THE THE WASHIM URBAN C OP BAN LTD, WASHIM V. D.C.I.T. AKOLA CIRCLE, Akola

ITA 340/NAG/2015

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 5041 (ITAT-NAGPUR)
• Duration Of Justice: 4 year(s) 2 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-02-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2011-2012
• Appeal Filed On: 08-12-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: U U KASAR
• Keywords: Business income; Business expenditure; Bad and doubtful debts; Commercial expediency; Capital expenditure; Set aside
• Section: 13; 37

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL BENCH, NAGPUR (AT E - COURT, PUNE) BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI PARTHA SARATHI CHAUDHURY , JM . / I TA NO. 340 /NAG /20 15 / ASSESSMENT YEAR : 2011 - 12 THE WASHIM URBAN CO - OPERATIVE BANK LTD. LATE R.G. RATHI MARG, RAVIVAR BAZAR, WASHIM DIST. WASHIM - 444505 PAN : AAAJT0115F ....... / APPELLANT / V/S. THE DEPUTY COMMISSIONER OF INCOME TAX, AKOLA CIRCLE, AKOLA. / RESPONDENT A SSESSEE BY : SHRI K.P DEWANI REVENUE BY : SHRI U.U. KASAR, SR. DR / DATE OF HEARING : 1 9 .0 2 .2020 / DATE OF PRONOUNCEMENT : 20 .02 .2020 / ORDER PER PARTHA SARATHI CHAUDHU RY, JM : THIS APPEAL PREFERRED BY THE ASSESSEE EMANATES FROM THE ORDER OF THE LD. CIT(APPEALS) - 1, NAGPUR DATED 28.09.2015 FOR THE ASSESSMENT YEAR 2011 - 12 AS PER THE GROUNDS OF APPEAL ON RECORD . 2 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 2. THOUGH THE ASSESSEE HAS PREFERRED MULTIPLE GROUNDS OF APPEAL, ALL THESE GROUNDS ARE INTERCONNECTED AND ULTIMATELY, THE GRIEVANCE OF THE ASSESSEE IS WITH REGARD TO THE ACTION OF THE LD. CIT(APPEALS) IN UPHOLDING THE VIEW TAKEN BY THE ASSESSING OFFICER IN RESPECT OF FRAUD AND EMBEZZLEMENT AT RS.52,30,000/ - . 3. BEFORE THE LD. CIT(APPEALS), THE ASSESSEE HAS SUBMITTED ON RECORD THAT THE AMOUNT OF RS. 52,30,000/ - A S CLAIMED BY THE ASSESSE E I S LOSS DUE TO FRAUD AND EMBEZZLEMENT. THE ASSESSEE HAS FILED ITEM WISE EXPLANATIONS WHICH ARE AS FOLLOWS: IN THE CASE OF THIS ASSESSEE THERE IS EMBEZZLEMENT BY EMPLOYEE OF THE OLD CLOTH MARKET BRANCH, AKOLA BANK, THE AMOUNT IS MENTIONED AT NO.1 OF TH E STATEMENT. IN THE WASHIM BRANCH EMPLOYEES HAVE COLLECTED BILLS ON BEHALF OF MSEB AND DID NOT DEPOSIT THE AMOUNT IN THE BANK, THIS HAS HAPPENED IN THE COURSE OF BANKING BUSINESS, IT AS SR. NO.2 OF THE STATEMENT. ITEM NO.3, 4, 5 & 6 OF THE STATEMENT ARE IN RESPECT OF THE DEBIT BALANCES AT WASHIM BRANCH, RISOD BRANCH, AKOT MOTOR STAND BRANCH AND KEDIA PLOT BRANCH IN THE CURRENT ACCOUNT AND SAVING ACCOUNT OF THE CUSTOMERS. THE EMPLOYEES HAVE PASSED THE CHEQUES EITHER WITHOUT VERIFYING THE CREDIT BALANCE OR IN ANTICIPATION OF CLEARING OF CHEQUES DEPOSITED BY THE CUSTOMERS. THIS AMOUNT COULD NOT BE RECOVERED HENCE WRITTEN OFF. ITEM NO.7 OF THE STATEMENT IS IN RESPECT OF FRAUD COMMITTED BY RECURRING DEPOSIT AGENT. THE RD AGENT COLLECTED MONEY FROM CUSTOMERS AND D ID NOT DEPOSIT THE AMOUNT WITH BANK. HE HAS GIVEN RECEIPTS TO THE CUSTOMERS. OUT OF THE TOTAL AMOUNT OF RS.300000/ - BONK COULD RECOVER RS.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 RS.1709914/ - AT AMRAVATI IN CLEARING HOUSE. OUT OF THIS BANK COULD RECOVER RS.776000/ - AND THE BALANCE AMOUNT RS.933914/ - COULD NOT BE RECOVERED. THEREFORE DEBITED TO PROF IT 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. 