RUDRA INDUSTRIES ,NIZAMABAD vs. ITO, WARD-3, NIZAMABAD

Aggrieved by the order dated 27/03/2023 passed by the learned Commissioner of Income Tax (Appeals)- National Faceless Appeal Centre (NFAC), Delhi (“Ld. CIT(A)”), in the case of Rudra Industries (“the assessee”) for the assessment year 2015-16, assessee preferred this appeal.

Briefly stated relevant facts are that the assessee is a partnership firm engaged in the business of rice mill. It filed the return of income for the assessment year 2015-16 on 10/10/2015, declaring an income of Rs. 5,66,910/-. During the course of scrutiny, learned Assessing Officer noticed from the financial statements that the assessee claimed Rs. 93,70,450/- as expenditure towards VAT and Rs. 6,58,520/- as expenses towards CST, totaling to Rs. 1,00,28,970/- in its Profit and Loss Account (P&L Account). To verify the correctness of the claim of the VAT and CST, learned Assessing Officer wrote to the CTO, Bodhan and got a reply that a criminal case was filed regarding some fake challans which were under investigation by the state CID and that the VAT authorities are calling information from the dealers to verify the genuineness of the challans paid. Assessee also failed to produce the challan/proof of payment of VAT and the CST, stating that in the circumstances, such production is beyond the control of the assessee. Learned Assessing Officer addressed their letter to the CTO, Bodhan, calling for the details of the payments made by the assessee towards VAT and CST, but received a reply stating that the challan payments by the assessee were only to the tune of Rs. 22,65,822/- towards VAT, Rs. 1,14,935/- towards CST totaling to Rs. 23,80,757/- in aggregate. In the circumstances, learned Assessing Officer added the difference of Rs. 84,38,910/- to the income of the assessee and determined the total income at Rs. 91,20,430/-.

Aggrieved by such an action of the learned Assessing Officer, assessee preferred appeal and had taken the plea that the assessee produced all the relevant evidence to show that the assessee paid the VAT and CST payments in the year and submitted ledger copy of VAT and CST payments, ledger copy of VAT payment receipt, monthly returns of VAT and CST payment, challan copies of VAT and CST payment etc., and when the assessee produced all such information and all the expenditure is wholly for the purpose of business, relief cannot be denied to the assessee merely because the CTO did not confirm the genuineness of the VAT and CST payments. Apart from this, the assessee took another plea that the tax consultant deeply frauded the assessee by breaching VATIS portal and preparing bogus challans driven by the greed to unduly enrich himself, which the assessee is unaware of. The further plea of the assessee on this aspect is that an FIR was lodged with police against the tax consultant and evidence to that fact is furnished to the state CID also. On this score also, the assessee pleaded before the learned CIT(A) that since it paid the amount to the VAT consultant, who misappropriated the same, assessee is entitled to claim the loss arising out of the misappropriation by the agent.

Learned CIT(A) considered all these aspects and recorded that the assessee filed the copies of the VAT returns and copies of the challan along with copy of FIR and CID investigation report. But since the issue relates to a scam or criminal breach of trust, forgery and criminal conspiracy with the connivance of the Commercial Tax Office, Bodhan and the CID highlighted all these facts, still the fact remains that the Government Treasury received only a sum of Rs. 23,80,757/-, the assessee is entitled to claim the deduction of only such amount and not the entire Rs. 1,00,28,970/- and, therefore, the learned Assessing Officer rightly disallowed the balance of Rs. 84,38,910/-.

Assessee is therefore, before us in this appeal contending that the authorities below failed to consider the evidence produced by the assessee in support of its contention that the assessee made the entire payment towards VAT and CST and as a matter of fact, the assessee filed cases against the tax consultant and it is proved that CID also highlighted this fact shows that the assessee suffered due to the misappropriation by the agent, which is an allowable deduction.

Per contra, learned DR submitted that the assessee is not entitled to claim the deduction under section 37(1) of the Act in respect of the amounts said to have been misappropriated by the tax consultants in connivance with the CTO office in respect of which the inquiry by the CID is pending. She submitted that the assessee is not entitled to claim to off-set the misappropriated portion of the money and claim deduction in the return.

We have gone through the record in the light of the submissions made on either side. It is a fact that out of the total sum of Rs. 1,00,28,970/-, the CTO, Bodhan confirmed a sum of Rs. 23,80,757/- to have been remitted to the Government exchequer and to that extent, learned Assessing Officer allowed the deduction. In respect of the balance of amount of Rs. 84,39,910/-, assessee claims to be a victim of the fraud committed by the agent and entitled to claim deduction in respect of such sum also, which the authorities below denied. To establish the fraud, assessee filed complaint against the tax auditor and produced the copies of FIR and the CID report before the learned CIT(A). But, the authorities below refused to grant any relief under section 37(1) of the Act.

On this aspect, in the case of Badridas Daga vs. CIT [1958] 34 ITR 10, the Hon’ble Apex Court affirmed the view that the loss resulting from embezzlement by an employee or agent of a business is admissible as a deduction under section 10(1) of the 1922 Act, corresponding to section 28 of the Act, if it arises out of the carrying on of the business and is incidental to it. In the case of Associated Banking Corporation of India Ltd. vs. CIT [1965] 56 ITR 1, the Hon'ble Court held that the loss must be deemed to have arisen only when the employer comes to know about it and realizes that the amounts embezzled cannot be recovered.

It was held by the Hon'ble Supreme Court in the case of Associated Banking Corporation of India Ltd. (supra) that it would be wrong to say that irrespective of other considerations, as soon as an embezzlement of the employer’s funds takes place, whether the employer is aware or not of the embezzlement, there results a trading loss, and so long as there is a reasonable prospect of recovery of the embezzlement, trading loss in a commercial sense cannot be deemed to have resulted. Further in the case of Hopkin and Williams (Travancore) Ltd. v. CIT (1967) 64 ITR 76 (Ker) it was held that deduction claimed was an admissible deduction if it was not possible to recover the loss from the persons responsible for the same. If the assessee has made the necessary attempts to recover the loss from the persons concerned and had failed or if the assessee did not make such attempts, because it was useless to make them in view of the financial position of the persons concerned, then and then alone the loss could be allowed. All the factual aspects require consideration by the authorities below in the light of the decisions reported in the cases of Badridas Daga (supra) Associated Banking Corporation of India Ltd. (supra) and Hopkin and Williams (Travancore) Ltd (supra). It would, therefore, be in the interest of justice to set aside the impugned order and restore the issue to the file of the learned Assessing Officer for verification of the facts in respect of entitlement of the assessee to claim deduction of the amount said to have been misappropriated by the VAT consultants.

We, therefore, set aside the impugned order and restore the issue to the file of the learned Assessing Officer for verification of the facts in respect of entitlement of the assessee to claim deduction of the amount said to have been misappropriated by the VAT consultants. Grounds are accordingly treated as allowed for statistical purposes.

In the result, appeal of the assessee is treated as allowed for statistical purposes. Order pronounced in the open court on this the 24th day of November, 2023.