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Petitioner: POHOOMAL BROTHERS (SILK SHOP) VS Respondent: COMMISSIONER OF INCOME-TAX, BOMBAY CITY
1980 P T D 168
1980 P T D 168
[Bombay (India)]
Before Y. S. Tambe and S. P. Kotwal, JJ
POHOOMAL BROTHERS (SILK SHOP)
versus
COMMISSIONER OF INCOME‑TAX, BOMBAY CITY
Income‑tax Reference No. 31 of 1957, decided on 3rd April 1964
Income‑tax Act (XI of 1922)‑
‑‑ S. 10 (2)‑Business loss‑Stock in trade frozen and lost by enemy action‑Held, trading loss‑Value of such loss-‑To be computed at rate of exchange prevailing in relevant assessment year.
Pohoomal Bross. v. Commissioner of Income‑tax (1958) 34 I T R 64 rel.
STATEMENT OF THE CASE
As required by Their Lordships of the Bombay High Court we draw up a statement of the case and refer it to the High Court at Bombay under sec tion 66 (2) of the Income‑tax Act.
2. The assessment year is 1942‑43 and the accounting period is from April 6, 1941, to March 26,1942. The return was filed on November 30, 1942. The assessee had branches at various places in India and outside India. In this reference we are concerned with three foreign branches at Yokohama, Kobe and Shanghai. The Japanese occupied Shanghai about the end of 1941. In the return of income filed by the assessee the total income was shown as Rs. 2,31,982 "subject to the result of Kobe, Yokohama and Shanghai accounts of which books of accounts are not received." In sections B and C of the return the assessee showed nil income but made the following remarks:
"Accounts of Kobe, Yokohama and Shanghai branches not received."
Before the Income‑tax Officer the assessee claimed on an estimate basis total loss of Rs. 1,72,070 detailed as under in respect of three of its branches:
Yokohama
Shanghai
Kobe
Rs.
Rs.
Rs.
Interest
3,403
1,997
Salaries (Sindhi staff)
4,000
8,000
Salaries (local employees)
2,400
4,000
Rent
2,400
2,400
Messing
5,000
7,600
Insurance, etc
3,000
3,000
Loss as per books for 6 months
39,810
Estimated expenses for the remaining months.
5,060
20,203
26,997
44,170
Total loss estimated: 92,070
Add: Further loss estimated by them which they say cannot be determined due to war conditions on account of losses in stock outstanding and other incidental losses arising due to war activities 80,000
Total loss claimed by the assessee re: the foreign branches situated in the countries under enemy occupation 1,72,070
3. The Income‑tax Officer's order shows that the assessee declared that he bad no communication of any sort with the enemy occupied territory. It was, therefore, not possible for him to ascertain the correct position as to the losses or profit in respect of the three branches. The Income‑tax Officer, by his order dated August 28,1945, disallowed the claim of the assessee in respect of salary and other expenses. The Income‑tax Officer did not estimate any income from these branches. A copy of the relevant portion (paragraphs 4 to 7) of the Income‑tax Officer's order is Annexure "A" and forms part of the case.
4. Before the Appellate Assistant Commissioner, the assessee confined his claim to a sum of Rs. 1,94,495 detailed as under:
Branch
Stock valued
Book debt
Total
Yens
Yens
Yens
Kobe
93,873
9,179
1,03,052
Yokohama
1,23,183
12,409
1,35,592
Yens 2,38,644
At Rs. 81‑8‑0 to 100 Yens. Rs. 1,94,495.
It may be noted here that before the Income‑tax Officer the assessee claimed losses on account of expenses amounting to Rs. 92,070 and stocks and outstandings of Rs. 80,000 in respect of the three branches. Before the Appellate Assistant Commissioner, stocks and outstandings were estimated at Rs. 1,94,495. This estimate did not include any expenditure in respect of the Shanghai branch.
5. The stand taken by the assessee before the Appellate Assistant Commissioner was a different one. The assessee agreed that the profit of the business from the commencement of the year of account to the date of the occupation by the Japanese be taken to be equal to the losses of the branches from the date of occupation to the date of the close of the year of account. The claim was therefore confined to the losses on account of stock‑in‑trade and book debts at Kobe and Yokohama. According to the assessee, the agreement between him and the Appellate Assistant Commissioner was a result of a compromise.
