TMI Blog2020 (2) TMI 1039X X X X Extracts X X X X X X X X Extracts X X X X ..... alyzed that deduction in the computation of business profits, it does not mean that the items go without any deduction at all, but the question has to be resolved on the basis of commercial prudency having regard to the accepted commercial practice and trading principles. To hold it to be expenditure allowable as a deduction under section 37, it is not essential that it should be necessary, legally or otherwise, to incur the same or that it should directly and immediately benefit the business of the assessee. Even expenditures incurred voluntarily on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business would be deductible under this section. In the present case, it is not disputed that the assessee took legal recourse by filing FIR and various legal actions before Higher Forum including termination of service of guilty employees. The loss that has been occurred to the assessee because of those factors which are very much irrecoverable and in the practical context, these have to be allowed since it has been incurred by the assessee for facilitating the carrying on of the business of the assessee. The Hon ble Supreme Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statement is in respect of fraud committed by recurring deposit agent. The RD agent collected money from customers and did not deposit the amount with bank. He has given receipts to the customers. Out of the total amount of ₹ 300000/- bonk could recover ₹ 38206/-from the agent and balance has to be write off. Item no.8 of the statement is in respect of fraud committed by the employees in clearing house transactions at Amravati. There was a total fraud of ₹ 1709914/- at Amravati in clearing house. Out of this bank could recover ₹ 776000/- and the balance amount ₹ 933914/- could not be recovered. Therefore debited to profit and loss account. Item no.9 of the statement was in respect of fraud committed by cashier at Manora Branch. As the amount could not be recovered it is debited in profit and loss account. Item. no. 10 of the statement is in respect of share amount ₹ 8500/- paid excess by the staff of the bank and could not be recovered and therefore debited to the profit and loss account. Item no.1 on pg. no.2 is a Fixed Deposit amount of ₹ 10 lacs with Maa Sharada ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 50000/- from some creditor- money was brought in cash to the town by its employee out of the said sum which was meant for purchase of Govt. Securities a sum of ₹ 30000/- was lost by theft - loss was directly connected with the business operation and was incidental to the business of purchase of Govt. Securities for resale in order to cam profit - hence it was a trading loss and deductible from profits. 4. 98 ITR 50 [BOM H.C.] Sassoon J. David Co. Pvt. Ltd vs Commissioner of Income Tax - Business income - loss on account of embezzlement committed by agent in course of business - agent was declared insolvent and embezzled amount was rightly written off in the account books of the company embezzled amount represented business loss, which was liable to be deducted in computing business profit. 5. 42 ITR 418 (MAD) Gothamch and Galda Anr. Vs Commissioner of Income Tax business income loss - embezzlement by cashier - assessee carrying on money lending business, appointment was a normal incident of such business - loss allowable as trading loss. 6. 254 ITR 673 (GUJ) Vs Commissioner of income Tax -Business inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asons for loss as well as allowability of same for determining assessable income at the hands of the assessee. The Ld. AR of the assessee further submitted that the Assessing Officer has not disputed the occurrence of loss and write off the same in the books of account. The Assessing Officer however observed that assessee needs to prove beyond doubt that such losses have actually become irrecoverable. The Assessing Officer has observed that there is possibility of recovery of this amount and losses claimed cannot be equated with the amount write off u/s.36(1)(ii) of the Act and assessee needs to prove beyond doubt that losses are not being crystallized and recoverable and the same view has been taken by the Ld. CIT(Appeals). 5.1 The Ld. AR of the assessee further submitted that the assessee had lost the complete hope of recovery of any amount during the year and therefore written off as loss. No amount is recovered till date even after 8 years of write off is undisputed fact on record. The Ld. AR of the assessee submitted that major amount is in relation to fraud committed by late Shri K.N. Ghotewar at OCM Branch, Akola. The aforesaid employee has committed suicide and copy of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn by the aforesaid decisions squarely applies to the facts in the case of the assessee. In view of above, the addition made by disallowing the claim of expenses at ₹ 52,30,000/- is unjustified and unsustainable. 5.4 The Ld. AR of the assessee further contended that the loss in fixed deposit is allowable business loss. The investment in FDR is in terms of directive of RBI to maintain liquidity ratio. Banks are required to keep money in liquidity by placing the same in Govt. Securities, Deposits with other banks and are required to maintain the same as current asset. The loss arising in Govt. Securities is allowable deduction. Loss in FDR is akin and similar to loss on Govt. Securities and thus is allowable deduction. Loss has incurred in the course of carrying out business activity of banking and is allowable expenses. Reliance was placed by the Ld. AR on the decision in the case of United Commercial Bank Vs. CIT, 240 ITR 0355 (SC). 