3 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 ITEM. NO. 10 OF THE STATEMENT IS IN RESPECT OF SHARE AMOUNT RS.850 0/ - 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 RS.10 LACS WITH MAA SHARADA MAHILA NAGARI SAHAKARI BANK LTD. BUSINESS OF THE ASSESS ES BANK IS TO EARN INTEREST ON LOANS, ADVANCES AND SECURITIES. IN THIS COURSE OF BUSINESS ASSESSES MADE DEPOSITS WITH THE ABOVE BANK AND EARNED INTEREST. ASSESSEE MADE DEPOSITS OF RS.55 LACS AND RECEIVED BACK RS.45 LACS AND THE BALANCE AMOUNT RS.10 LACS CO ULD NOT BE RECOVERED BECAUSE OF FRAUD AND MISMANAGEMENT IN THAT BANK. THE SAID BANK HAS BEEN CLOSED AND RECEIVER WAS APPOINTED BY THE COOPERATIVE DEPARTMENT AND THIS ASSESSEE COULD NOT RECOVER ANYTHING AND THEREFORE THE AMOUNT HAS BEEN WRITTEN OFF IN PROFI T AND LOSS ACCOUNT. COPY OF ACCOUNT OF MAA SHARDA BANK IS ENCLOSED HEREWITH. ITEM NO.2 ON PG. NO.2 OF THE STATEMENT IS IN RESPECT OF LEGAL CHARGES DEBITED TO THE ACCOUNT OF DEFAULTER. AS PER LAW LEGAL CHARGES CANNOT BE DEBITED TO THE ACCOUNT OF DEFAULTER B UT IT IS AN EXPENDITURE INCURRED BY THE BANK AND TO BE CLAIMED IN PROFIT AND LOSS ACCOUNT. THEREFORE NOW THE AMOUNT IS DEBITED TO THE PROFIT AND LOSS ACCOUNT.' 3.1 THE LD. AR OF THE ASSESSEE BEFORE THE LD. CIT(APPEALS) IN SUPPORT OF HIS CLAIM HAS SUBMITTE D FOLLOWING JUDICIAL PRONOUNCEMENTS WHICH READS AS UNDER: 1. 34 ITR 10 [S.C.] BADRIDAS DAGAVS COMMISSIONER OF INCOME TAX BUSINESS INCOME - LOSS - EMBEZZLEMENT BY AGENT - AGENT HOLDING POWER OF ATTORNEY TO ASSESSEE'S BANK ACCOUNT - LOSS IS INCIDENTAL TO BUSINESS, HENCE ALLOWABLE. 2. 55 ITR 707 (S.C.) - COMMISSIONER OF INCOME TAX VS NAINITAL BANK LTD. - BUSINESS INCOME - BUSINESS LOSS - LOSS BY DACOITY - CASH IS STOCK IN TRADE OF A BANKING BUSINESS AND ITS LOSS IN THE COURSE OF ITS BUSINESS UNDER VARYIN G CIRCUMSTANCES IS DEDUCTIBLE AS A TRADING LOSS IN COMPUTING THE TOTAL INCOME OF THE BUSINESS - BUT EVERY LOSS IS NOT SO DEDUCTIBLE UNLESS IT IS INCURRED IN CARRYING OUT THE OPERATION OF THE BUSINESS AND IS INCIDENTAL TO THE OPERATION - RETENTION OF MONEY IN THE BANK PREMISES CARRIES WITH IT THE ORDINARY RISK OF ITS BEING SUBJECTED TO EMBEZZLEMENT, THEFT, DACOITY OR DESTRUCTION BY FIRE AND SUCH OTHER THINGS - SUCH RISK OF LOSS IS INCIDENTAL TO CARRYING ON OF THE OPERATION OF BUSINESS OF BANKING - THEREFORE, THE LOSS OF CASH BY DACOITY IS AN ADMISSIBLE DEDUCTION. 3. 111 ITR 263 (S .C.) RAMCHANDAR SHIVNARAYAN VS COMMISSIONER OF INCOME TAX - BUSINESS INCOME - LOSS BY THEFT - ASSESSEE HAD BORROWED A SUM OF RS.50000/ - FROM SOME CREDITOR - MONEY WAS BROUGHT IN CASH TO THE TOWN BY ITS EMPLOYEE OUT OF THE SAID SUM WHICH WAS MEANT FOR PUR CHASE OF GOVT. SECURITIES A SUM OF RS.30000/ - WAS LOST BY THEFT - LOSS 4 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 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 AN D 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 B USINESS 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 INCOME - LOSS B Y EMBEZZLEMENT - YEAR OF ALLOWABILITY - LOSS ON ACCOUNT OF EMBEZZLEMENT BY AN EMPLOYEE WAS ALLOWABLE BEING INCIDENTAL TO BUSINESS - IT WAS DISCOVERED DURING THE YEAR UNDER CONSIDERATION AND NO DEDUCTION HAS ALLOWED IN ANY SUBSEQUENT YEAR - ASSESSEE ENTITLE D TO DEDUCTION IN THE RELEVANT YEAR SUBJECT TO VERIFICATION OF AFORESAID FACT BY THE TRIBUNAL. 7. 296 JTR 290 (P&H) COMMISSIONER OF INCOME TAX US SMT. PUKHRAJWATI BUBBER - BUSINESS INCOME - BUSINESS LOSS - EMBEZZLEMENT BY AGENT - IF A LOSS IS DIRECTLY CONNE CTED WITH THE BUSINESS OPERATION AND IS INCIDENTAL TO CARRYING ON OF BUSINESS, SAME HAS TO BE ALLOWED AS A DEDUCTION ASSESSEES REPRESENTATIVE COLLECTED AMOUNTS FROM CUSTOMERS BUT DID NOT PAY THE SAME TO THE ASSESSEE - LOSS ON ACCOUNT OF EMBEZZLEMENT OF M ONEY IS INCIDENTAL TO THE CARRYING ON THE BUSINESS AND HAS A DIRECT AND PROXIMATE CONNECTION WITH THE BUSINESS OPERATION OF THE ASSESSEE - SANE RIGHTLY ALLOWED AS DEDUCTION. 