M/S New Diwan Oil Mills, Chandigarh v. The Commissioner Of Income Tax, Patiala

I.T.R.No.59 of 1991 1 IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. Date of Decision:-24.2.2009 M/s New Diwan Oil Mills, Chandigarh Versus ---Applicant The Commissioner of Income Tax, Patiala ---Respondent CORAM:- HON'BLE MR.JUSTICE J.S.KHEHAR HON'BLE MR.JUSTICE NAWAB SINGH Present:-Mr.Akshay Bhan, Advocate for the applicant. Ms.Urvashi Dhugga, Advocate for the respondent. J.S.KHEHAR, J. (ORAL) The applicant-assessee i.e. M/s New Diwan Oil Mills,Chandigarh filed its return of income on 27.7.1983 disclosing an income ofRs.1,48,800/-. This return was accepted by the revenue on 20.1.1984. Therevenue conducts a survey under Section 133-A of the Income Tax Act,1961 (hereinafter referred to as “the Act”). The aforesaid survey wasconducted on the business premises of the applicant-assessee. During thecourse of the aforesaid survey, discrepancies of stocks were found. In orderto get over the aforesaid discrepancies, the applicant-assessee accepted todisclose the goods/stock to the tune of Rs.1 lac. Accordingly, the applicant-assessee acknowledged an additional income of Rs.1 lac. This acceptanceat the hands of the applicant-assessee took place on the date of survey,namely, on 20.1.1984. On 14.3.1984 the applicant-assessee filed a revised return forthe financial year 1982-1983 (assessment year 1983-84). In the aforestatedrevised return submitted by the applicant-assessee under Section 139 (5) of I.T.R.No.59 of 1991 2 the Act, the applicant-assessee claimed a set off on account of loss to thetune of Rs.1,48,950/-. The question which arises for consideration inadjudication of the present reference is whether the aforesaid set off of loss,could be claimed by the applicant-assessee in the return filed for theassessment year 1983-84. It is also necessary for us to narrate the foundational facts onthe basis whereof the respondent-revenue has based its claim that theaforestated loss having accrued in the year 1978, set off on the basis thereof,could be claimed by the applicant-assessee only during the assessment year1978-79. The claim of the applicant-assessee, on the other hand is, that theloss under reference was never acknowledged. The stock in questioncontinued to be consistently reflected in the closing stock of the applicant-assessee, wherein, it was shown as lying with the Punjab State WarehousingCorporation, Chandigarh (hereinafter referred to as “PSWC”) throughout.As per inventory of the closing stock filed with the return of income, for theassessment year 1978-79, till the assessment year 1983-84, the said positionremained unchanged. It is not a matter of dispute that the applicant-assessee wascarrying on the business of running a solvent plant at Chandigarh. It is not amatter of dispute that the stock in question was stored in the godown of thePSWC. It is also not a matter of dispute that the goods/stock belonging tothe applicant-assessee were destroyed on account of a fire while they werestored in the godowns of the PSWC on 26.3.1978. It is therefore, the case ofthe respondent-revenue that the instant loss had taken place during thefinancial year 1977-78 (assessment year 1978-79), and as such, in terms ofthe mandate of Section 71 of the Act, the same could have been set off as I.T.R.No.59 of 1991 3 loss, only during the said assessment year i.e. 1978-79. I.T.R.No.59 of 1991 3 loss, only during the said assessment year i.e. 1978-79. As against the aforesaid claim of the respondent-revenue, thecase of the applicant-assessee is, that applicant-assessee filed a civil suit on15.11.1978, wherein, the applicant-assessee had impleaded the PSWC asdefendant No.1, and the General Insurance Company (with whom the goodsstored in the godowns of the PSWC were insured) as defendant No.2. Sincethe goods/stock in question had been burnt in the godown of the PSWC, theapplicant-assessee claimed reimbursement of the same, from aforesaiddefendant Nos.1 and 2. The civil suit filed by the applicant-assessee washowever dismissed on 31.5.1982. It is therefore, the case of the applicant-assessee, that the applicant-assessee realized, that the aforesaid claim wasnot reimbursable from the PSWC, and as such, accepted the same as the losssuffered by the applicant-assessee itself, for the first time. Since theaforesaid loss in the hands of the applicant-assessee became clear, only ondismissal of the civil suit filed by the applicant-assessee, the same must bedeemed to have crystalized only during the financial year 1982-83(assessment year 1983-84). It is therefore, that the applicant-assessee filed arevised return seeking set off of the aforesaid loss of goods/stock, in therevised return filed on 14.3.1984. During the course of hearing, two judgments have been cited.The first at the hands of the learned counsel for the respondent-revenuenamely, Commissioner of Income-Tax, Lucknowv. Indian Turpentine &Rosin Co. Ltd.(1980) 124 ITR 830. In the case relied upon by the learnedcounsel for the respondent-revenue, in the previous year relevant to theassessment year 1966-67, the respondent-assessee despatched certain goodsto Madras. Necessary entries were recorded in the books of account, I.T.R.No.59 of 1991 4 wherein, the goods were debited in the purchaser's account and the saleproceeds were credited in the account of the respondent-assessee. Thepurchaser of the goods did not accept the goods. Thereafter, on theinstructions of the respondent-assessee, the goods were sold. The assesseereceived the sale proceeds in the same assessment year, namely, 1966-67.Instead of reversing the entries of the previous year relevant to theassessment year 1967-68, the respondent-assessee credited the sales accountand debited the stores account. On account of the aforestated mistake, therespondent-assessee was shown to have made a profit, and when, thismistake was detected in the previous year relevant to the assessment year1969-70, the respondent-assessee attempted