Commissioner of Income Tax vs Kadakatla Rice Mill

M.B.N., J.—This Reference is at the instance of the Revenue aggrieved by the order, dated 29th November,1978 passed by the Income Tax Appellate Tribunal in I.T.A.No.430/Hyderabad/1976-77 relating to the assessment year 1974-75.

The assessee is a registered firm deriving income from milling of paddy and sale of rice mainly by export to Kerala State. During the relevant accounting year ending on 12.12.1973, the Income Tax Officer noticed that the assessee had debited an amount of Rs.1,10,534/- to the profit and loss account, being the value of 1,110 quintals of rice seized by the Civil Supplies Department. It was urged before the Income Tax Officer that the Government had auctioned the rice seized by the Civil Supplies Department and as such the loss arising on account of such seizure should be allowed as a deduction during the year of account. The Income Tax Officer disallowed the claim of the assessee on the ground that the assessee was not able to adduce any evidence in support of the value of the stock appropriated by the Government. The Appellate Assistant Commissioner confirmed the disallowance by holding that the assessee had violated certain regulations of the Civil Supplies Department and in view of the same he concluded that the loss arising on account of such violation of statute cannot be allowed as a deduction from the computation of total income for the relevant year. The matter was carried before the Income Tax Appellate Tribunal (for short "the Tribunal).As there was difference of opinion between the learned Members of the Bench of the Tribunal, the matter was referred to a 3rd Member, who allowed the appeal filed by the assessee holding that the assessee is entitled for a deduction on account of the loss sustained due to confiscation of the rice seized by the Civil Supplies Department.

At the request of the Revenue, the Tribunal while stating the case referred the following question of law to this Court for opinion.

Question of Law:

"Whether the loss of Rs.1,10,534/- has to be allowed as deduction from the total income for the assessment year 1974-75?"

We have noticed that the assessee, though had received the notice, none represented the assessee. Though the assessee failed to participate in the proceedings before this Court, we proceed to decide the matter on merits of the case and on the basis of the submissions made by Sri S.R. Ashok, learned Senior Counsel for the Revenue.

The facts, which are not disputed, are that the Vigilance Cell of State Government of Andhra Pradesh seized 1,110 quintals of rice from the premises of the assessee viz., M/s. Kadakatla Rice Mill, Tadepalligudem. The matter fell for consideration before the Revenue Divisional Officer, who passed order of confiscation. Then the matter was carried before the learned District Judge, who also confirmed the confiscation order. Thereafter it came up before the learned Division Bench of this Court in a writ petition. The learned Division Bench of this Court held that the confiscation order was invalid. Finally the matter fell for consideration before the Hon''ble Supreme Court in appeal. The Hon''ble Supreme Court confirmed the order of confiscation while setting aside the order made by the learned Division Bench of this Court. The resultant effect is that the order of the confiscation of the rice seized by the Civil Supplies Department was confirmed. In other words it could be said that the seizure and confiscation of the rice by the Civil Supplies Department were on account of the infraction of the law by the assessee.

Sri S.R. Ashok, learned Senior Counsel appearing on behalf of the Revenue contended that in case during the course of trade activity the assessee suffers commercial loss, then only such an assessee is entitled for a deduction and if he suffers loss due to infraction of a particular provision of law, such loss could not be treated as a commercial loss and such loss could not be allowed as a deduction. In support of his contention the learned Senior Counsel relied on a decision of the Hon''ble Supreme Court in Haji Aziz and Abdul Shakoor Bros. Vs. The Commissioner of Income Tax, Bombay City II, and contended that since the loss sustained by the assessee as a result of the confiscation of the rice was due to infraction of certain provisions of law, such loss could not be treated as a commercial loss and as such the assessee is not entitled for a deduction. He further submitted that the Tribunal was not justified in granting deduction holding that the loss sustained by the assessee is a commercial loss.

Admittedly, the Civil Supplies Department seized 1,110 quintals of rice from the premises of the assessee and order of confiscation of the rice was passed, which was confirmed by the Hon''ble Supreme Court. As such this confiscation of the rice is as a result of violations of certain provisions of the Civil Supplies Act. That being so, it would be difficult for us to appreciate the case of the assessee that it is entitled for deduction as if it suffered loss on account of the seizure and confiscation of the rice. As the loss sustained by the assessee was due to infraction of law, such loss cannot be treated as a commercial loss incurred by the assessee during the course of activity of trade.

In view of the ratio laid down by the Hon''ble Supreme Court in the decision (1 supra) and in the facts and circumstances of the case, we have no hesitation to say that the loss sustained by the assessee as a result of the confiscation of the rice, which was confirmed by the Hon''ble Supreme Court, is not a commercial loss arising out of trade and it is only due to infraction of law by the assessee, therefore, such loss cannot be allowed as a deduction under the provisions of the Income Tax Act.

Accordingly, we answer the Reference in favour of the Revenue and against the assessee.