SHRI POOJAN K. PATEL,,AHMEDABAD vs. THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-10,, AHMEDABAD

Briefly stated facts are that the assessee in the present case is an individual and authorized stockiest of I.O.C. ltd. The assessee in the year under consideration has claimed bad debt amounting to Rs. 4,66,444/- due from one of the employees, namely Shri Maulik D. Pathak who was acting as the sales representative. The assessee claimed that such amount was collected by the employee from the customers against the sales made in the earlier Assessment Year. But the employee has not deposited said amount collected from the customer with the office. As such, the assessee submitted that the amount due to parties was embezzled by the employee against the sales made in the earlier year. Therefore the assessee debited such amount to the employee account after crediting the account of respective parties. The assessee also submitted that such embezzlement of fund pertains to Financial Year 2002-03 and 2003-04.

The aggrieved assessee preferred an appeal to the ''Ld.CIT (A)'' who has confirmed the order of the AO by observing as under: 3.3.1 The facts of the case and the submissions are considered. Mr. Maulik Pathak sales representative of the assessee had recovered amounts due form sundry debtors and didn’t deposit the same to the office of the assessee. The assessee came to know of this fact in F.Y. 2002-03. The assessee has also transferred the amounts due from such parties to Maulik Pathak account during the F.Y. 2002-03. This shows that fraud done by Mr. Maulik Pathak was in the knowledge of the assessee in the F.Y, 2002-03, however, the assessee has riot claimed this as a loss due to embezzlement in the A.Y. relevant to A.Y. 2002-03. The contention of the appellant that loss is crystallized during the year under appeal is not tenable. In the case of Dinesh Mills Ltd. 254 ITR 673 the Hon'ble jurisdiction! High Court has held that loss on account of embezzlement by an employee is allowed as deduction in the previous year in which such embezzlement is discovered and not the year in which the money is embezzled. Further once the debtors had paid the amount, the said sum has lost its character as debt. The said sum was not recovered by the assessee due to fraud done by Mr. Maulik Pathak employee of the assessee. Considering all these the claim made by the assessee of bad debt in the year under appeal cannot be accepted and rightly disallowed by the A.O. Thus the ground raised by the appellant to this extent is dismissed.

The Ld.AR, before us, filed a paper book running from pages 1 to 37 and submitted that the assessee had claimed the deduction in the year under consideration on rational that the amount became irrecoverable from the employee. Thus the impugned amount was written off in the year under consideration.

On the other hand, Ld.DR submitted that the impugned amount was not recoverable from the parties to whom the assessee has made sales. Therefore the same cannot be claimed as bad debt.

The Ld.DR vehemently supported the order of the authorities below.

We have heard the rival contentions of both the parties and perused the relevant materials available on records. The issue in the instant case relates to the deduction of loss incurred by the assessee due to embezzlement by the employee. Admittedly, the genuineness of the embezzlement of the fund by the employee has not been doubted by the authorities below. Thus such loss was incurred by the assessee in the course of the business. It is a settled law that the losses incurred in the course of business are allowed as deduction u/s 28 of the Act. In this regard, we find support and guidance from the judgment of Hon’ble Gujarat High Court in the case of Dinesh Mills Limited v/s. CIT reported in 254 ITR 673 wherein it was held as under: “it was to be held that the assessee would be entitled to deduction of loss during the year under consideration as that was the year in which the loss on account of embezzlement was, in fact, discovered. Page 4 of 7 8.1 The next question arises in which year the assessee can claim the deduction on account of such losses, i.e., embezzlement of the fund. Admittedly, the fund was embezzled by the employee of the assessee in the earlier years, but the assessee did not claim the deduction for the same till date as it was hopeful of recovering the same amount from the employee. In the year under consideration, the assessee has lost its hope for the recovery of the amount from the employee. Therefore the assessee has written off such amount as bad debt in the year under consideration. In our considered view, it is the decision of the assessee to hold the amount as irrecoverable from the employee. The Revenue cannot enter into the shoes of the assessee and direct him to claim the deduction of such amount in the year in which the embezzlement was discovered/crystalized.

The AO, based on the audit report filed by the assessee, found that the assessee has claimed an expense of Rs. 3,60,122/- which was paid to the Page 5 of 7 employees as bonus incentives in place of profits/dividends. Therefore he was of the view that the assessee is not entitled to the deduction of such amount. On a question by the AO, the assessee submitted that the amount described above was not representing as bonus/commission in the form of profit or dividend. Accordingly, the assessee claimed that it is eligible deduction u/s 36(1)(ii) of the Act.

The aggrieved assessee preferred an appeal to the ''Ld.CIT (A)''. The assessee before the ''Ld.CIT (A)'' submitted that the amount of bonus/commission was paid to the employe which was claimed as an expenditure. A such there was no documentary evidence justifying that assessee has paid such amount of bonus/commission in place of profits/dividends. However the ''Ld.CIT (A)'' disregarded the contention of the assessee and confirmed the order of the AO by observing as under: 3.4.1 The facts of the case and the submission are considered. The auditor in his report clearly stated that these payments are purely customary in nature. The appellant has simply said that the auditor didn’t mean that the same was in the nature of distribution of profits or dividend to the employees without furnishing any supporting details or evidences. Therefore, the action of the AO is found to be justified and th addition made is confirmed. Thus, the ground raised by the appellant to this extent is dismissed.

The Ld.AR, before us, reiterated the submission as made before the authorities below. Page 6 of 7

On the other hand, the Ld.DR vehemently supported the order of the authorities below.

We have heard the rival contentions of both the parties and perused the materials available on records. In the instant case, the AO has made the addition of the bonus/commission expenses incurred by the assessee on the ground that such amount was paid in place of the profit/dividend which is not allowable deduction u/s 36(1)(iii) of the Act. The AO has made the addition based on the remarks put by the auditors in the tax audit report. In our considered view, the remarks put by the auditors as “ bonus plus incentives paid to staff of Rs. 3,60,122/- is purely customary in nature” doesn’t suggest that assessee has paid any dividend/profit to the staff. Therefore we are of the view that the AO has made the addition on the wrong assumption of facts. Therefore, we are not inclined to uphold the order of the authorities below. Accordingly, we set aside the order of the ''Ld.CIT (A)'' and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is allowed.

In the result, the appeal of the assessee is allowed.