1981 (12) TMI 52 - AT - Income Tax

Tribunal allows appeal, reverses disallowance of expenditure as revenue, citing ordinary business loss.

The Tribunal allowed the appeal in part, reversing the disallowance of Rs. 1,67,586 and allowing the expenditure as revenue expenditure. The Tribunal ... Deductibility of business loss due to confiscation by customs - Mercantile system of accounting - recognition of loss on confiscation during previous year - Confiscation v. penalty - requirement of proven contravention to render expenditure non-deductible - Ordinary course of business - revenue nature of loss - Burden on revenue to establish assessee's culpability in import contraventionDeductibility of business loss due to confiscation by customs - Mercantile system of accounting - recognition of loss on confiscation during previous year - Confiscation v. penalty - requirement of proven contravention to render expenditure non-deductible - Whether the assessee is entitled to deduct, as a revenue loss, the value of imported woollen rags confiscated by the customs authorities during the previous year - HELD THAT: - The Tribunal found that the assessee had acted under valid import licences transferred to it and had placed bona fide orders through the State Trading Corporation; exporters described the consignments as woollen rags and there was a genuine difference of opinion as to the meaning of 'rags' for Customs purposes. The Collector of Customs had ordered confiscation, but the Tribunal recorded absence of evidence that the assessee knowingly imported goods contrary to the licences or colluded to subvert the licensing procedure. The confiscations occurred during the previous year relevant to the assessment and the assessee maintained accounts on the mercantile system; in such a system the loss arising in the year when goods passed out of the assessee's possession must be taken into account. Reliance was placed on the principle that a liability or loss continues to be recognised unless the assessee's contrary contention has prevailed on appeal. Since the loss arose in the ordinary course of the assessee's business and there was no proof of a penal breach by the assessee, the expenditure was revenue in nature and deductible. The Tribunal therefore reversed the disallowance made by theAssessing Officer and Commissioner (Appeals). [Paras 13, 14, 15, 16, 17]Disallowance of the loss on confiscation set aside; the value of the confiscated goods is allowable as a revenue loss in the relevant year.Final Conclusion: The Tribunal allowed the appeal in part, directing that the loss on confiscation of the imported woollen rags, recognised in the books on mercantile basis for the previous year, be allowed as a revenue deduction for assessment year 1974-75. Issues Involved:1. Sustention of the disallowance of Rs. 1,67,586 made by the ITO on account of loss due to confiscation of woollen rags by the customs department.Issue-wise Detailed Analysis:1. Sustention of the Disallowance of Rs. 1,67,586:Factual Background:The assessee, a registered firm named International Woollen Mills, maintained its books on a mercantile system of accounting. During the assessment year 1974-75, the ITO found a debit of Rs. 1,67,586 representing the value of woollen rags confiscated by customs authorities. The assessee claimed this as a business loss, arguing that the loss was incurred during ordinary business transactions and was debited in the books as per mercantile accounting principles. The ITO rejected this claim, stating that the confiscation was due to an infringement of the Customs Act and thus constituted illegal expenditure. The Commissioner (Appeals) upheld the ITO's decision, citing the Punjab and Haryana High Court judgment in Cineramas v. CIT [1977] 110 ITR 762.Assessee's Arguments:The assessee contended that the loss was incurred in the ordinary course of business and should be allowed as a business loss. They cited a judgment by the Assistant Director of Enforcement, which clarified the term 'rags' and noted that the customs authorities had withdrawn their appeal against this judgment. The assessee also argued that even if the loss was due to an infringement of law, it should still be admissible based on the Supreme Court judgment in CIT v. Piara Singh [1980] 3 Taxman 67/[1980] 124 ITR 40.Revenue's Arguments:The revenue countered that the judgment of the Assistant Director of Enforcement was not relevant and that the infringement of the Customs Act was clear. They cited the Supreme Court judgment in Haji Aziz & Abdulshakoor Bros. v. CIT [1961] 41 ITR 350, arguing that the loss was not deductible. They also referenced the Calcutta High Court judgment in Raghubir Prasad Gupta v. CIT [1979] 120 ITR 789, which held that fines paid in lieu of confiscation were not deductible under section 37(1) of the Income-tax Act, 1961.Tribunal's Findings:The Tribunal found that the assessee's claim had been erroneously rejected. The assessee had placed orders for woollen rags on valid import licences through the State Trading Corporation. The goods were certified as woollen rags by the Japanese exporters. The customs authorities' confiscation was based on a different interpretation of 'woollen rags,' and there was no evidence that the assessee had ordered goods not covered by the import licence.The Tribunal noted that the confiscation orders were made during the previous year relevant to the assessment year under appeal. Since the assessee maintained books on a mercantile system, the loss had to be accounted for in the year it occurred. The Tribunal referenced Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), which held that a liability does not cease to be a liability merely because the assessee is contesting it.The Tribunal concluded that the loss was incurred in the ordinary course of business and was not due to any penal infringement of law. The confiscation was a venial breach of law, and the loss should be allowed as revenue expenditure. The Tribunal directed that the disallowance be reversed and the expenditure allowed.Conclusion:The appeal was allowed in part, with the Tribunal directing that the disallowance of Rs. 1,67,586 be reversed and the expenditure allowed as revenue expenditure.