S. KUSHALCHAND & CO.,MUMBAI vs. CIT 21, MUMBAI

O R D E R Per Sanjay Arora, A. M.: This is an Appeal by the Assessee directed against the Order under section 263 of the Income Tax Act, 1961 (‘the Act’ hereinafter) by the Commissioner of Income Tax-11, Mumbai (‘CIT’ for short) dated 26.3.2014, setting aside her assessment for the assessment year (A.Y.) 2009-10 vide order dated 28.12.2011. 2.1 The controversy that obtains in the instant case is with regard to the deductibility of the sum of Rs.12,08,534/- in arriving at the computation of the assessee’s business income for the year; the relevant part of the ld. CIT’s order reading as under:

2 S. Kushalchand & Co. vs. CIT ‘13. However, interest received on FDR amounting to Rs.1,16,552/- and Income Tax refund of Rs.2,06,940/- do not form part of business income and are not directly linked to the business of the assessee. They are in the nature of ‘income from other sources’ and should have been treated as such. It is also observed that an amount of Rs.12,08,534/- pertaining to the insurance claim recovered from joint venture partner M/s. Essen Corporation has been subtracted twice from the insurance claim. No explanation has been provided by the assessee regarding the same. Hence, the Assessing Officer is directed to verify whether this amount pertains to the insurance claim/business income. Further, these incomes should have been excluded as per explanation 3 of section 40(b) of the Act while computing the allowable remuneration to partners as per section 40(b)(ii) and (iii) of the Act.’ 2.2 Examining the nature of the insurance claim for Rs.399.69 lacs, received at Rs.313.99 lacs – primarily on account of under-insurance (Rs.72.10 lacs, and the salvage value of the stock destroyed - Rs.13.60 lacs) and offered as business income (through credit to the Profit and Loss Account), the ld. CIT found the assessee’s claims with regard thereto as valid; the claim arising on account of loss of stock-in- trade in fire at the assessee’s premises. He, however, entertained doubt with regard to the treatment of Rs.12.09 lacs in arriving at the net loss, which had been explained by the assessee in the revision proceedings vide letter dated 04.12.2013, as under (PB pg. 5): ‘We submit that factually ‘other income’ is in nature of Business Income and not Income from other sources as understood by your office. The fact is justified by understanding nature of receipts as explained below: (Amt. in Rs.) i) Insurance claim lodged with Ins. Co. 3,99,68,926 Less: Salvage adjusted with Ins. claim 13,59,671 ___________ 3,86,09,255 Less: Under insurance claim disallowed 72,09,920 by Insurance Co. Less: Insurance claim recovered from 12,08,534 60,01,386 joint venture partner M/s. Essen __________ __________ Corporation 3 S. Kushalchand & Co. vs. CIT Insurance claim recd on loss of stock-in- 3,26,07,869 trade ii) Refund of 4% SAD Import Duty 1,63,172 iii) Technical Consultation charges 8,65,511 iv) Commission recd. 8,87,219 v) Interest on FDR 1,16,552 __________ 3,46,40,323 Less: Insurance claim recovered from 12,08,534 joint venture partner __________ 3,34,31,789 Add: Income tax refund shown in P & L 2,06,940 a/c __________ Amount as per I. T. Notice 3,36,38,729’ 2.3 What, therefore, is required to be seen is if the entire amount received/receivable, i.e., Rs.326.08 lacs, stands credited to the assessee’s operating statement for the relevant year, and which we find as so, each of the constituent figures being separately disclosed under Schedule G [‘Cost of Goods Sold’] of the balance-sheet as on 31.3.2009 (PB pgs. 21-31 at pg. 28): (Amount in Rs.)

SCHEDULE ‘G’: COST OF GOODS AS ON 31/3/2009 SOLD 1. Net purchases (1) 51,13,23,860 2. Add: (A) Duties & Taxes, paid or payable, in respect of goods and services purchased a. VAT xxxx (A) 16,94,180 TOTAL GROSS PURHCASES [1 + (A)] 51,30,18,040

(B) Other Direct Expenses a. Freight Inwards 40,300 b. Salvage stock 13,59,671 c. Loss by fire 60,01,386 d. Exchange rate difference 11,54,534 4 S. Kushalchand & Co. vs. CIT e. Insurance claim received (3,99,68,926) (3,14,13,035) (C) Increase or Decrease in stock 1 Opening stock xxxx 2 Less: Closing stock xxxx (C) (2,26,04,032) Total of cost of goods sold (1+A+B+C) 45,90,00,972 (figures in brackets, represent negative figures) The cost of goods sold (COGS) includes the cost of the bought out goods as well as the other input costs, and credited with the entire amount of insurance claim lodged. In-as-much as this value (Rs.399.69 lacs) includes the amount of under-insurance (Rs.72.10 lacs) and salvage value of the goods (Rs. 13.59 lacs), so that the same stands considered by the insurer, the same have been separately debited to the COGS. The amount falling to the share of the assessee’s joint venture partner, M/s. Essen Corporation (Rs.12.09 lacs) stands reduced, and there is no double deduction claim on that account. To state succinctly, the total loss arising and claimed may be stated as follows, and which cost agrees with the assessee’s accounts: (Amt. in Rs.) a) Credit to the cost of goods sold account 326.08 lacs b) Stock (salvage) 13.60 lacs c) Loss incurred (net) 60.01 lacs 399.69 lacs The ld. CIT has also required the A.O. to examine if the amount of Rs.12.08 lacs pertains to the insurance claim. This fact is apparent in-as-much as the assessee has reduced the loss on fire, which would otherwise be at Rs.72.09 lacs, i.e., to the extent of the claim short received. No adjustment on this count is therefore called for.

2.4 The direction by the ld. CIT with regard to the exclusion of incomes by way of interest, i.e., on FDRs and income tax refund, being assessable u/s. 56, for the purpose of computing deduction in respect of remuneration to partners u/. 37(1) r/w s. 40(b), 5 S. Kushalchand & Co. vs. CIT needs no modification or interference, being in consonance with the law. How, one may ask, could deduction of business expenditure be allowed against income assessable u/s. 56? In fact, no arguments were addressed in the matter during hearing.