NORTH ARCOT DISTRICT COOPERATIVE SUPPLY AND MARKETING SOCIETY LTD. VS COMMISSIONER OF INCOME-TAX
1999 P T D 3527
[230 I T R 33]
[Madras High Court (India)]
Before K.A. Thanikkachalam and S.M. Sidickk, JJ
NORTH ARCOT DISTRICT COOPERATIVE SUPPLY AND MARKETING SOCIETY LTD.
Versus
COMMISSIONER OF INCOME-TAX
Tax Cases Nos.243 and 244 of 1981 (References Nos.95 and 96 of 1981), decided on 09/01/1997.
Income-tax-
----Business loss---Loss on account of deficit stock on account of handling-- Action taken against persons responsible for deficit---Reserve created in respect of deficit---Loss not actually written off---Loss not deductible-- Indian Income Tax Act, 1961.
The assessee was a cooperative society. , It maintained day-to-day stock 'accounts in, respect of different branches. At the end of the year, a physical verification of the stocks as per the stock book and actual stock found in the godown, etc., was made by the cooperative authorities. At that time, certain deficits were noticed. They were separately shown as value of deficit stock in the trading account by the auditor of the cooperative department. For the recovery of those sums, action was taken against the persons responsible for these deficits. In respect of these amounts, a reserve was created and was claimed in the profit and loss account. It was also stated' that the action taken against the employees was in the Court of the Deputy Registrar. If and when the persons responsible for the deficit made good, the deficit value would be reduced. In the balance-sheet, the value of actual stock at the end of the year was shown and the deficit stock was shown as an asset and the reserve as a liability. It was claimed that it was only a fictitious asset till it was realised. Sums of Rs.1,20,691 and Rs.1,03,551, respectively, were claimed as deduction for the assessment years 1974-75 and 1975-76. The Income-tax Officer rejected the claim and this was upheld by the Tribunal. On a reference:
Held, that on verification of accounts, the Tribunal found that the books of account did not indicate any loss of stock. Moreover, the contention of the assessee was identical to the submissions made in the assessment year 1967-68 on a similar set of facts. The assessee had not produced any further evidence before the Tribunal for coming to a different conclusion than that arrived at for the earlier assessment years. The judgment rendered by the Court in North Arcot District Cooperative Supply and Marketing Society Ltd. v. CIT (1987) 165 ITR 623 (Mad.) was binding on the assessee. The reserve created in the assessment years 1974-75 and 1975-76 for deficit stock was not deductible.
North Arcot District Cooperative Supply and Marketing Society Ltd. v. CIT (1987) 165 ITR 623 (Mad.) fol.
Associated Banking Corporation of India Ltd. v.. CIT (1965) 56 ITR 1 (SC); Badridas Daga v. CIT (1958) 34 ITR 10 (SC); Bombay Forgings (Pvt.) Ltd. v. CIT (1994) 206 ITR 562 (Bom.); CIT v. Bank of India (1996; 218 ITR 371 (Bom.); CIT v. British Paints India Ltd. (1991; 188 ITR 44 (SC); CIT v. Byramjee Jeejeebhoy (P.) Ltd. (1990) 182 ITR 6 (Bom.); CIT v. Darbllanga Laheriasarai Electric Supply Corporation Ltd. (1988) 169 ITR 382 (Pat.); CIT v Hemalatha Textiles Ltd. (1990) 183 ITR 461 (Mad.;. CIT/CEPT v. Jwala Pratad Tiwari (1953) 24 ITR 537. (Bom.); CIT v. Mahabir Jute Mills (Pvt.) Ltd. 11991) 188 ITR 337 (All.); CIT v. Mohan. Trading Co. (1990) 182 ITR 101 (Delhi); CIT (Add(.) v. Upper Doab Sugar Mills Ltd. (1991) 188 ITR 190 (All.); Dhun Dadabhoy Kapadia (Miss) v. CIT (1967) 63 ITR 651 (SC); Glass Miniature Bulb Industries v. CIT (Add(.) (1993) 204 ITR 352 (SC); Goenka (R.N.) v. CWT (1989) 176 ITR 129 (Madj; Indequip Ltd. v. CIT (1993) 202 ITR 417 (Bom.); Indian Overseas Bank v. CIT (1.990) 183 ITR 200 (Mad.); Investors Corporation v. CIT (1993) 201 ITR 378 (Cal.); Jatia Investment Co. v. CIT (1994) 206 ITR 718 (Cal.); Kerala Financial Corporation v. CIT (1994) 210 ITR 129 (SC); Kikabhai Premchand (Sir) v. CIT (1953) 24 ITR 506 (SC); Manavala Naidu (G.) v. CIT (1961) 41 ITR 725 (Mad.); Pohoomal Bros. v. CIT (1958) 34 ITR 64 (Bom.); Rajagopala Vandayar (S.) v. CIT (1990) 184 ITR 450 (Mad.); Ritz Hotels (Mysore) Ltd. v. CIT (1992) 196 ITR 614 (Kar.); State of Travancore v. CIT (1986) 158 ITR 102 (SC); Sundarjas Kanyalal Bhatija v. Collector (1990) 183 ITR 130 (SC) and Union of India v. Raghubir Singh (1989) 178 ITR 548 (SC) ref.
