SUHAS CHANDRA SEN,J. - (1.) THE Tribunal has referred the following questions of law under s. 256(1) of the IT Act, 1961 to this Court : In R.A. No. 147 (Cal) of 1984 (filed by the Assessee) : "Whether, on the facts and in the circumstances of the case the Tribunal was correct in law in holding that the loss of Rs. 2,42,245 was a capital loss and as such could not be claimed as a business loss by the assessee?" In R.A. No. 166 (Cal) of 1984 (filed by the Department) : "Whether, on the facts and in the circumstances of the case the Tribunal was justified in law in holding that the assessee was entitled to claim the loss in respect of burglary which took place during the period between 30th Nov., 1969 to 3rd May, 1970 during the relevant accounting year?"
(2.) IN this proceeding the assessment year involved is 1977-78 for which the relevant accounting year is the year ended on 31st March, 1977. The facts found by the Tribunal have been stated in the Statement of case : "The dispute in this appeal related to the assessee's claim for Rs. 6,21,660 on account of loss of Rs. 6,21,660 alleged to have been incurred by it during the relevant accounting year. According to the assessee in the accounting year relevant to the asst. yr. 1971-72 there was a burglary in its factory at 77A, Benaras Road, Howrah, when there was some labour trouble. Due to this burglary, loss of raw materials to the tune of Rs. 3,94,415 and other assets valued at Rs. 2,42,245 occurred. The assessee had deducted the total value of raw materials from the opening stock and the value of other assets from the total assets in its balance sheet. A claim for Rs. 6,36,660 was put up before the insurance company. During the relevant accounting year the assessee settled the claim for a paltry sum of Rs. 6,21,660 in its P&L Account. The ITO, however, was of the opinion that the insurance company had not accepted the assessee's claim and there was no reason as to why the assessee could not produce its entire evidence relating to the theft and recover the said claim. The report about the theft made to the police was inordinately delayed inasmuch as the period of burglary mentioned therein was stated to be between 26th Dec., 1969 and 12th Feb., 1970. The stock and other assets had been verified between 4th May, 1970 and 11th May, 1970 but even then no report was made till 25th May, 1970. There were discrepancies in the statement made by the assessee and the insurance company itself was not satisfied with the genuineness of the assessee's claim. What the insurance company had given to the assessee was only by way of consolation. He, therefore, held that the claim was not genuine and disallowed the same. The assessee went up in appeal before the CIT(A) who did not think it necessary to go into the genuineness or otherwise of the claim but was of the opinion that the loss on account of theft could only be allowed in the asst. yr. 1971-72, and could not be considered during the relevant assessment year. She accordingly rejected the assessee's ground raised in this behalf. The assessee came up in second appeal before the Tribunal which was of the opinion that the claim of the assessee could be considered during the relevant accounting year. However, the same could be considered only to the extent of Rs. 3,94,415 which had been shown as price of the stocks stolen from the factory. The balance of the claim for Rs. 2,42,245 related to the theft of fixed assets which should be considered to be loss of a capital nature only. The relevant discussion of the Tribunal is contained in paras 3, 4 and 5 of the order which read as under : "We have heard the representatives of the parties at length in this appeal. The assessee's representative drew our attention to the assessment order for the year 1971-72 from which it transpires that the assessee got lesser depreciation on its fixed assets because assets worth Rs. 2,42,245 were excluded being the loss due to burglary. Similarly our attention was drawn to the balance sheet of the assessee as on 28th of Oct., 1970 where among the fixed assets some items have been excluded which valued at Rs. 2,42,245. In the current assets of loans and advances a sum of Rs. 6,36,660 has been shown as the amount recoverable from the insurance company and a sum of Rs. 3,94,415 has been shown as the price of the stocks stolen from the factory in the P&L Account. According to the assessee's representative, these figures and allegations were accepted by the IT Department and, therefore, it was not open for the ITO now to say that there was no loss or that the loss occurred to the assessee in that year because in the balance sheet for that year, the claim of the assessee payable by the insurance company had been disclosed as an asset and the income of the assessee had been disclosed