Disallowance u/s 37(1) for pan masala seized deleted following Supreme Court decision

Disallowance u/s 37(1) for pan masala seized deleted following SC decision that Explanation 1 apply to business expenses not to business losses

ABCAUS Case Law Citation:
ABCAUS 2979 (2019) (05) ITAT

Important Case Laws Cited/relied upon by the parties:
T.A. Quereshi Vs. CIT (2006) 286 ITR 547

The only issue raised in this appeal WAS against the confirmation of disallowance u/s 37(1) if the Income Tax Act, 1961 (the Act) being losses on goods due to seizure.

The assessee was engaged in the business of manufacturing of Pan Masala products. The assessee had claimed a deduction in the Profit and loss account under the head “goods seized by police”.

On being called upon to substantiate the claim, the assessee submitted that Pan Masala was being transported to a customer, which was seized by Police and handed over to Food and Drug Department.

The Assessing Officer (AO) noted that in the Police panchanama, it was recorded that Pan Masala was adulterated and harmful for human health. Invoking the provisions of Explanation 1 to section 37(1) of the Act, the AO made addition of the same which was upheld in the first appeal.

The Tribunal observed that in this regard, the Hon’ble Supreme Court had held that Explanation 1 to section 37(1) applies to business expenses and not to business losses.

It was noted that in the said case also, the assessee was engaged in the manufacturing and sale of Heroin which was seized. The assessee’s claim of business loss was upheld by the Hon’ble Supreme Court by holding that Explanation 1 to section 37(1) is not attracted to business loss.

The Tribunal opined that the facts of the instant case were similar in as much as the assessee claimed business loss on account of seizure of its stock in trade, which did not fall within the realm of Explanation 1 to section 37(1) of the Act.

Accordingly, the Tribunal ordered to delete the addition.

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