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Facts
The Revenue appealed against the CIT(A)'s order deleting the addition of interest income. The assessee filed a cross-objection challenging the confirmation of loss due to flood and theft.
Held
The Tribunal held that the addition of notional interest income was not justified as it was not a real income and there was no specific provision in law for taxing it. Regarding the loss due to theft, the Tribunal found that the assessee had substantiated the claim and it was an allowable deduction.
Key Issues
Whether notional interest income can be taxed and whether the loss claimed due to theft and flood is an allowable deduction.
Sections Cited
143(3), 36(1)(iii)
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Income Tax Appellate Tribunal, DELHI BENCH ‘G’, NEW DELHI
Before: Sh. Satbeer Singh Godara & Sh. S. Rifaur Rahman
ORDER
Per Satbeer Singh Godara, Judicial Member:
This Revenue’s appeal and assessee’s cross objection i.e.
CO No. 36/Del/2024 for Assessment Year 2017-18, arises against the CIT(A)-23, New Delhi’s in case No. CIT(A), Delhi-23/10218/2019-20 dated 05.01.2024, in proceedings u/s 143(3) of the Income Tax Act, 1961 (in short “the Act”).
Heard both the parties at length. Case files perused.
1. Whether on the facts and circumstances of the case ld. CIT(A) is justified in deleting the addition of Rs.52,65,28,560/- on account of interest on loans and advances? (ii) Whether on the facts and in the circumstances of the case Ld. CIT(A) is justified in deleting the addition of Rs.20,18,53,648/- on account of loss occurred due to theft?
The assessee’s cross objection CO No. 36/Del/2024 on the other hand raises the following grounds:
“1. That the Ld. CIT(A) has erred in law and on facts and circumstances of the case in confirming the addition of Rs. 12,09,87,377/- made by the Assessing Officer on claim of loss due to flood.
2. That the Ld. CIT(A) has failed to appreciate that the loss of stock due to flood/damping could have been only ascertained on physical verification undertaken after the close of the accounting year by a qualified Chartered Accountant.
3. That the Ld. CIT(A) has failed to appreciate the written submissions filed and is wrong in confirming the adverse inference drawn by the Assessing Officer which is contrary to the facts and circumstances of the case.
4. That on the facts and circumstances of the case as well as in law, the Ld. CIT(Appeals) is fully justified in deleting the addition of Rs.52,65,28,560/- made by the Assessing Officer in respect of imputed interest income @12% which was neither due nor received by the appellant.
5. That on the facts and circumstances of the case as well as in law, the Ld. CIT(Appeals) is fully justified in deleting the addition of Rs.20,18,53,648/- out of disallowance of Rs.32,28,41,025/- made by the Assessing Officer in respect of claim of loss due to theft and flood.”
5. It is in this factual backdrop that we come to the Revenue’s first and foremost grievance that the CIT(A) has CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. erred in law and on facts in reversing the Assessing Officer’s action adding the assessee’s notional interest income of Rs.52,65,28,560/-, in his assessment order dated 10.12.2019, vide the following detailed lower appellate discussion: “13. Ground No. 3, 4 & 5 are regarding the addition of Rs. 52,65,28,560/- made by the Assessing Officer. The appellant has made certain advances to various parties. On such advances made, the appellant has not charged any interest. The Assessing Officer computed interest @ 12% on advances made and accordingly made addition of Rs.52,65,28,560/-. In the assessment order, the Assessing Officer has stated as under:- "Since proper detail as required is not being provided by the assesses after several reminders hence, it cannot be ascertained as for what purpose this advance is given and to whom, Also, the company Is suffering loss on one side and on other side interest free advance is given to various investors. The justification with respect to the same has not been provided by the justification with respect to the same has not been provided by the assessee hence, interest income @ 12% of total advances in respect of sundry advance of Rs. 4,38,77,38,004/- is added to Income of the assessee. In view of the aforesaid facts, addition of interest Income of Rs. 52,65,28,560/- is made to the total income of the assessee for the relevant assessment year 2017-18."
