Punjab State Co-operative Supply & Marketing Fed. Ltd., Chandigarh V. JCIT, Chandigarh

ITA 189/CHANDI/2007

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68416 (ITAT-CHANDIGARH)
• Duration Of Justice: 6 year(s) 6 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 05-06-2013
• Assessment Year: 1997-1998
• Appeal Filed On: 12-02-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JYOTI
• Assessee Lawyers: YASH PAL GOYAL
• Keywords: Valuation report; Revised return
• Section: 143(3); 234B; 139(5); 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES ACHANDIGARH BEFORE SHRI T.R.SOOD, ACCOUNTANT MEMBE R AND MS SUSHMA CHOWLA, JUDICIA L MEMBER ITA NO. 189/CHD/2007 ASSESSMENT YEAR:1997-98 PUNJAB STATE CO-OPERATIVE VS THE JCIT, SUPPLY & MARKETING SPECIAL RANGE-I, FEDERATION .LTD., CHANDIGARH MARKFED HOUSE, SECTOR 35, CHANDIGARH. PAN NO. AAAAT-3454G (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI YASH PAL GOYAL RESPONDENT BY : SMT. JYOTI DATE OF HEARING : 12.06.2013 DATE OF PRONOUNCEMENT : 29.08.2013 ORDER PER SUSHMA CHOWLA, JM THE ASSESSEE HAS FILED THE APPEAL AGAINST THE ORDER OF CIT(APPEALS), DATED 07.12.2006 RELATING TO ASSESSME NT YEAR 1997-98 AGAINST THE ORDER PASSED UNDER SECTION 143(3) OF TH E I.T. ACT, 1961. 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APP EAL: 1. THAT THE ORDER OF THE LD. CIT(A) IN NOT ALLOWIN G LOSS OF PADDY AMOUNTING TO RS.38,29,67,095/- IS WHOLLY UNJUSTIFIED AND AGAINST THE LAW LAID DOWN BY COURTS . 2. THAT THE LD. CIT(A) WAS FURTHER NOT JUSTIFIED IN NOT ALLOWING LOSS OF RS.5,08,02,633/- ON ACCOUNT OF DAM AGED STOCK OF PADDY, PARTICULARLY WHEN THE AMOUNT REALIZ ED ON SALE OF THIS PADDY IN SUBSEQUENT YEARS HAS BEEN TAK EN AS INCOME IT HAS RESULTED IN DOUBLE TAXATION. 2 3. THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN NOT ALL OWING DEDUCTIONS UNDER SECTION 80P(2)(A)(III) DERIVED FRO M AGRO CHEMICAL PLANT AT MOHALI. 4. THAT THE DISALLOWANCE OF DEDUCTIONS UNDER SECTIO N 80P(2)(A)(III) AMOUNTING TO RS.29,42,11,642/- IS NO T JUSTIFIED, WHEN THE ISSUE OF VALIDITY OF RETROSPECT IVE AMENDMENT IN ASSESSEE'S OWN CASE IS PENDING BEFORE HON'BLE HIGH COURT. 5. THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN ALLOWIN G DEDUCTIONS U/S 80P(2)(E) ON THE TOTAL RENT RECEIVED FROM GODOWNS WITHOUT APPORTIONING EXPENSES AS HELD BY HO N'BLE SUPREME COURT AND HIGH COURTS. 6. THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN UPHOLDI NG THE CHARGE OF INTEREST U/S 234B AS THE ASSESSEE WAS NOT LIABLE TO PAY TAX ON INCOME ALLOWED EXEMPT U/S 80P(2)(A)(I II). IT WAS EXEMPT DURING THE YEAR. 3. THE GROUND NOS. 1 & 2 RAISED BY THE ASSESSEE ARE AGAINST LOSS OF PADDY. THE BRIEF FACTS RELATING TO THE ISSUE ARE T HAT THE ASSESSEE HAD FURNISHED THE ORIGINAL RETURN OF INCOME DECLARING T OTAL INCOME OF RS.1,09,15,87,795/- BEFORE SET OFF OF LOSS AND BEFO RE CLAIMING DEDUCTION UNDER CHAPTER VI-A. THE ASSESSEE HAD FIL ED A RETURN SHOWING LOSS OF RS.38,41,82,132/-. SUBSEQUENTLY, R EVISED RETURN WAS FILED IN WHICH LOSS WAS DECLARED AT RS.29,86,79,105 /-. IN THE REVISED RETURN, THE TOTAL INCOME BEFORE CLAIM OF DEDUCTION UNDER CHAPTER VI-A AND SET OFF OF LOSS HAD BEEN COMPUTED AT RS.72,98,3 7,523/-. ALONG WITH THE REVISED RETURN OF INCOME, A CERTIFICATE DA TED 17.03.1998 SIGNED BY MR.M.S.CHEEMA, AUDIT OFFICER, COOPERATIVE SOCIETIES, MARKFED WAS ATTACHED IN WHICH IT WAS MENTIONED THAT THE VALUATION OF SHORT AND DAMAGED PADDY STOCKS TO THE TUNE OF RS.43 ,37,69,728/- HAS BEEN TAKEN AT NIL IN ACCORDANCE WITH THE AUDIT OBSE RVATIONS DATED 29.10.97. THE PAPERS FILED WITH THE ORIGINAL RETUR N WERE AUDITED BY SHRI C.L.BHARDWAJ, DY. CHIEF AUDITOR, COOPERATIVE S OCIETIES, PUNJAB, 3 CHANDIGARH WHEREAS THE PAPERS ENCLOSED WITH THE REV ISED RETURN WERE SIGNED BY SHRI M.S.CHEEMA, AUDIT OFFICER. IN THE O RIGINAL RETURN OF INCOME, THE FOLLOWING AMOUNTS HAVE BEEN MENTIONED A S STOCK IN THE TRADING ACCOUNT OF PADDY: I) PADDY SHORTAGE DEBITED TO MILLERS RS.33.09 CRO RES II) PADDY SHORTAGE UNDER INVESTIGATIONS RS. 5.20 C RORES III) PHYSICAL BALANCE PADDY RS.186.32 CRORES THE FIRST TWO AMOUNTS HAVE BEEN REDUCED TO NIL IN THE REVISED RETURN OF INCOME AND THE PHYSICAL BALANCE OF PADDY HAS BEE N REDUCED TO RS.181.24 CRORES IN THE ACCOUNTS FILED WITH THE REV ISED RETURN. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE EXPLAINED THAT IT HAD ACCOUNTED FOR THE PADDY SHORT AGE DEBITED TO MILLERS AT RS.33.09 CRORES FOR THE YEAR 1994-95 AS THE SAID STOCKS HAD NOT BEEN ACCOUNTED FOR BY THE MILLERS, WHERE THE PA DDY HAD BEEN GIVEN TO THEM FOR MILLING. HOWEVER AS THE ABOVESAID STOC KS WERE NOT AVAILABLE WITH THE MILLERS ON PHYSICAL VERIFICATION , THESE WERE DEBITED TO THE RESPECTIVE ACCOUNTS. AS PER THE ASSESSEE, TH E MATTER WAS INVESTIGATED AND AFTER VERIFICATION, THE AUDITORS H AD GIVEN REPORT STATING THAT THE PROFITS WERE INFLATED BY THE ABOVE SAID AMOUNTS AND IT WAS ALSO REPORTED THAT THE SAME SHOULD BE TAKEN AS INCOME AS AND WHEN THE STOCKS/AMOUNTS WERE RECOVERED. IT WAS FURTHER E XPLAINED BY THE ASSESSEE THAT THE PADDY STOCK VALUED AT RS.5.20 CRO RES WHICH WAS SHOWN AS PHYSICALLY AVAILABLE, WAS DAMAGED AND NOT FIT FOR MILLING. THEREFORE, AUDITORS HAD DESIRED THAT THE VALUATION REPORT OF THE STOCKS BE DONE ON ZERO VALUE. THE PLEA OF THE ASSESSEE WA S THAT IN VIEW OF THE ABOVESAID OBSERVATIONS OF THE AUDITOR, MARKFED HAD REVISED THE BALANCE SHEET TO COMPLY WITH THE