K.S. Sivaraman for the Assessee.
C.V. Rajan for the Commissioner.
JUDGMENT
K.A. THANIKKACHALAM, J.---At the instance of the assessee, the Tribunal referred the following common question of law, for the assessment years 1974-75 and 1975-76, for the opinion of this Court under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as the "Act"):
"Whether, on the facts and in the circumstances of the case, the sum of Rs.1,20,691 and Rs.1,03,551, respectively, representing reserve for deficit stock on account of handing was includible in the income of the assessee for the assessment years 1974-75 and 1975-76?"
For the assessment years 1974-75 and 1975-76, the relevant previous years ended on June 30, 1973, and June 30, 1974. The assessee is a cooperative marketing society. In computing the income, the Income-tax Officer made the following additions:---
| | 1974-75 | 1975-76 |
| | (Rs.) | (Rs.) |
| Reserve for deficit stock | 1,20,691 | 1,03,551 |
| Reserve for excess stock | 20,990 | 24,550 |
These additions were confirmed in appeal by the Commissioner of Income-tax (Appeals). Aggrieved, the assessee filed second appeal before the Appellate Tribunal. The Appellate Tribunal upheld the above additions, following the earlier orders of the Tribunal in I.T.As. Nos.1678 and 1679/Mad. of 1972-73; 795/Mad. of 1973-74 and 376 (Mad.), 1974-75, for the assessment years 1968-69, 1969-70 and 1970-71, dated July 30, 1975, and I.T.A. No. 888(Mad.), 1977-78 for the assessment year 1971-72, dated January 6, 1978. For the assessment year 1975-76, the Income-tax Officer further disallowed a sum of Rs.88,314 being the reserve for damaged stock in finished products. The Commissioner of Income-tax, (Appeals) upheld this addition also. The Tribunal sustained the addition, following the decision of the Tribunal in I.T.A. No.888 (Mad.) of 1977-78 cited supra.
Before us, learned counsel appearing for the assessee submitted that in so far as reserve for deficit stock is concerned, the assessee maintained day-to-day stock accounts in respect of different branches. At the end of the year, a physical verification of the stocks as per the stock book and actual stock found in the godown, etc., was made by the cooperative authorities. At that time, certain deficits were noticed. They are separately shown as value of deficit stock in the trading account by the auditor of the Cooperative Department. For the recovery of these sums, action was taken against the persons responsible for these deficits. In respect of these amounts, a reserve is created and is claimed in the profit and loss account. It was also stated that the action taken against the employees was in the Court of the Deputy Registrar. If and when the persons responsible for the deficit make good, the deficit value will be reduced. In the balance-sheet, the value of actual stock at the end of the year is shown and the deficit stock is shown as an asset and the reserve as a liability. It was claimed that it was only a fictitious asset till it is realised. However, the Department was not correct in stating that what is debited in the profit and loss account is only a reserve and unless the deficit is written off, it cannot be allowed. The Department was also not correct instating that the reserve created can only be an appropriation of the profit and not an allowable expenditure.