8. 56 ITR 1 (SC) ASSOCIATED BANKING CORPORATION OF INDIA LTD. VS. CIT - BUSINESS IN COME EMBEZZLEMENT BY SECRETARY - ASSESSEE BANK HAD TO PAY LARGE AMOUNT TO ITS CONSTITUENTS TO SATISFY THE LIABILITY ARISING OUT OF SECRETARYS DEALING LOSS WAS THEREFORE SUFFERED BY ASSESSEE BANK. 4. THE LD. CIT (APPEALS) ON THE ISSUE OBSERVED THAT THE LOSS CLAIMED BY THE ASSESSEE DURING THE YEAR UNDER APPEAL RELATES TO A.Y.2004 - 05 AND ONWARDS. IT IS FURTHER NOTED THAT THE LOSS HAS BEEN CLAIMED IN RESPECT OF DIFFERENT ITEMS OF FRAUDS AND EMBEZZLEMENTS EITHER BY T HE EMPLOYEES OF THE BANK OR BY THE EMPLOYEES OF THE OTHER BANKS WITH THE CONNIVANCE BANK EMPLOYEES. IT IS ALSO 5 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 FACT THAT THE BANK HAS FILED POLICE COMPLAINTS AGAINST THE DEFAULTER EMPLOYEES AND THE MATTER BEING SUB - JUDICED HAS NOT YET ATTAINED THE FINALITY . THEREAFTER, THE LD. CIT(APPEALS) ALSO OBSERVED THAT SINCE THERE ARE LEGAL PROCEEDINGS PENDING AGAINST ALL THOSE DEFAULTERS, THEREFORE, POSSIBILITY OF RECOVERY CANNOT BE RULED OUT AND THEREFORE, THE LD. CIT(APPEALS) HELD THAT THE LOSS CLAIMED BY THE ASSE SSEE DOES NOT FALL WITHIN THE AMBIT OF BAD DEBTS U/S.36(II) OF THE ACT AND ACCORDINGLY, THE LD. CIT(APPEALS) UPHELD THE ADDITION. 5. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT COMPLETE DETAILS OF CLAIM OF LOSS OF RS.52,30,000/ - GIVEN ITEM WISE BEFORE THE ASSESSING OFFICER AND THE LD. CIT(APPEALS) EXPLAINING REASONS 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 H AS 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 H AS BEEN TAKEN BY THE L D. 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 6 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 OCM BRANCH, AKOLA. THE AFORESAID EMPLOYEE HAS COMMITTED SUICIDE AND COPY OF FIR HAS BEE N SUBMITTED. THE ASSESSEE HAS MADE ATTEMPT TO RECOVER FROM LEGAL HEIRS AND HAS FAILED TO RECOVER AMOUNT FROM THEM. THE MATTER IS MORE THAN 12 YEAR S OLD AND THERE IS NO RAY OF HOP E OF RECOVERY OF AMOUNT. IT IS UNDER SUCH COMPELLING CIRCUMSTANCES THE AFORESAID AMOUNT HAS BEEN WRITTEN OFF AS LOSS. THAT FURTHER, EMPLOYEES HAVE BEEN TERMINATED AND COMPLAINT FILED BEFORE POLICE STATION HAS NOT YIELD IN RECOVERY OF ANY AMOUNT. THE MATTER IS 10 YEARS OLD AND THE ASSESSEE HAS NOT BEEN ABLE TO RECOVER ANY AMOUNT. 5.2 THE LD. COUNSEL VEHEMENTLY ARGUED THAT IN RESPECT OF ALL THESE LOSSES SUFFERED DUE TO FRAUD AND EMBEZZLEMENT, THE ASSESSEE HAS TAKEN LEGAL ACTION AND ALL THE EVIDENCES ARE FURNISHED BEFORE THE DEPARTM ENT WHICH IS ON RECORD. THERE HAVE BEEN FIR FILED AND THE GUILTY EMPLOYEES HAVE BEEN ALSO TERMINATED FROM THEIR SERVICE. THE LD. AR FURTHER CONTENDED THAT TRADING LOSS ON ACCOUNT OF EMBEZZLEMENT AND FRAUD IS TO BE ALLOWED IN THE YEAR IN WHICH THE AMOUNT IS WRITTEN OFF AS IRRECOVERABLE AND RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS: (I) LORDS DAIRY FARM VS. CIT, 27 ITR 700 ( BOM.) (II) ABOVE JUDGMENT IS NOTED WITH APPROVAL BY HONBLE APEX COURT IN BEDRIDAS DAGA VS. CIT, 34 ITR 10 (SC) (III) BALLARPU R INDUSTRIES LTD. IN ITA NO.91/ NAG/2011 VIDE ORDER DATED 16.04.2018, 168 DTR 225. 