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Income Tax Appellate Tribunal, “B”, BENCH KOLKATA
Before: SHRI A.T.VARKEY, JM &DR. A.L.SAINI, AM
आदेश / O R D E R
Per Dr. A. L. Saini:
The captioned appeal filed by the Assessee pertaining to assessment year 2008-09, is directed against an order passed by the learned Commissioner of Income Tax (Appeals)-21, Kolkata (in short the ld. CIT(A)], which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 ( in short the Act) dated 30.11.2010.
Ranee Agency Assessment Year:2008-09
The grounds of appeal raised by the assessee are as follows:
1. For that the ld. comm. of Income tax (appeals)21 did not apply his judicious mind in discharging the appeal filed by your appellant.
2. For that the assessing officer as well as comm. Of Income tax (a) 21 erred in not allowing the business loss of Rs. 9,86,871/-.
3. For that the assessing officer did not consider your appellant’s view that the situation did not permit filing of any civil suit against an absconding person without any communicating address.
4. For that the comm. of Income tax (a) 21 as well as ITO, 55(1) failed to appreciate that cash embezzelment was not a normal loss.
5. For that the comm. of Income tax (a) 21 as well as ITO,. 55(1) wrongfully initiated proceedings u/s 271(1)(c ) on your appellant.
6. For that your appellant crave leave to adduce / furnish further ground / grounds at the time of hearing.
The brief facts qua the issue are that the assessee filed its return of income for assessment year 2008-09 on 24.09.2008 disclosing total loss of Rs. 12, 76,975/-. The return of income was processed u/s 143(1) of the Act. Later on the assessee case was selected for scrutiny u/s 143(1) of the Act. During the assessment proceedings, the Assessing Officer noted from the profit & loss account as on 31.03.2008, that the assessee had debited Rs. 11,60,035/- as cash defalcation by cashier-cum-manager. The assessee was requested to justify how the amount of Rs. 11,60,035/- is allowable as business expenditure. In response the assessee submitted that the following written submissions:
“Justification of cash defalcation: We would like to refer to para 5 of Schedule 16 annexed to our audit report for A.Y. 2008-09 and also to the photocopy of our letter no. 1 /100 / 08 dated 04/09/2008, which is enclosed herewith, addressed to the Officer-in-Charge, Tollygunge Police Station, Kolkata, wherein, the period amount and process of the said cash defalcation is narrated vividly for your kind perusal. In spite of the letter, the OC, Tollygunge Police Station refused to register FIR and hence we were compelled to file a petition before the ld. Chief Judicial Magistrate, Alipore u/s 156(3) Cr. PC, and upon being satisfied with the evidences and proofs in respect to the said cash defalcation which we Page | 2
Ranee Agency Assessment Year:2008-09 produced before the Ld ACJM, he was pleased to pass an order directing the OC, Tollygunge PS to register a FIR and to investigate. On the basis of such direction the OC, Tollygunge PS registered FIR. on 08/12/2008 and stated the investigation but is still pending. During the process of investigation Mr P Kundu, SI, Tollygunge PS took deposition of the undersigned and all the employees of our firm and took custody of all the relevant documents, vouchers, cash books, reports and statements of accounts relating to the said defalcation after duly issuing a seizure list in this respect, Since then, the accused, Mr. Subir Banerjee, is still absconding and the police could not trace out his whereabouts till date after searching all his known places of residences. A photocopy of the FIR is enclosed herewith for your kind perusal. The question arises about the manner in which this embezzlement defalcation loss should be claimed. Section 37(1) is a specific provision where deduction provided for any expenditure laid out or expended wholly and exclusively for the purpose of the business or profession. On the other hand, a general provision has been made in section 28(i) read with section 29 for determination of "profits and gains of any business or profession" carried on by the assessee "in accordance with the provisions contained in sections 30 to 43D". In arriving at the figure of profits and gains in the commercial sense business expenditure of all types, whether specifically provided for or not, may be deducted under section 28(i) itself {Addl CIT vs Rustam Jehangir Vakil Mills Ltd. [1976]103 ITR 298,310 (Guj)}. Hence, embezzlement / defalcation loss has to be claimed under section 28(i) of the Income Tax Act. The Supreme Court in the case of Badridas Daga vs CIT [1958] 34 ITR 10. The Supreme Court in that case observed that a business especially such as is calculated to yield taxable profits has to be carried on through agents, cashiers, clerks and peons. If employment of agents is incidental to the carrying on of business, it must logically follow that losses which are incidental to such employment are also incidental to the carrying on of the business. Human nature being what it is, it is impossible to rule out the possibility of an employee taking advantage of his position as such employee and misappropriating the funds of his employers, and the loss arising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it. The Madras High Court speaking through Rajagopalan J. in the case of Gothamchand Galada vs CIT [1961]42 ITR 418 made the following observations: "The test to apply in deciding whether a loss sustained by a businessman, when an employee of his embezzles funds left in the charge of that employee, constitutes a trading loss of the business of the employer, is whether the loss was incidental to the carrying on of that business. Was the employment of the employee in the normal course of that business and was it a normal incident of the conduct of that business? Was the entrustment of the funds of the employer to that employee in the normal course of the conduct of that business? Was the loss causes to the employer by the embezzlement by the employee incidental to that entrustment? If these tests are satisfied then the loss would be a trading loss." Furthermore the Central Board of Direct Taxes in Circular No. 35D(XLVII 20) of 1965, F.No. 10/48/65-IT(AI), dated 24/11/1965 after referring to its circulars no. 25 of 1939 and 13 of 1944 and the decision of the Supreme Court in the cases of Bradidas Daga vs. CIT [1958] 34 ITR 10 and Associated Banking Corporation of Page | 3
Ranee Agency Assessment Year:2008-09 India Ltd. vs. CIT [1965] 56 ITR 1 clarified the legal position that the loss by embezzlement by employees should be treated as incidental to a business and this loss should be allowed as deduction the year in which it is discovered. In view of the above, the fact, that the amount of Rs. 11,60,036/-, which is debited in our accounts in cash defalcated by cashier-cum-manager, is allowable expenses, is well justified.”
