NIRAJ OMPRAKASH PATIL,VASAI vs. ITO 4(3), THANE, THANE

The above titled appeals have been preferred by two assessees against the orders dated 01.02.2016 & 08.07.2016 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment years 2010-11 & 2011- 12.

The issue raised in ground No.2 & 3 is against the order of Ld. CIT(A) confirming the addition of Rs.3,81,92,800/- as made by the AO under section 68 of the Act.

The facts in brief are that the assessee was a bank employee working with the Axis Bank, Cuffe Parade Branch as mid corporate relationship manager. The assessee filed the return of income on 26.07.2010 declaring an income of Rs.6,56,898/-. During the year under consideration the assessee misappropriated cheques worth Rs.3,81,92,800/- received by the bank towards processing fee by taking cheques in the name of his wife and depositing the same into her account. The case of the assessee was selected for scrutiny to verify the information received from FIU-IND through DDIT-2, Thane regarding suspicious financial transactions. The AO also sent notice to the Axis Bank wherein certain details in respect of transactions to the extent of Rs.3,11,71,000/- were called for. Consequently, Axis Bank conducted an internal audit wherein it was revealed that transactions of Rs.3,11,71,000/ represented processing fee on loans granted to one Ashar Eco Power Ltd. and the assessee has misappropriated the said processing fee into his wife’s current account. During the course of internal audit it also came to light that during the assessment year 2010-11, the assessee had misappropriated cheques of Rs.3,81,92,800/- and subsequent assessment year 2011-12 of Rs.2,83,09,791/- which were received by the bank towards

The Ld. A.R. submitted before the Bench that the amount of processing fee misappropriated by the assessee and credited to his wife’s proprietary concern account M/s. Season Boutique ,in fact, represented the money which the bank has been defrauded by diverting the money to his wife’s account fraudulently and in no way the constituted the income of the 5 & 5940/M/2016 ITA No.3035/M/2016 Shri Niraj Omprakash Patil & Smt. Arpita Niraj Patil assessee. The Ld. A.R. also placed before the Bench the money received from various clients as additional processing fee over and above the normal processing fee through separate cheques and the same was credited to the assessee’s wife’s account. The Ld. A.R. also placed before the Bench the details of money refunded by the bank to various clients who have given the additional processing fee on the loans raised by them. The Ld. A.R. also submitted that Axis Bank has filed FIR against the assessee for recovery of the misappropriated amount a copy whereof is attached at page N.20 to 26 of the paper book and the Economic Offence Wing of the police had already initiated the recovery proceedings by attaching various properties of the assessee where the assessee has made investments out of the misappropriated amount. The Ld. A.R. submitted that since the properties bought by the assessee in the form of immovable and movable properties including bank accounts have already been attached by the police and consequently assessee has no control over the said assets and therefore the act of the AO in making addition in the hands of the assessee that too in respect of money fraudulently charged from the various clients/loanees of the bank and misappropriated to his wife’s account can not be treated as income. In defence of his arguments, the Ld. A.R. relied on a couple of decisions namely Commissioner of Wealth Tax vs. M. Rajgopal 199 236 ITR 461 Madras HC, Narang Overseas Pvt. Ltd. vs. ACIT (2008) 111 ITD 1 Mumbai (Spl. Bench). The Ld. A.R. also referred to the decision of US Supreme Court in the case of Commissioner vs. Will Cocks 327 US 2404 (1946). The Ld. A.R. finally prayed that in view of the underlying facts and in the light of the ratio laid down by the 6 & 5940/M/2016 ITA No.3035/M/2016 Shri Niraj Omprakash Patil & Smt. Arpita Niraj Patil Madras HC and other two decisions one of Tribunal and another of US Supreme Court the appeal of the assessee must be allowed by setting aside the order of Ld. CIT(A).

