The Commissioner of Income Tax and The Joint Commissioner of Income Tax (Assessment) Special Range V. Pyramid Timber Associates (P) Ltd

ITA/862/2008

AI Insights

The case involves multiple appeals by the Commissioner of Income Tax against M/s Pyramid Timber Associates (P) Ltd concerning the deduction of a loss claimed by the assessee for goods that were never delivered due to a dispute between the ship owner and the charterer. The assessee had entered into a contract for the import of teak logs, which were never delivered to them due to the ship not reaching the Indian port. The assessee claimed the loss in their tax returns for the assessment years 1996-97 and 1997-98, which was initially disallowed by the assessing authority but later allowed by the Appellate Authority and the Tribunal. The High Court upheld the Tribunal's decision, agreeing that the loss was incurred and the liability was crystallized in the assessment year 1995-96.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 799262 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 10-10-2014
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: V K GURUNATHAN; JINITA CHATTERJI
• Assessee Lawyers: K V ARAVIND
• Keywords: Contingent Liability; Force Majeure; Income tax appeal; Loss of Goods in Transit; Crystallized Liability
• Section: 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 10TH DAY OF OCTOBER, 2014 PRESENT THE HON’BLE MR. JUSTICE N. KUMAR AND THE HON’BLE MR. JUSTICE B. MANOHAR INCOME TAX APPEAL No.862 OF 2008 C/W INCOME TAX APPEAL No.863 OF 2008 AND INCOME TAX APPEAL No.861 OF 2008 BETWEEN: 1. THE COMMISSIONER OF INCOME TAX NO.55/1, SHILPASHREE VIDYARANYA COMPLEX VISHVESHWARANAGAR MYSORE – 570 008. 2. THE JOINT COMMISSIONER OF INCOME TAX (ASSESSMENT) SPECIAL RANGE, NO.55/1 SHILPASHREE VIDHYARANYA COMPLEX VISHVESHWARANAGAR MYSORE – 570 008. ... APPELLANTS [COMMON IN ALL THE APPEALS] (BY SRI: K V ARAVIND ADV) 2 AND: M/S PYRAMID TIMBER ASSOCIATES (P) LTD YELWAL ROAD BELAVADI MYSORE. ... RESPONDENT [COMMON IN ALL THE APPEALS] (BY SRIYUTHS: V K GURUNATHAN & JINITA CHATTERJI, ADVS FOR SRI: S PARTHASARATHI, ADV) ITA NO.862/2008 IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 07.05.2008 PASSED IN ITA NO.1262/BNG/2002, FOR THE ASSESSMENT YEAR 1998-99, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND TO ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO.1262/BNG/2002, DATED 07.05.2008 CONFIRM THE ORDERS OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE JOINT COMMISSIONER OF INCOME TAX (ASSESSMENTS), SPECIAL RANGE, MYSORE, IN THE INTEREST OF JUSTICE AND EQUITY. ITA NO.863/2008 IS FILED UNDER SECTION 260-A Of I.T. ACT, 1961 ARISING OUT OF ORDER DATED 07.05.2008 PASSED IN ITA NO.1261/BNG/2002, FOR THE ASSESSMENT YEAR 1997-98, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND TO ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO. 1261/BNG/2002, DATED 07.05.2008 CONFIRM THE ORDERS OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE JOINT COMMISSIONER OF INCOME TAX (ASSESSMENTS), SPECIAL RANGE, MYSORE IN THE INTEREST OF JUSTICE AND EQUITY. 3 ITA NO.861/2008 IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 07.05.2008 PASSED IN ITA NO.1260/BNG/2002, FOR THE ASSESSMENT YEAR 1996-97, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND TO ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO. 1260/BNG/2002, DATED 07.05.2008 CONFIRM THE ORDERS OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE JOINT COMMISSIONER OF INCOME TAX (ASSESSMENTS), SPECIAL RANGE, MYSORE IN THE INTEREST OF JUSTICE AND EQUITY. THESE ITAs COMING ON FOR HEARING, THIS DAY N.KUMAR J DELIVERED THE FOLLOWING: COMMON JUDGMENT All these appeals arise out of the common order, where the assessee is common. Therefore, they are taken up for consideration together and disposed of by this common order. 2. The assessee is engaged in the business of trade in importing timber logs in bulk quantity. The assessee entered into contract with M/s Ply International, USA on 02.09.1993 for import of teak logs of Tanzanian origin by shipment to be made in 4 June and July 1994, as per different terms and conditions mentioned in the contract. The sale was on C & F basis where insurance was to be covered by buyer and freight was to be paid by the seller. The terms of the contract stipulates that once the goods are accepted on inspection, it was to be considered to be sold and held at the risk and responsibility of the importer i.e., assessee company. 3. The assessee company engaged the services of shipping vessel, M V Hazar through the charterer viz., M/s Ummall Quwain (UAE) and booked the consignment. The teak logs were inspected by the representatives of assessee company at Tanga Port and a certificate was issued on behalf of the assessee on 28.06.1994 stating the quality, quantity and measurement of teak logs. The teak logs shipped on M V Hazar were insured by the assessee company with M/s National Insurance Company, Mysore for invoice value vide Marine policy dated 30.06.1994. The cargo 5 was loaded on shipping vessel, which was to arrive at Mangalore port on or around 19.07.1994. A bill of lading dated 01.07.1994 was issued by the Charterer which was signed by the Master of vessel M/s M V Hazar. The freight has been prepaid at Dubai. As per bill of lading, cargo was to be loaded at Tanga and unloaded at Mangalore. The shipping vessel M V Hazar did not report at Mangalore port on the expected date of arrival. There was a dispute between the Charterer and the ship owner as to non payment of freight by the former to the latter. As a result, the ship owner declared a lien over the goods and diverted the cargo to some other destination without delivering it to the assessee company. 