However, the Assessing Officer rejected the contention of the assessee and made an addition to the tune of Rs. 11,60,035/-.
Aggrieved by the order of the Assessing Officer the assessee carried the matter in appeal before the Ld. CIT(A) who has confirmed the addition made by the Assessing Officer.
Aggrieved by the order of the Ld. CIT(A) the assessee is in appeal before us.
We have heard both the parties and perused the material available on record. The ld. Counsel for the assessee has submitted before us the ledger copy of Ranee Agency period 01.04.2007 to 31.03.2008. We note that the cash defaulted by Subir Banerjee for assessment year 2006-07 is to the tune of Rs. 3,27,340/- and cash defaulted by Subir Banerjee for financial year 2007-08 is to the tune of Rs. 8,32,695/- which has been credited in the cash book and debited as expenditure for the assessment year 2008-09. The ld. Counsel submitted that in the sales account the corresponding amount in the sales figure has been increased in the financial year 2007-08 relevant to the assessment year 2008-09. Therefore the counsel submitted that the said loss should be allowed as a deduction in the year in which it was discovered. Since the loss was discovered in the accounting year 2007-08 which relevant to assessment year 2008-09, therefore the said loss should be allowed in the assessment year under consideration.
On the other hand, the ld. The ld. DR has primarily reiterated the stands taken by the Assessing Officer which we have discussed in our earlier para and the same is not being repeated for the sake of brevity.
Ranee Agency Assessment Year:2008-09 8.We note that in the assessee’s case under consideration the loss by embezzlement by employees, by name Shri Subir Banerjee has incurred in the financial year 2007-08 relevant to assessment year 2008-09. We note that the said loss partly relates to financial year 2006-07 which relates to assessment year 2007-08 but the assessee has discovered the said loss in the accounting year 2007- 08 which relates to assessment year 2008-09 and therefore he is entitled to claim the deduction for the entire amount consisting to Rs. 3,27,340/- and Rs. 8,32,695/- in the assessment year under consideration. Since the assessee came to know about the loss of embezzlement in the A.Y. 2008-09, therefore he claimed the loss in A.Y. 2008-09. For that we rely on the following judgments: i) Badri Das Daga vs. CIT(1958) 34 ITR 10 (SC) : TC 14R. 202 ii) Associated Banking Corporation of India Ltd. vs. CIT (1965) 56 ITR 1 (SC): TC 14R.211 In the first case, the Supreme Court has 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 IT Act, 1922 (corresponding to s. 28 of the IT Act, 1961) if it arises out of the carrying on of the business and is incidental to it. In the second case the decision is that 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.
In the light of the above decisions of the Supreme Court the legal position now is that loss by embezzlement by employees should be related as incidental to a business and this loss should be allowed as deduction in the year in which it is discovered.
The Central Board of Direct Taxes in Circular No.35-D (XLVII-20) of 1965, F.No.10/48/65-IT(AI), dated 24-11-1965 after referring to its Circulars No.25 of 1939 and 13 of 1944 and the decision of the Supreme Court in the cases of Badridas Daga v. CIT [1985] 34 ITR 10 and Associated Banking Corporation of Page | 5
Ranee Agency Assessment Year:2008-09 India Ltd. v. CIT [1965] 56 ITR 1 clarified the legal position that the loss by embezzlement by employees should be treated as incidental to a business and this loss should be allowed as deduction in the year in which it is discovered.
Once it is established that loss has been occasioned by embezzlement of an employee the same should be treated as incidental to a business and this loss should be allowed as deduction in the year in which it is discovered, and the bifurcation of the same as between what was irretrievably loss and what was possible of recovery is therefore unnecessary as was held in the case of Dinesh Mills Ltd. v. CIT [2002] 254 ITR 673 (Guj.).
About the treatment of subsequent recovery of embezzled amount, - The Allahabad High Court in the case of Harijan Evam Nirbal Varg Avas Nigam Ltd. v. CIT [1998] 229 ITR 776 held that the Tribunal was right in holding that the assessee was entitled to deduction of loss on account of theft, pilferage. Etc,. as business loss and if any money is subsequently is recovered out of this embezzlement amount the same could be brought to tax under section 41(2) of the Income-tax Act.
Considering the entirety and facts and circumstances of the case and the fact that this is the cash defalcated by the employees of the assessee during the business hour therefore this loss is to be treated as if it has incurred during the course of doing business. So far the liability of the loss is concerned we note that the assessee first time came to know the cash defalcated by the employee to the tune of Rs. 3,27,340/- in the accounting year 2007-08 therefore he passed relevant journal entry in his books of accounts to record the said loss. Another loss in respect of cash defalcated to the tune of Rs. 8,32,695/- has incurred by the assessee in the financial year 2007-08. Therefore the loss is allowable in the assessment year 2008-09. Therefore, in the light of the above judgments of the Supreme court, the legal position explained above that the loss by embezzlement by employees should be treated as incidental to a business and this loss should be allowed as deduction in the year in which it is discovered, therefore, we allow the Page | 6
Ranee Agency Assessment Year:2008-09 loss of Rs. 3,27,340/- and Rs. 8,32,695/- claimed by the assessee in assessment year 2008-09.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 29.04.2019