TMI Blog1998 (4) TMI 156X X X X Extracts X X X X X X X X Extracts X X X X ..... ls of lading to the Corporation Bank even in spite of the reminders sent by the bank. The Corporation Bank then tried to get the money back from Bakul Cashew Co. but they did not pay back the amount. The bank then initiated legal action against Bakul Cashew Co. and also against the assessee for issuing out-agency receipts without actual delivery of cashew kernels by the other party. A suit was in fact filed before the sub-Court, Quilon as O.S. No. 238 of 1989 in which the name of the assessee firm, Jhai Narain Trades, Cochin, appears as defendant No. 9. When the legal proceedings were pending, the assessee came to an agreement with the bank for repaying the entire amount in instalments and accordingly they paid Rs. 1 lakh in the previous year relevant for the asst. yr. 1990-91. The assessee's claim for deduction of this amount as a business expenditure or a loss incidental to business was not allowed by the AO on the view that the liability to the bank had arisen not in the normal course of the assessee's business but on account of the issue of incorrect out-agency receipts to help Bakul Cashew Co. The AO further noted that Bakul Cashew Co. had admitted their liability to pay back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of the assessee's business as a customs house agent it was necessary to issue out-agency receipts and the banks would honour such receipts to give advance to the exporters. Bakul Cashew Co. was an old client of the assessee and their exports of cashew kernel was always made through the assessee and so it became necessary for the assessee to issue out-agency certificate with a view to keep the goodwill of the client. The learned counsel submitted that normally the out-agency receipts would be levied only on actual receipts of the goods but in the case of Bakul Cashew Co. the assessee made a mistake in issuing the receipts without delivery of the goods by the exporter. The assessee was hoping to get the goods delivered by the client within one or two days but unfortunately, the client failed to deliver the goods and so the assessee had no alternative but to compensate the bank for the loss incurred by them on the advance given to Bakul Cashew Co. It was the contention of the learned counsel that when the assessee was compelled to make the payment to the bank in discharge of the liability which had arisen in the course of their business as a customs house agent, the same was all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iated legal action against Bakul Cashew Co., though the assessee was shown only as one of the defendants, the assessee had wisely came to a compromise and decided to make good the loss suffered by the bank. According to him, the eagerness with which the assessee had agreed to pay the total sum of Rs. 17,93,700 would show that the assessee did not want the entire matter to be exposed in the Court proceedings. He expressed the view that the assessee must have been colluding with their client Bakul Cashew Co. to get money from the Corporation Bank without delivery of cashew kernels as otherwise there was no reason why legal action against Bakul Cashew Co. was not allowed to proceed. According to the learned Departmental Representative, the evidence clearly pointed to the fact that the assessee had been issuing a number of bogus out-agency receipts to their clients to enable them to get huge amounts from the banks and in the process if the assessee had to pay heavy price, such payment would not fall within the ambit of s. 37 of the IT Act as an eligible deduction in computing the income under the head 'business'. 6. We have given due consideration to the submissions on both sides an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of the business" in s. 37 is wider in scope then the expression "for the purpose of earning profit". Kesavan contended that such expenses would include measures for the preservation of the business and for the protection of its assets and would comprehend many other acts incidental to the guarantee of the business. Reference was also made to the decision of the Supreme Court in the case of CIT vs. Malayalam Plantations (1964) 53 ITR 140 (SC). The learned counsel argued that the assessee was compelled to make the payment to the bank when there was the threat by the bank to black list the assessee through the bankers' association and that the payment by the assessee was an expenditure incurred for the preservation of the business as the assessee could not have carried on the business without banking facility. It was the contention of the learned counsel that the assessee wanted to avoid the threat by the bank at any cost as that would have seriously damaged its business and in that sense, it was expenditure incurred for the purpose of the business and so eligible for the deduction under s. 37. There can be no dispute about the fact that the expression "for the purpose of bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to Bakul Cashew Co. during the period from June to August, 1985, are given below: No. date of out- agency receipts Marks Quantity Packing O.A. 899/19-6-1985 Bakul/STC/Sydney/Lot-1-6 150 Cts. 320 S O.A.V. 6/21-6-1985 Bakul/STC/Sydney/Lot-1-6 120 Cts. 320 S O.A.V. 23/25-6-1985 Bakul/HTC/N. York 75 Cts. 240 S . . 