AUDIT OBSERVATIONS AND THE STOCKS WERE REDUCED. THE EXPLANATION OF THE ASSESSEE DID NOT F IND FAVOUR WITH THE 4 ASSESSING OFFICER AS THE ORIGINAL ACCOUNTS WERE AUD ITED BY THE DY.CHIEF AUDITOR WHEREAS ENCLOSURES TO THE REVISED RETURN WERE SIGNED BY THE AUDIT OFFICER. THE ASSESSEE WAS REQUIRED TO EXPLAIN THE CIRCUMSTANCES UNDER WHICH THE BALANCE-SHEET WERE RE -AUDITED AND FIGURES WERE SUBSTANTIALLY CHANGED. FURTHER ENQUIRI ES WERE RAISED IN RESPECT OF THE REVISED FIGURES IN BALANCE-SHEET AND ALSO AS TO WHETHER ANY SECURITY WAS TAKEN BEFORE SENDING PADDY TO THE MILLER. THE ASSESSING OFFICER FOUND THE EXPLANATION FILED BY TH E ASSESSEE IN RESPECT OF PADDY SHORTAGE DEBITED TO THE MILLERS RS .33.09 CRORES AND PADDY SHORTAGE UNDER INVESTIGATION RS.5.20 CRORES T O BE UNTENABLE FOR THE VARIOUS REASONS AS ENUMERATED UNDER PARA 3.3 AT PAGES 5-6 OF THE ASSESSMENT ORDER. THE ASSESSING OFFICER, ACCORDING LY DISALLOWED THE ENTIRE CLAIM OF RS.38.29 CRORES. 5. THE CIT(APPEALS) OBSERVED THAT THE LIABILITY HAS NOT YET CRYSTALLIZED AND AT BEST IT COULD BE TREATED AS CON TINGENT LIABILITY. THE CIT(APPEALS) NOTED THE ASSESSEE TO HAVE TAKEN NO ST EPS FOR RECOVERY OF FUNDS AND HAD ALSO GONE INTO ARBITRATION. AS THE A WARD OF ARBITRATOR WAS STILL AWAITED, THE ALLOWABILITY OF THE AMOUNT W AS NOT CERTAIN AND HENCE THE ADDITION MADE BY THE AO WAS UPHELD BY THE CIT(APPEALS). 6. ANOTHER ADDITION WAS MADE BY THE AO ON ACCOUNT O F PHYSICAL BALANCE OF PADDY AMOUNTING TO RS.5.08 CRORES. THE ASSESSEE IN THE REVISED BALANCE-SHEET HAD REVISED THE PHYSICAL BALA NCE OF PADDY FROM RS.186.32 CRORES TO RS.181.24 CRORES. THE ASSESSEE HAD EXPLAINED THE DIFFERENCE IN THE PADDY STOCK TO BE PHYSICALLY AVAI LABLE BUT DAMAGED AND NOT FIT FOR MILLING. THE SAID STOCK WAS VALUED AT ZERO IN VIEW OF THE AUDITORS REPORT. THE AO ASKED THE ASSESSEE TO FURNISH THE EVIDENCE REGARDING DAMAGED STOCK INCLUDING THE MANA GING DIRECTORS REPORT AND ALSO WHAT HAPPENED TO THE DAMAGED STOCK. THE ASSESSEE 5 FAILED TO FURNISH ANY REPLY TO THE SAME AND THE AO TREATED THE SAID LOSS OF RS.5.08 CRORES AS CAPITAL LOSS IN THE HANDS OF T HE ASSESSEE. THE CIT(A) UPHELD THE SAID LOSS. 7. THE ASSESSEE IS IN APPEAL AGAINST THE SAID ORDER OF THE CIT(APPEALS). 8. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT THE LOSS IN THE PADDY ACCOUNT WAS CLAIMED BY THE ASSESSEE AND THE QUESTIO N IS WHETHER THE SAID LOSS IS TO BE ALLOWED IN THE YEAR WHEN IT WAS DISCOVERED OR WHEN THE PROCEEDINGS WERE CULMINATED. THE LD. AR POINTE D OUT THAT FOR THE ASSESSMENT YEAR 1994-95, PADDY WAS GIVEN FOR MILLIN G AND BECAUSE OF RAINS, THE QUALITY OF RICE MILLED WAS NOT GOOD AND RICE REMAINED WITH THE MILLERS. EVEN IN ASSESSMENT YEAR 1995-96 THE Q UALITY OF THE RICE MILLED WAS NOT GOOD. IN VIEW THEREOF, THE FOOD COR PORATION OF INDIA MADE CERTAIN DECISIONS. IN THE YEAR UNDER APPEAL, THE AUDITORS HAD MADE PHYSICAL VERIFICATION OF THE SAID STOCK AND IT WAS FOUND THAT THE STOCK OF PADDY WAS NOT AVAILABLE, WHICH WAS MISSING OR WAS TAKEN AWAY BY THE RICE SHELLER. THE ASSESSEE REVISED ITS BALA NCE-SHEET BY EXCLUDING THE SAID STOCK AND CLAIMING THE LOSS ON A CCOUNT OF PADDY. FURTHER, THERE WAS SHORTAGE ON ACCOUNT OF EMBEZZLEM ENT BY EMPLOYEES AND THE SAID SHORTAGE WAS ALSO BOOKED AS A DEDUCTIO N. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT RECOVERY OF RS.8.25 C RORES HAD BEEN MADE IN THE SUCCEEDING YEARS AGAINST THE SAID LOSS OF PA DDY, I.E. PADDY UNDER INVESTIGATION PLUS SHORTAGE OF PADDY TO TAX, WHICH HAS BEEN OFFERED BY THE ASSESSEE. THE LD. AR FURTHER SUBMITTED THAT EARLIER YEAR LOSSES AT RS. 271,34,241/- + RS.253,216/- + RS.2866,725/- MAY BE IGNORED. 9. THE LD. DR FOR THE REVENUE PLACING RELIANCE ON T HE ORDER OF THE CIT(A) POINTED OUT THAT THE ASSESSEE HAD BOOKED CON TINGENT LIABILITY AND HAD FAILED TO FILE ANY DETAILS EXCEPT FOR THE A UDIT REPORT AND THE 6 AUDIT NOTE. IT WAS POINTED OUT BY THE LD. DR THAT FIR HAS NOT BEEN FILED IN ALL THE CASES AND AS LIABILITY HAD NOT CRY STALLIZED, THERE WAS NO MERIT IN THE CLAIM OF THE ASSESSEE. 10. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE RECORD AND ALSO THE WRITTEN SUBMISSIONS FILED BY THE ASSESSEE. THE ASSESSEE IS A STATE LEVEL APEX COOPERATIVE SOCIETY REGISTERED UNDER THE PUNJAB CO- OPERATIVE SOCIETIES ACT. THE ASSESSEE IS A STATE G OVERNMENT AGENCY FOR PROCUREMENT OF WHEAT, PADDY, COTTON AND OTHER F OODGRAINS FOR CENTRAL POOL. THE STOCK PURCHASED FOR CENTRAL POOL ARE DELIVERED TO THE FOOD CORPORATION OF INDIA. VARIOUS PRODUCTS I. E. WHEAT, PADDY, COTTON ARE PROCURED BY THE ASSESSEE ON MINIMUM SUPP ORT PRICE FIXED BY THE GOVERNMENT OF INDIA. THE WHEAT PROCURED WAS SO LD AS SUCH TO FCI, BUT PADDY PROCURED BY THE ASSESSEE WAS GOT SHELLED AND RICE WAS DELIVERED TO THE FCI. 11. THE ASSESSEE FOR THE YEAR UNDER APPEAL HAD FILE D THE ORIGINAL RETURN OF INCOME DECLARING GROSS TOTAL INCOME OF RS .109.15 CRORES AND HAD FURTHER CLAIMED SET OFF OF EARLIER YEARS LOSSE S AND DEDUCTION UNDER CHAPTER VI-A OF THE ACT. THE RETURN OF INCOME SHOW ING LOSS OF RS.38.41 CRORES WAS FILED ON 31.10.1997, ALONGWITH COPY OF THE AUDIT REPORT. THE STATUTORY AUDIT OF THE ASSESSEE FIRM W AS UNDERTAKEN BY THE AUDITORS APPOINTED BY THE PUNJAB GOVERNMENT UNDER T HE PUNJAB COOPERATIVES SOCIETY ACT. THE ASSESSEE HAD SHOWN TH E STOCKS OF PADDY FOR THE CROP YEAR 1994-95 AS STOCK IN TRADE IN SCHE DULE L OF THE BALANCE-SHEET AS UNDER : S. NO. PARTICULARS