5.3 THE LD. AR OF THE ASSESSEE FURTHER SUBMITTED THAT ALL THE CASES OF FRAUD AND EMBEZZLEMENT ARE BY EMPLOYEES AND AGENT AND LOSSES HAVE BEEN SUFFERED IN THE COURSE OF CARRYING ON DAY TO DAY ACTIVITIES OF BUSINESS OF BANKING. THE LOSS BY FRAUD AND EMBEZZLEMENT BY EMPLOYEES/AGENT BEING INCIDENTAL TO THE 7 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 BANKIN G BUSINESS IS ALLOWABLE DEDUCTION AND RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS: (I) BADRIDAS DAGA VS. CIT, 34 ITR 10 (SC) (II) CIT VS. NAINITAL BANK LTD. 55 ITR 707 (SC) (III) J & K BANK LTD. VS. ACIT, 157 DTR 361 (J & K) (IV) SASSON J DAVID AND COMPANY (P) LTD., 98 ITR 50 ( BOM.) (V) HARIJAN EVAM NIRBAL VARG AVAS NIGAM LTD. VS. CIT, 229 ITR 776 (ALL) (VI) PUNJAB STEEL STOCKHOLDERS SYNDICATE LTD. VS. CIT, 125 ITR 519 ( PUBJAB & HARYANA) (V) CIT VS. SMT. PUKHRAJ WATI BUBBER, 296 ITR 290 ( P UNJAB & HARYANA) IT IS THE CONTENTION OF THE LD. AR THAT RATIO LAID DOWN 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 RS.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). 8 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 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 INCIDENTAL TO THE ACTI VITIES OF BANKING AND THEREFORE, ALLOWABLE BUSINESS LOSS. THE LOSS CLAIMED BY THE ASSESSEE IS TRADING LOSS INCURRED IN THE COURSE OF CARRYING ON BUSINESS ACTIVITY OF BANKING. GENUINENESS OF LOSS IS NOT IN DISPUTE AND ALLOWABILITY OF SAME IN ONE YEAR OR ANO THER HAS NO BEARING ON REVENUE. ALLOWABILITY IN THE YEAR OF WRITE OFF CANNOT BE DISPUTED. THE LD. AR OF THE ASSESSEE IN SUPPORT OF HIS CONTENTION HAS PLACED RELIANCE ON THE FOLLOWING DECISIONS: (I) CIT VS. NAGRI MILLS CO. LTD. 33 ITR 681 ( BOM.) (II) CIT VS. TRIVENI ENGINEERING & INDUSTRIES LTD. (III) M/S. BALLARPUR INDUSTRIES LTD. IN ITA NO. 194 OF 2007 ORDER DATED 01.02.2018 (IV) M/S. BALLARPUR INDUSTRIES LTD. IN ITA NO. 121/2006 ORDER DATED 01.02.2018 6. THE LD. DR FOR THE REVENUE HAS PLACED STRONG RELIANCE ON THE ORDERS OF THE SUB - ORDINATE AUTHORITIES. 7. WE HAVE PERUSED THE CASE RECORDS AND HEARD THE RIVAL CONTENTIONS. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HAS TAKEN LEGAL ACTIONS, FILED FIR AND TERMINATED THE GUILTY EMPLOYEES. THESE FA CTS ON RECORD WERE ACCEPTED BY THE LD. DR. THE LD. DR COULD NOT CONTROVERT THE FACTS STATED BY THE LD. AR OF THE ASSESSEE. THE LD. DR FURTHER COULD NOT BRING ON RECORD ANY MATERIAL/ EVIDENCE/ CASE LAWS WHICH COULD CONTROVERT/RAISE ANY DOUBT REGARDING THE FACTS ALREADY ON RECORD. IT IS THEREFORE, UNDISPUTED FACT THAT THERE WAS FRAUD 9 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 AND EMBEZZLEMENT FOR WHICH THE ASSESSEE SUFFERED LOSS OF RS.52,30,000/ - . BEFORE US, THE ASSESSEE HAS RELIED ON THE FOLLOWING DECISIONS: (I) LORDS DAIRY FARM VS. CIT, 27 ITR 700 ( BOM.) (II) ABOVE JUDGMENT IS NOTED WITH APPROVAL BY HONBLE APEX COURT IN BEDRIDAS DAGA VS. CIT, 34 ITR 10 (SC) (III) BALLARPUR INDUSTRIES LTD. IN ITA NO.91/NAG/2011 VIDE ORDER DATED 16.04.2018, 168 DTR 225. IN ALL THESE ABOVE REFERRED DECISIONS, IT HAS BEEN HELD THAT TRADING LOSS ON ACCOUNT OF EMBEZZLEMENT AND FRAUD IS TO BE ALLOWED IN THE YEAR IN WHICH THE AMOUNT IS WRITTEN OFF AS IRRECOVERABLE. 8. IN THE CASE OF BALLARPUR INDUSTRIES LTD. IN ITA NO.91/NAG/2011 VIDE ORDER DATED 16.04.2018, 168 DTR 225, THE CO - ORDINATE BENCH OF THE TRIBUNAL, NAGPUR HAD FACED IDENTICAL ISSUE AND ALLOWED THE APPEAL OF THE ASSESSEE BY OBSERVING AS FOLLOWS: 9. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. WE HAVE GONE THROUGH FACTS AND NOTICED THAT IMPORTED MATERIALS AMOUNTING TO RS. 34CRORES (ANNEXURE A) AS LYING UNDER THE CUSTODY OF PORT AUTHORITIES / BONDED WARE HOUS E 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 RS. 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 RS. 6 CRORES (APPROX) BEFORE INSURANCE, DUTY AND OTHER C HARGES. 