6. Reliance was placed on copies of the inventories of the assessee's property said to have been filed with the British Consulate at Kobe and Yokohama on September 3, 1941 and August 14, 1941. The assessee also relied upon the acceptance of claim by the Japanese Government in September of October, 1945, and as a result of which bonds of the value of 5,22,855 Yens were issued to the assessee. According to the assessee, this Payment was received on account of losses suffered by the assessee in respect of his personal belongings and business assets. The value of these bonds in rupees at the time when they were given by the Japanese authorities in 1945 amounted to only Rs. 3,983. Before the Appellate Assistant Commissioner, the assessee, therefore, claimed that he should at least be allowed a toss o; Rs. 1,91,512 (Rs. 1,94,495‑Rs. 2,983).
7. It may be noted here that the assessee's accounting year starts on April 6, 1941, at ends on March 26, 1942. The inventories filed indicate not only the business assets but also the personal assets. What happened in 1945 could not affect the claim of the assessee in the year of account. The assessee has accepted the position that from the date of the commencement of the year of account to the date of occupation by the Japanese authorities at the end of 1941, the assessee had made profits and that from the date of occu pation to the date of closing of the year of account, the assessee had made losses,
8. The assessee made an alternative claim on account of loss in the value of exchange. The value of yens in terms of rupees had considerably fallen. The Appellate Assistant Commissioner dealt with the assessee's claim in the following manner:‑
.. However, as already stated above, the assessee had received full compensation in yens and, therefore, the loss suffered was nil ye ns which will come to nil rupees whatever might have been the rate of exchange at the time of freezing of the assets and at the bone of receipt of compensation. It is admitted that even till now the assessee has not disposed of these bonds, and therefore actually the assessee has not yet suffered any loss on account of the fall in exchange rate also. The question of allowing such loss due to fall in exchange rate will arise only in the year in which the bonds are disposed of, and it is in that year that the question will be considered about the allowance of loss suffered, if any. So far as this accounting period is concerned, I can not accept Mr. Mistry's contention that the assessee has suffered any loss as claimed, and therefore so far as Kobe and Yokohama branches are concerned also I confirm the Income‑tax Officer's estimate of income at `Nil' for this year."
A copy of the Appellate Assistant Commissioner's order is Annexure "B" and forms part of the case.
9. The Tribunal upheld the order of the Appellate Assistant Commis sioner. In paragraph 31, the Tribunal observed: ‑
"Even according to the assessee all the stocks and debtors were lost to it as a result of the assessee's property being declared enemy property. There can be no question of suspension of business in a case like this. The business came to an end. The loss accrued to the assessee as a result of enemy action. By no stretch of imagination, in our opinion, it can be described as a business loss whatever compensation the assessee is entitled to claim the loss, nor the compensation received could be liable to tax."
Paragraphs 30 and 31 of the order of the Tribunal are made Annexure "C" and forms part of the case.
10. We refer the following questions of law as directed by their Lord ships:
(1) Whether, on tae facts and under the circumstances of the case, the petitioner firm was entitled to deduct from their taxable in come, the loss suffered by them due to their stock in‑trade and book debts amounting to Rs. 1,94,495 (rupees one lakh ninety‑four thousand for hundred and ninety‑five) being lost by the Japanese authorities in July one thousand nine hundred and forty‑one by way of trading loss or loss of revenue nature?
(2)Whether the petitioner‑firm was entitled in law to claim the amount of the said loss suffered by them converted into Indian currency at the rate of exchange prevailing at the time of such loss."
11. The assessee wanted the Tribunal to reproduce paragraphs 2, 3 and 4 of the Appellate Assistant Commissioner's order in the statement of the case. As we have made a copy of the Appellate Assistant Commissioner's order a part of the case, we think it is not necessary to do so. At the special request of the assessee, the following three documents are made a part of the case:
"(1) Joint affidavit of Kishinchand Lekhraj and Lokumal Sahijram dated‑February 11, 1953.
(2) Affidavit of Hemandas Gulmal dated February 11, 1953.