WEIGHT AMOUNT AMOUNT PADDY : I. PHYSICAL BALANCE PADDY (A) CROP 1994-95 12,073 50,958.042 409,042, 965 (B) CROP 1995-96 28,586 130,277,941 2,826,464,4 19 (C) CROP 1996-97 341,112 1,681,989,840 0 1,863,225,823 3,235,507,384 7 I(A) PADDY SHORTAGE DEBITED TO MILLERS (A) PADDY OLD SHORTAGE 27,134,241 27,134,2 41 (B) PADDY CROP 1994-95 68,921 303,830,410 0 330,964,651 27,134,241 II PADDY SHORTAGE UNDER INVESTIGATION (A) CROP 1992-93 44 253,216 2 53,216 (B) CROP 1993-94 771 2,866,725 2,866 ,725 (C) CROP 1994-95 11,918 53,783,148 0 (D) CROP 1995-96 19,797 85,172,552 0 (E) CROP 1996-97 (EXCESS) (13,040) 94,073,197 0 52,002,444 164,757,105 TOTAL PADDY 2,246,192,918 3,427,398,730 12. THE ORIGINAL TRADING ACCOUNT, PROFIT & LOSS ACC OUNT AND BALANCE- SHEET ARE ANNEXED AT PAGES 22 TO 24A OF THE PAPER B OOK. 13. THE AUDITORS IN THE AUDIT REPORT DATED 29.10 .1997 ANNEXED TO THE RETURN OF INCOME HAD REMARKED AS UNDER : SCRUTINY OF STOCKS IN TRADE AS PER SCHEDULE L OF BALANCE SHEET REVEALED THAT FIGURES OF PADDY SHORTAGE DEBIT ED TO MILLERS, PADDY SHORTAGE UNDER INVESTIGATION AND MIS CELLANEOUS STOCKS UNDER INVESTIGATION AND OTHER STOCKS FOUND S HORT AS PER PHYSICAL VERIFICATION REPORT DATED 31.03.1997 HAVE BEEN SHOWN AS CLOSING STOCKS IN THE BALANCE SHEET WHICH HAS IN FLATED THE PROFIT OF THE MARKFED TO THIS EXTENT AS BELOW : SR.NO. OF AUDITORS CERTIFIATE SUB SR.NO. PARTICULARS AMOUNT 1. I) PADDY SHORTAGE DEBITED TO MILLERS 330964651.00 II) PADDY SHORTAGE UNDER INVESTIGATION 52002444.00 III) MISC.STOCKS UNDER INVESTIGATION 302347. 00 A) COTTON SEED 856.00 B)PADDY SEED 15377.00 C)WHEAT SEED 241714.00 D)WEEDICIDES 44400.00 TOTAL : 302347.00 2. PADDY STOCK CROP 1994-95 HAVE BEEN VALUED AT RS.5,08,02,633.00 WHEREAS THESE SHOULD HAVE BEEN VALUED AT ZERO BEING DAMAGED/NOT FIT FOR MILLING. 50802633.00 8 14. THE COPY OF THE AUDITORS CERTIFICATE DATED 29. 10.1997 IS PLACED AT PAGES 28 TO 31 OF THE PAPER BOOK. 15. THE ASSESSEE, IN ORDER TO DECIDE WHETHER THE BA LANCE-SHEET FILED WITH THE RETURN OF INCOME NEEDED REVISION, CALLED F OR A MEETING OF THE BOARD OF DIRECTORS. AN AGENDA FOR THE REVISED BALA NCE-SHEET WAS PLACED BEFORE THE BOARD OF DIRECTORS. THE BOARD OF DIRECTORS COMPRISED OF THREE NOMINEES OF THE PUNJAB GOVERNMEN T (REGISTRAR OF CO-OPERATIVE SOCIETIES PUNJAB, SECRETARY CO-OPERATI ON AND SECRETARY FINANCE ALL IAS OFFICERS), A NOMINEE OF THE APEX CO-OPERATIVE BANK, 12 ELECTED MEMBERS FROM THE PRIMARY AND THE MARKETI NG SOCIETIES AND MANAGING DIRECTOR OF THE MARKFED. REVISED BALANCE-S HEET WAS APPROVED BY THE BOARD OF DIRECTORS IN ITS MEETING HELD ON 26 .02.1998. THE APPROVAL OF THE BOARD OF DIRECTORS IS ANNEXED AT PA GE 32 OF THE PAPER BOOK. 16. THE PROFIT AS PER THE ORIGINAL PROFIT & LOSS AC COUNT WAS RS.109.01 CRORES. THE ASSESSEE MADE FOLLOWING ADJUS TMENTS TO REVISE ITS BALANCE-SHEET: SR.NO. PARTICULARS AMOUNT A) SALARY ARREARS RS. 7.00 CR B) PROVISION FOR GRATUITY RS.12.92 CR C) PROVISION FOR INCOME TAX RS.13.39 CR D) PADDY TRADING EXPENSES RS.1.12 CR E) MISC. STOCKS REDUCED RS. 3.02 LACS F) PADDY STOCKS REDUCED RS.43.37 CR TOTAL RS.77.85 CR 17. AS PER THE REVISED BALANCE-SHEET, THE PROFIT WA S COMPUTED AT RS.37.15 CRORES. THE ASSESSEE FILED ITS REVISED RE TURN OF INCOME ON 08.05.1998. THE COPY OF THE REVISED TRADING ACCOUNT , PROFIT & LOSS ACCOUNT AND BALANCE-SHEET ARE ANNEXED AT PAGES 25-2 6A OF THE PAPER BOOK. 9 18. THE ISSUE ARISING BEFORE US IS IN CONNECTION WI TH THE FOLLOWING ADJUSTMENTS MADE BY THE ASSESSEE : (I) PADDY SHORTAGE DEBITED TO MILLER RS.33.09 CRO RES (II) PADDY SHORTAGE UNDER INVESTIGATION RS.5.20 C RORES (III) PHYSICAL BALANCE OF PADDY SHORT RS.5.08CROR ES 19. THE ISSUE RAISED BEFORE US VIDE GROUND NO. 1 & 2 IS IN CONNECTION WITH THE ALLOWANCE OF THE SAID LOSS ON A CCOUNT OF PADDY TO THE TUNE OF RS.43.38 CRORES (APPROXIMATELY). WE HA VE PERUSED THE ORDERS OF THE AUTHORITIES BELOW, WRITTEN SUBMISSION S FILED BY THE ASSESSEE, PLEADINGS OF BOTH THE COUNSELS BEFORE US AND PROCEED TO DECIDE THE ISSUE. THE CLAIM OF LOSS ON ACCOUNT OF PADDY TOTALING APPROXIMATELY RS.43.38 CRORES WAS REJECTED BY THE AO ON ACCOUNT OF THE FOLLOWING REASONS : I) THE MATTER REGARDING LOSS OF PADDY IS STILL UNDE R INVESTIGATION. FIRS HAVE BEEN FILED AND COURT CASE S ARE PENDING. ARBITRATION CASES ARE ALSO PENDING. THE AS SESSEE HAS ALSO NOT WRITTEN OFF THE AMOUNTS RECOVERABLE FROM M ILLERS; II) THE PADDY HANDED OVER TO THE MILLERS FOR MILLIN G IS USUALLY KEPT EITHER IN THE EXCLUSIVE CUSTODY OF THE ASSESSEE OR IN JOINT CUSTODY WITH THE MILLERS, SO IT WAS NOT COMPREHENSIVE AS TO HOW THE LOSS INCURRED IN FINANC IAL YEAR 1994-95 WAS REPORTED AS LATE AS IN FINANCIAL YEAR 1 996-97; III) IT IS INCOMPREHENSIBLE AS TO WHY SO MUCH PADDY (APP. 30.38 CR) WAS LOST IN ONE YEAR I.E. FINANCIAL YEAR 1994-95 ONLY. SUCH TYPE OF LOSSES HAVE NOT OCCURRED IN ANY PRECEDING OR SUCCEEDING YEARS; IV) THERE IS CONFUSION OVER THE CORRECT POSITION RE GARDING CUSTODY OF PADDY. AS PER THE ASSESSEE, THE PADDY L OST WAS IN JOINT CUSTODY BUT AS PER THE VERSION OF SHRI VIPAN KUMAR, PARTNER OF M/S GURU NANAK RICE & GENERAL MILLS, THE PADDY WAS IN THE EXCLUSIVE CUSTODY OF THE MARKFED ; 10 V) THE ASSESSEE HAD NOT CLAIMED ANY LOSSES ON ACCOUNT OF SHORTAGE OF PADDY IN ITS ORIGINAL RETURN OF INCOME AND ONLY IN THE REVISED RETURN OF INCOME SUCH LOSSES WERE CLAIM ED BY ENCLOSING A CERTIFICATE SIGNED BY AUDIT OFFICER, WH EREAS THE AUDIT REPORT WAS SIGNED BY DY.CHIEF AUDITOR ; VI) AS PER THE CONDITIONS IN THE AGREEMENT BETWEEN THE MARKFED AND EACH OF THE MILLERS, THERE WAS A STIPUL ATION THAT PADDY WOULD BE ISSUED AGAINST ADVANCE RICE ONLY. TH E PROCEDURE HAS BEEN BREACHED AND THERE WAS LARGE SCA LE OF MISAPPROPRIATION AND CONSEQUENT LOSS ; VII) THE LOSSES COULD BE CLAIMED AS DEDUCTION ONLY AFTER THE DEPARTMENTAL ENQUIRY UNDER THE CO-OPERATIVE SOCIETI ES ACT FINALLY SETTLED AS TO HOW THE LOSS AROSE AND WHETHE R ANYTHING COULD BE RECOUPED FROM THOSE IN-CHARGE OF THE STOCK . 