According to the assessee, the reserve is only a fictitious asset. The closing stock as per the physical verification is shown in the balance-sheet. There is a difference between the balance-sheet figures and the stock register. Normally an assessee would treat the difference as a deficit in stock and would immediately claim it as a deduction. This would also be normally allowed. However, in respect of the cooperative societies, the audit had to be apprised of the situation. Until the matter is cleared, it is to be shown as a reserve in accordance with the bye-laws of the cooperative society. Therefore, the additions were not warranted.
According to learned counsel, the Department should not be carried away by what is stated in the account books and the return. It is the duty of the Department to find out the real income aid levy the tax thereon. In any event, the cooperative society incurred a loss in the handling of goods by its employees and, therefore, the loss incurred by the assessee in the assessment years under consideration is liable to be allowed as deduction. According to learned counsel, all the necessary documents including account books were produced before the Income-tax Officer. As per the provisions of section 34 of the Evidence Act, the Income-tax Officer is bound to consider the documents filed by the assessee and find out the real income that is assessable in the case of the assessee. If the loss is shown in the account books and all full particulars were furnished for substantiating that such loss occurred during the course of the business, it is the duty of the Income-tax Officer to allow the loss as a deduction.
It is not necessary that the loss incurred and entered in the account books should necessarily be written off for the purpose of claiming the same as deduction.
According to learned counsel, the decision rendered by this Court in the case of the same assessee in the earlier assessment years reported in North Arcot District Cooperative Supply and Marketing Society Ltd. v. CIT (1987) 165 ITR 623, would not be applicable to the facts arising in the present assessment years under consideration. According to learned counsel for the assessee, the principles of res judicata would not be applicable in the income -tax matters and each assessment year has got to be dealt with separately. It was submitted that the facts arising in the present two assessment years are different from the facts arising in the earlier assessment years. Therefore, the decision should be rendered afresh on the facts available on record in so far as the present assessment years under consideration are concerned. Therefore, according to learned counsel, the reserve as shown in the balance- sheet is created for fictitious assets and actually no amount was set apart as reserve. What the assessee meant was the loss occasioned on account of deficit stock, which was shown as reserve until the account is finally settled with the approval of the audit of the cooperative society. Therefore, what was claimed really was the deduction of loss and not bad debt. Therefore, writing off of the loss is not necessary in the present case. It was further submitted that from the entries made in the accounts, the Tribunal can infer that the loss was actually, written off and, therefore, there is no justification on the part of the Department in disallowing the loss claimed by the assessee in these two assessment years under consideration. In order to support his submissions, learned counsel appearing for the assessee relied upon the following decisions:
(1) Add. CIT v. Upper Doab Sugar Mills Ltd. (1991) 188 ITR 190 (All.);
(2) CIT v. Mahabir Jute Mills (Pvt.) Ltd. (1991) 188 ITR 337 (All);
(3) Investors Corporation v. CIT (1993) 201 ITR 378 (Cal.);
(4) Bombay Forgings (Pvt.) Ltd. CIT (1994) 206 ITR 562 (Bom.);
(5) CIT v. British Paints India Ltd. (1991) 188 ITR 44 (SC);
(6) Pohoomal Bros. v. CIT (1958) 34 ITR 64 (Bom.);
(7) Manavala Naidu (G.) v. CIT (1961) 41 ITR 725 (Mad.);
(8) CIT v. Hemalatha Textiles Ltd. (1990) 183 ITR 461 (Mad.);
(9) Ritz Hotels (Mysore) Ltd. v. CIT (1992) 196 ITR 614 (Kar.);
(10) Badridas Daga v. CIT (1958) 34 ITR 10 (SC);
