TMI Blog1979 (7) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Government. The AAC confirmed the disallowance by holding that the assessee had violated certain regulations of the Civil Supplies Department and in view of this, he Supplies Department and in view of this, he concluded that the loss arising on account of such violation of a statute cannot be allowed as a deduction from the computation of total income for this year. The AAC also observed that the assessee-firm had acquiesced to the confiscation made by the Civil Supplies Department by not taking up the matter to the Court of Law. In this view of the matter, he upheld the disallowance made by the ITO. 3. In order to appreciate the real point in dispute, it would be necessary to briefly state the facts leading to the seizure of some of the rice which the assessee-firm was exporting to Kerala. The assessee-firm had been usually exporting rice to Kerala and on the basis of a permit issued by the State Government during the year of account, it was exporting broken rice in a wagon which was seized at Bitragunta on 22nd July, 1971. by the vigilance cell of the Civil Supplies Department on the ground that the wagon contained full rice mixed in the broken rice. On 18th Nov., 1971, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clearly show, it was submitted, that during the year of account the assessee was not in possession of the above stock of rice and as such it correctly wrote off the above stock from its books of account. The question whether the assessee incurred any loss on account of such seizure and consequent auction can be decided only in the year when the matter was ultimately settled by the Supreme Court and the Government returned part of the value of the stock to the assessee-firm in accordance with the directions of the Supreme Court. In any case, it was submitted that even as on date the assessee-firm had not received anything and the entire sale proceeds of 1,110 quintals have been appropriated by the Government. It was particularly pointed out that these stocks were sold by the Revenue Divisional Officer on 5th Oct., 1972 after taking special permission from the High Court. Subsequently, when the Revenue Divisional Officer passed further order on 4th Dec., 1973 confirming the original confiscation order, it was explained that the assessee firm became fully aware of the fact that the stock of rice actually confiscated by the Government would not be returned to them as such. As soon as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justifiable reasons for writing off the value of the above quantity of rice from its books of account during the year of account under appeal. We are not called upon to decide in this appeal whether the assessee incurred any loss on account of confiscation of rice by the Civil Supplies Department on 22nd July, 1971 because the assessee has been contending before the judicial authorities that confiscation of rice by the Government is illegal. This contention has also been accepted by the Honourable High Court on 29th Aug., 1975 when they set aside the order of the District Judge dt. 20th Nov., 1974 and allowed the rice miller's appeal in full accepting their contention that the very seizure of the goods on 22nd July, 71 is invalid and illegal. Therefore, the question of loss on account of confiscation cannot be decided for this year. The loss, if any, on account of seizure of rice can be ascertained only on the receipt of part of the confiscated quantity of rice by the assessee in accordance with the directions of the Supreme Court. Hence, the quantification of the loss arising on account of such seizure will not arise for consideration for this year. Viewed from this angle, the AA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f confiscation that there are no prospects at all of getting back the confiscated stocks. The accounting year relevant for the assessment under appeal ended on 12th Dec., 1973 and so the assessee appear to have decided that the value of confiscated stock should be written off during this year. In the circumstances, we hold that the write off of the value of stocks to the extent of 1,110 quintals was correctly done during this year. In the view of the above facts and circumstances of the case, we are of the view that the assessee was justified to reduce the value of its closing stock by the value of 1,110 quintals of rice confiscated by the Government. Hence, the addition to the extent of Rs. 1,10,534 should be deleted. 8. The next ground contended by the assessee is regarding the disallowance of contribution made to the welfare Fund amounting to Rs. 6,955. The ITO disallowed the contribution to the Welfare fund and such disallowance was confirmed was confirmed by the AAC. We find that the question of allowance of contribution made to the Welfare Fund has been decided by a Special Bench of the Tribunal in ITA No. 1402/Hyd/1975-76, dt. 25th Oct., 1977 to which one of us was a party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g year. 3. The loss of stock-in-trade can certainly be allowed as a trading loss under s. 29 of the IT Act, 1961, provided that such loss has not been occasioned by infraction of law. For instance, if the stock-in-trade has been lost owing to natural causes or by theft or embezzlement or destroyed by fire or enemy action in the course of transit, the same can be treated as incidental to business and allowed as a deduction in the computation of the assessee's business income, but the loss of stock-in-trade cannot be treated as incidental to business if it has been the result of violation of law by the assessee. In the present case, the loss claimed by the assessee cannot be allowed as a deduction for the reason that the said loss had been occasioned by infraction of law, i.e. by transport of the goods in violation of the prohibition contained in the Control Orders made under the Essential Commodities Act. It is now well settled, and no authorities need be cited for the proposition, that loss occasioned as a result of infraction of law is not a permissible deduction in the computation of business income. 4. The next question that arises for consideration is whether the loss can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant asst. yr. 1952-53 or whether the loss should not have been allowed in the asst. yr. 1949-50 but only shown as a loss of approximately Rs.50,000 after the claim had been settled by the Govt." 5. On those facts the Punjab High Court held that since on the last day of the accounting year goods which cost Rs. 1,74,827 were not in the closing stock nor was there an admitted liability of any person in respect of either the cost price or the sale price of such goods, according to the correct method of accounting the debt of Rs. 1,74,827 in the goods account had necessarily to be transferred to the profit and loss account. There was a loss of stock-in-trade during the relevant year of account to that extent, and the loss of Rs. 1,74,827 should accordingly be treated as a loss in the previous year for the asst. yr. 1949-50. 