4. When the negotiation between the assessee company and shipping owner was not fruitful, the assessee informed these developments to its Insurance company and requested them to take immediate steps to protect its insured cargo. The 6 Insurance company contended that the aforesaid risk was not covered under the policy. In the meanwhile, bill of lading endorsed in favour of assessee company and bill of exchange drawn by M/s Ply International against the assessee were presented to the assessee through its banker on 29.08.1994 alongwith invoice raised by the seller M/s Ply International, USA. 5. The assessee accepted the bill of exchange presented by the supplier. However, the assessee company’s banker could not remit the payment in the absence of bill of entry. When the banker approached RBI for instructions to remit the foreign exchange without insisting on the bill of entry, the RBI declined the permission. Therefore, the bankers of assessee returned the documents to the seller bank. In those circumstances, the assessee company filed a suit in the Court of Civil Judge, Mangalore, impleading the ship owners, Charterers, their agents and also the National Insurance Company seeking a decree in 7 favour of assessee company against the defendants jointly and severally to make good the loss incurred by the assessee. 6. The assessee recognized the said transaction in the financial year relevant to the assessment year 1995-96 i.e., as on 31.03.1995, purchases were debited to the extent of invoice value, goods were taken into closing stock under the head ‘goods in transit’. M/s Ply International was shown as a creditor for supply of goods. The same position continued in the books of accounts as on 31.06.1996 with notes to the effect that provision will be made in the account after exhausting the legal remedy available to the company. No provision for loss of goods in transit was made in the accounts for the year ending 31.03.1996. 7. However, in the return filed for the assessment year 1996-97, the assessee claimed the 8 loss stating loss of goods in transit by illegal diversion of cargo by ship owner and a refusal of claim by the Insurance company. According to the assessee, the loss was crystallized during the previous year relevant to assessment year 1996-97, so the same was claimed as deduction in the previous year relevant to the assessment year 1996-97. The assessee has shown the loss of said amount during the financial year relevant to the assessment year 1997-98. In the course of assessment proceedings for the assessment year 1997-98, the assessee made a claim of deduction of this loss as the same was not allowed in the assessment for the assessment year 1996-97. 8. The said assessment was disallowed by the assessing authority on the ground that as the title in goods was not transferred to the assessing company, the assessee cannot claim any loss. The assessee was not liable for payment of the cost of logs, in the circumstances, as it falls under the heading of ‘Force 9 Majeure’. Further, the assessing authority held that the liability claimed by the assessee is an uncrystalized liability. It was also held as the civil suit was pending and the RBI did not grant permission to remit the foreign exchange, the loss arising out of contingent liability is not allowable. It was observed that the foreign supplier M/s Ply International, USA is the proprietary concern owned by brother of one of the Directors of the assessing company. Therefore, it raises a doubt that this is not a normal business transaction. It also held that the seller has not made any serious claim towards payment of the purchase price and it has not taken any legal action for the recovery of dues. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax Appeals. 9. The Appellate Authority held the assessee and its sister concerns have been regularly doing business with M/s Ply International during subsequent 10 years and therefore, it cannot be said that it is not a normal business transaction. The contract entered into between the parties is valid and complete contract. Once in the terms of contract, inspection of goods was done and the same was loaded to the ship, the title in the goods passes to the assessee, the purchaser. Admittedly, the goods were not delivered to the assessee and therefore, the assessee has sustained loss. Once the acceptance of bill of exchange is signed, the liability is crystallized. There was a definite liability to pay on the part of assessee as on the date of accepting the bill of exchange during the relevant period of assessment year 1995-96. The pendency of Civil Suit or the refusal of RBI to grant permission would in no way affect the liability, nor it would make the contingent liability and the liability to pay was incurred by the assessee during the year relating to assessment year 1995-96 which is reflected in its books of account. In the accounts for the 11 assessment year 1995-96, the invoice value has been shown as purchase, the seller has been shown as ‘Creditor’ and the goods taken to closing stock as ‘goods in transit’. The assessing authority has not questioned these facts in the assessment year 1995- 96. Therefore, the liability is ascertained. 