(11) Associated Banking Corporation of India Ltd. v. CIT (1965) 56 ITR I (SC);
(12) Miss Dhun Dadabhoy Kapadia v. CIT (1967) 63 ITR 651 (SC);
(13) S. Rajagopala Vandayar v. CIT (1990) 184 ITR 450 (Mad.);
(14) CIT v. Bank of India (1996) 218 ITR 371 (Bom.);
(15) CIT v. Byramjee Jeejeebhoy (P.) Ltd. (1990) 182 ITR 6 (Born.);
(16) CIT v. Mohan.Trading Co. (1990) 182 ITR 101 (Delhi);
(17) Glass Miniature Bulb Industries v. Add. CIT (1993) 204 ITR 352 (SC);
(18) Indequip Ltd. v. CIT (1993) 202 ITR 417 (Bom.);
(19) Indian Overseas Bank v. CIT (1990) 183 ITR 200 (Mad.);
(20) Sir Kikabhai Premchand v: CIT (1953) 24 ITR 506 (SC);
(21) CIT v. Darbhanga Laheriasarai Electric Supply Corporation Ltd (1988) 169 ITR 382Patna);
(22) State of Travancore v. CIT (1986) 158 ITR 102 (SC);
(23) Jatia Investment Co. v. CIT (1994) 206 ITR 718 (Cal.);
(24) Kerala Financial Corporation v. CIT (1994) 210 ITR 129 (SC);
(25) CIT/CEPT v. Jwala Prasad Tiwari (1953) 24 ITR 537 (Bom);
(26) Union of India v. Raghubir Singh (1989) 178 ITR 548 (SC)
(27) R.N. Goenka v. CWT (1989) 176 ITR 129 (Mad.);
(28) Sundarjas Kanyala Bhatija v. Collector (1990) 183 ITR 130 (SC)
On the other hand, learned standing counsel appearing for the Department submitted as under:
The Income-tax Officer noticed that the deficit is not written off in the accounts of the assessee. They continued to be shown as assets. What is debited in the profit and loss account is only a reserve. Unless the deficit is written off, it cannot be allowed. The reserve created can only be an appropriation of the profit and not an allowable expenditure. The stock book showed goods of certain value as in stock whereas physically they were not available. The fact that they are losses or deficit in goods has not beer proved so far. The cooperative societies are subject to audit by the cooperative department and they had not admitted this as loss of stock. The Tribunal also noticed that action had been taken against the employees fog these losses. The loss of stock was also not mentioned in the day-to-day stock book maintained by the assessee. Therefore, the claim of the assessee that this was only a loss of stock was not sustainable, with any evidence. The creation of reserve by debiting the profit and loss account cannot be allowed as a deduction. It is true that the assessee credited the sale amount as closing stock, but that is not the correct stock according to the stock register. Since the assessee was not able to show as to how the deficiency arose, there way no question of reducing the closing stock stage.
All the contentions raised by learned counsel appearing for the assessee for these assessment years under consideration were already raised before this Court while the decision was rendered in North Arcot District Cooperative Supply and Marketing Society Ltd. v. CIT (1987) 165 ITR 623 (Mad.). All these contentions were considered and negatived by this Court it the abovesaid decision. Therefore, it is not now open to learned counsel appearing for the assessee to re-agitate the same points that were raised and decided by this Court in the earlier assessment years. Learned standing counsel further pointed out that only on the scrutiny of the accounts, the Tribunal came to the conclusion that the deficit shown as reserve was no allowable since the loss was not written off in the account books. According to learned standing counsel the decision rendered in North Arcot District Cooperative Supply and Marketing Society Ltd. v. CIT (1987) 165 ITR 623 (Mad.) does not suffer from any infirmity. Therefore, that decision would be binding upon the assessee in the subsequent assessment years also where the facts are similar. Learned standing counsel pointed out that he is no disputing the principles in allowing loss when the loss was established b5 evidence. No specific question was raised challenging the findings of fact b3 the Tribunal as perverse. Therefore, unless the loss is proved and the same is written off, the assessee is not entitled to ask for deduction of the same.
We have heard learned counsel appearing for the assessee and learned standing counsel appearing for the Department.