The Ld. D.R., on the other hand, relied on the order of authorities below by submitting that the money in fact has been credited in the bank accounts of the assessee’s wife which was not denied at any stage. The movable and immovable properties were attached to recover the money siphoned by the assessee. Illegally and fraudulently. The Ld. D.R., therefore, prayed that the income credited in the bank accounts of the assessee’s wife is income of the assessee and has rightly been added by the AO and affirmed by Ld. CIT(A) and thus prayed that the same may kindly be upheld by dismissing the appeal of the assessee.

We have heard the rival submissions of both the parties and perused the material on record. The undisputed facts are that the assessee is a mid corporate relationship manager in Axis Bank in Cuffee Parade branch. The assessee was assigned the duties of processing of loans to various corporates and in the process used to charge the processing fee on the loans processed. The assessee used to charge additional processing fee from the loanees over and above the normal processing fee as per bank norms and used to credit the said additional fee into his wife account maintained under the name of M/s. Season Boutique. During the assessment year 2010-11 and 2011-12 the assessee has diverted Rs.3,81,92,800/- and Rs.2,83,09,791/- to his wife’s account respectively and invested the said funds in various properties movable and immovable. A FIR was also registered against the assessee and his wife in the 7 & 5940/M/2016 ITA No.3035/M/2016 Shri Niraj Omprakash Patil & Smt. Arpita Niraj Patil Cuffe Parade Police Station for recovery of misappropriated money. The case was also transferred to Economic Offence Wing, Mumbai police who have attached the properties of the assessee comprising flats, cars, bank balances and other investments. It is also undisputed that the said money aggregating to Rs.6,65,02,591/- was refunded by the bank to the respective clients. For the sake of convenience, we are reproducing the money collected from various clients and also the refund thereof by the Axis Bank as under:

Now, the only question before us is whether the money which was diverted without any mandate of the bank by way of misappropriation constitutes the income in the hands of the assessee or his wife or none of them. In our view, just diverting the money from the bank in an illegal and fraudulent manner will not transfer the ownership of the said money to the assessee and in fact it belongs to the bank . The corresponding sum of money has already been refunded to the various clients by the banks. In our considered view, the money credited in the bank account of M/s. Season Boutique current account does not represent the income of the assessee or his wife. In the present case, the assessee has misappropriated the money of the bank which was charged as additional processing fee from various clients as stated hereinabove which in noway can be treated as income of the assessee as the assessee has no legal right on the said money. Besides the money has already been refunded by 9 & 5940/M/2016 ITA No.3035/M/2016 Shri Niraj Omprakash Patil & Smt. Arpita Niraj Patil the Axis Bank to various customers and the process of recovering the money from the assessee and his wife is underway as all the investments, properties, bank accounts have been attached by the Economic Offence Wing of Mumbai police. The case of the assessee finds support from the decision of Hon’ble Madras High Court in the case of CWT vs. M. Rajagopal (supra) wherein the Hon’ble High Court has held that while upholding the order of Tribunal held that assessee is duty bound to return the money embezzled to the employer corporation and therefore the market value of the embezzled money would be nil in the hands of the assessee on the relevant valuation date and accordingly the amounts embezzled were not includable in the hands of the assessee. In the case of Narang Overseas vs. ACIT (supra) the co-ordinate bench of the Tribunal has held that the MESNE profits received by the assessee for wrongful deprivation of use and acquisition of property constitute capital receipt not chargeable tax. We have also perused the decision of US Supreme Court in the case of Commissioner vs. Will Cocks (supra) wherein it has been held that where the embezzler received the embezzled money without any semblance of a bonafide claim of right and remains under an unqualified duty and obligation to repay, does not constitute taxable income. After considering the facts of the assessee in the light of aforementioned decisions, we are of the view that the money which has been misappropriated by the assessee into his wife’s account is neither income of the assessee nor of his wife as that money is without any legal right and obligation to repay the said money remains upon the assessee. The said fact is further fortified by the attachment of properties of the assessee

In the result, the appeals of the assessee are allowed.