M/S.THE ORIENTAL INSURANCE EMPLOYEES CO-OPERATIVE SOCIETY LIMITED,MUMBAI vs. ITO 17(3)(4), MUMBAI

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ITA 5199/MUM/2018Status: DisposedITAT Mumbai05 December 2019AY 2012-133 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that substance prevails over form and book entries are not determinative. The explanation of embezzlement loss was not doubted. Therefore, disallowing the claim based on the nomenclature used in the books was unsustainable.

What were the facts?

The assessee debited Rs. 1,17,495/- in its P&L account as 'bad and doubtful debt'. The assessee explained this was an embezzlement loss by an employee, which was written off over several years. The authorities below disallowed the claim, considering it as bad debt and not embezzlement loss.

What were the issues?

Whether an embezzlement loss, initially recorded as bad debt, is allowable as a business loss. Whether the timing of writing off the loss affects its allowability.

Which sections of the Income-tax Act were involved?

Section 37(1),Section 28,Section 80P(2)(a)(i)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI

Before: SHRI SHAMIM YAHYA

For Respondent: Shri Akhtar H. Ansari
Hearing: 24/09/2019Pronounced: 05/12/2019

This appeal by the assessee is directed against the order of CIT(A)-28, Mumbai dated 02.07.2018 and pertains to assessment year 2012-13.

2. The grounds of appeal read as under :-

“1. The Ld. CIT(A) erred in confirming the action of Ld. A.O by disallowing Rs.1,17,495/- i.e. loss occurred due to embezzlement of cash u/s 37(1) of the Income Tax Act, 1961.

2.

Without prejudice to above, Rs.1,17,495/- ought to be allowed as business loss u/s 28 of the Income Tax Act, 1961.

The Oriental Insurance Employees Co-op. Society Ltd. 3. Without prejudice to above, Ld. CIT(A) erred in confirming the action of Ld. A.O by denying the deduction u/s 80P(2)(a)(i) of the Income Tax Act, 1961 in respect of disallowance of Rs.1,17,495 made u/s 37(1) of the Income Tax Act, 1961.”

3.

The brief facts of the case are that during the course of assessment, the Assessing Officer noted from the Profit & Loss Account that assessee has debited an amount of Rs.1,17,495/- as ‘bad and doubtful debt’. In response, assessee submitted that the said amount was actually embezzlement loss by one of the employee who had misappropriated cash during financial years prior to 2011-12, that the total misappropriation was of Rs.6,63,948/- and assessee could recover only Rs.1,94,000/- in 2002-03. Thereafter, the balance of Rs.4,69,948/- was found to be irrecoverable and 25% thereof was written off every year from 2010-11 to 2013-14. These submissions of the assessee were rejected by both the authorities on the ground that since the amount has been mentioned as ‘bad debts’, assessee now cannot claim the same to be embezzlement loss. In this regard, I find that it is settled law that substance prevails over form. It is equally settled that entries in the books of account are not determinative of the true nature of the transaction. The explanation of assessee has not at all been doubted or found to be false. In such circumstances, the authorities below taking adverse inference simply because the amount was claimed as bad debt instead of embezzlement loss is totally unsustainable. Moreover, when the loss finally materialised and crystallised, the assessee decided to write it off @ 25% each year. Now, the authorities below are holding that when there was a crystallised loss there was no reason that it should be spread over four years and on this basis, they have disallowed the claim of loss. In this regard, it is settled law that no tax can be recovered from the assessee except as permissible by law. When the authorities below are accepting that the entire amount of loss has crystallised, adverse inference

The Oriental Insurance Employees Co-op. Society Ltd. against assessee cannot be taken if the assessee by mistake spreads the same to four years. It is equally settled law that the revenue authorities are not supposed to take advantage of the ignorance/mistake of the assessee. In this view of the matter, in my considered opinion, the order of the authorities below are unsustainable in law. Hence, I set-aside the orders of the authorities below and hold the impugned amount is allowable as business loss.

4.

In the result, assessee’s appeal stands allowed.

Order pronounced in the open court on 5th December, 2019.

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