I.T.A. No.4293/LB of 2003, decided on 8th June, 2005. VS I.T.A. No.4293/LB of 2003, decided on 8th June, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1881 (2005)

Income Tax Ordinance (XXXI of 1979)---

----Ss. 23(1)(x) & 25(a)---Deductions---Loss due to destruction of stock by fire---Disallowance of loss caused by fire of the insured stocks due to partial receiving of compensation from the Insurance Company Assessee contended that stocks had actually been destroyed by fire while the hope for recovery of the same from Insurance Company was not in sight and in case any compensation was received or recovery was subsequently made then the same could be offered to tax as per provisions of S.25(a) of the Income Tax Ordinance, 1979---Validity---Loss due to destruction of stock by fire was an allowable expense---Recovery of claim from Insurance Company after partial payment had apparently become not possible---In case of recovery of claim in future it could be taxed in the year of receipt under the provisions of S.25(a) of the Income Tax Ordinance, 1979---Amount of claim which had not been accepted by the Insurance Company shall be written off and in future if at all the same was recovered, wholly or partly, it shall be added in the year in which it was recovered.

1 Tax 4 ref.

1983 PTD 30 rel.

Zia Haider Rizvi along with Haroon Mirza for Appellant.

Imran Raza Kazmi, D.R. for Respondent.

ORDER

The titled appeal is directed against the order, dated 1-8-2003 passed by the learned CIT/WT(A), Zone-III, Lahore by submitting various grounds but before us has mainly contested the disallowing of loss caused by fire of the insured stocks due to partial receiving of A compensation from the Insurance Company. The sections referred to in this order are of the Repealed Income Tax Ordinance, 1979.

Facts in brief of the case are that the Assessing Officer during the course of assessment proceedings found that following loss of stock due to fire is claimed as an expenditure:--

-- ??????? Total value of stock lost due to fire??????????????????????????????? 106583522 kgs

-- ??????? Stock loss insurance claimed received

from HIC1 and PITC1???????????????????????????????????? 40769866

--???????? Insurance claimed receivable from PGIL?????????????????????? 9900000

--???????? Expenses claimed.??????????????????????????????????????????????????????? 55913656

Two Insurance Companies paid the claim made by the appellant/assessee but in the case of Pakistan General Insurance claim was lodged for a sum of Rs.59.518 million out of it only Rs.9.9 million were received, and balance sum of Rs.49.618 million was written off. This balance sum Rs.49.617 million was not allowed as admissible under section 23(1)(x). Prior to proceeding in this respect show-cause notice was issued by the Assessing Officer and reply was filed by the assessee. In support of irrecoverability of this amount respondent/assessee produced as proof Photostat copies of the plaint as a proof of litigation but ultimately the Assessing Officer disallowed this amount. The learned 'first appellate authority also by bringing on record the following findings rejected the contention for allowability of this amount in the hands of' the appellant/assessee:--

"As is apparent from the above quotation the issue involved in referred cases were quite different thus the appellant cannot claim the benefit of these two cases. As discussed the amount in question is in dispute, therefore, it was not liable to deduct from the profit of the company. Whenever the issue is decided either in favour of the appellant or against him the amount can be claimed by the appellant as per facts available at that time thus the addition at this point of time has rightly been made by the Assessing Officer."

Before the learned first appellate authority following two reported orders were referred by the learned AR:

(i) 1 Tax 4

(ii) 1983 PTD 30.

But the learned first appellate authority held that appellant/assessee cannot claim the benefit of these two reported cases.

Before us the learned AR has firstly pleaded that now after exhausting the legal course seeking payment of claim from Pakistan. General Insurance Company,, the matter has reached before the Honourable Lahore High Court the chances of recovery of claim from the said Insurance Company have disappeared, as matter has not ended here because the Insurance Company has also filed a suit of damages against appellant company for improperly recovering the sum against the assured sum an simultaneously for returning the same to the Insurance Company. To prove this contention the learned AR produced before us the Photostat copies of filing of suits before the Senior Civil Judge and then presently pendency of proceedings before the Honourable Lahore High Court (Companies jurisdiction) and also a copy of the suit filed against Messrs Maqbool Textile Mills for recovery of already received compensation, along with damages. With these submissions the learned AR has contended that the amount so far claimed from Insurance Company has become a loss as not receivable, amount. Stocks have actually been destroyed by fire while the hope for recovery of the same from Insurance Company is not in sight and in case any compensation is received or recovery is subsequently made then the same could be offered to tax as per provisions of section 25(a). The learned AR in support of his contention that loss due to destruction of stock by fire is an allowable expenditure has again referred to the same two orders already quoted by the learned first appellate authority in his order. The citation is again referred as under:---

(i) 1 Tax 4

(ii) 1983 PTD 30.

The learned AR further contended that in the beginning the amount was considered as receivable from the Insurance Company but after this prolong litigation the chances of recovery are no more there as a bad debt it is to be allowed also, as in case of its recovery it could be taxed in the year of its recovery. In support of this the learned AR has referred to the reported judgment as 1983 PTD 30. The learned AR has also submitted that amount of loss has not been disputed but it is only on the basis of appellant/assessee's claim against the Insurance Company that it has been not allowed to be charged as an expenditure for the year. The. learned AR has offered that affidavit could be filed affirming that whenever any amount of compensation in the form of claim from Insurance Company will be received then the same will be offered to tax under the provisions of section 25(c) and the application of this section will never be contested.

The learned DR contested the stance taken by the assessee through its AR by firstly submitting that it was by a notice under section 62 that the attention of the assessee was drawn to the provisions of section 23(1)(x) and thereafter disallowing the same is quite proper. The learned DR has submitted that the claim for writing off as bad debts was not proper. The learned DR insisted that amount cannot be written. off despite the filing of counter claim by the Insurance Company for damages and the failure of appellant/assessee before all the lower forums. The learned AR in reply has also submitted that amount of loss has not been disputed by the Department but. its position on non?-receivability has been opposed by the Department. The learned AR again referred to order of this Tribunal as cited in the impugned order and also another reported order with citation as 1983 PTD 30 wherein it has been held that the expense/loss is to be allowed and subsequently on its recovery it is to be added in the income of year in which it was received. With these arguments as reply to the learned DR it has again prayed that loss as has arisen in the year may be allowed and if at all it could be recovered wholly or partially then in the year of its recovery will be added in the income.

We have heard both the learned representatives and have also perused the available record. The learned AR has provided us with the Photostat copy of petition re: C.O. 17/2001 seeking liquidation of company and appointment of liquidator. The learned AR also provided us a copy of suit for recovery of damages with Civil Suit No.9850-C/05 filed in the Court of Senior Civil Judge, Lahore. The case-law as cited by the learned AR has also been gone through we find that it is on all fours to this case firstly that loss due to destruction of stock by fire is an allowable as expense and secondly so far the recovery of claim from Insurance Company after partial payment has apparently become not possible, thirdly in case of recovery of claim in future it could be taxed in the year of receipt under the provisions of section 25(a).

In the circumstances of this case we do not have any hesitation in holding that the amount of claim which has not been accepted by the Insurance Company shall be written off and in future if at all the same is recovered wholly or partly it shall be added in the year in which it is recovered. No other ground has been pressed by the learned AR of the appellant/assessee. Appeal on this point is accepted.

C.M.A./1/Tax (Trib.)??????????????????????????????????????????????????????????????? Appeal accepted.