The appellant has furnished the following details In respect of investment, loans and advances:
CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. Name of the party Opening Balance Amount Source of Income earned Rate of with PAN and address given/ Loan/Advanees/ interest Advance Investment during the year Investment In Equity Shares Sanya Hospitality 119,589,711 - Nil Nil Nil Pvt. Ltd, D- 13/1 Defence Colony, New Delhi-110024 In Mutual Funds Sahara Liquid Fund- 234,868,073 - NII 118,477,471 Nil Variable Pricing- Growth Option (LFVG) Sub Total A 354,457,784 - - 118,477,471 Loans Mr. Roop Madan & 1,104,328,231 Nil Nil Mrs. Bela Roop Madan, A-9/4, Vasant Vihar, New Delhi- 110057 1,104,328,231 - Sub Total B - - Other Advances - Security Deposit with 20,000.00 Nil Nil Nil sales Tax Deptt. Interest Accrued on Loan Mr. Roop 234,072,134.0 Nil Nil Nil Madan & Mrs. Bela 0 Roop Madan, A-9/4, Vasant Vihar, New Delhi- 110057 Advance to Parties 326,797 M/s SRM 000023(Advance Nil Nil Samart Hoops Pvt. from S.I) Ltd. M/s Bhatia & 3,000,000 Nil Nil Nil - Company M/s MDPL 900 Nil Nil Nil Infosystem(P) Ltd. Alchemy Enterprises 361,086 - Nil Nil Nil Bridges Healthcare 60,000 Nil Nil Nil Federation CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. D.C. 1,575,000 - Nil Nil Nil International Gyan Security Press 1,255,650 Nil Nil Nil Pvt. KVR Infosys Pvt. Ltd. 2,704,252 Nil Nil Nil N.K. Gossaln and 44,806 - Nil Nil Nil Company Pvt. Ltd. Par's 158,250 - Nil Nil Nil Packagers R Cube Intl. 1,869,273 Nil Nil Nil - The New India 605,361 Nil Nil Nil Assurance Co Ltd Sahara Welfare 16,452 Nil Nil Nil Foundation Commission Advance 23,069,358 Nil Nil Nil (Advance to various field workers) Sundry Advance 4,387,738,004 Nil Nil Nil (Advance to various Investors) Sahara Credit Co- 141,031 91,676 Book entry Nil Nil operative Society Ltd. Sahara India 367,262 Nil Nil Nil Karyakarta Gratuity Fund Trust Misc. Advance to 49,862 Nil Nil Nil employee Sahara Housing 206,216 Nil Nil Nil Investment Corporation Ltd. TDS & 241,514,751 Nil Nil Nil 6,863 Advance Income Tax (Net to Provision) Input VAT 858,843 Nil Nil Nil including Disputed Vat Advance TDS 91,754 Nil Nil Nil Deposited (Excess TDS) TDS on 16,428,281 Nil Nil Nil Commission Prepaid Expenses 30,949 26,462 Nil Nil Nil (Insurance to Vehicle) Interest Accrued on 240,931 67,566 Fixed Deposit Sub Total C 4,916,480,406 519,364 Grand Total (A+B+C) 6,375,266,421 519,364 118,477,471 CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. 15, The submissions of the appellant with regard to this addition are as under:- "Ground No- 3, 4 & 5: In these grounds of appeal the appellant has objected to imputation of interest income of Rs.52,65,28,560/- on hypothetical basis made by the Ld. Assessing Officer for alleged loans given by the appellant to customers as appearing under the head Sundry Advances. In response to the query of the Ld, Assessing Officer, complete details of loans and advances were duty submitted before her, and out of the same, she has imputed an interest Income @ 12% of total advances in respect of sundry advances of Rs.4,38,77,38,004/- and has added the same to the income of the appellant. The brief facts of the case are that the appellant company was in the business of mobilizing of OFCDs from the public. The appellant had taken on hire the entire infrastructural facilities of M/s. Sahara India including its branches and usage of its bank account format on its business activities. In the preceding years, interest was provided /paid to the debenture holders, either on accrual system of accounting or on payment basis. Inadvertently, the tax which was deductible at source was not deducted from the payments made / provision made in respect of the interest on debentures and full amount paid to bond holders, However, the deductible though not deducted TDS was deposited by the appellant at the time of finalization of books, and therefore proper accounting entries for TDS deduction and TDS deposited were made by the appellant company and the TDS which could not be deducted became a debt or amount recoverable from bond holder of the appellant- company, to be realized from the debenture holders. Thus, the appellant Company debited the said amount under the head Sundry Advances (advance to various investors) which represented recoverable TDS in their cases from them. It was not a loan which was given by the appellant company to the debenture holders or any other party but was in the nature of a Trade Debt which was recoverable. All these facts were brought to the notice of the Ld. Assessing Officer vide our reply filed during the course of assessment proceedings on 28.05.2019, 21.10.2019 and 27.11.2019 on the above subject, Without finding any fault in the replies of the assessee, the Ld. Assessing Officer has in a cursory way that the proper details have not been provided by the appellant, and it CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. cannot be ascertained as to and for what purpose this advance was given details with reference to the same has not been provided by the appellant and she has imputed an interest income of Rs.52,65,28,560/- and added the same to the income of the appellant. The entire observation of the Ld. Assessing Officer is misplaced, in as much as, in all the replies submitted by the appellant, the explanation with reference to the amount outstanding was given to the Assessing Officer. At no stage of the proceedings she required the appellant to submit the details of the parties in whose case TDS was deposited by the appellant company and was appearing under the head Sundry Advances. Moreover, the amount is an old balance brought forward from earlier years on which no interest has been imputed in those years and, therefore, there arises no occasion for imputing interest income @ 12% of the said amount as there is no contract or agreement between the appellant company and the debenture holder, on whose account the TDS has been deposited ,for payment of any interest on the TDS amount deposited on their behalf by the appellant company. The entire addition made is merely on surmises and conjectures and on wishful thinking of the Ld. Assessing Officer and, therefore, deserves to be deleted. For the above proposition, the appellant would like to rely on the following cases:-
1. 1. Jwala Prasad Radha Kishan vs. CIT 198 ITR 415 (Alld) 2. Highway Construction Pvt. Ltd. vs. CIT 111 CTR 143 (Guwahati).
