9911796707
TMI Blog2002 (9) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... ited Exports entered into a c.i.f. (cost, insurance, freight) contract on June 11, 1979 with Palmex Enterprises, Singapore, for the import of 800 metric tonnes (M. T.) of P. V. C. resin at the rate of 780 U.S. dollars per M. T. The shipment was to be made by September 30, 1979, and payment was to be made by way of an irrevocable letter of credit. United Exports requested the Bank of India, Bombay, to open a letter of credit and the bank issued a letter of credit for a sum of Rs. 51,18,950. United Exports took an insurance policy from the New India Assurance Co. Ltd. for Rs. 55 lakhs in respect of the goods as per cover note No. 25556 dated June 29, 1979, valid up to September 29, 1979. On August 17, 1979, United Exports took another cover note for Rs. 22 lakhs with New India Assurance Co. Ltd. for profit insurance. The foreign seller, Palmex Enterprises, presented the bills along with the copy of invoice, packing list and certificate of origin to the Bank of India for payment and the bank made the payment on August 21, 1979. United Exports then received a presentation memo on August 22, 1979, from the bank informing the arrival of the documents. On September 12, 1979, United Expo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sum of Rs. 51,18,232 should be allowed as business expenditure. The Income-tax Officer rejected the claim of the assessee on the ground that United Exports obtained the licence and it was only United Exports who entered into an agreement with Orient Enterprises, New Delhi, and Siraj and Co., Bombay, for the import of P. V. C. resin and palm oil. He also found that only United Exports opened the letter of credit with the Bank of India and United Exports arranged for the insurance of goods and filed a suit against the insurance company. Accordingly, the Income-tax Officer was of the opinion that the loss could be claimed only in the hands of United Exports and not in the hands of the assessee. He was also of the opinion that even in the hands of United Exports the liability was not crystallised. The Inspecting Assistant Commissioner, who was associated in the assessment proceedings, was also of the opinion that the consortium was nothing but a group of certain parties with the object of achieving certain results for earning income. He was of the opinion that United Exports did not act as an agent for the constituent units. He agreed with the Income-tax Officer that it was United E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llate Tribunal found that the report of the C. B. I. could not be ignored and the goods contracted to be purchased by United Exports were not actually put on board "Averilla". The Appellate Tribunal held that the bill of lading did not refer to the actual goods and hence it is not possible to accept the claim of the assessee that the closing account of United Exports should be reduced by an amount equivalent to the value of the goods. The Appellate Tribunal also found that the bank filed a suit and United Exports also filed a suit against the insurance company. The Appellate Tribunal was of the view that the right of the bank to receive payment is itself a dispute and consequently the liability cannot be said to have accrued in the previous year relevant to the assessment year in question. In this view of the matter, the Appellate Tribunal felt that it is not necessary to decide the question whether United Exports had actually suffered any real loss in the previous year by cheating and as long as United Exports has a recourse both against the bank and the insurance company, it could not be said that United Exports had actually incurred any loss. The Appellate Tribunal also rejected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 and submitted that the liability does not cease to be a liability because the assessee had taken proceedings before the higher authorities for getting it reduced or wiped out. Learned counsel also submitted that during the previous year, the bank paid the money and the bona fides of the transaction are not disputed and when the Appellate Tribunal has accepted that the assessee's title to the goods transferred by delivery of document, viz., bill of lading, it erred in applying the exception where there is no misrepresentation or fraud on the facts of the case. Learned counsel submitted that the assessee was cheated and when the loss occurred due to the loss of stock-in-trade to the assessee and when the liability arose during the previous year relevant to the accounting year in question, the assessee is entitled to claim the amount as deduction. He also relied upon the decision of the Supreme Court in CIT v. Bharat Carbon and Ribbon Mfg. Co. P. Ltd. [1999] 239 ITR 505. Mr. T. C. A. Ramanujam, learned counsel appearing for the Department, submitted that the Department should have proceeded on the basis that there was no consorti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uent unit, and should have made an assessment on the consortium as an association of persons. We are not expressing any opinion as to what the Department should have done. We are also not expressing any opinion on the submission of learned counsel for the Revenue and we are not inclined to give any direction also for making such an assessment. Another point sought by Mr. T. C. A. Ramanujam, learned counsel for the Revenue, is that the loss occurred is that of United Exports and it is not open to the assessee to claim the same in the computation of its income. We are of the view that it is not open to the Revenue to raise such a contention. We have already set out the facts. The Income-tax Officer as well as the Inspecting Assistant Commissioner in the tax assessment proceedings proceeded on the basis that the loss is that of United Exports and if there is any loss, that could be claimed by United Exports. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals) and the Commissioner of Income-tax (Appeals) did not accept that view and held that the Income-tax Officer and the Inspecting Assistant Commissioner had not properly appreciated the circumstances in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the constituent units to claim the loss has become final. In this connection, we would also like to mention that there were two transactions and the Appellate Tribunal held that as regards one transaction the loss was allowable in the hands of the assessee and in the case of other transaction, which is the subject matter of the present tax case reference, the Tribunal held that the loss did not accrue in the previous year. The Appellate Tribunal independently went into the question and decided that the loss is that of the assessee and that United Exports acted only as an agent. Since the finding of the Appellate Tribunal has not been challenged by filing an independent reference application requesting the Tribunal to refer the question, in the absence of any question before us, it is not open to learned counsel for the Revenue to urge the point. This court in EID Parry Ltd. v. CIT [1988] 174 ITR 11 has held that the Tribunal was not competent to refer a question suo motu and there must be an application either oral or written before the Tribunal. On the facts of the case, we find that there was neither an oral request, nor a written application before the Tribunal and the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llahabad High Court