THE issues before the Bench are - Whether where the goods have been given in shipment and title of goods along with the risk has been passed on to the assessee in terms of a contract, the assessee will be said to be at loss if such goods are not received by him and Whether where the assessee has exhausted all the methods to recover the losses he incurred during previous year on account of loss of goods in transit and has not claimed deduction on those losses in the previous year, he cannot be denied from claiming deduction on the said losses in the subsequent year if such loss was not written off. And the verdict favours the assessee.
The assessee is engaged in the business of trade in importing timber logs in bulk quantity. It had entered into contract with M/s Ply International, USA for import of teak logs of Tanzanian origin by shipment to be made in June and July 1994. The sale was on C & F basis where insurance was to be covered by the assessee and freight was to be paid by Ply International. The terms of the contract stipulated that once the goods were accepted on inspection, it would be considered as sold and held at the risk and responsibility of the assessee. The assessee for purpose of such contract had engaged the services of shipping vessel, M V Hazar through the charterer viz., M/s Ummall Quwain (UAE) and booked the consignment. The teak logs were inspected by the representatives of assessee at Tanga Port and a certificate was issued on behalf of the assessee stating the quality, quantity and measurement of teak logs. The teak logs shipped on M V Hazar were accordingly insured by the assessee with M/s National Insurance Company, Mysore for invoice value vide Marine policy. Subsequently, the cargo was loaded on shipping vessel, which was to arrive at Mangalore port. A bill of lading was issued by Ummall Quwain which was signed by M V Hazar and the freight had been prepaid at Dubai. However, M V Hazar did not reported at Mangalore port on the expected date of arrival. This resulted in a dispute between the Charterer and the ship owner as to non payment of freight by the former to the latter. As a result, the ship owner declared a lien over the goods and diverted the cargo to some other destination without delivering it to the assessee. The assessee tried to negotiate but it was not fruitful. Accordingly, the assessee informed these developments to its Insurance company and requested them to take immediate steps to protect its insured cargo, however, the Insurance company contended that the said risk was not covered under the policy. In the meanwhile, bill of lading endorsed in favour of assessee and bill of exchange drawn by Ply International against the assessee were presented to the assessee through its banker. The assessee accepted the bill of exchange, however, the assessee's banker could not remit the payment in the absence of bill of entry. When the banker approached RBI for instructions to remit the foreign exchange without insisting on the bill of entry, the RBI declined the permission. Therefore, the bankers of assessee returned the documents to the seller bank. Thereafter, in such circumstances, the assessee filed a suit in the Court of Civil Judge, Mangalore, impleading the ship owners, Charterers, their agents and also the National Insurance Company seeking a decree in favour of assessee against the defendants jointly and severally to make good the loss incurred by the assessee.
The assessee debited its purchases to the extent of invoice value and took goods into closing stock under the head 'goods in transit'. The assessee also showed Ply International as a creditor for supply of goods and continued it in the books of accounts with notes to the effect that provision were to be made in the account after exhausting the legal remedy available to the company. The assessee however did not made any provision for loss of goods in transit. Although in the return filed for A.Y 1996-97, the assessee claimed the loss of goods in transit by illegal diversion of cargo by ship owner and a refusal of claim by the Insurance company. The assessee submitted that since the loss was crystallized during the previous year relevant to A.Y 1996-97, so the same was claimed as deduction in the previous year. However, since the same was not allowed in the A.Y 1996-97, the assessee claimed the said deduction in A.Y 1997-98. The said assessment was disallowed by the AO on the ground that as the title in goods was not transferred to the assessee, it could not claim any loss. The assessee was not liable for payment of the cost of logs, in the circumstances, as it fall under the heading of 'Force Majeure'. Further, the AO held that the liability claimed by the assessee was an uncrystalized liability. It was also held that as the civil suit was pending and the RBI did not grant permission to remit the foreign exchange, the loss arising out of contingent liability was not allowable. It was observed that the foreign supplier Ply International was the proprietary concern owned by brother of one of the Directors of the assessee, there could be a doubt that this was not a normal business transaction.
On appeal, the CIT(A) held the assessee and its sister concerns had been regularly doing business with Ply International during subsequent years and therefore, it could not be said that it was not a normal business transaction. The contract entered into between the parties was valid and complete contract. Once in the terms of contract, inspection of goods was done and the same was loaded to the ship, the title in the goods passes to the assessee. Admittedly, the goods were not delivered to the assessee and therefore, the assessee had sustained loss. Once the acceptance of bill of exchange was signed, the liability got crystallized. The pendency of Civil Suit or the refusal of RBI to grant permission would in no way affect the liability, nor it would make the contingent liability. The assessee did not claim loss on goods in transit it as a deduction in computation of income for the A,Y 1995-96. Neither did he write off the loss in its books of account for the A.Y 1996-97, but it was written off in the books of account. Accordingly, the CIT(A) set aside the order of the AO and allowed the set off claimed by the assessee. On further appeal, the Tribunal upholding the findings of the CIT(A) held that the loss of goods in transit accrued in the commercial sense during the relevant A.Y 1996-97 and therefore, the assessee was eligible for deduction of loss of Rs.1,43,51,506/-.
On appeal before the High Court, the counsel for revenue contended that admittedly, the assessee did not receive the consignment. The consignment did not enter shores of India, therefore, there was no liability on his part to make any payment to the seller. Admittedly, the RBI did not permit the remittance of sale consideration by way of foreign exchange on the ground that the goods never reached the Indian source. Therefore, the counsel contended that the authority were not justified in treating the amount as expenditure and consequently the loss incurred by the assessee and remitting deduction of the said amount.
However the counsel for assessee supported the order of the appellate authorities.
Having heard the parties, the High Court held that,
++ it is clear from the facts that there is no dispute regarding the contract entered into between the parties. The terms of contract stipulates once the teak logs are inspected and loaded in the ship, the title in the goods passes to the buyer. The transportation of the goods is at the risk of the buyer. Therefore, the buyer was expected to take the insurance policy whereas the seller has to pay the freight charges. When the seller negotiated the document of title, the assessee received the same and acknowledged the liability. Admittedly, the ship which carried the logs did not enter the Indian waters and the goods was not delivered because of the dispute between the owner of ship and the charterer. Once the title of goods has passed to the assessee and the goods was transported at his risk, he accepted the document negotiated through the bank and acknowledged the liability. But, when the goods has not reached him, it is clear that the assessee has incurred loss of the value of goods which he has purchased. In the books of account of the assessee, necessary entries were made though loss was not claimed. The assessee approached the RBI for permission to make payment by way of foreign exchange which was refused by RBI. The assessee approached the Insurance company to settle the claim, to which they also declined. Therefore, assessee was constrained to file the Civil Suit in Mangalore Court against the ship owners, charterers, Insurance company claiming the said amount. In view of these steps taken, the assessee did not make entry in the book of accounts for the A.Y 1994-95 showing the loss. However, for the subsequent year, necessary entries were made showing loss and in the return filed, the deduction was claimed. When it was not allowed in the subsequent year after writing off the losses, deduction was claimed. In the light of these undisputed facts, both the Appellate Authorities were justified in upholding the claim of assessee and in allowing the deduction.
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