M.M. Cherian, A.M. - (1.) THIS appeal has been filed by the assessee Jhai Narain Trades, Cochin, against the order of the CIT (A), Cochin, in the income-tax assessment for the asst. yr. 1990-91. The assessee is a partnership firm carrying on business as a customs house agent and also undertaking lorry transport contracts.
(2.) The first ground raised by the assessee in this appeal is against the disallowance of a sum of Rs. 1 lakh claimed as expenditure incurred for the purpose of the business as a customs house agent. During the period from June to August, 1985, the assessee issued 11 out-agency receipts in favour of Bakul Cashew Co., Quilon showing a total quantity of 1,440 cartons of cashew kernels for export. On the strength of the said receipts, Bakul Cashew Co. raised as advance from the Corporation Bank, Quilon, a total sum of Rs. 17,93,700. As Bakul Cashew Co. had not in fact delivered the goods for export the proposed shipment did not take place. The assessee could not deliver the relative bills of lading to the Corporation Bank even in spite of the reminders sent by the bank. The Corporation Bank then tried to get the money back from Bakul Cashew Co. but they did not pay back the amount. The bank then initiated legal action against Bakul Cashew Co. and also against the assessee for issuing out-agency receipts without actual delivery of cashew kernels by the other party. A suit was in fact filed before the sub-Court, Quilon as O. S. No. 238 of 1989 in which the name of the assessee firm, Jhai Narain Trades, Cochin, appears as defendant No. 9. When the legal proceedings were pending, the assessee came to an agreement with the bank for repaying the entire amount in instalments and accordingly they paid Rs. 1 lakh in the previous year relevant for the asst. yr. 1990-91. The assessee's claim for deduction of this amount as a business expenditure or a loss incidental to business was not allowed by the AO on the view that the liability to the bank had arisen not in the normal course of the assessee's business but on account of the issue of incorrect out-agency receipts to help Bakul Cashew Co. The AO further noted that Bakul Cashew Co. had admitted their liability to pay back the amount to the assessee as evidenced by the entries in their books of accounts. The AO came to the finding that the sum of Rs. 1 lakh paid by the assessee to the bank was in the nature of an advance or remittance on behalf of their client Bakul Cashew Co. and not in discharge of any liability of the assessee as such and further the assessee was entitled to get the money back from the client. In the above circumstances, the AO held that the assessee was not entitled to deduct the sum of Rs. 1 lakh as an expenditure incurred for the purpose of its business. In the assessee's appeal, the CIT (A) found that the payment to the bank could be considered as effected by the assessee on behalf of the client only who was the real debtor to the bank and also evidenced by the entries in the books of account letter acknowledging the liability. The CIT (A) was of the view that as the assessee was entitled to receive the amount back from their client, Bakul Cashew Co., the remittance by the bank was not allowable as a deduction in computing the assessee's income.
(3.) ON behalf of the assessee, Shri M. K. Kesavan, Advocate, submitted before us that the CIT (A) was not correct in holding that there was no liability of the assessee to pay the amount to the bank and that it was a payment made by the assessee on behalf of their client, Bakul Cashew Co. Shri Kesavan stated that though the bank first tried to recover the amount from Bakul Cashew Co., it was found that on account of their financial difficulties the amount could not be recovered and then the bank initiated legal action in the sub-Court, Quilon in 1989. A copy of the petition filed by the bank before the Court was furnished before us by the learned counsel for the assessee. In that petition Bakul Cashew Co. and its partners are shown as the defendants but the assessee-firm and also the partners are shown as defendants from No. 9 onwards. The learned counsel stated that the assessee was forced to come to an agreement with the bank to discharge the entire liability on finding that legal action by the bank would damage their reputation. It was stated that apart from taking legal action against the assessee, the Corporation Bank also threatened that through the Indian Banks Association they would advise all the banks not to accept the out-agency receipts issued by the assessee. Shri Kesavan explained that in the course of the assessee's business as a customs house agent it was necessary to issue out-agency receipts and the banks would honour such receipts to give advance to the exporters. Bakul Cashew Co. was an old client of the assessee and their exports of cashew kernel was always made through the assessee and so it became necessary for the assessee to issue out-agency certificate with a view to keep the goodwill of the client. The learned counsel submitted that normally the out-agency receipts would be levied only on actual receipts of the goods but in the case of Bakul Cashew Co. the assessee made a mistake in issuing the receipts without delivery of the goods by the exporter. The assessee was hoping to get the goods delivered by the client within one or two days but unfortunately, the client failed to deliver the goods and so the assessee had no alternative but to compensate the bank for the loss incurred by them on the advance given to Bakul Cashew Co. It was the contention of the learned counsel that when the assessee was compelled to make the payment to the bank in discharge of the liability which had arisen in the course of their business as a customs house agent, the same was allowable either as an expenditure incurred for the purpose of the business or as a loss incidental to the business falling under s. 37 of the IT Act.;