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 WERE OWNED BY THE APPELLANT COMPANY THOUGH SUCH MATERIALS WERE PARTLY USED AND PARTLY LYING IN THE BONDED WARE HOUSE OF THE PORT AUTHORITIES IN PLACE OF ASSESSEE'S OWN GODOWN. IN SHORT, FACTS OF THIS CASE SUGGEST THAT AT A MATERIAL TIME, THE STORES AND SPARES WERE USED AND/OR READY FOR USE AS AND WHEN NEED HAD ARISEN. 10 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 10. IT IS FAC T THAT THE ASSESSEE HAD INCURRED EXPENSES WHEN MATERIALS WERE IMPORTED. ADMITTEDLY EXPENSES INCURRED FOR SUCH IMPORT WAS FOR THE PURPOSE OF BUSINESS PENDING CAPITALIZATION I.E. UTILIZATION THEREOF. THUS, OVER THE YEARS, MATERIAL SO IMPORTED IRRESPECTIVE OF THEIR COST, WAS IN USE IN WIDER SENSE I.E. A PASSIVE USE BY ASSESSEE AND IN REALITY, AS AND WHEN REQUIRED BASIS. HOWEVER, THE ASSESSEE RELINQUISHED THE RIGHT & TITLE TO THOSE GOODS IN ACCORDANCE WITH SUB - SECTION (2) OF SECTION 23 OF CUSTOM ACT. 1962 CONSI DERING GOODS SO LYING WITH THE PORT AUTHORITIES HAD LOST ITS LIFE FOR USE IN THE ASSESSEE'S BUSINESS. MOREOVER, PAYMENTS TOWARDS INSURANCE, WARE HOUSE RENT AND OTHER CHARGES WOULD BECOME UNECONOMIC IN TRUE COMMERCIALS SENSE. THEREFORE, IT IS A BUSINESS LOS S WHICH IS ALLOWABLE AS PER ORDINARY COMMERCIAL PRINCIPLE IN COMPUTING PROFIT. ANY REFERENCE TO BOOK ENTRY DIVORCED FROM THE REALITY AND SURROUNDING CIRCUMSTANCES, EVEN IF OPPOSED TO PRINCIPLE OF ACCOUNTANCY, SHOULD NOT BE A FACTOR IN ORDER TO DECIDE THE T RUE CHARACTER OF INCOME AND OR LOSS. THE ASSESSEE BEFORE LOWER AUTHORITIES AND BEFORE US ALSO FILED DOCUMENTS SUCH AS, I.E. IMPORT INVOICES DETAILS FOR THE GOODS DAMAGED AND FOR LOST ITS MARKET VALUE, PAYMENT DETAILS IN RESPECT OF IMPORT OF MARKET VALUE OF GOODS, STATEMENT SHOWING MATERIALS CLEARED FROM, PORT AUTHORITIES FOR USE IN THE ASSESSEES BUSINESS AND THE MATERIALS RELINQUISH THEREOF, BILL OF ENTRIES FOR GOODS CLEARED AND USE FOR THE BUSINESS ETC. STORES & SPARES BEING ESSENTIALLY A STANDBY ITEM FOR ANY PAPER PLANT MORE PARTICULARLY FOR A CHAIN OF MANUFACTURING/PROCESSING OF PAPER UNITS WHEN ALL SUCH UNITS ARE RUNNING CONTINUOUSLY 365 DAYS IN A YEAR. THUS, EXPENDITURE OR THE IMPORTED ITEM WHETHER USED OR NOT WAS FOR ASSESSEE'S EXISTING BUSINESS. FOR ALLOWANCE OF A CLAIM FOR DEDUCTION AS BUSINESS LOSS / EXPENDITURE, ALL THAT IS NECESSARY IS THAT FIRSTLY, THE MONEY, I.E. CAPITAL, MUST HAVE BEEN UTILIZED, SECONDLY, IT MUST HAVE BEEN EXPENDED IN RELATION TO BUSINESS. IT IS ADMITTED POSITION IN LAW, 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 TRANSACTI ON, 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 : S. NO. DESCRIPTION US $ RATE AMOUNT (RS.) AMOUNT IN LACS (RS.) 1 GOODS RELINQUISHED 7851680 36.156 283885342 2838.85 2 INTEREST ON CUSTOM DUTY 135.00 3 BPT CHARGES 354.00 4 SHIPPING CHARGES 25.00 11 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 5 OTHER CHARGES 47.16 3400.02 BPT (BOMBAY PORT TRUST CHARGES) INCLUDES WAREHOUSE, DEMURRAGES AND GROUND RENT. 11. IN THE GIVEN FACTS OF THE CASE, WE HAVE GONE THROUGH THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF CIT VS. SALES MAGNESITE (P.) LTD [1995] 214 ITR 1 (BOM.) WHEREIN HONBLE BOMBAY HIGH COURT HAS CONSIDERED THE ISSUE OF COMMERCIAL EXPEDIENCY AND ALLOWANCE OF LOSS IN THE BUSINESS BY OBSERVING AS UNDE R: - 7. WE HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE. WE HAVE ALSO NOTED THE FINDING OF THE TRIBUNAL THAT THE PAYMENT MADE BY THE ASSESSEE TO ITS SOLE SELLING AGENTS AS COMPENSATION FOR TERMINATION OF THE SOLE SELLING AGENCY WAS A BUSINESS EXPENDIT URE