as an asset and the income of the assessee had been assessed on that basis. Reliance was placed upon some commentaries in which there is a reference to Rangamma vs. Atchama (1846) R.M.I.A. 1 and observations by Lord Chelmsford in Shah Mukhun Lall vs. Baboo Sree Kishan Singh 12 M.I.A. 157 that no person shall be entitled to approbate and reprobate the same deed. It was argued that the Department having accepted that the assessee had business assets in the form of claim against the insurance company, it was not open for it now to say that the assets were not lost during the year or they were not business assets and were of only capital nature. After carefully considering the facts and circumstances of the case we are of the opinion that the nature of assets did not change because the assessee claimed the loss from the insurance company and showed the claim as part of its assets. The fact that the assessee did not claim rehabilitation allowance under s. 33B which it might have done does not mean that the Department accepted the position, that the capital assets had been transformed into a business one, merely because the assessee showed the same as an asset in the balance sheet. Even if the insurance company had paid for the loss, the assessee would have purchased the requisite moulds and it would have added to the assessee's invested capital on which the assessee could again start claiming depreciation. What we are trying to point out is that the nature of the loss is not altered by the fact that the assessee did not choose to claim it in the first insurance and debited the amount to the account of the insurance company. The cause of loss is still the theft and not the rejection of the claim by the insurance company because if it were so then it would be a simple case of a bad debt. What the assessee showed in its accounts was the liability of the insurance company as if it were its debtor. Even then for the purpose of claiming bad debt, the assessee would have to show that the debt was taken into consideration while computing its income but the debt incurred in relation to capital asset would not fall in this category. We, therefore, are of the opinion that the loss would not change its nature so far as the assets are concerned and the loss of Rs. 2,42,245 would be loss of the capital, which the assessee would not be entitled to claim as business loss. This conclusion, however, would not be true in case of the loss of stocks stolen from the assessee's factory. A perusal of the P&L Account for the year ending on 28th Oct., 1970 would show that the stock were shown to have depleted to the tune of Rs. 3,94,415 but corresponding loss was not claimed by the assessee as business loss because the current assets included a sum of Rs. 6,36,660 on account of insurance claim as being still recoverable. According to the assessee this claim was finalised in the relevant year and, therefore, the loss should be deemed to have crystallised in this year. There appears to be force in this contention. In M.P. Venkatachalapathy Iyer and Anr. vs. CIT (1951) 20 ITR 363 (Mad) there had been an embazzlement by an employee which continued for a pretty long period. The question arose whether the loss should have been claimed in the year when the misappropriation took place or when the loss became actual and certain. It was held that although the embezzlement took place between 17th Oct., 1939 and 24th Oct., 1940 the assessee's claim for the same in the asst. yr. 1942-43 (accounting year ending on 12th April, 1942) could be admitted as such because the matter was ultimately compromised in August, 1941, when the clerk paid some amount to the assessee in full settlement of its claim. Same is the ultimate conclusion arrived at by the Punjab and Haryana High Court in CIT vs. Pretty Cycle Industries (1980) 16 CTR (P&H) 56 : (1980) 123 ITR 227 (P&H) where the loss had been incurred in an earlier year but since the amount had not been transferred to the P and L Account in that year as import entitlement against export was yet to be received, the assessee was held entitled to set off the actual loss in a later year. A decision of the Calcutta High Court in this behalf is CIT vs. Shew Bux Jahurilal (1962) 46 ITR 688 (Cal) wherein it was held that the assessee was not bound to show all anticipated loss and was entitled to have the matter re- adjusted when the loss was actually quantified. Nearly same are the observations of the Hon'ble Supreme Court at page 13 in the decision in the case of Associated Banking Corporation of India Ltd. vs. CIT (1965) 56 ITR 1 (SC). We are, therefore, of the opinion that the CIT(A) was wrong in holding that the assessee was not entitled to claim the loss in this year at all."
(3.) THE first question relates to loss of capital assets of the company.;