to correct the entries whereinthe loss was claimed as a deduction. The Allahabad High Court whiledisposing of the aforesaid controversy arrived at the conclusion that the losscould not have been claimed as a deduction in the assessment year 1969-70. As against the judgment relied upon by the learned counsel forthe respondent-revenue, learned counsel for the applicant-assessee hasplaced reliance upon the decision rendered by this Court in Commissionerof Income-Tax, Amritsar-Iv. United India Woollen Mills(1981) 132 ITR457. In the case relied upon by the learned counsel for the applicant-assessee, for the assessment year 1971-72 the respondent-assessee claimeddeduction on account of payment of purchase tax. The liability to paypurchase tax had arisen in the year 1967-68. The respondent-assessee hadmaintained its accounts by following the mercantile system. The method ofaccounting adopted by the assessee being mercantile, the Assessing Officerrejected the claim of the respondent-assessee by holding that purchase taxcould be deducted only during the year in which it had arisen. Since the I.T.R.No.59 of 1991 5 liability under reference is stated to have accrued during the years 1965-66to 1967-68, the Assessing Officer rejected the claim of the respondent-assessee for a deduction in the assessment year 1971-72. On a reference ofthe aforesaid issue to this Court, it was held that income chargeable underthe head “Profits and gain of business or profession” or “Income from othersources” would have to be computed according to the method of accountingemployed by the respondent-assessee. Since the respondent-assessee hadadmittedly adopted the mercantile system of accounting, it was held that therespondent-assessee could not claim deduction during the assessment year1971-72. Having considered the judgments relied upon by the learnedcounsel for the rival parties, we are of the view that controversy in theinstant reference cannot be adjudicated upon on the basis of either of theaforesaid judgments. We are of the view that the facts and circumstances ofevery case will have to be taken into consideration to determine the datewhen the liability was incurred. In the controversy in hand if the liability isaccepted to have been incurred on 26.3.1978 when the goods/stock weredestroyed by a fire which had broken down in the godowns of the PSWCduring the financial year 1977-78 (assessment year 1978-79) then theproposition canvassed on behalf of the respondent-revenue will have to beupheld. However, if we arrived at the conclusion that liability was incurredon 31.5.1982 i.e. when the suit filed by the applicant-assessee wasdismissed during the financial year 1982-83 (assessment year 1983-84) thenthe proposition canvassed at the hands of the learned counsel for theapplicant-assessee will have to be accepted. In the facts and circumstances of this case, the determination of I.T.R.No.59 of 1991 6 date when the loss was incurred will have to be derived from the admittedfacts. It is not a matter of dispute that the fire which resulted in destructionof the stock of the applicant-assessee took place on 26.3.1978. Theaforesaid fire destroyed the stock/goods of the applicant-assessee lying withthe PSWC. Despite the destruction of the stock/goods during the financialyear 1977-78 (assessment year 1978-79), the applicant-assessee consistentlyhas been showing these goods in the inventory of the closing stock, statingtherein, that these goods were lying with the PSWC. According to thelearned counsel for the applicant-assessee, the aforesaid reflection wasvalid, bonafide and genuine because of the fact that applicant-assessee hadnever accepted that any loss had been incurred by the applicant-assessee inspite of fire on 26.3.1978 where his stock/goods were destroyed. The reasonfor the applicant-assessee to entertain the aforesaid belief was, because theresponsibility/liability of the destruction of the stock/goods in the fire whichtook place in the godowns of the PSWC on 26.3.1978, was that of thePSWC itself, as the PSWC was the custodian of the stock/goods while theywere stored in the godowns of the PSWC. It is therefore, that the applicant-assessee even filed a civil suit on 15.11.1978 claiming compensation for thesaid goods/stock. It is only when the claim raised by the applicant-assesseefor reimbursement of the loss on account of the fire at the godowns ofPSWC failed, that the applicant-assessee accepted for the first time that theaforesaid loss was not reimbursable, and as such, accepted the same as lossin the hands of the applicant-assessee. The applicant-assessee therefore,submitted a revised return of income on 14.3.1984 claiming a deduction onaccount of the loss of the aforesaid stock/goods. It is apparent from the facts noticed in the foregoing paragraph I.T.R.No.59 of 1991 7 It is apparent from the facts noticed in the foregoing paragraph I.T.R.No.59 of 1991 7 that the applicant-assessee in spite of the fire which destroyed stock/goodsbelonging to the applicant-assessee, did not accept the same as his own losstill the dismissal of the civil suit filed by him, and it is only after thedismissal of the aforesaid civil suit, that applicant-assessee acknowledgedthat he had incurred the said loss. Since the aforesaid civil suit wasdismissed on 31.5.1982 i.e. during the financial year 1982-83 (assessmentyear 1983-84), we are of the view that the loss must be accepted to haveincurred during the financial year 1982-83 (assessment year 1983-84). Assuch, we are satisfied that the revenue should have allowed the applicant-assessee a deduction of the aforesaid loss from its income in the assessmentyear 1983-84. In view of the above, the instant reference is answered infavour of the applicant-assessee. We hereby conclude that the Tribunalerred in law in disallowing the claim of loss of Rs.1,48,950/- to theapplicant-assessee in the assessment year 1983-84. Disposed of in the aforesaid terms. (J.S.Khehar) Judge (Nawab Singh) 24.2.2009 JudgeAS