20. IN RESPECT OF DEDUCTION IN PHYSICAL BALANCE OF PADDY FROM RS.186.32 CRORES, THE LD. AR FOR THE ASSESSEE IN IT S WRITTEN SUBMISSIONS HAVE FILED REPLY TO THE OBSERVATIONS OF THE AO RAISED IN THE ASSESSMENT ORDER, WHILE REJECTING THE CLAIM OF LOSS ON ACCOUNT OF PADDY. THE POINT-WISE REPLY OF THE ASSESSEE IS AS U NDER : I) THE LOSS IS ALLOWABLE AS THE MILLERS HAD NEITHER DELIVERED THE RICE NOR PADDY WAS AVAILABLE WITH THE M. THE FACT THAT FIRS HAD BEEN FILED AND ARBITRATION CASES WERE PENDING, PROVES THE CASE OF THE ASSESSEE. FURTHER, THE ASSESSEE HAD SUPPLIED THE PADDY TO THE MILLERS FOR SHELLING AS PER THE AGREEMENT AND IT WAS NOT A CASE OF SALE TO THEM. SINCE NO AMOUNT WAS OUTSTANDING AGAINST THE MILLERS ON ACCOUNT OF PADDY SUPPLIED, THERE WAS NO OCCASION FO R WRITING OFF THE AMOUNT. II) AS PER CLAUSE (III) OF THE AGREEMENT, THE PADDY WAS IN JOINT CUSTODY OF MILLER AND MARKFED. HOWEVER, AS P ER CLAUSE (IV) OF THE AGREEMENT, THE MILLER WAS RESPONSIBLE F OR SAFE CUSTODY OF PADDY TILL THE DELIVERY OF THE RICE TO T HE MARKFED. THE ASSESSEE ADMITTED TO THE NEGLIGENCE OR COMPLICI TY OF THE EMPLOYEES OF ITS CONCERN WITH THE MILLER BUT THE SA ME COULD 11 NOT BE THE BASIS FOR DISALLOWANCE OF LOSS. IT WAS FURTHER STATED BY THE ASSESSEE THAT PROCEEDINGS HAD BEEN IN ITIATED AGAINST 36 ERRING OFFICIALS AND EMPLOYEES. THE SAI D LOSS WAS CLAIMED TO BE DELETED IN THE YEAR AND HENCE CLAIMED DURING THE YEAR. THE ASSESSEE ALSO EXPLAINED THAT DURING THE CROP YEAR 1994-95, PHYSICAL VERIFICATION WAS CARRIED OUT AND PADDY WEIGHING 545372 MT WAS FOUND PHYSICALLY AVAIL ABLE. DURING THE FINANCIAL YEAR 1995-96, OUT OF STOCKS OF PADDY PERTAINING TO 1994-95, PADDY WEIGHING 418151 M.T. W AS SOLD. OUT OF BALANCE STOCKS OF 127221 MT OF PADDY, PADDY WEIGHING 92702 MT WAS AVAILABLE WITH THE ASSESSEE B UT THE REMAINING PADDY WEIGHING 34519 MT WAS UNDER INVESTI GATION AS ITS WHEREABOUTS COULD NOT BE ASCERTAINED. DURING THE FINANCIAL YEAR 1996-97, PADDY WEIGHING 34309 MT WAS SOLD AND OUT OF BALANCE STOCKS OF 92912 MT (127221 MINUS 34309=92912 MT), IT WAS FOUND THAT PADDY WEIGHING 6 8921 MT SUPPLIED TO MILLERS FOR SHELLING HAD BEEN MISAPP ROPRIATED AS NO STOCKS OF PADDY WAS AVAILABLE WITH THEM NOR A NY RICE HAS BEEN SUPPLIED TO THE GOVERNMENT AGENCY. STOCKS WEIGHING 12073 MT WAS FOUND TO BE DAMAGED AND THE BALANCE ST OCK OF 11918 MT WAS TAKEN AS STOCKS UNDER INVESTIGATION AS THE WHEREABOUTS OF THE SAME WERE NOT ASCERTAINABLE AND YEAR WISE CHART WAS ENCLOSED AS ANNEXURE TO CLARIFY THE WHOLE ISSUE. SINCE THE FACT OF LOSS DUE TO MISAPPROPRIATI ON OF PADDY BY THE RICE MILLERS AS WELL AS DAMAGED STOCKS OF PA DDY CAME TO THE NOTICE OF THE APPELLANT DURING THE FINANCIAL YEAR 1996- 97 RELEVANT TO THE ASSESSMENT YEAR 1997-98, THE SAM E WAS ALLOWABLE AS SUCH FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. III) IN RESPECT OF ALLEGATION OF AO THAT WHY THERE WAS SO MUCH LOSS IN ONE YEAR, IT WAS EXPLAINED THAT DURING THE CROP YEAR 1994-95 LARGE STOCKS OF PADDY WERE PROCURED UN DER PRICE SUPPORTS SCHEME BUT THE RICE WHICH WAS BEING DELIVERED BY THE MILLERS HAD MORE BROKEN RICE, WHIC H THE FCI REFUSED TO ACCEPT. THE ASSESSEE CLAIMS THAT THE FC I & THE GOVERNMENT DECIDED THAT PADDY AS SUCH LYING WITH TH E MILLERS BE SOLD AT THE REDUCED RATE WHICH WERE FIXED VIDE L ETTER DATED 14.01.1997 BUT ON PHYSICAL VERIFICATION, NO STOCK O F PADDY 12 WAS FOUND AVAILABLE WITH THE MILLERS, NEITHER THEY HAD DELIVERED THE RICE NOR RETURNED THE PADDY. THE SAI D LOSS CAME TO THE NOTICE OF THE ASSESSEE ON PHYSICAL VERI FICATION DURING THE FINANCIAL YEAR 1996-97 WHICH IS FURTHER ESTABLISHED BY THE FACT THAT FIRS WERE FILED AGAINS T THE MILLERS AND THE CONCERNED EMPLOYEES WERE CHARGE-SHE ETED DURING THE FINANCIAL YEAR 1996-97. THE ASSESSEE PL ACED RELIANCE ON THE LETTERS FILED BEFORE THE CIT(A) DUR ING APPELLATE PROCEEDINGS UNDER WHICH IT WAS INFORMED T HAT FIRS FOR 53420 MTS WERE LODGED AGAINST 60 MILLERS AND IN THE SUBSEQUENT YEAR, MARKFED HAD RECOVERED RS.6.72 CROR ES TOWARDS SALE OF 19482 MT OF PADDY OUT OF 23991 MT (12073MT PHYSICALLY DAMAGED AND 11918 STOCK INVESTI GATION AS ON 31.3.1997). IV) IN RESPECT OF CUSTODY OF PADDY, THE ASSESSEE CL AIMED THAT AS PER CLAUSE 3 OF THE AGREEMENT IT WAS IN THE CUSTODY OF MILLER AND MARKFED AND AS PER CLAUSE 4 MILLERS WERE RESPONSIBLE FOR ANY LOSS TILL DELIVERY OF RICE. V) THE ASSESSEE CLAIMS THAT IT WAS LEGALLY ENTITLED TO FILE REVISED RETURN U/S 139(5) AND CLAIM THE LOSS THAT W AS OMITTED TO BE CLAIMED. VI) IN RESPECT OF THE STIPULATION IN AGREEMENT THAT PAD DY WOULD BE ISSUED AGAINST ADVANCE RICE ONLY, THE ASSE SSEE ADMITS THAT DUE TO NEGLIGENCE OR OTHERWISE OF ITS E MPLOYEES OR BREACH OF FAITH BY THE CONSTITUENTS, THE LOSS WA S SUFFERED AND THE SAME COULD NOT BE DISALLOWED ON THE GROUND THAT PROCEDURE FORMULATED WAS NOT ADHERED TO. THE LOSS HAVING BEEN OCCURRED DURING THE COURSE OF BUSINESS AND BEI NG GENUINE, WAS CLAIMED TO BE ALLOWABLE. VII) IN RESPECT OF THE CLAIM OF LOSS BEING ALLOWED AS A DEDUCTION ONLY AFTER THE DEPARTMENTAL ENQUIRY, THE ASSESSEE PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HON'B LE PUNJAB & HARYANA HIGH COURT IN PUNJAB STEEL STOCK HOLDER V CIT 125 ITR 519 (P&H). 