5.5 The Ld. AR of the assessee further submitted that the legal expenses incurred for recovery was debited to the account of customer. The expenses were not recoverable and have been written off as bad debts/loss. The loss arising is inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and gone through facts and circumstances of the case. We have gone through facts and noticed that imported materials amounting to ₹ 34crores (Annexure A) as lying under the custody of Port Authorities / Bonded Ware House was considered as permanently impaired in terms of Accounting Standard AS 28, because market/realizable value of all such materials were completely eroded and claim for use those material was surrendered to the Port Authorities. In early97, the assessee imported certain materials mainly from Finland. Cost of import for such materials were to the tune of ₹ 37 crores (approx..) before insurance, custom duty and other cost. The assessee, on account of financial stringency prevailing during the period, was not in a position to clear all those materials from the Port Authorities. However, charges for port/ware houses etc. were paid on regular basis. However, the appellant company cleared materials worth ₹ 6 crores (approx) before insurance, duty and other charges. These two factors i.e. (I) use of certain materials after clearance from Port Authorities and (ii) payment of ware house charges / amply suggest that imported materials wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w, where there is no specific statutory provision for a deduction in the computation of business profits, it does not mean that the items goes without any deduction at all, but the question has to be resolved on the basis of commercial prudency having regard to the accepted commercial practice and trading principles and can be said in a case to arise out in course of carrying on the business and very much incidental to such business. Impugned loss contains all the indicia of expense. Similarly, any isolate transaction, once in 40 -50 years is not an impediment to it being called as business loss since the expenses were very much incidental to the carrying on of the business. All that is germane is whether the expenses was, or was not, for the purpose of business and its nexus to the business. The expression for the purpose of business has been satisfied as explained hereinbefore and therefore the assessee would be entitled to deduction. The tax law requires that the assessee must incur expenditure, loss for business which is carried on in the year of account. The detail of loss is enclosed by assessee as under: Details of loss : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions, we do not find any cogent reason to hold that the claim of the assessee was not allowable as a business deduction. 8. The principles governing the allowance of deduction in respect of such expenditure are well-settled by now by a catena of decisions of the Supreme Court and the various High Courts. Such deductions are ordinarily claimed and allowed under section 37 of the Act which is a residuary section extending the allowance of deduction to items of business expenditure not covered by any of the preceding sections (sections 30 to 36) and section 80VV of the Act. The only conditions are that (i) it is not an expenditure (a) in the nature of capital expenditure or (b) personal expenses of the assessee, and (ii) it is laid out or expended wholly and exclusively for the purposes of the business or profession. 9. Various tests have been evolved by the Courts from time to time to decide whether an expenditure is incurred for the purposes of business. One of the tests often applied is whether it is incurred by the assessee in his character as a trader. To hold it to be an expenditure allowable as a deduction under section 37, it is not essen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igation on the assessee to pay any compensation to the said sole selling agents, the payment made by the assessee by way of compensation for loss of office of sole selling agents cannot be held to be for commercial consideration. We are not impressed by these submissions. So far as the second contention regarding payment for extra-commercial consideration is concerned, we find that it is wholly untenable in view of the clear finding of the Tribunal to the contrary. The Tribunal, on consideration of the totality of the facts and circumstances of the case, has come to a clear finding of fact that the payment was dictated by commercial expediency. This finding of fact having not been challenged on the ground of perversity or the like, it is not open to the revenue at this stage to contend that the payment of compensation by the assessee was not for business consideration but was a payment for extra-commercial consideration. On facts also, there does not appear to be anything wrong or unusual in the payment of the sum of ₹ 1,55,855 by way of compensation to the sole selling agents for loss of office which they had been holding for more than three decades and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee, submitted that the departmental authorities as well as the Tribunal had failed to appreciate that the consignment containing spare parts was not traced by port/Customs authorities but was traced by the assessee's agents, Messrs. Insimax Corporation, Bombay, who were paid their fees of ₹ 3,500 for the purpose. When they traced the consignment, they informed the assessee that the spare parts in the consignment were almost junk and that it was not worthwhile to clear them by incurring further expenditure by way of duty, wharfage, demurrage, etc. It was a business decision which their clients took and the departmental authorities had no business to question the same unless there was even a suggestion that the goods were wrongly imported or that the Customs authorities would have otherwise confiscated them. Dr. Balasubramanian relied on the order of the Tribunal. In our opinion, the submissions on behalf of the assessee are well-founded. It is common ground that the consignment was not being traced for a sufficiently long time and it was traced only as a result of the efforts made by the assessee's agents, Messrs. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar, viz., 1947-48. 13. We will, therefore, reframe the question in the following way : Whether the assessee was entitled to claim a sum of ₹ 32,000 as a permissible allowance under the circumstances of the case ? and answer it in the affirmative. The Commissioner to pay the costs. 14. Reference answered in the affirmative. 14. In view of the above legal authorities and facts of the case as discussed above, we are of the view that write off of stores spares imported earlier but lying in the godown of a port authority is a loss incidental to the business. We allow the loss accordingly. This issue of assessee s appeal is allowed. 9. Reverting to the facts of the present case of the assessee and taking guidance from the decision in the case of CIT Vs. Sales Magnesite (P) Ltd. (1995) 214 ITR 1 (Bom) wherein Hon ble Bombay High Court has considered the issue of commercial expediency and allowance of loss in the business. The main proposition which has been analyzed that deduction in the computation of business profits, it does not mean that the items go without any ..... X X X X Extracts X X X X X X X X Extracts X X X X
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