10. When the liability for purchase relates to the assessment year 1995-96, trading loss has been claimed for the assessment year 1996-97, this loss arose due to loss of goods in transit. The assesee did not claim it as a deduction in computation of income for the assessment year 1995-96. Neither did he write off the loss in its books of account for the assessment year 1996-97, but it was claimed as an deduction in the assessment for the assessment year 1997-98, it was written off in the books of account. Therefore, the order passed by the assessing authority was set aside and set off claimed by the assessee was 12 allowed. Aggrieved by the said order, the revenue preferred an appeal before the Tribunal. 11. The Tribunal upholding the findings of Appellate Authority held that the loss of goods in transit accrued in the commercial sense during the relevant assessment year 1996-97 and therefore, the assessee was eligible for deduction of loss of Rs.1,43,51,506/-. Aggrieved by the said order, the revenue is in appeal. 12. These appeals were admitted to consider the following substantial question of law: “Whether the Appellate Tribunal is right in treating the amount as an expenditure and consequentially as a loss incurred by the assessee when the amount in fact was never remitted to the foreign supplier for want of RBI clearance and the goods in fact were never received by the assessee?” 13 13. Learned Counsel for the revenue assailing the impugned order contended that admittedly, the assessee did not receive the consignment. The consignment did not enter shores of India, therefore, there was no liability on his part to make any payment to the seller. Admittedly, the Reserve Bank of India did not permit the remittance of sale consideration by way of foreign exchange on the ground that the goods never reached the Indian source. Therefore, the authority were not justified in treating the amount as expenditure and consequently the loss incurred by the assessee and remitting deduction of the said amount. 14. Per contra, learned Counsel appearing for the respondent supported the impugned order. 15. From the aforesaid facts, it is clear that there is no dispute regarding the contract entered into between the parties. The terms of contract stipulates once the teak logs are inspected and loaded in the 14 ship, the title in the goods passes to the buyer. The transportation of the goods is at the risk of the buyer. Therefore, the buyer was expected to take the insurance policy whereas the seller has to pay the freight charges. When the seller negotiated the document of title, the assessee received the same and acknowledged the liability. Admittedly, the ship which carried the logs did not enter the Indian water and the goods was not delivered because of the dispute between the owner of ship and the charterer. Once the title of goods has passed to the assessee and the goods was transported at his risk and when he accepted the document negotiated through the bank and acknowledged the liability and when the goods did not reach him, he did sustain loss of the value of goods which he has purchased. In the books of account of the assessee, necessary entries were made though loss was not claimed. The assessee banker approached the RBI for permission to make payment 15 by way of foreign exchange which was refused by RBI. The assesee approached the Insurance company to settle the claim, to which they declined. The assessee was constrained to file the Civil Suit in Mangalore Court against the ship owners, charterers, Insurance company claiming the said amount. In view of these steps taken, the assessee did not make entry in the book of accounts for the year 1994-95 showing the loss. However, for the subsequent year, necessary entries were made showing loss and in the return filed and also claimed deduction. When it was not allowed in the subsequent year after writing off the losses, deduction was claimed. 16. In the light of these undisputed facts, both the Appellate Authorities were justified in upholding the claim of assessee and in allowing the deduction. Therefore, we do not find any error or infirmity in the order passed by the Appellate Authorities. Hence, the 16 substantial question of law is answered in favour of assessee and against the revenue. 17. In so far as other two appeals are concerned, they pertains to fluctuation in the foreign exchange rates. In view of the dismissal of appeal in ITA 861/2008, those issues become purely academic. Therefore, we do not see any merit in these appeals also. Consequently, all the appeals are dismissed. Sd/- JUDGE Sd/- JUDGE *bgn/- "