3. CIT vs. Motor Credit Co. Pvt. Ltd, 127 ITR 572 (Mad.).
4. CIT vs. Devi Films (P) Ltd. 143 ITR 386 (Mad.) 5. S.A. Builders Ltd. vs. CIT(A) 288 ITR 1 (SC).
6. CIT vs. Hotel Savera 239 ITR 795 For the proposition that if no interest has been charged in the preceding year, the same cannot be considered during the year and the inquiries has to be limited to the increase in current year only. For the above proposition, the appellant would like to place reliance on the following cases:- 1. CIT vs. Sridev Enterprises 59 Taxman 439 (Karnataka).
2. CIT vs. H.V. Stock Holdings' Ltd. (No.1) 325 ITR 216 (Del.).
CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. In light of the above facts and circumstances as well as the legal position, the addition of Rs.52,65,28,560/- is not tenable on the facts and circumstances of the case and, therefore, deserves to be deleted."
The reply of the appellant on the impugned Issue is examined. It is a well settled principle of law that only the real income which has accrued to an assessee can be brought to tax. Hypothetical income in the nature of notional interest cannot be brought to tax. The income-tax is chargeable or payable on the Real income. The income tax is not payable on any income which one could have been earned but has not been earned. In the case of CIT Vs. Shoorjl Vailabhdas & CO. 46 ITR 144 (SC), the apex court on the concept of real income held as under:- "Income Tax is a levy on income. No doubt, the Income Tax Act takes into account two points of time at which the ¡¡ability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a "hypothetical income", which does not materialize. Where income has, in' fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of accounts."
Similarly In the case of Godhra Electricity Co. Ltd. Vs. CIT 225 ITR 746 (SC), the apex court held as under:- "The question whether there was real accrual of income to the assessee-company in respect of enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realization in a realistic manner. If the matter Is considered in this light, it is not possible to hold that there was real accrual of income to the assessee-company in respect of enhanced charges for supply of electricity which were added by the ITO while passing the assessment orders in respect of the assessment years under consideration. The AAC was right in deleting the said addition made by the ITO and the Tribunal had rightly held that the Claim CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. at the increased rates as made by the assessee- company on the basis of which necessary entries were made represented only hypothetical income and the Impugned amounts as brought to tax by the ITO did not represent the income which had realty accrued to the assessee-company during relevant previous years. The High Court, in our opinion, was in error in upsetting the said view of the Tribunal."
In the case of E.D. Sassoon & Co. Ltd. Vs. CIT 26 ITR 27 (SC) it was laid down by the court that income accrues when the assesses acquires a right to receive the income. The assessee must have created a debt in his favor and he must have acquired a right to receive the payment. The observations of the court are as under:- "...........A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or In other words a debitum in presentí, solvendum in future it cannot be said that any income has accrued to him. The mere expression "earned" In the sense of rendering the services etc. by itself is of no avail......."
The Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom.) has held that if there are funds available both Interest-free and overdraft and/or loans taken, then a presumption would arise that Investments would be out of the interest- free fund generated or available with the company, if the interest-free funds were sufficient to meet the Investments. The relevant portion of the judgement of Bombay High Court is reproduced below:- "10. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd.'s case (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd.'s case (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and hot out of the overdraft account CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. for the running of the business and in these circumstances' the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.'s case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and In such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both- interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments, In this case this presumption is established considering the finding of fact both by the CTT (Appeals) and ITAT."
The Hon'ble Apex Court in the case of CIT(LTU) vs. Reliance Industries Ltd, 410 ITR 466(SC)/ 102 taxmann.com 52 (SC) upheld the order of Mumbai High Court 86 Taxmann.com 24 (Bombay). The High Court in para 33 of its order held as under:- "(Para 33) We do not see how when the Assessing Officer's views are that in cases of the interest-free loans and interest given by the assessee to its subsidiary companies are in the above sums, still, the principle laid down by this court that if there are funds available to them interest-free and over-draft or loans taken, would not apply. This view of the Assessing Officer is ex facie contrary to the settled principle that a presumption would arise that the investment would be out of the interest free funds generated or available with the company. Then, the borrowed capital in hand in that case and interest expenditure was deductible under section 36(1)(iii) of the Income-tax Act, 1961. The Tribunal held that the interest-free fund available to the assessee is sufficient to meet Its investment. It can be presumed that investments were made from interest-free funds available with the assessee. The position clearly emerges from the record and for the CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. current assessment year as well. We do not see how a different view in the facts and circumstances .can be taken, If the Tribunal had followed the earlier view and on facts, then, there is no perversity when nothing contrary to the factual material was brought on record by the Revenue. In such circumstances, the concurrent view on disallowance of interest was reversed and the appeal of the assessee to that extent was partly allowed. We do not see any substantial question of ¡aw arising from such a view of the Tribunal."
Thus, it is settled principle of law that if anything is to be taxed, there has to be specific provision in law. Had it been the intention of law to tax notional interest on interest free loans, in that case, there would have been separate deeming provision in law as is there in section 68, 69 etc. It is beyond the jurisdiction of the Assessing Officer to create a source of Income that never existed and that too when there is no specific provision in law. What is Income is to be decided by the legislature and not by the executive. The Assessing Officer therefore, erred in computing notional Income and bringing it to tax despite there being no taxing provision in this regard.
In view of the above discussion it is held that the Assessing Officer was not justified in creating a new source of income in the form of interest on loan and advance, Therefore, the addition of Rs, 52,65,28,560/- is hereby deleted.