(3) Summary of the inventories filed before the British Consulate a1 Robe and Yokohama (without the details of individual items). They are Annexures `D', 'E' and `F' respectively. The assessee wanted that extract from an award given by Tricumdas Dwarkadas dated August 5, '1947, and the decree of the Court thereon be also made a part of the case. The departmental representative objects to the inclusion of these documents, as they were at no stage produced before the Income‑tax authorities or before the Tribunal. We think that it would not be right to include a document in the statement of the case which was not produced at the time of the hearing, In all other respects the statement of the case is accepted by both the parties."
SUPPLEMENTARY STATEMENT OF CASE
In this matter a supplementary statement of the case was submitted by ire Tribunal to the honourable High Court under section 66(4) on Novem ber 13, 1959. The honourable High Court, however, by its order dated April 19, 1960, was pleased to direct as under:
" . . . The Court doth order that the said supplementary statement of case submitted by the said Tribunal herein dated the thirteenth day of November, one thousand nine hundred and fifty‑nine be and the same is hereby referred back to the said Income‑tax Appellate Tribunal, Bench `A', with the direction that the said Tribunal do resubmit the said supplementary statement of case after including therein the affidavit of the Income‑tax Officer affirmed on the first day of July, one thousand nine hundred and fifty‑nine, and the counter‑affidavit of Kishinchand Lekhraj affirmed on the twenty- eighth day of September, one thousand nine hundred and fifty‑nine, being Exhs. `H' and `I' respectively to the said supplementary statement of case and for making necessary changes in the said supplementary statement of case on the footing that the said two affidavits form part of the said supplementary statement of case."
2. The Members of the Tribunal who drafted the original supple mentary statement of the case are not here at present. We, therefore, submit to the honourable High Court the supplementary statement of the case which has been referred back to us after making the necessary changes therein as directed by the said order dated April 9, 1960.
3. As directed by their Lordships of the Bombay High Court by their order dated September 25, 1957, we hereby draw up a supplementary state ment of the case and refer it to the High Court of Judicature at Bombay under section 66(4) of the Income‑tax Act.
4. The direction given to the Tribunal is
"to submit a supplementary statement of the case including therein the facts on which the Tribunal came to the conclusion that the loss occurred to the assessee as result of enemy action, and also the facts as a result of which the assessee claimed that the goods which were frozen were ultimately lost to them and the point of time at which the book debts and stock in trade were lost to the assessees."
5. As their Lordships had allowed the assessee to lead fresh evidence, the case was remanded to the Appellate Assistant Commissioner for .a report. A copy of the remand report along with its enclosures is Annexure "G" and forms part of the case.
6. The assessment year is 1942‑43, and the relevant accounting period is April 6, 1941, to March 26, 1942. The evidence on record, in our opinion, establishes beyond doubt that in July 1941, there was a freezing order made by the Japanese authorities. Under this order the stocks of various merchants were frozen and could not be sold by the merchants. The original order passed by the Japanese Government has not been produced. The fact, however, is not disputed. The goods which were frozen never came back to the assessee.
7. According to the departmental representative, these stocks were taken over by the Japanese authorities on the declaration of the war on December 8, 1941. The market value of the goods so taken over is said to have been credited to the assessee's account with the banks in Japan bet ween December 1941, and September 1945. On the facts produced be fore the Income‑tax authorities it has not established that market value of the goods was paid to the assessee. As a matter of fact, this is a new case made out by the departmental representative at the final day of the hearing. In the remand report the Appellate Assistant Commissioner says that the goods were lost between July 1941 and 1943. He, however, has admitted that the stocks which were frozen in July 1941, never came back to the assessee. Whether the assessee received any compensation from the autho rities in Japan or in India is a different matter altogether. The goods which were originally frozen, in our opinion, were lost to the assessee before the end of 1941 on the declaration of the war. These goods never came to be owned by the assessee thereafter. It is not, therefore, correct for the Appellate Assistant Commissioner to say that he was not sure as to the point of time when the goods were lost. These goods, in our opinion, were lost in the year of account.
8. The next question which arises is whether the assessee received any compensation in respect of these goods. So far the case has proceeded on the footing that the assessee received compensation in yens in respect of the loss of goods in 1945. The value of the yen at that time had considerably gone down. Measured in Indian money, it was only about Rs. 2,000 in 1945.