The fact remains that in the assessment years 1974-75 and 1975-7f in computing the income, the Income-tax Officer made the following additions, under the head "reserve for deficit stock" Rs.1,20,691 in the assessment year 1974-75 and Rs.1,03,551 in the assessment year 1975-76 Addition was also made under the head "reserve for excess stock" Rs.20,99t in the assessment year 1974-75 and Rs. 24,550 in the assessment yea 1975-76. According to the assessee, the reserve is only a fictitious asset the closing stock as per the physical verification is shown in the balance sheet. There is difference between the balance-sheet figure and the stock register. The difference is a deficit in stock. In respect of the cooperative societies, the audit had to appraise this situation. Until such appraisal has taken place, the deficit is shown as a reserve in accordance with the bye-laws of the society. Therefore, the deficit should be allowed as a loss occasioned during the assessment years under consideration due to the defective handling of the goods by the employees. According to the Department, unless the alleged loss is written off, it is not possible for the assessee to claim the same as deduction. The Tribunal is the highest fact-finding authority. The Tribunal found the following facts the stock book showed goods of certain value as the stock, whereas physically they are not available. The fact that they are losses or deficit in goods have not been proved. The cooperative societies are subject to audit by the cooperative department and they had not admitted this as a loss of stock. Action has been taken against the employees for these losses. The loss of stock was also not mentioned in the day-to-day stock book maintained by the assessee. Therefore, according to the Tribunal, on the facts, the assessee has not established that it was only a loss of stock. Therefore,' according to the Tribunal, the creation of a reserve by debiting the profit and loss account cannot be allowed as a deduction. The Tribunal also noted that the assessee credited the same amount as closing stock, but that is not the correct stock according to the stock register.
According to learned counsel for the assessee, the assessing authority should find out the real income before taxing the same without simply following the entries made in the account books. If the real income theory is applied, it would be clear that the reserve created is nothing but a fictitious asset and the assessee was claiming really the loss occasioned by way of deficit stock.
In the matter of allowing loss, it is necessary that it should be written off in the books of account. Learned counsel appearing for the assessee brought to our notice various decisions to show that actual writing off is not necessary for claiming the loss as deduction. According to learned counsel, such a situation can be inferred on going through the entries made in the account books. We have carefully gone through these decisions cited by learned counsel appearing for the assessee in order to support the abovesaid contentions.
The Tribunal being the highest fact-finding authority recorded its finding with regard to the entries made in the account books and the day books, etc. We are bound by the facts recorded by the Tribunal. We cannot interfere with the finding of facts unless it is shown that such finding of fact is perverse, which is not the case put forward by the assessee. In the entries made in the account books, there was, no indication to show that what was suffered by the assessee is loss occasioned by deficit of goody on verification. According to learned counsel for the assessee unless the audit party of the cooperative department scrutinises the account and appraised the loss, it cannot be written off. In such circumstances, it was submitted that the loss claimed should be allowed as a deduction even though it was not actually written off in the account books. According to learned counsel for the assessee, the writing off of the loss can be inferred and implied from the entries made in the account books. This contention put forward by learned counsel appearing for the assessee cannot be accepted, unless the assessee proved that really the loss occurred and the same was written off in accordance with the materials available on record. Further, a similar question came up for consideration in the case of the same assessee before this Court in the assessment year 1967-68. In the assessment year 1967-68, the Income -tax Officer disallowed the deduction claimed by the assessee on the following two sums (see (1987) 165 ITR 623, 625):
| | | (Rs.) |
| (1) | Reserve for deficit in jail supply disallowed on the ground that it is a provision. | 4,803 |
| (2) | Reserve for deficit stock disallowed on the ground that it is a provision as in earlier years. | 1,13,589 |
Aggrieved by the disallowance, the assessee went before the Appellate Assistant Commissioner, who held that under the Income-tax Act, no reserve can be allowed as a deduction. The assessee took the matter in appeal to the Income-tax Appellate Tribunal, contending that the sum of Rs.1,13,589 represented the deficit stocks in various items and they were in the nature of handling losses, that usually the purchases are made in bags of different weights and they are rebagged and standardised, that the loss occurring at that stage as well as at the stage of handling should be taken to be handling losses and that at any rate they are only contra entries and did not affect the profit and the society is entitled to create a non-statutory reserve in view of section 62 of the Cooperative Societies Act.
As regards the sum of Rs.4,803 it was contended before the Tribunal that during the supply of goods to the jail authorities, a shortage has occurred and, therefore, a reserve has been created in that regard, as it could not be written off without due sanction from the higher authorities during the year of account. The Department contended that the stock deficit has not been entered then and there in the books and that the deficit in stocks arising out of physical verification is created towards the reserve account, which is neither an outstanding nor has been treated as a loss during the year of account.
