Deduction denied for reserve not backed by actual loss.

The court held that the reserve for deficit stock could not be included in the income of the assessee as it was not proven to be an actual loss. The Tribunal found that the reserves created were not allowable deductions as they were not backed by actual losses in stock. The court emphasized that deductions for losses must be supported by evidence of actual loss in the account books. Therefore, the Tribunal's decision to disallow the deduction for the reserve for deficit stock was upheld.

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Issues Involved:
1. Inclusion of reserve for deficit stock in the income of the assessee.
2. Allowability of reserve for excess stock as a deduction.
3. Requirement of writing off the loss for claiming it as a deduction.

Detailed Analysis:

1. Inclusion of Reserve for Deficit Stock in the Income of the Assessee:
The primary issue was whether the sums of Rs. 1,20,691 and Rs. 1,03,551, representing reserve for deficit stock, were includible in the income of the assessee for the assessment years 1974-75 and 1975-76. The assessee, a co-operative marketing society, maintained day-to-day stock accounts and conducted physical verification at the end of the year. Deficits were noticed and shown as value of deficit stock in the trading account by the auditor. The assessee argued that these deficits, shown as reserves, were fictitious assets until realized and should be allowed as deductions. The Department contended that unless the deficit was written off, it could not be allowed as a deduction, and reserves created were only appropriations of profit, not allowable expenditures.

2. Allowability of Reserve for Excess Stock as a Deduction:
The Income-tax Officer made additions under the head "reserve for excess stock" amounting to Rs. 20,990 for the assessment year 1974-75 and Rs. 24,550 for the assessment year 1975-76. The Tribunal upheld these additions, stating that the stock book showed goods of certain value as in stock whereas physically they were not available. The Tribunal found that the losses or deficits in goods were not proved, and the co-operative societies' audit did not admit these as losses of stock. Hence, the creation of a reserve by debiting the profit and loss account could not be allowed as a deduction.

3. Requirement of Writing Off the Loss for Claiming it as a Deduction:
The Tribunal, as the highest fact-finding authority, noted that the assessee did not establish the loss of stock. The assessee argued that the real income theory should be applied, and the reserve created was a fictitious asset representing the loss occasioned by deficit stock. The Department maintained that unless the alleged loss was written off, it could not be claimed as a deduction. The Tribunal found that the stock book showed goods of certain value as stock, but physically they were not available, and the losses were not proved. The Tribunal also noted that action had been taken against the employees for these losses, and the loss of stock was not mentioned in the day-to-day stock book maintained by the assessee.

Conclusion:
The Tribunal's findings were based on the entries made in the account books and the day books, which did not indicate any loss of stock. The court held that the assessee's claim for deduction towards the loss could not be allowed unless the books of account indicated such a loss. The court also noted that the facts and submissions in the current assessment years were similar to those in the assessment year 1967-68, where a similar claim was disallowed. Therefore, the Tribunal was correct in concluding that the reserve created for deficit stock could not be allowed as a deduction. The questions referred were answered in the affirmative and against the assessee.

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