Nikon Systems Pvt Ltd vs ACIT Circle 18(2), New Delhi: Loss Due to Fire Allowed as Deduction for Assessment Year 2015-16

Nikon Systems Pvt Ltd vs ACIT Circle 18(2), New Delhi: Loss Due to Fire Allowed as Deduction for Assessment Year 2015-16

Case Number: ITA 6115/DEL/2019

Appellant: Nikon Systems Pvt Ltd, New Delhi

Respondent: ACIT Circle 18(2), New Delhi

Assessment Year: 2015-16

Order Type: Final Tribunal Order

Date of Order: 15th May 2020

Case Filed On: 18th July 2019

Pronounced On: 15th May 2020

Background of the Case

Nikon Systems Pvt Ltd, a company based in New Delhi, filed an appeal against the Assistant Commissioner of Income Tax (ACIT), Circle 18(2), New Delhi, for the assessment year 2015-16. This appeal, under case number ITA 6115/DEL/2019, was directed against an order passed by the Commissioner of Income Tax (Appeals)-37 [CIT(A)], New Delhi, dated 28th June 2019.

The appellant, engaged in trading and manufacturing activities, filed its return of income on 31st October 2015, declaring a loss of Rs. 2,90,07,689/- for the assessment year 2015-16. During the assessment, the Assessing Officer (AO) disallowed a loss of Rs. 5,24,06,053/- that the appellant had claimed as a result of goods destroyed in a fire, leading to a dispute that was eventually brought before the tribunal.

Grounds for Filing the Appeal

The appellant, Nikon Systems Pvt Ltd, filed the appeal to challenge the disallowance made by the AO, which was upheld by the CIT(A). The appellant argued that the loss due to fire was a definite and crystallized trading loss incurred during the year, and therefore, it should be allowed as a deduction under the Income Tax Act, 1961. The appeal was grounded on the following points:

• The loss due to fire was real and not contingent, as the goods were destroyed during the year, and the appellant had filed an insurance claim, although it was still under process.
• The disallowance of the loss by the AO and CIT(A) was based on the incorrect assumption that the loss was contingent upon the insurance claim being settled, which was contrary to the legal principles governing the deduction of business losses.
• The appellant sought relief from the tribunal to have the disallowed loss allowed as a deduction, arguing that the loss had been incurred during the year and should be recognized for tax purposes.

Tribunal Proceedings

The case was listed for hearing before the Delhi Bench ‘E’ of the Income Tax Appellate Tribunal (ITAT) on 11th February 2020. The bench was presided over by Judicial Member Shri Bhavnesh Saini and Accountant Member Shri Prashant Maharishi. The appellant was represented by Dr. Rakesh Gupta, Advocate, while the respondent was represented by Senior Departmental Representative (DR) Ms. Rakhi Vimal.

The appellant’s counsel argued that the loss due to fire was a definite trading loss incurred during the year and should be allowed as a deduction. The counsel emphasized that the loss was real, as the goods had been destroyed in the fire, and the fact that the insurance claim was still under process did not make the loss contingent. The counsel cited several judicial precedents to support the argument that trading losses should be allowed in the year they are incurred, regardless of any subsequent compensation from insurance.

On the other hand, the respondent’s counsel argued that the loss was contingent because the insurance claim had not been settled. The counsel asserted that the loss should only be allowed as a deduction in the year when the insurance claim is finalized, as the loss could be recovered through the insurance settlement.

Final Tribunal Order

After considering the arguments from both sides, the tribunal found merit in the appellant’s arguments. The tribunal observed that the fire occurred during the assessment year 2015-16, and the goods destroyed were stock-in-trade, which formed part of the appellant’s trading assets. The tribunal held that the loss incurred was definite and crystallized during the year and should be allowed as a deduction, regardless of the pending insurance claim.

The tribunal rejected the contention that the loss was contingent, noting that the mere existence of an insurance policy did not negate the occurrence of the loss. The tribunal referred to legal precedents, including a decision by the Patna High Court, which held that trading losses due to fire are allowable as deductions, irrespective of any subsequent insurance recovery.

Accordingly, the tribunal reversed the orders of the lower authorities and directed the AO to allow the deduction of the loss due to fire amounting to Rs. 5,24,06,053/-. The tribunal allowed the appeal filed by the appellant.

Conclusion

The case of Nikon Systems Pvt Ltd vs ACIT Circle 18(2), New Delhi, is a significant ruling that clarifies the treatment of trading losses incurred due to unforeseen events like fire. The tribunal’s decision to allow the deduction of the loss emphasizes that such losses, when incurred during the year, should be recognized for tax purposes, regardless of any pending insurance claims.

This judgment serves as a reference for taxpayers facing similar situations, where business losses are disallowed on the grounds of being contingent. It reinforces the principle that trading losses are deductible in the year they occur, aligning with the broader objective of accurate income determination under the Income Tax Act.

Note: The above summary provides an overview of the tribunal proceedings and the final order in the case of Nikon Systems Pvt Ltd. For a more detailed understanding, interested parties are encouraged to refer to the full text of the tribunal’s order dated 15th May 2020.

Sd/-
(BHAVNESH SAINI)
JUDICIAL MEMBER

Sd/-
(PRASHANT MAHARISHI)
ACCOUNTANT MEMBER

Assistant Registrar

Nikon Systems Pvt Ltd vs ACIT Circle 18(2), New Delhi: Loss Due to Fire Allowed as Deduction for Assessment Year 2015-16