9. A few days before the remand report was to be finally considered by the Bench, the Department filed an affidavit of the Income‑tax Officer in which it is alleged that the assessee received about Rs. 3 lakhs as compensa tion from the Government of India and that this compensation includes the compensation for the loss of stock‑in‑trade in Japan. The relevant assess ment year is 194243. It is now 1959. It is surprising that the Department should not have known anything about the manner in which such matters were dealt with by the Government of India or the Custodian of Enemy Property. It would not be right for us to go into these facts and get the parties examined. We would only be allowing the Department to make out entirely a new case for itself at this late stage. As directed by the High Court by its order dated June 14, 1960, we have made the affidavit of the Income‑tax Officer and the counter‑affidavit made by the assessee; as Annexures "H" and "I" respectively and form part of the case.
10. The loss of stock‑in‑trade and the book debts which have accrued to the assessee did not accrue or arise in the ordinary course of the business carried on by the assessee. This loss took place as a result of Japan declar ing war, India being on the other side. The Department's stand that the loss did not take place in the year of account, as the assessee had a claim against the Japanese Government is, in our opinion, neither here nor there, What would have happened if we had lost the war? We cannot look at the picture as it emerged in 1945. We have to ascertain the position as it existed at the close of the year of account, i.e., March 26, 1942. We are surprised at the finding given by the Appellate Assistant Commissioner that it was not conclusively proved that the loss took place in the year of account. On the facts as brought out in the remand report, we think that such a finding is erroneous. The assessee did, suffer the loss in respect of stock and book debts in the year of account.
SUPPLEMENTARY STATEMENT OF CASE
This supplementary statement of the case is drawn up in pursuance of the orders of the Bombay High Court dated September 25, 1957, April 19, 1960 and 6th October 1962.
2. The applicant was at the relevant time a firm doing business in silk and having branches all over the world. The assessment year in question is 194243 and the corresponding previous year is the period from April 6, 1941, to March 26, 1942. The aspect of assessment which is relevant for the purpose of the supplementary statement relates to the claim of the assessee for deduction of loss on account of trading stocks and business debts in its branches at Yokohama and Kobe after the declaration of the war by Japan.
3. In the order of the High Court dated September 25, 1957, the direction given to the Tribunal was:
"to submit a supplementary statement of the case indicating therein the facts on which the Tribunal came to the conclusion that the loss occurred to the assessee as a result of enemy action, and also the facts as a result of which the assessee claimed that the goods which were frozen were ultimately lost to them and the point of time at which the book debts and the stock‑in‑trade were lost to the assessees?"
On receipt of this order the Tribunal remanded the case to the Appellate Assistant Commissioner for a report. A copy of this report is made Annexure G and forms part of the case. In the meantime Income-tax, Shri A. I. Shaikh filed an affidavit dated 1st July 1959, stating that the assessee had recovered sale proceeds of his stock‑in‑trade in Japan and also obtained full compensation from the Indian Government and he placed reliance on a letter he had received from the Custodian of Enemy Property dated 10th February 1959. On the other hand, Kishinchand Lekhraj a partner of Pohomal Bros., filed an affidavit stating that the compensation received by the assessee did not include the value of stocks. The Tribunal submitted a supplementary statement on November 13, 1959, but did not make these affidavits a part of the case.
4. The High Court by its order dated April 19, 1960, was pleased to direct as under
" The Court doth order that the said supplementary statement of case submitted by the said Tribunal herein dated the thirteenth day of November, one thousand nine hundred and fifty‑nine be and ‑the same is hereby referred back to the said Income‑tax Appellate Tribunal, Bombay Bench "A", with a direction that the said Tribunal do resubmit the said supplementary statement of case after including therein the affidavit of the Income‑tax Officer affirmed on the first day of July, on thousand nine hundred and fifty‑nine and the counter‑affidavit of Kishinchand Lekhraj affirmed on the twenty‑eighth day of September, one thousand nine hundred and fifty‑nine, being Exhs. "H" and "I" respectively to the said supplementary statement of case and for making necessary changes in the said supplementary statement of case on the footing that the said two affidavits form part of the said supplementary
The Tribunal thereafter submitted another supplementary statement of the case making the two affidavits a part of the case but without changing any other part of the original supplementary statement of the case. When the matter went up to the High Court, again the High Court by its order dated 6th October 1962, observed as under:
"This Court had not only required the Tribunal to make the two affidavits part of the supplementary statement of case, but also to record its finding on the controversy raised by the parties by their respective affidavits. In short the controversy raised is, according to the departmental representative, the compensation amount paid by the Government of India to the assessee included the value of the stock-in‑trade of the assessee, frozen by the Japanese authorities, while, according to the assessee, the amount received by him did not include any value for the stock‑in‑trade lost by the assessee."