The Tribunal held that during the year of account, goods of the value of Rs.1,13,589 have been shown as deficit in stocks, that instead of writing it off as a loss, it has been shown as a reserve, that according to the stock books the value of the goods to this extent were in stock, but, in fact, they were not available, that they were handling losses or any other type of loss during the year of account, were not proved; that the assessee's employees and ex-employees were proceeded against for loss of the deficiency in stocks and a sum of Rs.41,000 odd had, in fact, been recovered, that the loss arising out of the deficiency in stocks should be taken as a loss in the nature of embezzlement of stocks and that only when the matter is finally settled, the assessee can be allowed to write off the loss. Thus, the Tribunal held that the assessee has not established that the loss has occurred in the year of account in which case alone the assessee could get a deduction and the recoveries, if any, later, could be brought to tax under section 41 of the Act. Regarding the sum of Rs.4,803, the Tribunal found that the nature of the loss and whether it has arisen in this year has not been established.
Aggrieved by the order of the Tribunal, the assessee approached this Court. Before this Court, the assessee contended that though normally a deduction can be claimed only when the deficiency in the stocks is written off during the year of account and treated as a loss in stocks, the position in the case of a cooperative society is different. In cooperative societies before the loss in stock is written off, sanction of the higher authorities has to be obtained and since obtaining of the sanction takes considerable time, .the actual writing off of the loss in stocks during the accounting year should not be insisted upon. According to the assessee, it is because of the delay in getting the sanction from the higher authorities for writing off of the loss in stocks that the cooperative audit has suggested creation of a reserve towards such a loss, so that the deduction can be claimed in respect of the said reserve in the year in which the loss in stocks had occurred. According to the assessee, the purpose of creating such a non-statutory reserve is to prevent the inflation of divisible profits and to provide for irrecoverable assets or doubtful cases under suspense transactions and to prevent an increase in profit when the expenditure was objected to in audit and shown as recoverable from those responsible. The assessee further contended that an entry in the books of account, writing off a debt as irrecoverable -is not a condition precedent for its admissibility as an allowance under section 37 of the Income Tax Act, 1961, and, therefore, the Revenue cannot insist on the writing off of the deficit entry in the year of account as a condition for allowing a deduction of the amount set apart as a reserve. The assessee further stated that the case of the assessee, which is one of deficiency of stock, cannot be treated as an embezzlement by the employees so as to attract the principle laid down by the Supreme Court in Associated Banking Corporation of India Ltd. v. CIT (1965) 56 ITR I. According to the assessee even without the actual writing off of the loss during the year of account, the assessee is entitled to claim deduction of the amount created as a reserve towards such loss in stocks for that alone will indicate the real or proper statutory income and that if the deduction is not allowed, the computation of income will not be real. Ultimately, this Court, on considering the submissions made by the assessee, held that if the books of account do not indicate any loss of stocks, then the assessee's claim for deduction towards that loss cannot be allowed in the year of account. This Court further held that the books of account not disclosing the loss during the accounting year and the mere creation of a reserve out of the profits, will not entitle the assessee to claim the benefit of deduction.
In the present assessment years also, on verification of accounts, the Tribunal found that the books of account do not indicate any loss of stock. Considering that the facts arising in the assessment years under consideration and the submissions made by learned counsel appearing for the assessee, before us, are similar and identical to the submissions made in the assessment year 1967-68, we are unable to come to a different conclusion than what was reached by this Court on a similar set of facts in the earlier assessment years The assessee has not produced any further evidence before the Tribunal for coming to a different conclusion than was arrived at in the earlier assessment years. The judgment rendered by this Court in North Arcot District Cooperative Supply and Marketing Society Ltd. v CIT (1987) 165 ITR 623, is binding on the assessee when the facts are similar in both the assessment years under consideration. In view of the foregoing reasons, we hold that the Tribunal was correct in coming to the conclusion that the reserve created in the assessment years under consideration for deficit stock, cannot be allowed as deduction. Accordingly, we answer the questions referred to us in the affirmative and against the assessee. No costs.
M.B.A./3097/FCReference answered.