Consequently, Ground No.3, 4 & 5 are allowed.” 5.1 This is what leaves the Revenue aggrieved.
We have given our thoughtful consideration to the Revneue’s and the assessee’s vehement rival submissions against and in support of the learned CIT(A)’s foregoing detailed discussion deleting notional interest income in issue made by the Assessing Officer. We make it clear first of all that this is not an instance of disallowance of interest u/s 36(1)(iii)
CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. of the Act wherein the department alleges the assessee to have diverted it’s interest bearing funds for non-business purposes. This is for the precise reason that the learned Assessing Officer had computed notional interest @ 12% on advances made to sister concerns without invoking section 36(1)(iii) of the Act which couldn’t be concurred with since not made under any specific provision in the Act. That being the clinching case, we hold that the learned CIT(A) has rightly interfered with the foregoing notional interest computation @ 12% made in the assessee’s hands in assessment proceedings. The Revenue’s instant first and foremost substantive ground is rejected therefore.
The assessee’s fourth substantive ground in it’s cross objection herein supporting the CIT(A) foregoing findings stands rendered infructuous in very terms.
Next comes the remaining common sole issue between the parties wherein the assessee had claimed loss of inventory due to floods, expiry of products and theft at it’s godowns of warehouse; involving varying sums, which stood disallowed by the Assessing Officer and the CIT(A) has partly interfered with his action to this effect, vide the following detailed discussion:
“24. Ground No. 6, 7 and 8 are regarding the disallowance of Rs, 32,28,41,025/- made by the Assessing Officer. In these grounds of appeal the appellant has objected to disallowance of Rs.32,28,41,025/- on account of stock of loss which has occurred due to theft and flood (dampness and water logging) etc.
25. The appellant in the accounts has claimed the following deduction on account of theft/loss etc.
1. Loss of inventory due to flood-Rs. 12,09,87,377/-
2. Loss of inventory due to expiry of products-Rs. 4,06,73,167/-
3. Loss of inventory due to theft-at Vadodara-Rs, 11,87,46,052/-, At Jaipur Warehouse- Rs, 23,107,597/- and At Lucknow Warehouse- Rs. 5,99,99,999/- totaling Rs. 201853648/-.
26. The Assessing Officer has not allowed the claim of loss of Inventory due to floods amounting to Rs.12,09,87,377/- and loss of Inventory due to theft amounting to Rs. 20,18,53,648/-.
27. The Assessing Officer raised certain .queries during the course of assessment proceedings. Unsatisfied with the reply of the appellant, the Assessing Officer concluded as under:- "In respect of loss due to flood:- On perusal of warehouse wise detail of Joss due to flood It is found that mostly locations of warehouse are in Delhi/NCR, Chandigarh & Panipat, As per the records available and in the internet it was found that there was no major flood occurred in Delhi/NCR during F.Y. 2016-17. Assesses has claimed loss due to flood of Rs. 12,09,87,377.12/-. Documentary evidence is not showing that the area was actually effected from flood. Copy of Insurance policy, Copy of RC etc were demanded from the assessee which are not provided by It. However, complete details to substantiate the flood is not provided. Hence under these circumstances, loss of stock due to flood is not to be allowed, addition under this head is made of Rs. 12,09,87,377.12/-.
CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. In respect of loss due to theft: - Loss claimed by the assessee on account of fire of Rs. 5,99,99,998,92/-. On perusal of documents submitted by you it was found that of insurance policy, Copy of RC (evidencing that the. places where fire occurred were declared as additional place of business, with VAT department) were hot submitted by the assessee detail. Further it was found that in FIR copy to Station House Office, police station Ban! Park, Jaipur, combined stock held by SICCL & SIRCEL was mentioned and entity wise detail of stock was not provided to us. Since proper detail w.r.t. above said documents have not been filed by the assessee hence, ;pss under the head loss due to theft/fire of Rs. 20,18,53,648/- is not to be allowed, addition under this head Is made of Rs. 20,18,53,648/-. In view of the aforesaid facts, disallowance of Rs. 32,28,41,025/- is made under the said head and added to the total income of the assessee for the relevant assessment year 2017-18."