200 Cts. 320 S . . 25 Cts. SW O.A.V. 36/27-6-1985 Bakul/HTC/NY 25 Cts. 320 S O.A.V. 29/28-6-1985 Bakul/HTC/NY 50 Cts. SW O.A.V. 40/28-6-1985 Bakul/STC/Sydney/Lot 200 Cts. 320 S O.A.V. 67/4-7-1985 Bakul/W. 320/4222/Hamburg/ITTCSSR 150 Cts. 320 S O.A.V. 113/13-7-1985 Bakul/W. 320/4222/Hamburg/ITTCSSR 150 Cts. 320 S O.A.V. 248/9-8-1985 Bakul/4222/Hamburg/ITTCSSR 75 Cts. SW O.A.V. 209/14-8-1985 Bakul/4222/Hamburg/ITTCSSR 75 Cts. 320 S O.A.V. 276/16-8-1985 Bakul/HTC/NY (C. No. 22505) 75 Cts. 320 S . . 45 Cts. SW . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... client would be presenting the out-agency receipts before banks and raising loans on the strength of the incorrect receipts issued by them. Still the assessee continued to issue the receipts even though the goods had not been delivered by the client. 8. From the facts as stated above and considering the circumstances in which the assessee had been issuing 11 wrong out-agency receipts one after the other to Bakul Cashew Co. to enable them to raise advances from the Corporation Bank. We do not accept the plea that it was a case of a genuine mistake committed by the assessee in the normal course of its business. It is difficult to believe that in the normal course of the business of the assessee, the assessee was required to issue untrue or bogus out-agency receipts to enable the clients to take loans from banks without actual receipt of the goods in the customs house. Further, we also take note of the fact that as soon as the bank had initiated legal action the assessee readily agreed to make the payment even though the bank could have proceeded with the recovery again against Bakul Cashew Co. We find force in the contention of the learned Departmental Representative that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Singapore party. Thus, according to the assessee, it had no alternative but to enter into such a transaction with a view to dispose of the said unsold stock of inferior quality tobacco. The High Court held that the agreement being illegal and contrary to law could not be recognised by a Court of law nor could entering into such a transaction be a normal incidence of carrying on business. Dismissing the assessee's appeal, the Supreme Court observed as under: "...that the assessee had indulged in transactions in violation of the provisions of the Foreign Exchange (Regulation) Act. The assessee's case was that it would have incurred a loss. This cannot be a justification for contravention of law. The assessee was engaged in tobacco business. The assessee was expected to carry on the business in accordance with law. If the assessee contravened the provisions of the Foreign Exchange (Regulation) Act to cut down its losses or to make larger profits while carrying on the business, it was only to be expected that proceedings would be taken against the assessee for violation of that Act. The expenditure incurred for evading the provisions of the Act and also the penalty levied for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year ending 31st March, 1997. It was also stated that the assessee would be admitting these two amounts as income under s. 41 of the IT Act in the respective assessment years. We are not inclined to accept the plea of the learned counsel that whatever amount the assessee had paid to the bank should be first allowed as a deduction under s. 37 of the IT Act as expenditure incurred for the purpose of the business and then the amount recovered in turn from Bakul Cashew Co. should be brought to tax as deemed income under s. 41(1) of the IT Act in the respective years of receipt. In view of our finding that the assessee is not entitled to deduct amounts paid to the bank as expenditure incurred for the purpose of the business under s. 37, we hold that offering the amounts recovered from Bakul Cashew Co. in the subsequent years would not alter the position regarding the allowability of the claim as expenditure incurred wholly and exclusively for the purpose of the business under s. 37. 10. Having regard to the facts and circumstances of the case, we uphold the order of the CIT(A) to the effect that the assessee is not entitled to deduct the sum of Rs. 1 lakh under s. 37 of the IT Act as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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