WHICH WAS INCURRED BY THE ASSESSEE AFTER PROPER CONSIDERATION ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON THE BASIS OF LEGAL OPINION OF ITS SOLICITORS. THE TRIBUNAL HAS ALSO RECORDED A CLEAR FINDING OF FACT THAT THE PAYMENT WAS MADE FOR COMMERCIA L EXPEDIENCY. IN VIEW OF THIS CLEAR FINDING THAT THE PAYMENT FOR TERMINATION OF THE SOLE SELLING AGENCY WAS WHOLLY ON BUSINESS CONSIDERATIONS, 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 EXPENDITU RE (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 3 7, 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 I N ORDER INDIRECTLY TO FACILITATE THE CARRYING ON OF THE BUSINESS WOULD BE DEDUCTIBLE UNDER THIS SECTION. THE QUESTION WHETHER IT WAS NECESSARY FOR COMMERCIAL EXPEDIENCY OR NOT, IS A QUESTION THAT HAS TO BE DECIDED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT BY THE SUBJECTIVE STANDARD OF REASONABLENESS OF THE REVENUE. AS OBSERVED BY THE SUPREME COURT IN BOMBAY STEAM NAVIGATION CO. (1953) (P.) LTD. V. CIT [1964] 56 ITR 52 , THE QUESTION MUST BE VIEWED IN THE LARGER CONTEXT OF BUSINESS NECESSITY OR COMME RCIAL EXPEDIENCY. NO ABSTRACT OR PEDANTIC VIEW CAN BE TAKEN IN THE MATTER. 12 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 10. APPLYING THESE TESTS TO THE FACTS OF THE PRESENT CASE, IT IS CLEAR THAT THE PAYMENT OF COMPENSATION MADE BY THE ASSESSEE TO ITS ERSTWHILE SOLE SELLING AGENTS FOR LOSS OF SOLE SELLING AGENCY IS ALLOWABLE AS A DEDUCTION UNDER SECTION 37 IN COMPUTATION OF THE INCOME OF THE ASSESSEE. THIS IS PARTICULARLY SO IN VIEW OF THE FOLLOWING FINDINGS OF FACT ARRIVED AT BY THE TRIBUNAL WHICH ARE NOT SUBJECT - MATTER OF CHALLENGE IN THIS REFEREN CE APPLICATION : (I) THE FACTUM OF PAYMENT IS PROVED. (II) THERE IS NOTHING ON RECORD TO SHOW THAT PAYMENT WAS ILLUSORY OR THAT THE ASSESSEE'S CLAIM WAS MALA FIDE. (III) THERE IS NO EVIDENCE ON RECORD TO SHOW THAT THE TRANSACTION WAS A GOT - UP AFFAIR TO HOODWINK THE REVENUE. (IV) THE CLAIM OF THE SOLE SELLING AGENTS IS NOT SHAM (V) THE COMPENSATION HAS BEEN GIVEN IN THE LIGHT OF THE OPINION OF THE SOLICITORS WHO ADVISED THE ASSESSEE TO PAY THE SAME. (VI)THE AMOUNT PAID BY WAY OF COMPENSATION MORE OR LESS CORRESPONDS TO THE AMOUNT OF REMUNERATION THAT WOULD HAVE BEEN PAYABLE FOR THE UNEXPIRED PERIOD OF THE AGENCY. (VII)THE PAYMENT WAS FOR BUSINESS OR COMMERCIAL EXPEDIENCY. 11. THE LEARNED COUNSEL FOR THE REVENUE PLACED RELIANCE UPON THE PROVISI ONS OF SECTION 294AA(2) IN SUPPORT OF HIS CONTENTION THAT THE SOLE SELLING AGENCY STOOD AUTOMATICALLY TERMINATED IN THE ABSENCE OF THE APPROVAL OF THE CENTRAL GOVERNMENT. IT WAS URGED THAT THERE BEING NO LEGAL OBLIGATION ON THE ASSESSEE TO PAY ANY COMPENSA TION 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 CONTE NTION 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 PAYME NT 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 RS. 1,55,855 BY WAY OF COMPENSAT ION TO THE SOLE SELLING AGENTS FOR LOSS OF OFFICE WHICH THEY HAD BEEN HOLDING FOR MORE THAN THREE DECADES AND IN CLAIMING DEDUCTION OF THE SAME IN COMPUTATION OF ITS TOTAL INCOME. WE, THEREFORE, ANSWER THE FIRST QUESTION ALSO IN THE AFFIRMATIVE AND IN FAVO UR OF THE ASSESSEE. 