In response to the addition made, the appellant has stated as under:- "In this grounds of appeal
the appellant has objected to the disallowance of Rs.32,28,41,025/- on account of loss occurred due to theft and floods (dampness and water logging etc.) of the stock in hand. During the course of assessment proceedings, details in respect of flood were called for by the Ld. Assessing Officer which were duly submitted before her by the appellant. The details of total loss of stock of Rs.36,37,53,303/- was submitted before the Ld. Assessing Officer. This loss of stock was found during the course of the physical verification of the 31st stock in hand on March of the year under assessment. The loss had occurred because of expiry of inventory, theft of inventory and loss due to flood (dampness and water logging in the warehouse) etc. The breakup of stock where ¡t was found short during the course of assessment proceedings by the Ld. Assessing Officer was submitted before her. It was also intimated In response to her query that no separate Stock Register was maintained, but the stock was maintained on Tally Software, which itself works as Stock Register and the printout of the same was filed before the Ld. Assessing CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. Officer during the course of assessment proceedings. As regards the loss on account of theft, complete details of the theft which have taken place at Baroda, Jaipur and Lucknow were intimated to the Ld. Assessing Officer alongwith the list of inventory of the items which was given him. Copy of the FIR which was filed at Jaipur was also submitted before the Ld. Assessing Officer alongwith the FIR, Complete list of items in respect of which theft had taken place was submitted by the appellant, The Ld. Assessing Officer has proceeded to disallow the loss on account of theft only for the reason that the theft had occurred In the case of the appellant instead of all belonging to the appellant company, there were goods of Sahara India Commercial Corporation Limited, and the stock kept in the godown consisted of stocks both of the appellant Company as well as stock of Sahara India Commercial Corporation Limited. As regards the stock appearing under the head Theft at Lucknow, the same was in form of stock misappropriated by the Landlord the godown, for which a legal notice was Issued to them which finds place at Paper Book at page 106-110. Copy of the same was also submitted before the Ld. Assessing Officer. As regards the loss on account of flood, due to heavy rainfall in the NCR Region and in ‘Mumbai, lot of water logging had taken place in the godown, where the stock of the appellant company was placed which has resulted in damage of goods and loss of stock at Chandigarh, Delhi, Gorakhpur, Mumbai, Panipat and and Mindeka (Delhi). Complete details of stock which was dilapidated because of dampness, water logging and heavy rainfall was placed before the Ld. Assessing Officer. A certificate from a Chartered Accountant certifying the stock which was damaged and was considered as a loss due to heavy rainfall, flood, water logging etc. was submitted before the Ld. Assessing Officer alongwith the list of items to which such stock was relatable. The Ld. Assessing Officer has disbelieved the statement of the appellant in respect of loss of stock, as according to her as per record available in the Internet, it was found that no major flood occurred in Delhi/ NCR during the Financial Year 2016-17, It is for this reason, that she has proceeded to disallow the loss claimed by the appellant inspite of the fact that it has never been claimed by the appellant that the loss because of dampness, water logging and flood has occurred during the year itself. It was intimated to CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. the Ld. Assessing Officer that physical verification of the stock was undertaken at close of the year which has resulted in shortage of stock. This shortage was ' booked under the head Loss of Inventory Written off (theft and abnormal loss). The stagnation in the stock for a long period is one of the reasons for damage & theft of the stock which stagnancy had occurred because of the embargo pieced by the Hon'ble Supreme Court of India In the case of SEBI vs. SIRECL & others. The Hon'ble Supreme Court had in their order passed on 21.11.2013 held that no concern of the Sahara Group shall part with any of their assets whether immovable or movable as well as order dated 13,.02,2013, all the bank accounts and or movable and immovable properties of its Directors and company was freezed and attached respectively and as a result thereof the sale of the goods which were in stock could not take place over a period of few years from 2013, onwards because of which the stock lying idle In the godown was stolen as well as it was damaged due to dampness, water logging etc. in the godown. In light of the above factual position, your honour will appreciate that the appellant has correct/y claimed the loss of stock incurred during the course of carrying on of business by the appellant and, therefore, it is a fully allowable deduction. Without prejudice to the above submission, the appellant would like -to understand a$ to why the assessee will claim a bogus loss of stocks, more particularly, when a return of Income of the year was at excess loss than the amount written off on account of loss of stock, As far as the legal aspect of the matter is concerned, it a settled law that any loss which had occurred on account of shortage of stock .is a fully allowable deduction and the primary case regarding this issue is that of the Hon'ble Supreme Court in the case of Badri Das Daga vs. CTT 1958 AIR 783 34 ITR and Associated Banking Corporation of India Ltd. vs. CIT 56 ITR 1 also:
1. Ram Chander Shivnarayan vs. CIT 111 ITR 263 (SC), 2. Lord's Berry Farm Ltd, vs. CIT 27 ITR 700 (Mum.) CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd.
GG DandekarMachine Works Ltd. vs. CIT 114 CTR 190 (Bom.) 4. Circular No.13 (C.No.27 (29-IT/43) dated 24.5.1994.
Nikon Systems Pvt. Ltd. vs. ACIT Appeal No.ITA 6115/De//2019 dated 15.05.2020 In light of the above facts as- well as legal position of the matter that the disallowance made by the Ld. Assessing Officer may kindly be deleted."
The reply of the appellant is considered. The break- up of claim made by the appellant under the said claim comprises of two Items. The first item Is loss on theft amounting to Rs.20,18,53,947/- and the second ¡tern is loss on account damage because of expiry items and destruction to the stock at warehouses because of water logging Rs. 16,18,99,352/- totaling to Rs.36,37,53,299/-. Before the Assessing Officer as well as during the course of appellate proceedings the appellant had submitted his reply in respect of same. The Assessing Officer in para 9 to para 13 of the assessment order has proceeded to disallow a sum of Rs.32,28,41,025/- out of claim made by the assessee by allowing loss in relation to expired products and difference in valuation of closing inventory and difference due to physical verification, the details of which finds place at paper book page 47 thereby as against the total loss claimed by the appellant. The disallowance of Rs.32,28,41,025/- by the Assessing Officer allowing the balance amount of loss.