13 21. THE LD. AR FOR THE ASSESSEE ALSO ASSAILED THE O BSERVATIONS OF THE CIT(A) THAT THE LOSS IS TO BE SEEN CONSEQUENT TO TH E FINALIZATION OF THE ARBITRATION PROCEEDINGS. IT WAS POINTED OUT BY THE ASSESSEE THAT THE ARBITRATOR HAD HELD THAT NO REFERENCE COULD BE MADE ON THIS ISSUE IN VIEW OF CLAUSE 5 & 6 OF THE AGREEMENT BETWEEN MARKF ED AND THE RICE SHELLERS. THE HON'BLE PUNJAB & HARYANA HIGH COURT VIDE ITS ORDER DATED 14.03.2002 CONFIRMED THE ABOVE VIEW OF THE AR BITRATOR VIDE ITS ORDER 14.03.2002 WHICH WAS FURTHER CONFIRMED BY THE HON'BLE SUPREME COURT OF INDIA VIDE ORDER DATED 02.03.2007. LD. AR , THUS POINTED OUT THAT SUCH REFERENCE FOR ARBITRATION WAS VOID ABINIT IO AND THE ALLOWANCE OF LOSS CLAIMED BY THE ASSESSEE COULD NOT BE DEPEND ENT ON A VOID REFERENCE. THE LD. AR FURTHER MADE A REFERENCE TO T HE BOARDS CIRCULAR NO.35B DATED 24.11.1965 IN CONNECTION WITH THE ALLO WANCE OF LOSS ON ACCOUNT OF EMBEZZLEMENT OF EMPLOYEES OR DUE TO NEGL IGENCE OF EMPLOYEES UNDER WHICH IT HAS BEEN PROVIDED THAT THI S LOSS IS TO BE ALLOWED IN THE YEAR IN WHICH IT IS DETECTED IF IT I S INCURRED DURING THE COURSE OF BUSINESS. 22. IN RESPECT OF THE DISALLOWANCE OF LOSS OF 5.08 CRORES CLAIMED ON ACCOUNT OF DAMAGED STOCKS OF PADDY, LD. AR POINTED OUT THAT THE SAID LOSS WAS CLAIMED ON THE BASIS OF OBSERVATIONS MADE BY DY.CHIEF AUDITOR IN HIS AUDIT REPORT FILED WITH THE RETURN O F INCOME AND SUCH LOSS OF STOCK COULD NOT BE TERMED AS CAPITAL LOSS. THE LD. AR FURTHER POINTED OUT THAT THE AO HAD ALLOWED THE LOSS ADJUST MENT ON ACCOUNT OF MISCELLANEOUS STOCK OF RS.302347/- CLAIMED IN THE R EVISED RETURN AND HAD DISALLOWED THE LOSS ADJUSTMENT IN PADDY ACCOUNT OF RS.43.37 CRORES BY HOLDING THAT SUCH LOSS WAS NOT CLAIMED IN THE ORIGINAL RETURN. 23. THE ASSESSEE HAS PLACED ON RECORD THE AGREEMENT DATED 07.10.1994 BETWEEN THE ASSESSEE AND M/S LEKHRAJ DHA WAN RICE MILLS, 14 ONE OF THE RICE MILLERS AT PAGES 51 TO 61 OF THE PA PER BOOK. THE CLAIM OF THE ASSESSEE IS THAT IT HAD ENTERED INTO SUCH AG REEMENTS WITH VARIOUS RICE MILLERS IN CONNECTION WITH THE CROP OF 1994-95 . AS PER THE TERMS AGREED UPON BETWEEN THE PARTIES, THE MILLERS WERE T O BE SUPPLIED WITH PADDY BY MARKFED AND THE MILLER HAD TO UNDERTAKE SH ELLING OF PADDY AND THE VARIOUS SERVICES TO BE PROVIDED BY THE MILL ER ARE ENLISTED IN CLAUSE 1 & 2 OF THE AGREEMENT. AS PER CLAUSE 3 OF THE AGREEMENT, THE DELIVERY OF PADDY WAS TO BE MADE TO THE MILLER CONC ERNED ON AS IS WHERE IS BASIS. IT WAS FURTHER AGREED TILL THE MILLING IS COMPLETED, IT SHALL BE IN THE JOINT CUSTODY OF PROCURING AGENCY A ND THE MILLER. 24. AS PER CLAUSE 4, THE MILLER SHALL BE RESPONSIBLE FOR THE SAFE CUSTODY OF PADDY SO LIFTED. IT WAS FURTHER AGREED UPON BETWEEN THE PARTIES AS PER CLAUSE 4 THAT MILLER SHALL ALSO MAKE GOOD THE LOSS THAT MAY BE OCCURRED IN PADDY AND RICE DURING TRANSIT 1 TIMES THE ECONOMIC CAUSE OF THE CONVERTED VARIETY OF PADDY AN D OR RICE TOWARDS THE SHORTFALL. MILLER WAS TO PROVIDE A BANK GUARANTEE OF THE VAL UE OF RS.3 LACS DRAWN IN FAVOUR OF MARKFED AS PER CLAUSE 7 OF THE AGREEMENT. AS PER CLAUSE 8, THE MILLER WAS TO ENSURE AT HIS OW N COST THE PADDY/RICE LYING IN HIS PREMISES AGAINST FIRE, THEFT AND OTHER ACCIDENTAL LOSS. AS PER CLAUSE 9, THE MILLER WAS TO TAKE MEASURES AND A LL SUCH PRECAUTIONS AS TO PRESERVE THE PADDY/RICE. THE MILLER FURTHER A GREED TO PAY A SUM OF RS.30,000/- AS SECURITY DEPOSIT TOWARDS FULFILLMENT OF THE AGREEMENT TO MARKFED AS PER CLAUSE 10 OF THE AGREEMENT. THE SAI D SECURITY DEPOSIT COULD BE FORFEITED BY MARKFED IN CASE OF NON FULFIL LMENT OF ANY OF THE OBLIGATIONS UNDER THE CONTRACT AS PER CLAUSE 11 OF THE AGREEMENT AND IN CASE THE GOODS ARE RETURNED IN GOOD CONDITION, THE MARKFED WAS TO REFUND THE SECURITY DEPOSIT TO THE MILLER. IT IS F URTHER PROVIDED IN THE SAID CLAUSE 11 THAT PROVIDED THAT IF THE LOSS OR DAMAGE EXCEEDS THE AMOUNT OF SECURITY DEPOSIT, MARKFED SHALL BE WITHIN ITS RIGHT TO RECOVER 15 THE SAME IN ACCORDANCE WITH LAW. UNDER CLAUSE 12 & 13, THE VARIOUS FUNCTIONS OF THE MILLER ARE ENUMERATED. AS PER CLA USE 18 OF THE AGREEMENT, ALL THE DISPUTES AND DIFFERENCES ARISING OUT OF THIS AGREEMENT, SHALL BE REFERRED TO THE SOLE ARBITRATIO N OF THE MANAGING DIRECTOR OR ANY PERSON APPOINTED BY HIM IN THIS BEH ALF. 25. THE SAID LOSS WAS DETECTED DURING THE YEAR AND PURSUANT THERETO, ARBITRATION PROCEEDINGS WERE STARTED IN SOME CASES. IN OTHER CASES, FIR WAS LODGED FOR MISAPPROPRIATION OF THE STOCK. THE I SSUE ARISING BEFORE US IS WHETHER SUCH LOSS IS ALLOWABLE IN THE HANDS O F THE ASSESSEE IN THE YEAR IN WHICH LOSS OF PADDY WAS DISCOVERED. THE AS SESSEE IN THE ORIGINAL RETURN OF INCOME HAD SHOWN THE SAID STOCKS AS PART OF CLOSING STOCK. THE AUDITORS IN THE AUDIT REPORT ACCOMPANYI NG ORIGINAL RETURN OF INCOME HAD REPORTED THE CLOSING STOCK BUT WITH QUAL IFICATION AS UNDER : SR.NO. OF AUDITORS CERTIFIATE SUB SR.NO. PARTICULARS AMOUNT 1. I) PADDY SHORTAGE DEBITED TO MILLERS 330964651.00 II) PADDY SHORTAGE UNDER INVESTIGATION 52002444.00 III) MISC.STOCKS UNDER INVESTIGATION 302347.00 A) COTTON SEED 856.00 B)PADDY SEED 15377.00 C)WHEAT SEED 241714.00 D)WEEDICIDES 44400.00 TOTAL : 302347.00 2. PADDY STOCK CROP 1994-95 HAVE BEEN VALUED AT RS.5,08,02,633.00 WHEREAS THESE SHOULD HAVE BEEN VALUED AT ZERO BEING DAMAGED/NOT FIT FOR MILLING. 