12. SIMILARLY, THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ZENITH STEEL PIPES LTD. VS. CIT (1990) 186 ITR 594 (BOM.) AND CONSIDERED THE ISSUE OF WRITE OFF OF STORES & SPARES IMPORTED EARLIER BUT LYING IN THE GODOWN OF A 13 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 PORT AUTHORITY IS A LOSS INCIDENTAL TO THE BUSINESS. HONBLE HIGH COURT CONSIDERED THIS ISSUE AS UNDER: - EVIDENTLY, THE SUBJECT - MATTER OF BOTH THE QUESTIONS IS THE SAME. THE ASSESSEE HAD IMPORTED CERTAIN ELECTRICAL SPARE PARTS FOR BEING USED IN THE COURSE OF ITS MANUFACTURING BUSINESS. THE SAID CONSIGNMENT WAS RECEIVED AT BOMBAY PORT BUT THE SAME WAS NOT TRA CEABLE. THE ASSESSEE ENTRUSTED THE WORK OF TRACING THE CONSIGNMENT TO MESSRS. INSIMAX CORPORATION, BOMBAY, WHO WERE PAID THEIR FEES OF RS. 3,500. THE SAID CONSIGNMENT WAS TRACED BUT THE ASSESSEE FOUND THAT THE SPARE PARTS IMPORTED BY IT WERE RUSTED AND IT WAS NOT WORTHWHILE TO CLEAR THEM AFTER PAYING DUTY, WHARFAGE, DEMURRAGE, ETC. ACCORDINGLY, IT DECIDED NOT TO TAKE DELIVERY OF THE GOODS AND WROTE OFF THE AMOUNT OF RS. 43,168 BEING THE PURCHASE PRICE OF THE SPARE PARTS AND RS. 3,500 BEING THE FEES PAID TO MESSRS. INSIMAX CORPORATION, THE TOTAL OF WHICH CAME TO RS. 46,668 AS BUSINESS LOSS. THE INCOME - TAX OFFICER REJECTED ITS CLAIM ON THE GROUND THAT THE LOSS WAS A LOSS ON ACCOUNT OF NON DELIVERY BY THE ASSESSEE AND IT WAS NOT A LOSS IN THE NORMAL COURSE OF CARRYING ON OF ITS BUSINESS. THE APPELLATE ASSISTANT COMMISSIONER CONFIRMED THE DISALLOWANCE OBSERVING THAT, WITHOUT TAKING ACTUAL DELIVERY AND PUTTING THE SPARE PARTS TO TEST, IT COULD NOT BE POSSIBLE FOR ANY ONE TO SAY THAT THE GOODS WERE HEAVILY RUSTED AND EXTENSIVELY DETERIORATED. ON FURTHER APPEAL, THE TRIBUNAL ALSO CONFIRMED THE DISALLOWANCE. IN ITS VIEW, NON - ACCEPTANCE OF THE GOODS BY THE ASSESSEE, IN THE CIRCUMSTANCES, AMOUNTED TO CONFISCATION OF GOODS AND THIS LOSS WAS, THEREFORE, MORE IN THE NATU RE OF PENALTY OR FINE RATHER THAN A LOSS DURING THE NORMAL COURSE OF BUSINESS. THE TRIBUNAL OBSERVED THAT THE ASSESSEE HAD NOT EVEN PRODUCED THE INSPECTION REPORT IN ORDER TO PROVE THAT THE GOODS WERE REALLY RUSTED. SHRI TOPRANI, LEARNED COUNSEL 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 CORPORATI ON, BOMBAY, WHO WERE PAID THEIR FEES OF RS. 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 EXPEN DITURE 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 C USTOMS 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 F OR A SUFFICIENTLY LONG TIME AND IT WAS TRACED ONLY AS A RESULT OF THE EFFORTS MADE BY THE ASSESSEE'S AGENTS, MESSRS. INSIMAX CORPORATION, BOMBAY, TO WHOM THE ASSESSEE HAD TO PAY FEES OF RS. 3,500. IT IS NOT ON RECORD AS TO HOW MUCH TIME THE AGENTS TOOK TO TRACE THE CONSIGNMENT. HOWEVER, THE ASSESSEE - COMPANY CARRIES ON ITS BUSINESS AND IT IS FOR THE ASSESSEE TO DECIDE WHETHER IT WAS IN ITS INTEREST TO CLEAR THE CONSIGNMENT OR 14 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 NOT AS IT WOULD HAVE AMOUNTED TO WASTE OF GOOD MONEY AFTER BAD MONEY. IT WAS A BUSI NESS DECISION WHICH THE DEPARTMENTAL AUTHORITIES COULD NOT HAVE QUESTIONED WITHOUT ANY COGENT REASONS. IN THE CIRCUMSTANCES, INSISTING UPON THE INSPECTION REPORT WAS ABSOLUTELY MEANINGLESS. 13. EVEN THE HONBLE BOMBAY HIGH COURT IN THE CASE OF LORD'S DA IRY FARM LTD. VS. CIT (1955) 27 ITR 700 (BOM.) 12. THE NEXT QUESTION THAT WE HAVE TO CONSIDER IS WHETHER THE WHOLE OF THIS AMOUNT CAN BE PERMITTED AS AN ALLOWANCE TO THE ASSESSEE. IF WE ARE RIGHT IN THE VIEW THAT WE HAVE TAKEN THAT WHAT IS CLAIMED AS A TRADING LOSS IS NOT A PERMISSIBLE DEDUCTION UNDER SECTION 10 (2) (XV), THEN THE MATERIAL DATE OBVIOUSLY IS NOT THE DATE WHEN THE EMBEZZLEMENT TOOK PLACE BUT THE MATERIAL DATE IS WHEN THE LOSS IS CAUSED. SO LONG AS THERE IS ANY POSSIBILITY OF THE MONEY BEIN G RECOVERED FROM THE EMPLOYEE WHO HAS EMBEZZLED THE MONEY, THERE IS NO LOSS TO THE ASSESSEE. IT IS ONLY WHEN IT IS