claimed by the assessee as business loss. We are of the view that the Tribunal has come to a right decision in the facts of this case. Even if loss was suffered in the earlier year to the knowledge of the assessee no mistake was committed by the assessee by not claiming the loss straightaway as deduction in that year of account. The assessee was entitled to claim compensation for the loss from the insurance company. The assessee claimed compensation for the loss as soon as the loss took place. But the assessee in its account book showed the amount entirely on accrual basis. The insurance company substantially rejected the assessees claim. So long as the assessee did not recover the amount from the insurance company, it did not write it off in its books of account.
9. On the second question, in our view, the Tribunal was right in holding that the assessee was entitled to claim the loss in respect of burglary which took place during the relevant accounting year. But it must be noted that the question, whether actually burglary had taken place or any loss had actually been suffered by the assessee had been left undecided by the Tribunal and the matter was referred back to the CIT(A) to take decision afresh.
10. Our attention was drawn to two decisions. The first one is the judgment of the Supreme Court in the case of Associated Banking Corporation of India Ltd. vs. CIT (1965) 56 ITR 1 (SC), wherein the Supreme Court held that "but this does not mean that on assessee, who chooses not to post an entry in the books of account about bad or doubtful debts places himself in a better position than an assessee, who has actually posted entires writing off amounts as irrecoverable in his books of account. On the materials placed before him, it is always open to the ITO to come to the conclusion that the fact that the assessee has not chosen to post an entry is consistent with the circumstances that no part of the debt due to him in the year of account has become bad or doubtful and, therefore, irrecoverable, and on that account to disallow the claim which may be made at the hearing that some or all debts had become bad or doubtful. Even when no entry has been posted in the books of account, the question is one of power to be exercised on the facts and circumstances on the record by the ITO to allow deductions in the computation of profits and gains. If the ITO estimates certain debts to be irrecoverable it would be within his power under s. 10(2)(xi) to allow the same in computing the profits. The power is only restricted in one direction namely that where the assessee has posted an entry or entries in the books of account the amount to be estimated as irrecoverable is not to exceed the amount actually written off as irrecoverable by the assessee."
11. The Allahabad High Court in the case of U.P. Vanaspati Agency vs. CIT reported in (1968) 68 ITR 12 (All) held, where assessee has been dispossessed of money or property, it cannot be treated as loss because of mere dispossession. There must be consciousness of loss in the mind of the person, who has been dispossessed of money or property, before it can be treated as loss consciousness of company being lost should be attributed to the assessee only after a reasonable amount of time is spent in making efforts for recovery of the sum of Rs. 12,000. The principle laid down in this case is that here the assessee made a claim for loss as soon as the property was lost or destroyed. At first the assessee found that there was no likelihood of recovery of property and then it claimed for loss. When the assessee realised that in fact loss had taken place, it lodged its claim with the insurance company for compensation. The assessee stated that the amount of compensation will enable him to write off the loss. The assessee had actually shown its claim with the insurance company and made entry to this effect in the account book. It is only after the insurance company declares to pay the entire amount of claim the question of writing off the covered amount may take place. In view of the above the first question is answered in the affirmative and in favour of the Revenue and the second question is answered in the affirmative and in favour of the assessee.
There will be no order as to costs.
BHAGABATI PRASAD BANERJEE, J. :
I agree.