50802633.00 26. THE ASSESSEE, THEREAFTER FILED REVISED RETURN C LAIMING THE ABOVESAID LOSS AND ISSUE IS IN RELATION TO ALLOWABI LITY OF SAME. THE LD. AR FOR THE ASSESSEE HAS FAIRLY ADMITTED THAT THE LO SS RELATING TO PRIOR YEAR I.E. PRIOR TO CROP YEAR 1994-95 MAY BE I GNORED. OUT OF 16 PADDY SHORTAGE DEBITED TO MILLERS, THE POSITION WAS ; PADDY OLD SHORTAGE RS. 27134,241/- PADDY CROP 1994-95 RS. 303830,410/- IN RESPECT OF PADDY SHORTAGE DEBITED TO MILLER, CLA IM IS RESTRICTED TO RS. 303,830,410/- I.E. 30.38 CRORES. 27. IN RESPECT OF PADDY SHORTAGE UNDER INVESTIG ATION, THE BIFURCATION OF THE CLAIM WAS AS UNDER : CROP 1992-93 RS. 253,216/- CROP 1993-94 RS. 28,66,725/- CROP 1994-95 RS. 53,783,148/- CROP 1995-96 RS. 85,172,552/- CROP 1996-97 ( RS. 94,073,197/-) (EXCESS) ----------------------- TOTAL : RS. 52002,444/- ----------------------- 28. AS PER THE LD. AR FOR THE ASSESSEE, EARLIER YEA R LOSSES OF RS. 253,216/- AND RS. 2866,725/- MAY BE IGNORED. FURTH ER LOSS OF CROP 1995-96 GETS ADJUSTED TO EXCESS OF CROP 1996-97 AND BALANCE PADDY SHORTAGE UNDER INVESTIGATION AMOUNTS TO : RS. 53,783,148/- (+) RS. 85,172,552/- (-) RS. 94,073,197/- ----------------------------- BALANCE : RS.488,84,603/- ----------------------------- 29. THE THIRD ITEM IS PADDY CROP 1994-95 WHICH HAD BEEN DAMAGED, VALUED AT ZERO, RESULTING IN LOSS OF RS. 5.08 CRORE S. AGAINST THE LOSS ON ACCOUNT OF PADDY SHORTAGE UNDER INVESTIGATION OF RS . 4.88 CRORES + PADDY CROP DAMAGED AT RS. 5.08 CRORES, THE ASSESSEE CLAIMED TO HAVE RECOVERED RS. 8.25 CRORES IN THE SUCCEEDING YEARS. THE FIRST ITEM OF 17 EXPENDITURE IS PADDY SHORTAGE TO MILLERS ON ACCOUNT OF MISAPPROPRIATION OF PADDY BY MILLERS IN CONNIVANCE WITH THE STAFF OF THE ASSESSEE COMPANY. THE CASE OF THE ASSESSEE IS THAT THE SAME IS TO BE ALLOWED IN THE FINANCIAL YEAR 1996-97 AS THE MIS APPROPRIATION WAS DETECTED IN THIS YEAR THOUGH COMPLETE ACTIONS AGAIN ST ALL THE MILLERS WERE NOT TAKEN IN THE YEAR 1996-97 AND VARIOUS PROC EEDINGS WERE INITIATED AND AGAINST SOME, THE SAME HAD TO BEGIN B UT STILL LOSS WAS ALLOWABLE IN THE YEAR OF DISCOVERY. 30. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN PUNJ AB STEEL STOCKHOLDERS SYNDICATE LTD. VS CIT 125 ITR 519 (P&H ) WHILE CONSIDERING THE ISSUE OF LOSS BY EMBEZZLEMENT HAD H ELD THAT LAUNCHING OF CRIMINAL PROCEEDINGS WAS A RELEVANT PIECE OF EVI DENCE FOR PROVING LOSS BY EMBEZZLEMENT BUT THE CULMINATION OF SUCH PR OCEEDINGS IN THE CONVICTION OF THE ACCUSED IS NOT NECESSARY TO PROVE THE LOSS. THE HON'BLE HIGH COURT HELD AS UNDER : 7. AFTER HEARING THE LEARNED COUNSEL FOR THE PARTI ES AND GOING THROUGH THE RECORDS OF THE CASE, WE HAVE COME TO TH E CONCLUSION THAT IT IS NOT POSSIBLE FOR US TO ANSWER THE QUESTI ONS REFERRED TO US AND WE ARE OF THE OPINION THAT IT IS A FIT CASE WHI CH SHOULD BE SENT BACK TO THE TRIBUNAL FOR REDECIDING THE APPEALS OF THE ASSESSEE. THE TRIBUNAL VIEWED THE CONTENTIONS OF THE ASSESSEE FROM A COMPLETELY DIFFERENT ANGLE FROM THE ONE FROM WHICH THE SAME SHOULD HAVE BEEN VIEWED. IT CANNOT BE DISPUTED THAT IF THE EMBEZZLEMENT IS PROVED BY THE ASSESSEE, THE SAME CA N BE CLAIMED AS BUSINESS LOSS. IT IS NO DOUBT TRUE THAT EMBEZZLE MENT IS A CRIMINAL OFFENCE AND IF, IN A GIVEN CASE, CRIMINAL PROCEEDINGS HAVE BEEN LAUNCHED, THIS MAY BE ONE OF THE RELEVANT PIECES OF EVIDENCE FOR PROVING THE LOSS BUT THE CULMINATION O F SUCH PROCEEDINGS IN THE CONVICTION OF THE ACCUSED IS NOT NECESSARY TO PROVE THE LOSS. IF THE ASSESSEE IS ABLE TO PLACE RE LEVANT MATERIAL BEFORE THE AUTHORITIES FOR PROVING THE LOSS IRRESPE CTIVE OF THE FACT WHETHER THE ACCUSED CHARGED OF EMBEZZLEMENT HAS BEE N CONVICTED 18 OR NOT THE AUTHORITIES CANNOT REFUSE TO CONSIDER TH E MATERIAL BY OBSERVING THAT THE CONVICTION OF THE PERSON ACCUSED OF EMBEZZLEMENT, HAS NOT BEEN RECORDED. IN THE PRESENT CASE, THE ASSESSEE PRODUCED ITS BALANCE-SHEETS, AUDIT REPORT, COPY OF THE FIRST INFORMATION REPORT, COPY OF THE LETTER DATED 10TH SEPTEMBER, 1969, OF THE ASSESSEE ALONG WITH ITS ENCLOSURE. THE TRIBUNAL OBSERVED THAT THERE WAS ONLY SUSPICION AGAINST SHRI D.D. MEHTA AND THAT THERE WAS ONLY A CHARGE OF EMBEZZLEMENT AG AINST HIM. IT WAS FURTHER OBSERVED THAT TILL THE CRIMINAL CASE PE NDING AGAINST SHRI MEHTA IS DECIDED AGAINST HIM, IT COULD NOT BE SAID WITH ANY DEGREE OF CERTAINTY THAT ANY EMBEZZLEMENT HAD TAKEN PLACE OR THAT SHRI D.D. MEHTA IS GUILTY OF ANY OFFENCE. THIS OBSE RVATION OF THE TRIBUNAL, IN OUR VIEW, IS UNCALLED FOR. IN A GIVEN CASE, EVEN IF THE PERSON, WHO IS ACCUSED OF EMBEZZLEMENT, IS ACQUITTE D, STILL IF PROPER EVIDENCE IS LED BEFORE THE AUTHORITIES, THE AUTHORITIES ARE BOUND TO CONSIDER THE MATERIAL WITH A VIEW TO FIND OUT IF THE LOSS IS PROVED OR NOT. THE OBSERVATION OF THE TRIBUNAL THAT NO DIRECTOR OR ANY OTHER WITNESS HAS APPEARED BEFORE THE ITO, IS N OT RELEVANT AS THE RESOLUTION OF THE BOARD OF DIRECTORS WAS PLACED ON THE RECORD. THE FURTHER OBSERVATION THAT SHRI D. D. MEHTA HAS N OT BEEN EXAMINED BY THE ASSESSEE, IS AGAIN IRRELEVANT AS IT CANNOT BE EXPECTED THAT THE PERSON WHO IS CHARGED OF EMBEZZLE MENT IS LIKELY TO CONFESS IN EVERY CASE BEFORE THE AUTHORITIES