DINESH MILLS LTD vs. COMMISSIONER OF INCOME TAX

ITR/21/1988HC GujaratGJHC24013099198805 December 2001Author: HONOURABLE MR. JUSTICE B.C.PATEL,HONOURABLE MR. JUSTICE D.A.MEHTA6 pages
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What were the facts?

The assessee, Dinesh Mills Ltd., a textile company, maintained accounts on a mercantile system. For assessment year 1977-78, the assessee claimed a deduction for embezzlement loss of Rs. 13,40,000 incurred due to an employee. The Income Tax Officer disallowed the claim, stating the loss was indeterminate. The CIT(Appeals) allowed a deduction of Rs. 6,20,000, estimating Rs. 7,20,000 as recoverable. The Tribunal upheld the CIT(Appeals)'s order, relying on the principle that a trading loss is incurred only when reasonable prospects of recovery cease. The assessee's appeal to the High Court concerned the disallowance of the embezzlement loss. The revenue's appeals concerned motor car expenses and depreciation. The High Court heard arguments from both sides.

What did the High Court hold?

The High Court allowed the assessee's appeal on the embezzlement loss (Question 1). The Court noted the assessee's statement that no deduction was allowed in subsequent years for the balance loss. Therefore, the Court held that the assessee is entitled to the deduction of loss during the year of discovery, as it is incidental to business. The Tribunal's order was set aside, and the deduction was to be allowed in the year under consideration. Question 2, regarding commission paid to directors, was left unanswered as the assessee did not press it. Both questions raised by the revenue (Questions 3 & 4) were answered in favour of the assessee and against the revenue, based on an unreported decision of the High Court in *Sayaji Iron & Engg.Co. vs. C.I.T.*. The reference was disposed of accordingly.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing the embezzlement loss of Rs. 7,80,000? (Assessee's question, AY 1977-78). The assessee argued that the entire loss of Rs. 13,40,000 should be allowed as a deduction in the year of discovery, citing CBDT Circular No. 35-D(XLVII-20) of 1965, and noting that a substantial portion was later recovered. The revenue contended that the loss was not fully ascertainable until a compromise decree was reached in a later year, supporting the Tribunal's view that a trading loss is incurred only when recovery prospects cease, as per *Associated Banking Corporation of India vs. CIT*. 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in disallowing the commission paid to the Directors as perquisite in the assessment years 1979-80 and 1980-81, for the purposes of section 40(c) of the Act? (Assessee's question). The assessee did not press this issue. 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law to hold that a sum of Rs. 20,000 out of motor car expenses in each of the assessment years 1977-78, 1979-80 and 1980-81 was not disallowable as personal and non-business use of motor car in the hands of the assessee? (Revenue's question). The revenue argued for disallowance of motor car expenses. The judgment refers to an unreported decision of the High Court in *Sayaji Iron & Engg.Co. vs. C.I.T.* for resolution. 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to the depreciation as claimed and 1/7th portion of the depreciation of motor car was not disallowable? (Revenue's question, AY 1979-80). The revenue argued for disallowance of a portion of depreciation on motor cars. The judgment refers to an unreported decision of the High Court in *Sayaji Iron & Engg.Co. vs. C.I.T.* for resolution.

Which sections of the Income-tax Act were involved?

Section 256(1),Section 40(c)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 21 of 1988

For Approval and Signature:

Hon'ble MR.JUSTICE B.C.PATEL and Hon'ble MR.JUSTICE D.A.MEHTA ============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements?

2.

To be referred to the Reporter or not? : NO 3. Whether Their Lordships wish to see the fair copy : NO of the judgement?

4.

Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge? : NO

The order continues below.

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