6. Applying the ratio of the above case to the present case, I am of the opinion that the loss to the assessee must be said to have arisen on 18th Nov., 1971 when the goods were irretrievably lost to the assessee as a result of the confiscation order passed by the Revenue Divisional Officer on that day. On appeal by the assessee, District Judge no doubt set a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34 can be allowed in the computation of the assessee's business income of the previous year relevant to the asst yr. 1974-75"? Order dt. 11th July, 1979 PER D. RANGASWAMI, V.P. As a result of difference of opinion arising between the Accountant Member and the Judicial Member as to whether on the facts and in the circumstances of the case, the deduction of Rs. 1,10,534 can be allowed in the computation of the assessee's business income of the previous year relevant to the asst. yr. 1974-75, the said question thus became the subject matter of reference to third member for consideration. 2. The amount of Rs. 1,10,534 representing the value of 1,110 quintals of rice seized by the Civil Supplies Department, was claimed as deduction. The ITO did not accept the claim on the ground that the assessee was not able to produce any evidence in support of the value of the stock appropriated by the Government. The AAC, while confirming the disallowance, altogether for different reasons, held that the assessee had violated certain regulations of the Civil Supplies Department and in view of this, he concluded that the loss arising on account of such violation of the statute cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eby the confiscation of full rice was upheld. The stand of the assessee's counsel was that since the Supreme Court finally decided that matter only in May, 1976 till then the assessee could not be said to have violated any law and further, the simple fact that the assessee firm was not in possession of 1,110 qtls., was an adequate reason to write off the stock from the books of account. It was also explained that only when the Revenue Divisional Officer passed further orders on 4th Dec., 1973 confirming the original confiscation, the assessee became fully aware that the stock of rice could no longer be available to be returned to it. As soon as the assessee firm became aware of this position, a decision was taken to write off the stock of the quantity of 1,110 qtls. From the books of account during this year. The Department's stand before him, on the other hand, was that the assessee firm had contravened some of the provisions of the Essential Commodities Act and such contravention of law could not be held as normal incidence to the business carried on by the assessee and that the loss arising on account of any infraction of law could not be allowed as a deduction and this point ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enge the confiscation but that could not mean that the goods irretrievably lost to the assessee could be only related to the date when they were actually confiscated. Finally, he was of the view that the order of the lower authorities must be confirmed. 5. Mr. M.J. Swamy, appearing for the assessee, repeated the same arguments as were advanced before the regular Bench and particularly laid stress on the fact that so far as the assessee was concerned, the goods were no longer in closing stock and as the Accountant Member has pointed out that it became aware of the position finally when the Revenue Divisional Officer passed an order finally. According to him, the Andhra Pradesh High Court decision in case of Soni Hinduji Kushalji Co. vs. CIT (3) does not apply to the facts of this case. There, the fundamental accepted position was that the claim itself was based on the loss arising as a result of the seizure of gold and silver jewellery by the customs officials and further the accepted position was that the petitioner firm was smuggling gold from Goa to Adoni and therefore, in that case it did not arise in the course of the business, where as the decision of the Gujarat High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods and, therefore, no write-off could have been made. It was further his case that till 4th Dec., 1973, which fell within the accounting year, the position was that as the annulment of the confiscation order has been confirmed by the High Court, there was thus no infraction of law as alleged by the Department. It is true that the Supreme Court subsequently revised the High Court's order and restored the original order of the District Judge dt. 20th Nov., 1974. I am of the view that when the assessee wrote off on the basis of the order of the Revenue Divisional Officer dt. 4th Dec., 1973 confirming the confiscation, it is only at that point of time of could be said that the assessee could believe that there was no hope for recovering the goods, as legal remedies so far had gone against it. Apart from that, the real question in my view would be in this case whether as a result of giving effect to the final depletion in the stock by reducing correspondingly the same in the inventory, it would be claimed as arising on account of any infraction of law or violation of law. In my opinion, since the assessee was challenging that there was no violation of law and it could be settled onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of case as explained below. The Head-note of the said decision reads as under: " Held , that the receipt of the sale price of 9/10th of the goods by the assessee was business receipt and therefore the loss sustained by the assessee, excluding the 10 per cent of the sale proceeds which had been imposed as a penalty and the expenses of sale, was trading loss and deductible in computing the income of the assessee. It is common ground that the goods that are stated to have been no longer in its closing stock have entered into its gross profit of earlier years. If these stocks did not figure in those years the gross profit would have been lower by the value of those items of closing stock. Therefore, it is obvious that when these items have entered into the business income of the assessee in the earlier years, consequently such increase in the gross profit when these stocks are no longer with the assessee gets adjusted in the accounting year. The ratio of the decision of the Madras High Court, in my opinion, will fit in. I am, therefore, of the view that as against such income already taxed, the set off of the value of the stock so adjusted now will have to be made. That is t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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