The loss claimed by the appellant and disallowed by the Assessing Officer are of two different types. The first is loss of Inventory due to floods at the following locations: Chandigarh 7,447,7797- Delhi 13,281,105/- Gorakhpur 21,316,901/- Mumbai 13,304,960/- Mundka (Delhi) 54,602,227/- Panipat 11,034,403/- Total 12,09,87,377/- 31. The second is loss due to theft at following locations:
Vodadara 11,87,46,052/- Jaipur 2,31,07,597/- Lucknow 5,99,99,999/- Total 20,18,53,648/- CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd.
In respect of the above two losses, the appellant has furnished a common reply. However, the two Issues are 'different and needs to be adjudicated separately.
During the course of appellate proceedings It was argued by the appellant that the physical verification of Inventory was undertaken during the year and the loss of products which depleted due to water logging etc were affected by flooding and dampness was discovered by the assesses and therefore the same was accounted for during the year under assessment.
It was argued that the Hon'ble Supreme Court of India in appellant's case vs. SEBI had placed embargo on disposal of any assets of the company as well as the assets of entire Sahara Group. Consequent thereof since 2013, the stock was lying in the godown. It was only on 31.03.2017 when physical verification was undertaken by the appellant that the loss could be determined which was destroyed by dampness etc. and therefore the same was written off during the year. The appellant also submitted a certificate of Chartered Accountant dated 04.05.2017 certifying the loss which had taken place on 31.03.2017. The same is reproduced as under:-
Apart from the report of the auditor dated 04.05.2017, the appellant furnished ledger account wherein the entries are dated 31.03.2017.
From the above report of the auditor resolution. It is evident that the loss was found out and quantified on 04.05.2017 i.e. after 31stMarch, 2017. The management could not have made the entry of loss of Rs. 12,09,87,377/- on 31.03.2017 In Its books of accounts. As the report of the auditor was prepared on 4th May 2017, therefore, the decision of the management to write off must have been after 4th May 2017. However, the entry in the books of accounts is dated 31.03.2017, This establishes the fact that the appellant had made a back dated entry in its books of accounts some time after 4th May 2017.
CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd.
Anything happening after closure of the Financial Year has no bearing on the accounts of the Financial Year. If the accounts were closed on 31st March, 2017, the findings, quantification and decision of 4th May 2017 has no bearing on the account or the profitability for the year ended 31st March 2017.
The assessee is a large corporate body. It has a bureaucratic structure of command. The accountant making entries in the accounts is not empowered to write off the inventory in the books without permission and approval of the Board/management. The decision can only be taken by the management and then only the stock/inventory can be written off in the accounts. In this case also first the decision to write off the stock/inventory was taken by the management and then the stock/inventory was written off. However, the stock/inventory was written off not in the current year (i.e. F.Y.2017- 18) but in the accounts of the immediate preceding year i.e. F.Y.2016-17. The back dated entry in the accounts were made and the adjustment for the stock/inventory was made subsequently.
The assessee company follows the mercantile system of accounting. Any event occurring after the date of closure of the balance sheet has no bearing on the profitability of the year ending on 31st March, 2017. It was only for the purpose of claiming deduction that the Inventory were claimed to have been written off in the assessment year 2017-18.
As brought out in the foregoing paragraphs, the decision to write off the inventory was taken in the Asst. Year 2018-19. So properly the inventory were to be written off in the subsequent year's accounts and not in the accounts for the year ended 31/03/2017.
Thus, when all the necessary compliance took place after the end of the F.Y. 2016-17, the write off cannot be allowed in the A.Y. 2017-18 relevant to the previous year 2016-17.
The above position in law has the support of the decision of the jurisdictional Bombay High Court In the case of CIT V/s. Herdilla Chemicals Ltd. 225 ITR 532, the relevant extract of which reads as under:-
CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. “We have carefully considered the rival submissions. The PAN catalyst was purchased by the assessee in the year 1970. It was tying with the assessee as stand by for the phthalic anhydride plant. It is the case of the assessee that over the course of years, the production process of the chemicals had changed whereby the catalyst plant was rendered superfluous and á result thereof, the PAN catalyst became, obsolete. Admittedly, even on it's becoming superfluous or obsolete; it was neither sold nor otherwise disposed of by the assessee, It was merely written off by the assessee in its accounts in the previous years relevant to the assessment year under consideration and deduction claimed in respect of the entire cost of acquisition and deduction claimed In respect of the entire cost of acquisition thereof in the computation of its income for the said assessment year. In fact, it was with the assessee even at the time of hearing of the appeal by the Tribunal, The assessee, however, assured the authorities to bring back the sale proceeds of the same for the assessment as and when it was sold. In such a- situation, in our opinion, it cannot be said that the assessee suffered any loss in the previous year relevant to the assessment year under consideration. Moreover the production of process of the chemical in the factory of the assessee did not undergo the change in the year under consideration. Admittedly, as set out in paragraph 8 of the statement of the case, the production process had been .changed over the course of the years. In such a situation, the assessee cannot claim deduction for the cost of the PAN catalyst in any year it likes. The only year in which the deduction can be claimed is the year in which it is sold or disposed off. Merely by writing off the value thereof, the assessee is not entitled to claim deduction in the year in which he had written of the same. There must be something positive to show that its value become nil in the particular year to justify the claim for deduction in that year. This legal position would not change with the assurance of the assessee to bring back the sale price as and when it was sold. In fact, the assessee will have, to wait till it is sold or otherwise disposed off and only then it may be justified in claiming deduction of the difference between the purchase price and sale price in the computation of its Income."