THA T HE IS GUILTY OF HAVING EMBEZZLED THE AMOUNT ESPECIALLY WHEN HE IS B EING TRIED IN A CRIMINAL TRIAL. MOREOVER, IT IS NOT NECESSARY FOR THE ASSESSEE TO PROVE THAT THE EMBEZZLEMENT WAS DONE BY A PARTICULA R EMPLOYEE. IF THE LOSS BY WAY OF EMBEZZLEMENT IS PROVED, THE ASSE SSEE IS ENTITLED TO CLAIM SET-OFF. THE OBSERVATION OF THE TRIBUNAL T HAT THERE IS NO MATERIAL ON THE RECORD TO HOLD THAT THE ALLEGED EMB EZZLEMENT OF THE RELEVANT AMOUNTS OCCURRED IN THE RESPECTIVE ASS ESSMENT YEARS, IS AGAIN IRRELEVANT. IT IS WELL SETTLED THAT IF THE LOSS IS NOT KNOWN, AND IT COMES TO BE KNOWN DURING A PARTICULAR ASSESS MENT YEAR, THE ADJUSTMENT CAN BE CLAIMED IN THE ASSESSMENT YEAR WH EN IT CAME TO BE KNOWN. THE MATERIAL PRODUCED BY THE ASSESSEE BEF ORE THE TRIBUNAL WAS NOT AT ALL CONSIDERED BY THE TRIBUNAL FROM A TRUE PERSPECTIVE. IT IS, THEREFORE, OBVIOUS THAT IRRELEV ANT CONSIDERATIONS GOT IN AND THE TRIBUNAL WITHOUT CONSIDERING THE MAT ERIAL REJECTED THE CLAIM OF THE ASSESSEE. IN THE CIRCUMSTANCES OF THE CASE, WE FEEL 19 THAT IT IS NOT POSSIBLE FOR US TO ANSWER QUESTION N O. 1. SINCE THE DECISION OF QUESTION NO. 2 IS DIRECTLY LINKED WITH QUESTION NO. 1, THEREFORE, IT IS ALSO NOT POSSIBLE FOR US TO ANSWER THE SAME.. 31. THE HON'BLE GUJRAT HIGH COURT IN DINESH MILLS L TD. VS CIT [254 ITR 673 (GUJ)] HAVE HELD THAT THE LOSS ON ACCOUNT O F EMBEZZLEMENT BY EMPLOYEE WAS ALLOWABLE IN THE YEAR OF DISCOVERY. S UCH LOSS WAS HELD BY THE HON'BLE HIGH COURT TO BE INCIDENTAL TO BUSIN ESS CARRIED ON BY THE ASSESSEE. HOWEVER, THE ISSUE WAS RESTORED BACK TO THE TRIBUNAL TO ASCERTAIN THE ALLOWABILITY OR OTHERWISE OF THE LOSS IN VIEW OF THE STATEMENT TO THE EFFECT THAT NO DEDUCTION HAD BEEN ALLOWED IN ANY SUBSEQUENT YEAR. 32. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN CIT VS M/S PUNJAB STATE WAREHOUSING CORPORATION, CHANDIGARH IN IT APP EAL NO. 275 OF 2010 VIDE DECISION DATED 30.07.2010 HAD ALLOWED THE CLAIM OF RECOVERY FROM MILLERS WRITTEN OFF AS BAD DEBT SUBJECT TO VER IFICATION. 33. NOW COMING TO THE FACTS OF THE PRESENT CASE, IN VIEW OF THE RATIO LAID DOWN BY THE HON'BLE PUNJAB & HARYANA HIGH COUR T IN PUNJAB STEEL STOCKHOLDERS SYNDICATE LTD. VS CIT (SUPRA) AND HON' BLE GUJRAT HIGH COURT IN DINESH MILLS LTD. VS CIT (SUPRA), WE HOLD THAT THE MIS- APPROPRIATION OF THE STOCK BY THE MILLER AND ALSO L OSS ARISING ON ACCOUNT OF PADDY SHORTAGE UNDER INVESTIGATION ARE I N THE NATURE OF EMBEZZLEMENT. THE ASSESSEE CLAIMS TO HAVE INITIATE D CRIMINAL PROCEEDINGS AGAINST THE MILLERS AND IN SOME CASES E VEN ARBITRATION PROCEEDINGS HAVE BEEN INITIATED. THE HON'BLE PUNJA B & HARYANA HIGH COURT IN PUNJAB STEEL STOCKHOLDERS SYNDICATE LTD. V S CIT (SUPRA) HAVE HELD THAT THE CULMINATION OF THE CRIMINAL PROCEEDIN GS IS NOT THE DETERMINING FACTOR FOR ALLOWING THE LOSS, WHERE THE LOSS HAD OCCURRED DURING THE COURSE OF CONDUCT OF THE BUSINESS. THE ASSESSEE BEFORE US 20 HAD HANDED OVER PADDY TO THE MILLERS, WHO IN-TURN W ERE THE CUSTODIAN OF THE SAID PADDY ON BEHALF OF THE ASSESSEE BUT THE SAME HAD BEEN MIS- APPROPRIATED BY THE SAID MILLERS AND ON VERIFICATIO N, THE SAID PADDY WAS NOT FOUND AVAILABLE WITH THE SAID MILLERS. FUR THER, THERE WAS CERTAIN AMOUNT OF PADDY SHORTAGE DETECTED WHICH WAS UNDER INVESTIGATION. THE ASSESSEE CLAIMS TO HAVE RECOVER ED PART OF THE AMOUNT AGAINST PADDY SHORTAGE UNDER INVESTIGATION. IN THE ENTIRETY OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD TH AT THE ASSESSEE IS ENTITLED TO SUCH CLAIM OF PADDY SHORTAGE DEBITED TO MILLERS WHERE THE ASSESSEE HAD INITIATED CRIMINAL PROCEEDINGS AGAINST THE MILLERS OR HAD STARTED ARBITRATION PROCEEDINGS IN THIS REGARD. BUT WHERE THE ASSESSEE HAS FAILED TO TAKE ANY ACTION AGAINST THE MILLER TH EN, SUCH LOSS IS NOT ALLOWABLE IN THE HANDS OF THE ASSESSEE. THOUGH A L IST OF MILLERS HAS BEEN PLACED ON RECORD AGAINST WHOM CRIMINAL PROCEED INGS HAVE BEEN INITIATED BUT TOTAL DETAILS ARE NOT AVAILABLE AS IN THE SAID LIST ONLY THE QUANTITY OF THE PADDY MIS-APPROPRIATED IS MENTIONED AND NOT THE VALUE OF THE SAID PADDY MIS-APPROPRIATED. IN VIEW THEREO F, FOR THE LIMITED PURPOSE OF VERIFYING AND DETERMINING THE QUANTUM OF SUCH LOSS WHERE THE ASSESSEE HAS EITHER STARTED CRIMINAL PROCEEDING S AGAINST THE MILLERS OR INITIATED ARBITRATION PROCEEDINGS, WE REMIT THIS ISSUE BACK TO THE FILE OF ASSESSING OFFICER WHO SHALL VERIFY THE CLAIM OF THE ASSESSEE IN LINE WITH OUR DIRECTIONS AND COMPUTE THE LOSS IN THE HAN DS OF THE ASSESSEE. 34. WE FIND NO MERIT IN THE ORDER OF THE ASSESSING OFFICER IN HOLDING THAT THE SAID LOSS HAVING BEEN CLAIMED BY WAY OF RE VISED RETURN, CANNOT BE ENTERTAINED OR ALLOWED IN THE HANDS OF THE ASSES SEE. THE PERUSAL OF THE RECORD REFLECTS THE ASSESSEE TO HAVE DECLARED T HE SAID AMOUNTS AS NOT RECOVERABLE IN THE ORIGINAL AUDIT REPORT ITSELF AND THEREAFTER REVISED RETURN WAS FILED IN VIEW OF THE COMMENTS OF THE AUD ITORS. THE SAID 21 CLAIM IS DULY ALLOWABLE IN THE HANDS OF THE ASSESSE E SUBJECT TO VERIFICATION. 