CLEAR THAT THE MONEY CANNOT BE RECOVERED THAT THE LOSS IS CAUSED. IN THIS CASE IT IS IN EVIDENCE THAT THE ASSESSEE WROTE OFF THIS AMOUNT OF R S. 32,000 IN THE YEAR OF ACCOUNT. THE ADVOCATE - GENERAL SAYS THAT THERE IS NO FINDING THAT THIS AMOUNT, THERE IS PRIMA FACIE EVIDENCE THAT THAT AMOUNT IS IRRECOVERABLE. UNDOUBTEDLY THE DEPARTMENT CAN REBUT THE PRIMA FACIE INFERENCE BY DRAWING ATTENTION TO C IRCUMSTANCES OR BY LEADING SOME EVIDENCE TO SUGGEST THAT THE POSITION TAKEN UP BY THE ASSESSEE WAS NOT CORRECT. IN THIS CASE THERE IS NO EVIDENCE WHATSOEVER ON THE RECORD EXCEPT THE FACT THAT THE ASSESSEE WROTE OFF THIS AMOUNT IN THE YEAR OF ACCOUNT. IN TH E ABSENCE WROTE OFF THIS AMOUNT IN THE YEAR OF ACCOUNT. IN THE ABSENCE OF ANY EVIDENCE WE ARE ENTITLED TO PRESUME THAT THE AMOUNT BECAME IRRECOVERABLE WHEN THE ASSESSEE WROTE IT OFF IN ITS BOOKS OF ACCOUNT. THEREFORE, IN OUR OPINION, NOT ONLY IS THE ASSESS EE ENTITLED TO CLAIM THIS AMOUNT OF RS. 32,000 AS A TRADING LOSS BUT IS ALSO ENTITLED TO CLAIM THIS AMOUNT IN THE ASSESSMENT YEAR, VIZ., 1947 - 48. 13. WE WILL, THEREFORE, REFRAME THE QUESTION IN THE FOLLOWING WAY : 'WHETHER THE ASSESSEE WAS ENTITLED TO CLAIM A SUM OF RS. 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 ASSESSEES APPEAL IS ALLOWED. 15 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 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 HONBLE 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 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 . VARIOUS TESTS HAVE BEEN EVOLVED BY THE COURTS FROM TIME TO TIME TO DECIDE WHETHER 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 EXPENDITURE ALLOWABLE AS A DEDUCTION UNDER SECTION 37, IT IS NOT ESSENTIAL THAT IT SHOULD BE NECESSARY, LEGALLY OR OTHERWISE, TO INCUR T HE 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. 10. 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 TH E ASSESSEE BECAUSE OF THOSE FACTORS WHICH ARE VERY MUCH IRRECOVERABLE AND IN THE P RACTICAL 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 HONBLE SUPREME COURT IN THE CASE OF BOMBAY STEAM NAVIGATION CO . (1953) (P) LTD. VS. CIT (1964) 56 ITR 52 16 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 HAS CATEGORICALLY HELD THAT THE QUESTION MUST BE VIEWED IN THE LARGER CONTEXT OF BUSINESS NECESSITY OR COMMERCIAL EXPEDIENCY. NO ABSTRACT OR PEDA NTIC VIEW CAN BE TAKEN IN THE MATTER. IN VIEW OF THE AFORESAID DECISION AND ON EXAMINATION OF FACTS ON RECORD, WE SET ASIDE THE ORDER OF THE LD. CIT(APPEALS) AND GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED. 1 1 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRO NOUNCED ON 20 TH DAY OF FEBRUARY , 2020 . SD/ - SD/ - D. KARUNAKARA RAO PARTHA SARATHI CHAUDHURY ACCOUNTANT MEMBER JUDICIAL MEMBER / PUNE; / DATED : 20 TH FEBRUARY , 20 20 . SB / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT(APPEALS) - 1, NAGPUR. 4. THE CIT - 1, NAGPUR. 5 . , , / DR, ITAT, NAGPUR. 6. / GUARD FILE. // TRUE COPY // / BY ORDER, / PRIVATE SECRETARY , / ITAT, PUNE . 17 ITA NO. 340 /NAG /20 15 A.Y. 2011 - 12 DATE 1 DRAFT DICTATED ON 19 .0 2 .2020 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 20 .02 .2020 SR.PS/PS 3 DRAFT PROPOSED AND PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/JM 5 APPROVED DRAFT COMES TO THE SR. PS/PS SR.PS/PS 6 KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7 DATE OF UPLOADING OF ORDER SR.PS/PS 8 FILE SENT TO BENCH CLERK SR.PS/PS 9 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 10 DATE ON WHICH FILE GOES TO THE A.R 11 DATE OF DISPATCH OF ORDER