in U. P. Vatiaspati Agency v. CIT [1968] 68 ITR 120 wherein it was held that if the assessee made necessary attempts to recover the loss from the persons, but failed or if the assessee did not make such attempts because it was useless to make them in view of the financial position of the person concerned, then and then alone the loss could be allowed. Learned counsel relied on those decisions and submitted that the assessee has not taken any step to recover the money lost either from United Exports or from the foreign seller and since the assessee has not taken steps to recover the loss, the loss could not be said to have occurred enabling the assessee to claim deduction. We are unable to accept the submission of learned counsel for the Revenue. There is no dispute that the contract entered into was a c.i.f. contract for the purchase of certain articles and the shipment was to be made on September 30, 1979, and payments were required to be made by an irrevocable letter of credit. The foreign seller issued sixteen bills of lading dated August 6, 1979, and presented the bills along with a copy of invoice, packing list and certificate of origin to the Bank of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods -on demand if the beneficiary presents whatever documents may be required by the letter. They are normally the only two parties involved in the contract. The bank which issues a letter of credit acts as a principal, not as agent for its customer, and engages its own credit. The letter of credit thus evidences-irrevocable obligation to honour the draft presented by the beneficiary upon compliance with the terms of the credit. The letter of credit has been developed over hundreds of years of international trade. It was most commonly used in conjunction with the sale of goods between geographically distant parties. It was intended to facilitate the transfer of goods between distant and unfamiliar buyer and seller. It was found difficult for the seller to rely upon the credit of an unknown customer. It was also found difficult for a buyer to pay for goods prior to their delivery. The bank's letter of credit came into existence to bridge this gap. In such transactions, the seller (beneficiary) receives payment from the issuing bank when he presents a demand as per the terms of the documents. The bank must pay if the documents are in order and the terms of credit are satisfied. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant previous year ending June 30, 1980. We are of the view that the fact that the bank had made payment to the foreign seller in honouring the letter of credit taken out by United Exports and the fact that the ship sank in high seas during the relevant previous year and the further fact that there was a debit entry in the accounts of United Exports because of the loss of goods cannot be overlooked in determining the question whether the loss had occurred during the previous year ended on June 30, 1980. Though it is permissible to look into the subsequent events, yet, it is difficult to visualise that the assessee should wait for the finalisation of its accounts till the C. B. I. investigation is over and the C. B. I. submits its report. It is also relevant to notice that in the report of the C. B. I. there was no indictment either against the assessee or against United Exports and it was only against the foreign seller and another firm, called Oriental Enterprises the indictment was made. It is not the case of the Revenue that the assessee or United Exports was a party to the fraud committed by the foreign seller. In our view, when the ship was alleged to have sunk in high seas, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the bank is not relevant when the ship had sunk in the high seas. Further, neither the assessee, nor United Exports was a party to the fraud committed by the foreign seller. We are of the view that it is also permissible to look at the matter from another angle. The assessee was a member of the consortium and on the basis of the agreement with United Exports, it was found that United Exports was acting as a medium to channelise the export activities of the member units. The assessee requested United Exports to import goods and had the assessee paid the full value of the goods, there would have been a credit entry in favour of the assessee in the book of United Exports. Had the goods been received by United Exports and delivered to the assessee, corresponding entry cancelling the credit entry would also have been made in the delivery account and United Exports might at least be entitled to commission as agreed upon in the agreement. The assessee apparently had not paid the value of the goods at the time of placing orders to import goods. Since it was an international trade, a letter of credit was opened with the Bank of India by United Exports and the bank also paid the money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us year relevant to the assessment year in question. The Tribunal disallowed the loss only on the ground that the loss did not arise during the previous year relevant to the assessment year. In our view, the Tribunal has misdirected itself in this matter as it has focussed its attention only to the suit instituted by the bank and the resistance of the suit by United Exports. We are of the view that whatever may be the stand taken by United Exports in the suit instituted by the bank, the undisputed facts are that the bank has paid the money to the foreign seller on the basis of the letter of credit and corresponding debit entry has been made against the assessee by United Exports. In this connection, it is also relevant to notice that the report of the C. B. I. was filed only on June 30, 1994, and it is not expected of the assessee to keep its accounts pending till the C. B. I. filed its report. The Central Board of Direct Taxes taking note of the ground realities of the situation in commercial transactions, has issued a circular dated November 24, 1965, directing the Assessing Officers to allow the loss arising by embezzlement in the year in which it was discovered and claimed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xports is a honest and bonafide one and so long as the debit entry is existing at the time of finalisation of accounts of the assessee, the assessee was justified in claiming the same as a business loss. Though United Exports pursued the matter against the insurance company and resisted the suit filed by the bank, that is not relevant in considering the question whether the loss has fallen on the assessee. We are therefore of the opinion that the loss incurred by the assessee is a trading loss. In the peculiar circumstances of the case in which the assessee was not a party to the fraud, the loss occurred during the previous year relevant to the assessment year in question. No doubt, it is made clear that if the insurance company reimburses the money of the assessee, the question whether it is taxable or not would arise in the year of reimbursement. However, on the facts of the case, we are satisfied that the loss occurred because of the loss of goods said to have exported by the foreign seller in the foreign soil. Accordingly, we do not approve the view of the Tribunal that the assessee is not entitled to claim the deduction of the amount as a business loss. Accordingly, we answer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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