Section 145 – An assessee who follows mercantile system of accounting can, at the time of finalisation of accounts of any relevant assessment year, claim deduction of actual figure of loss on account of short realisation of export proceeds even though such export proceeds are outstanding as receivable as on the end of the relevant year and are actually realised in the subsequent assessment year.

9. [2017] 163 ITD 56 (Mumbai – Trib.) Assistant CIT vs.
Allied Gems Corporation (Bombay)A.Y.: 2009-10         Date
of Order: 20^th January, 2017     

FACTS

The assessee was a
partnership firm engaged in the business of dealing in cut & polished
diamonds and precious & semi-precious stones.

In the course of
assessment proceedings, it was noticed that assessee had claimed a loss of Rs.
49,64,937/- on account of realisation of export proceeds, which was outstanding
as on 31.03.2009.

The AO disallowed the
aforesaid claim of loss on the ground that the realisation of outstanding
export receivables was an event which took place in the subsequent assessment
year i.e. AY 2010-11 and, therefore, such loss could not be allowed while
computing the income for the relevant assessment year.

The CIT-(A) noted that the
AO had not doubted the short realisation of the debtors and, hence, following
the principle of prudence, CIT-(A) allowed assessee’s claim of loss.

On appeal by the revenue
before the Tribunal.

HELD

The dispute relates to the
income chargeable under the head ‘profits and gains of business or profession’;
which is liable to be computed in accordance with the methodology prescribed in
section 145(1) of the Act i.e. either in terms of cash or mercantile system of
accounting regularly employed by the assessee. The claim of the assessee is
that the mercantile system of accounting adopted by the assessee justifies
deduction of loss of Rs. 49,64,937/- and for that matter, reference is made to
the principle of prudence, which has been emphasised in the Accounting
Standard-1 notified u/s. 145(2) of the Act also. The principle of prudence
seeks to ensure that provision ought to be made for all known liabilities and
losses even though there may remain some uncertainty with its determination.
However, it has to be appreciated that what the principle of prudence signifies
is that the probable losses should be immediately recognised. In the present
context, the stand of the assessee is that though realisation of export receivables
took place in the subsequent period, but the loss could be accounted for in the
instant year itself as it would be prudent in order to reflect the correct
financial results.

Factually speaking,
Revenue does not dispute the short realisation from debtors to the extent of
Rs. 49,64,937/- and, therefore, insofar as the quantification of the loss is
concerned, the claim of the assessee cannot be assailed on grounds of
uncertainty.

In the case of U.B.S.
Publishers and Distributors [1984] 147 ITR 144; the assessee following
mercantile system of accounting, for AY 1967-68 (previous year ending on
31/05/1966), had claimed an expenditure by way of purchases of a sum of Rs.
6,39,124/- representing additional liability towards foreign suppliers in
respect of books imported on credit up to the end of 31.05.1966. The said
additional claim was based on account of devaluation of Indian currency, which
had taken place on 06.06.1966 i.e. after the close of the accounting year. The
Hon’ble Allahabad High Court noted that liability to pay in foreign exchange
accrued with the import of books and was not as a result of devaluation.
According to the High Court, since the actual figure of loss on account of
devaluation was available when the accounts for 31/5/1966 ending were
finalized, the same was an allowable deduction in assessment year 1967-68
itself. The parity of reasoning laid down by the Hon’ble Allahabad High Court
is squarely applicable in the present case. In the present case also, short
realization of export proceeds to the extent of Rs. 49,64,937/-, took place in
next year but it related to export receivable for the relevant assessment year,
and at the time of finalisation of accounts for the relevant assessment year,
the actual figure was available, and therefore, the assessee made no mistake in
considering it for the purposes of arriving at the taxable income.

Even otherwise, it has to
be appreciated that income tax is a levy on income and that what is liable to
be assessed is real income and while computing such real income, substance of
the matter ought to be appreciated. Quite clearly, the assessee was aware while
drawing up its accounts for the previous year relevant to the assessment year
under consideration that the export receivables, outstanding as at the year-
end were short recovered by a sum of Rs. 49,64,937/-and, therefore, the real
income for the instant year could only be arrived at after deduction of such
loss.

Therefore, considering the
entirety of facts and circumstances, the Tribunal held that the CIT (A) had
made no mistake in allowing the claim of the assessee and appeal of the revenue
was dismissed.