The following question has been referred to us by order of this court dated the 9th of March, 1960, under section 66(2) of the Income-tax Ac :
'Whether, on the facts and circumstances of the case, any, and if so which, portion of the sum of Rs. 1,74,827 could in law be treated as a loss in the previous year for the assessment year 1949-50.'
The assessee is a firm, M/s. Tulsi Ram Karam Chand of Amritsar, dealing in cloth and the relevant accounting year ended on the 7th of July, 1948. The Textile Control Officer at Amritsar issued a permit to the firm about middle of 1947 for the supply of 250 bales of cloth to the Assistant Controller at Jammu. The assessee firm placed an order with its commission agents at Ahmedabad for 176 bales of cloth to be consigned by rail to the Textile Commissioner at Jammu Tavi Station. The firm of the commission agents at Ahmedabad called M/s. Tulsi Ram Kanahaya Lal despatched 176 bales by rail, the consignment being made to 'Self'. The goods were sent under a railway receipt at railway risk. The railway receipt along with the invoice was sent to the assessee firm at Amritsar and the assessee firm duly endorsed the railway receipt in favour of the Controller at Jammu and sent it to the assessee firms bankers at Jammu for collection. It is mentioned in one of the orders that two partners are common both to the Ahmedabad firm and the assessee firm at Amritsar, but I do not think that this has any relevance to the point involved.
These events took place during July and August, 1947, about the time of the partition, and it is not disputed that the whole consignment of 176 bales of cloth was irretrievably lost in the course of its passage through territory which had become part of Pakistan after the 15th of August, 1947. It seems that the only way by which the consignment could reach Jammu by rail was Via Sialkot. In the meantime when the invoice was received from the commission agents at Ahmedabad, the assessee firm debited its goods account with Rs. 1,74,827, being the price of the goods and credited that amount to the Ahmedabad firm and when the railway receipt was sent to the assessee firms bankers at Jammu the goods account was credited with Rs. 1,84,045, the sale price of the goods, and the corresponding debit was made to the account of the Textile Commissioner at Jammu. The Ahmedabad firm had sent a notice to the Government of India under section 80, Civil Procedure Code, on the 12th of June, 1948, i.e., within the accounting period of the assessment year, and a suit was instituted against the Government on the 15th of October, 1948, for the value of the lost goods. In that suit a compromise was reached on the 18th of June, 1951, under the terms of which the Ahmedabad firm received a sum of Rs. 1,24,586 in settlement of its claim. The Ahmedabad firm credited this amount to the account of the assessee firm in due course and the assessee firm in its accounts debited the Ahmedabad firm. It is stated that this amount was treated as a taxable receipt in the relevant assessment year.
The question which arose was whether the cost of the goods, Rs. 1,74,827, should have been shown as a loss in the assessment year 1949-50, and the subsequent amount recovered from the Government of India shown as a profit in the relevant assessment year 1952-53, or whether the loss should not have been allowed in the assessment year 1949-50 but only shown as a loss of approximately Rs. 50,000 after the claim had been settled three or four years later by the Government of India.
The Income-tax Officer and the Appellate Assistant Commissioner refused to allow the amount to be shown as a loss in the assessment of 1949-50, and when the assessee firms appeal was heard by the Appellate Tribunal dissenting view were taken by the learned Accountant Member and the learned Judicial Member, the former holding that the appeal should be accepted to the extent of Rs. 1,74,827 while the latter held that the appeal should be dismissed. In these circumstances the case was referred to the President of the Income-tax Appellate Tribunal who concurred with the learned Accountant Member. The present reference has been made at the instance of the Income-tax Commissioner.
It does not seem that there is any reported decision in a case of this kind, in which there was an undoubted loss of a very large quantity of goods during the assessment year in question in circumstances which are not likely to arise again. The learned counsel for the Commissioner relied chiefly on the case of M.P. Venkatachalapathy Iyer v. Commissioner of Income-tax, on which the learned Judicial Member had also relied. This was a case of embezzlement by an employee of the assessee firm. The employee was alleged to have embezzled about Rs. 36,298 between October, 1939, and October, 1940, the loss being detected in May, 1941. In that year the matter was compromised and the employee paid the firm Rs. 16,250 and the firm, accordingly, claimed a loss of the balance of Rs. 21,000 as a loss in the assessment year 1942-43, which was the year in which the loss was definitely ascertained and the settlement made.
In that case it was the Commissioner who was contending that the loss ought to have been claimed in the year in which it occurred instead of in the year in which the settlement was reached. The learned judges quite rightly decided that the loss was properly claimed in the assessment year 1942-43, observing, 'Loss implies that it is an amount which is gone for ever and it is impossible to recover it. The analogy of bad debts may be taken. It cannot be said that a debt becomes bad immediately it was advanced or immediately it was suspected that the debtor was not financially sound. The creditor has to establish that he had taken all available steps to realise the debt and that it was impossible to recover it'. Further it was observed, 'As in the case of a bad debt it cannot be said that until it is found that the clerk was unable to pay and it was impossible to recover the balance from him that the loss had been incurred by the business in this case. The mere entry in the accounts is of no consequence as what matters is the case and not the entries in the accounts. The fact is that the amount became a loss only after the compromise and the moment the dispute was settled between the parties and Rs. 16,250 was accepted in full settlement of the claim of the assessees against the clerk.'
I am inclined to agree with the view of the learned Accountant Member that the case of an embezzlement by an employee does not involve the same kind of loss as the loss in the present case in which, in spite of the fact that a notice had been sent to the Government in June, 1948, there had been definitely an irretrievable loss of stock and the prospect of recovering its value must at that time have appeared to be extremely shadowy owing to the doubts, which took a long series of decisions by the courts to decide, as to the respective liabilities of the Governments of India and Pakistan in matters of this kind. In fact I may venture the opinion that in the light of subsequent decisions it is doubtful whether anything would have ever been recovered from the Government of India if the compromise had not been reached in 1951. The learned Accountant Member seems to me to have summed up the position correctly when he observed 'on the last day of the account year goods which cost Rs. 1,74,827 were not in the closing stock nor was there an admitted liability of any person in respect of either the cost price or the sale price of such goods. According to every known method of accounting, the fictitious debit of Rs. 1,74,827 in the goods account had necessarily to be transferred to the profit and loss account, from which the conclusion must necessarily be drawn that there was a loss of stock-in-trade during the relevant year of account to that extent.'
The difference between cases of embezzlement and cases of bad debts is that there is an admitted liability even when it is uncertain how much is going to be realised, whereas in the present case there was nothing like an admitted liability for the loss and only a shadowy hope of recovering all or any substantial portion of it. I am, therefore, of the opinion that the matter was correctly decided by the majority of the Appellate Tribunal and that the answer to the question propounded must be in the affirmative. The assessee will have his costs from the Commissioner. Counsels fee Rs. 250.
HARBANS SINGH J. - I agree.
Question answered in the affirmative.