35. THE THIRD ITEM OF THE LOSS CLAIMED BY THE ASSES SEE IS ON ACCOUNT OF THE DAMAGED STOCK WHICH, INITIALLY WAS VALUED AT RS. 5.08 CRORES AND SHOWN AS PART OF THE STOCK IN THE ORIGINAL RETURN O F INCOME FILED BY THE ASSESSEE. THE SAME WAS REDUCED TO NIL IN THE REV ISED RETURN FILED BY THE ASSESSEE. HOWEVER, THE ASSESSEE HAS FAILED TO BRING ON RECORD ANY EVIDENCE TO PROVE THAT THE SAID STOCK OF THE ASSESS EE HAS BEEN DAMAGED AND ITS VALUE HAS BEEN REDUCED TO NIL. IN THE AB SENCE OF ANY EVIDENCE HAVING BEEN FILED BY THE ASSESSEE, MERE RECITAL IN THE REVISED BALANCE SHEET AND PROFIT & LOSS ACCOUNT DOES NOT ESTABLISH THE CLAIM OF THE ASSESSEE AND IN VIEW THEREOF, WE FIND NO MERIT IN T HE SAID CLAIM AND THE SAME IS REJECTED. THE ADDITION OF RS. 5.08 CRORES IN THIS REGARD IS, THUS UPHELD. WE FIND NO MERIT IN THE PLEA OF THE ASSESS EE THAT RECOVERY AGAINST THE SAID PADDY VALUED AT ZERO HAD BEEN MADE IN THE SUCCEEDING YEAR IN THE ABSENCE OF ANY CONCRETE EVIDENCE BEING FILED THAT SAID RECOVERY WAS AGAINST THE DAMAGED STOCK OR AGAINST S OME OTHER ITEM. THE GROUND NO.1 IS ALLOWED FOR STATISTICAL PURPOSE AND GROUND NO. 2 RAISED BY THE ASSESSEE IS, THUS DISMISSED. 36. THE LD. AR FOR THE ASSESSEE FAIRLY ADMITTED THA T THE ISSUES RAISED IN GROUND NOS. 3 TO 6 ARE COVERED BY THE ORDERS OF THE TRIBUNAL IN ASSESSEE'S OWN CASE IN THE EARLIER YEARS. 37. THE ISSUE IN GROUND NO. 3 RAISED BY THE ASSESSE E IS AGAINST DISALLOWANCE OF DEDUCTION UNDER SECTION 80P(2)(A)(I V) OF THE INCOME- TAX ACT ON ACCOUNT OF INCOME FROM AGRO CHEMICALS, M OHALI. SIMILAR ISSUE AROSE BEFORE THE TRIBUNAL IN ASSESSEE'S OWN C ASE IN ITA NO. 79/CHD/2004 RELATING TO ASSESSMENT YEAR 2000-01 AND VIDE ORDER DATED 07.11.2005, THE TRIBUNAL VIDE PARA 8 HELD THAT THE DEDUCTION UNDER 22 SECTION 80P(2)(A)(IV) WAS AVAILABLE ONLY IN RESPECT OF INCOME EARNED BY WAY OF TRADING OF ITEMS INTENDED FOR AGRICULTURE FO R THE PURPOSE OF SUPPLYING THEM TO ITS MEMBERS AND THE SAME WAS NOT AVAILABLE IN CASE OF ITEMS PROCESSED OR MANUFACTURED THROUGH THE INDU STRIAL ACTIVITIES. THE ASSESSEE IN THE PRESENT CASE HAD CLAIMED THE SA ID DEDUCTION AGAINST THE MANUFACTURING ACTIVITY CARRIED OUT BY THE ASSES SEE AT MOHALI. FOLLOWING THE RATIO LAID DOWN BY THE TRIBUNAL IN AS SESSEE'S OWN CASE IN ASSESSMENT YEAR 2000-01, WE DISMISS GROUND NO. 3 RA ISED BY THE ASSESSEE. 38. THE GROUND NO. 4 RAISED BY THE ASSESSEE IS AGAI NST THE DISALLOWANCE OF DEDUCTION UNDER SECTION 80P(2)(A)(I II) OF THE ACT ON ACCOUNT OF INCOME FROM AGRICULTURE PRODUCE I.E. WHE AT AND PADDY. THE LD. AR FOR THE ASSESSEE FAIRLY ADMITTED THAT THE SA ID ISSUE WAS DECIDED AGAINST THE ASSESSEE BY AN ELABORATE ORDER IN MISCE LLANEOUS APPLICATION NO. 5 OF 99 IN ITA NO. 1327 OF 1995 VID E ORDER DATED 22.7.2003 AND MISCELLANEOUS APPLICATION NO.6 OF 199 9 IN ITA NO. 666 OF 1996 IN VIDE ORDER DATED 22.07.2003. THE COPY O F THE ORDER HAS BEEN PLACED ON RECORD AND FOLLOWING THE SAME PARITY OF REASONING, WE DISMISS GROUND NO. 4 RAISED BY THE ASSESSEE HOLDING IT NOT TO BE ENTITLED TO CLAIM OF DEDUCTION UNDER SECTION 80(P)( 2)(A)(III) OF THE ACT ON ACCOUNT OF INCOME FROM AGRICULTURE PRODUCE AND P ROPORTIONATE EXPENSES. 39. THE GROUND NO. 5 RAISED BY THE ASSESSEE IS AGAI NST THE CLAIM OF DEDUCTION UNDER SECTION 80(P)(2)(A)(E) ON ACCOUNT O F STORAGE RENTAL INCOME PROPORTIONATE EXPENSES TO BE REDUCED. THE T RIBUNAL IN ITA NO. 319/CHD/2004 VIDE ORDER DATED 8.9.2005 AND ITA NO. 533/CHD/1999 AND ITA NO.1002/CHD/1999 VIDE ORDER DATED 16.09.200 4 DISALLOWED THE 23 CLAIM OF THE ASSESSEE. THE TRIBUNAL VIDE ORDER DAT ED 16.09.2004 IN PARA 4 HELD AS UNDER : WE HAVE HEARD THESE MATTERS ALONG WITH THE APPEALS IN HARYANA STATE CO-OPERATIVE SUPPLY & MARKETING FEDER ATION LTD., PANCHKULA VS. ASSISTANT COMMISSIONER OF INCOM E-TAX, PANCHKULA CIRCLE, PANCHKULA IN ITA NO. 681 TO 683/CHANDI/2002 & 935/CHANDI/95 FOR THE ASSESSMENT YEARS 97-99 TO 99-2000 AND 94-95 RESPECTIVELY AND VIDE OU R ORDER OF EVEN DATE WE HAVE HELD THAT THE A.O. WAS JUSTIFI ED IN ASSUMING THE INCOME OF LETTING OUT OF GODOWNS/WAREH OUSES ETC. AS INCOME FROM BUSINESS AND THAT IN COMPUTING THE INCOME ELIGIBLE TO DEDUCTION UNDER SECTION 80P(2)(E ), THE INCOME IS TO BE COMPUTED AFTER TAKING INTO ACCOUNT THE DIRECT EXPENSES AS WELL AS PROPORTIONATE ADMINISTRATIVE EX PENSES AND OFFICE OVERHEAD EXPENSES. WE RESPECTFULLY FOLL OWING THE AFORESAID ORDER TAKE THE VIEW IN RESPECT OF SIMILAR FACTS INVOLVED IN THESE APPEALS IN HARYANA STATE CO-OPERA TIVE SUPPLY & MARKETING FEDERATION LTD., PANCHKULA VS. A SSISTANT COMMISSIONER OF INCOME-TAX, PANCHKULA CIRCLE, PANCH KULA, WE HAVE ASKED THE A.O. TO RE-DETERMINE THE DEDUCTIO N IN THE LIGHT OF THE CLAIM OF THE ASSESSEE THERE BEING A MI STAKE IN CALCULATING THE EXPENSES. THE LD. COUNSEL FOR THE ASSESSEE HAS ALSO MADE SIMILAR CLAIM IN THESE CASES. WE ACC ORDINGLY REMIT THE ISSUE TO THE A.O. FOR THE LIMITED PURPOSE OF RECALCULATING THE PROPORTIONATE EXPENSES FOR DETERM INING THE EXACT AMOUNT OF DEDUCTION PERMISSIBLE UNDER SECTION 80P(2)(E). WE DIRECT ACCORDINGLY. 40. THE FACTS OF THE PRESENT CASE ARE IDENTICAL TO THE FACTS BEFORE THE TRIBUNAL IN EARLIER YEARS AND FOLLOWING THE SAME PA RITY OF REASONING, WE HOLD THAT THE ASSESSEE IS NOT ENTITLED TO DEDUCT ION UNDER SECTION 80P(2)(E) OF THE ACT. ACCORDINGLY, GROUND NO. 5 RA ISED BY THE ASSESSEE IS DISMISSED. 24 41. THE LAST GROUND RAISED BY THE ASSESSEE IS AGAIN ST LEVY OF INTEREST UNDER SECTION 234B OF THE ACT, WHICH IS CONSEQUENTI AL IN NATURE AND HENCE, THE GROUND OF APPEAL RAISED BY THE ASSESSEE IS DISMISSED. 42. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 29 TH DAY OF AUGUST, 2013. SD/- SD/- (T.R.SOOD) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 29 TH AUGUST,2013 POONAM COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR BY ORDER ASSISTANT REGISTRAR, ITAT, CHANDIGARH