Similar is the case of the assessee. There is nothing which can positively indicate that the decision to write off the Inventory was taken in the F.Y.2016-17.
On the similar issue in. the case of M/s. Eastern Peripherals Ltd V/s, ACIT, Circle- 8(1), Mumbai In.ITA No.321/Mum/2007 the Hon'ble ITAT, Mumbai has confirmed the addition made by the Assessing Officer on the issue of write off of stock after the closure of financial year.
Above mentioned facts prove that inventory was not written off during the year under consideration but in the subsequent year. Hence, the claim of the assessee is not allowable. 46. Apart from making entry in the books of accounts dated 31.03.2017, the appellant has not been able to furnish any evidence to show that when the goods were actually discarded even as scrap. By the report of the auditor dated 04.05.2017, it is evident that the goods were in possession of the appellant atleast till 04.05.2017. Thus, the right over the goods continued with the appellant atleast till 04.05.2017. In any transaction there has to be more than one party. As one cannot make profit out of himself, one cannot make loss out of himself. In the impugned case as the right over the goods continued with the appellant till 31.03.2017, therefore, there was no transaction resulting into any loss to the appellant. 47. The nomenclature of an item of expenditure or loss would not decide the actual nature of transaction. What the appellant is calling loss is actually in the nature of provision, for diminution in the value of stock/inventory. Taxation is dependent upon the actual nature of transaction. What is the nomenclature given in the books of accounts or how the entry has been passed cannot determine the taxability of the receipts or allowability of the expenditure. Taxability of a receipt or allowance of a deduction is dependent upon the actual nature of transaction. This position of law has been affirmed by Hon'ble Supreme Court In the case of Kedarnath lute Manufacturing Co. Ltd. vs CIT reported in [1971] 82 ITR 363 (SC).
CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd.
Therefore, it Is held that the Inventory write off amounting to Rs, 12,09,87,377/- were actually a provision for diminution in the value of Inventory as at 31,03.2017. On this ground also, the claim of the appellant is not allowable.
In view of the above discussion, the addition to the extent of Rs.12,09,87,377/- is upheld.
The other issue for adjudication is addition of Rs.20,18,53,648/- in respect of loss of Inventory due to theft.
The appellant claimed that there was a loss of Inventory due to theft at three locations. In this regard, the appellant also submitted a notice issued by MSA JURIEC Advocate and Solicitor which was issued on 20.1,0.2016 in respect of loss of stock at Jaipur and Baroda warehouses which was issued to M/s Vision Freight Solution India Limited who were the warehouse owner's at Baroda and Jaipur. It was stated by appellant that no response or further actions was taken up in the matter.
Copy of FIR made with Jaipur Police Station against M/s Vision Freight Solution India Limited and its Directors was also filed by the appellant. The FIR also- included the loss in respect of goods stolen from Baroda Guest House.
Similarly, a letter in respect of recovery of stock which was missing from the godown of Lucknow was also issued by the same Advocate and Solicitor by way of reminder notice on 06.12.2016.
On perusal of the documents furnished by the appellant/ it is seen that there was some theft of goods belonging to the appellant.
In light of the above facts and circumstances, it is seen that the loss of stock found on physical verification of stock was written off by the appellant. The appellant has specifically relied on a few case laws the gist thereof is summarized as follows: 56. Badridas Daga V. Commissioner of Income-tax 34 ITR 10(SC) wherein Hon'ble Supreme Court has held as follows:
CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. "Loss resulting from embezzlement by an employee or agent in a business is, however, admissible as a deduction under section 10(1) of the Indian Income Tax Act if it arises out of the carrying on of the business and is incidental to it. It makes no difference in the admissibility of the deduction whether the employee occupies a subordinate position in the establishment or it's an agent with large powers of management, It is a question turning on the facts of each case whether the embezzlement in respect of which deduction is claimed took place in the carrying on of the business.”
Further reliance is placed by the Bombay High Court in the case of G.G.DANDEKAR MACHINE WORKS LTD Vs. CIT reported in 114 CTR(Bom) 190 wherein Hon'ble Bombay High Court as held as follows: "The real controversy that falls for determination in such cases is whether the loss is incidental to the operation of the business and this question evidently has to be decided on the facts of each case having regard to the nature of the business and the operations carried on by the assessee. If the loss incurred by the assessee is found to be incidental to the carrying on of his business, It will be deductible as a trading loss in computing the profits, of the assessee from the said business, The loss caused to assessee in this case was by embezzlement from its bank account. The account in the bank was. a current account maintained for the running of the business. The amount kept there was also the amount required for the purpose of the business. There Is no dispute that by forging the signature of the secretary of the company the amount in question was withdrawn by some unknown person which resulted in a loss to the assessee to that extent. Looking from, a businessman's angle, it is difficult to hold that such a loss is not incidental to the business of the assessee. It is difficult to draw a distinction between embezzlement of the amount from, the bank and theft of the amount from the cash box of the business-man from his sales counter or business premises. What is material is whether the loss was caused to the assessee in the course of his business activity and closely connected with his business. If that is so, it will be an allowable deduction in computing the "profits". In the Instant case, it is so and that being so, the loss suffered by the assessee is clearly a loss which is deductible in the computation of income, under s.
CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. 28(1) of the Act- CIT-Vs, Nainital Bank Ltd.(19.65) 55 ITR 707(SC), RamchandarShivnarayan v. CIT 1978 CTR(SC)5: (1978) 111 ITR 2&3(SC). Sassoon J. David & Co. (P) Ltd. Vs CIT(1975) 98 ITR 50(Bom), CIT vs. P.V. Gore & Co.(1982) 29 CTR(Bom) 110(1983) 143 ITR 922(Bom) and BadridasDaga vs. CIT(1958) 34 ITR 10(SC) relied on."
The cases followed by Bombay High Court have been mentioned herein above also.
Similar view has been taken by the Hon'ble Supreme Court once again in the case of Ramchandar Shivnarayan v. CIT reported in 111 ITR 263(SC) wherein the Hon'ble Supreme Court has following its earlier decision in the case of Badridas Daga vs. Commissioner of Income-tax 34 ITR 10(SC) held as follows; "A businessman has to keep moneys either when he gets it as sale proceeds of the stock-in-trade or for disbursement to meet the business expense or for purchasing stock-in-trade and if he loses such money in the ordinary course of business, the toss is a deductible trading loss, It is Immaterial whether the money is a part of the stock-in-trade, such as,, of a banking company or a money-lender, or is directly connected with' other business operations. The risk is inherent in the carrying on of the business and is either directly connected with it or incidental to it."
The stock-in-trade was part, of business carried out by appellant The stock remains the part of trading asset. There was loss due to theft of such stock in trade. Therefore, such stock has a direct nexus in the carrying on of the business by the appellant. However, no transaction could be effected from such stock because of embargo placed by the Hon’ble Supreme Court.
In view of the peculiar facts of the case and the decision of Hon'ble Apex Court as cited and the Hon'ble Bombay High Court, the addition made by the Assessing Officer of Rs.20,18,53,648/- is liable to be deleted.” 8.1 It is in this factual backdrop that the Revenue raises it’s second substantive ground seeking to revive the Assessing CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. Officer’s action disallowing the assessee’s loss claim on account of theft to the tune of Rs.20,18,53,648/- in issue whereas the latter’s endeavour is to support the lower appellate findings qua the Revenue’s second substantive ground; and, at the same time, it seeks to allow the remaining claim of Rs.12,09,87,337/- which has been disallowed in both the lower proceedings.
Both the learned representatives reiterate their respective stands as per the Revenue’s and the assessee’s pleadings. Coming to the former components of Rs.20,18,53,648/- representing loss of inventory due to theft, the Revenue could hardly dispute that the assessee had duly substantiated the same by filing the necessary first information report (“FIR”) as well as the inventory of the corresponding items which could not be rebutted by the Assessing Officer. That being the case, we are of the considered view that the assessee was very well justified in booking it’s impugned loss as an allowable deduction at the first sign of reasonable probability in light of Chainrup Sampatram vs. CIT (1953) 24 ITR 481 (SC) holding as under:
“.........The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. course of the year showing the profit or loss actually realized on the year's trading. As pointed out in paragraph 8 of the Report of the Committee on Financial Risks attaching to the holding of Trading Stocks, 1919, "As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure .........From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less, than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question" (extracted in paragraph 281 of the Report of the Committee on the Taxation of Trading Profits presented to British Parliament in April 1951). While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been superseded or modified by legislative enactments unrealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year's account in a business that is continuing are not brought into the charge as a matter of practice, though, as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually realised.”
CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. 9.1 We accordingly reject the Revenue vehement contentions, it’s instant second substantive ground and the main case in very terms.
This leaves us with the assessee’s grievance(s) canvassed in it’s cross objections wherein it seeks to allow the balance amount of Rs.12,09,87,377/- as representing write off on account of diminution in the value of inventory as on 31.03.2017. It is an admitted fact that the assessee/a company is engaged in real estate and allied activity business. And that the hon’ble apex court had passed it’s order dated 21.11.2013 restraining M/s Sahara Group; including the assessee/company, from alienating all their movable or immovable assets, as the case may be. The said injunction continued admittedly combined at lease upto the relevant previous year. It is in this factual backdrop that the assessee chose to write off the impugned inventory items including child’s toys, ladies saris and bed sheets etc. i.e. gift items as on 31.03.2017 in the corresponding ledgers since the same had become very much obsolete after a time period of almost four years. The Revenue vehemently argues the decision to this effect was taken subsequently on 04.05.2017. We find no merit in these arguments once it is clear the corresponding write off had been CO No. 36/Del/2024 Sahara India Real Estate Corporation Ltd. passed in the ledger(s) accounts concerned on the closing day of the relevant accounting period based on the principle of reasonable probabilities (supra). The mere fact that the same was ratified subsequently on 04.03.2017 would not change the status already written off items in our considered opinion. We thus accept the assessee’s instant last substantive ground canvassed in it’s cross objection to delete the impugned disallowance of Rs.12,09,87,377/- in very terms. It’s cross objection CO No. 36/Del/2024 is partly allowed therefore.
To sum up, this Revenue’s appeal CO No. 36/Del/2024 is partly allowed. A copy of this common order be placed in the respective case files.
Order Pronounced in the Open Court on 07/10/2025.