It directed the Tribunal to give its finding on the following points:
"(1) What amount was paid by the Government of India to the assessee as compensation? (2) Whether the amount, if any, received by the assessee from the Government of India, included therein any amount representing the price of the stock-in-trade of the assessee frozen in Japanese action; and
(3) The quantum of loss, if any, suffered by the assessee by reason of the freezing of his stock-in-trade by the Japanese authorities, in the light of its finding on the aforesaid two issues.
5. The Tribunal remanded the case to the Appellate Assistant Commissioner with the direction that he should examine Shri Kishinchand with reference to his affidavit and also allow the Custodian of Enemy Property to be examined by the assessee-firm. The Appellate Assistant Commissioner submitted his remand report based on based on examination by the Income-tax Officer of Shri Kishinchand and examination by the Appellate Assistant Commissioner himself of the Deputy Custodian of Enemy Property. The affidavit made by the Incometax Officer is already made Annexure H including the letter of the Custodian of Enemy Property dated February 10, 1959, and forms part of the case. The affidavit of Shri Kishinchand is already made Annexure I and forms part of the case. The remand order of the Tribunal, the remand report of the Appellate Assistant Commissioner, the statement of Shri Kishinchand before the Incometax Officer and the statement of the Deputy Custodian of Enemy Property before the Appellate Assistant Commissioner are made Annexures J , K , L and M respectively, and form part of the case.
6. The facts which are not in dispute are as under:
The assessee-firm had, at the time of declaration of war by Japan, balances with banks amounting to 3,01,301 Yen at Kobe and 3,870 Yens at Yokohama. It had in addition cash on hand or by way of advance against good amounting to 15,608 Yens at Kobe and 3,506 Yens at Yokohama. The stock‑in‑trade at Kobe, was valued at 93,878 Yens and at Yokohama at 1,23,183 Yens and the book debts amounted to 28,787 Yens in Kobe and Yokohama. In addition, there were immovable properties valued at 50,003 Yens at Yokohama and 25,1100 'Yens at Kobe, There were also sundry assets like furniture, cutlery, linen, etc. The total assets at "Yokohama were worth 2,78,493, Yens and at Kobe 5,56,705 Yens. There were liabilities amounting to 52,268 Yens at Yokohama. After the end of the war, on September 2, 1945, the balance to the credit of the assessee firm was 4,09,346 Yens. As a result of agreement between the Government of India and the Japanese Government, the assessee firth received an amount of Rs. 2,87,517 on or about 20th October, 1958, and the question is to deter mine whether any part of the amount received included compensation on account of loss of stocks.
7. The Income‑tax Officer, in his affidavit, had claimed on the strength of a letter received by him from the Custodian of Enemy Property that the assessee had a bank balance of 409,346 Yens at the end of the war and that the amount was made up of the assessee's bank balances at the break of the war as and increated by credit due to sale of the assessee's properties end as reduced by expenditure on account of taxes, staff, etc. According to him, goods of the assessee which were frozen in Japan were not totally lost to the assessee and the goods were old by or on its behalf, the proceeds stood credited to its account in Yens and it received adequate compensation for that balance. It was contended that the assessee's goods were never physically taken possession of by the Japanese Government, that the merchant were allowed to sell goods themselves or under orders of the Japanese Government and the sale proceeds were required to be deposited in the bank accounts which were under prohibitory orders. This claim of the income tax Officer was based on a letter he received from Custodian of Enemy Property dated 10th February 1959, which is already trade a part of Annexure "H". The Deputy Custodian of Enemy Property was examined by the Appellate Assistant Commissioner and it is clear from the examination that the information given by the Custodian was in general tetras, that he no copy of any orders of the Japanese Government, that he had no details of the composition of the bank balances of the assessee‑firm and he could not give details about the stocks of the Indian firm sold under orders of the Japanese…
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