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Income Tax Appellate Tribunal, DELHI BENCH “C” NEW DELHI
Before: SHRI S.V. MEHROTRA : & SHRI C.M. GARG :
Appellant by : Mr. Sachit Jolly Adv. Respondent by : Shri Amrit Lal Sr. DR Date of hearing : 25/07/2016. Date of order : 29/07/2016. O R D E R PER S.V. MEHROTRA, A.M:
This is assessee’s appeal against the order dated 26.12.2012 passed by the ld. CIT(A)-X, New Delhi, relating to A.Y. 2004-05. 2. Following grounds have been raised by the assessee in its appeal:
1. The CIT(A) erred in upholding the disallowance of Rs. 40,00,000/- claimed under the head Provision! write-off of container on loan on account of fraud committed by employees.
The CIT (A) erred in failing to appreciate that expense is in the nature of liability in praesenti and not in the nature of contingent liability.
The CIT (A) erred in upholding the disallowance on account of employee's fraud on the grounds that liability is not crystallized and is based on estimation. 4. The CIT(A) erred in not considering the detail filed along with the first investigation report in police station while upholding the disallowance as uncrystallized liability. 5. Appellants crave leave to add to, alter, amend, modify or delete any of the above grounds at the time of or before the hearing of the appeal as they may be advised. 3. Brief facts of the case are that assessment was completed u/s 143(3)
vide order dated 29.12.2006 at an assessed loss of Rs. 128,84,65,840/-.
Thereafter, ld. CIT passed order u/s 263 on 25.3.2009 and set aside the assessment, inter alia, on following issue:
“Claim and allowability of Rs. 40,00,000/- towards provision/ write off of containers on loan as revenue expenditure”. 4. At the time of hearing, ld. counsel for the assessee pointed out that the order passed by the Commissioner u/s 263 has been upheld by the Tribunal.
Accordingly, in view of the order passed u/s 263, the AO proceeded to make the assessment. As regards the claim of provision/ write off of containers on loan, the assessee submitted before the AO that embezzlement of Rs. 40 lakhs was committed by one of the distributors, which was discovered by the assessee in Chennai, Tamilnadu. It was further submitted that after the discovery of the embezzlement a team was deputed at the concerned station and after full investigation a FIR was lodged and the amount was debited to P&L A/c. The AO did not accept the assessee’s contention and disallowed the same, inter alia, observing that the same was merely a provision and, therefore, could not be allowed.
Ld. CIT(A) confirmed the AO’s action, inter alia, observing that no scientific basis for claiming the amount was provided either before the AO or during the appellate proceedings. He pointed out that it is an established position of law that unless there is a crystallized liability and in some cases like provision for warranty , if there is a suitable and scientific methodology for arriving at any provision that such claim can at all be considered as a deduction. However, in the present case it was merely an estimated claim which had not crystallized and no scientific basis for making the claim had been provided by the assessee. Ld. counsel referred to page 43 to 46 of PB wherein the FIR lodged by the assessee dated 17.5.2004 is contained. He submitted that after detailed examination of the stock, the FIR was lodged.
Ld. counsel further referred to page 107 of the PB wherein the schedule ‘H’ of Administration, Selling and Distribution expenses is contained, in which it was clearly stated that debit of Rs. 40 lakh was towards provision/ write off of containers on loan. Thus, he pointed out that it was only part amount of provision but the balance amount of Rs. 37.59 lakh was towards actual write off. He relied on following decisions in support of his contention that embezzlement loss is an allowable loss:
- Badridas Daga Vs. CIT 44 ITR 10 (SC); - Associated Banking Corporation of India Ltd. Vs. CIT 56 ITR 1 (SC); and - Punjab Steel Stockholders Syndicate Ltd. Vs. CIT 125 ITR 519 (P&H).
Ld. Sr. DR submitted that since police has not filed final report, therefore, it is still an uncertained liability.
We have considered the submissions of both the parties and have perused the record of the case. In the FIR the assessee, inter alia, stated as under:
“We have reconciled the empty RGB and sale of beverage account as a matter of routine and found huge deficit of empty RGB’s that have not reached the factory. Further RGB’s containing beverages were also not duly accounted for. Therefore, we have requested Mr. Bhojrajan as well as Mr. Ananda Narayanan to come to our office with all accounts and its supporting in the first week of February. Since they have not come to our office and produced records, we have stopped supplies to Perungudi C&FA. Also, an internal audit of reconciliation of RGB and beverage account was undertaken in all the C& FA’s. Our company has me and deputed M/s J. Venkatesh Sr. Finance Officer, S. Selvakumar Sr. Finance Executive during 1st week of April to Perundgudi Depot. Our audit team took about 20 days to complete the audit. In the course of audit, it came to our notice that C&FA Proprietor Mr. Bhojarajan in connivance with his employees and our employee J. Ananda Krishnan has collected moneys from four Route Agents as per the detail given below: Sl. No. Date Receipt no. Value in Rs. 1 26.09.2003 11401 45,140.00 2 26/09/2003 11402 55,000.00 3 26/09/2003 11403 59,000.00 4 17/09/2003 27,000.00 First 3 receipts were signed by the C&FA’s employees and the last one by our employee Mr. J. Ananda Krishnan. It will be very important to note that first three receipts were dated 26/09/2003 and the fourth one is dated 17/09/2003 which cannot happen in any accounting system. This will clearly establish connivance and cheating committed by our employee, C&FA and his employees. Further, it revealed in the course of the audit, huge quantity of the empty RGB’s and filled stocks of beverages worth were missing from C&FA and they are not properly accounted for. The C&FA has submitted Stock Movement Report every month in which they have given false figures to the effect that stocks which were not available in the depot as if that they are physically available in the C&FA. In the month of December report submitted by the C&FA revealed that the closing stock for the month November was not shown as opening stock for the month of December. Thereby, we have incurred a loss of Rs. 35,73,157/- over and above the cash of Rs. 1,86,140/- which was not credited to Company’s account”.
A bare perusal of the aforementioned contents of FIR clearly shows that assessee had resorted to extensive reconciliation of its stock and thereafter lodged FIR for Rs. 35,73,157/- towards stock over and above the cash of Rs. 1,86,140/-. Ld. CIT(A) has observed that assessee has not resorted to any scientific method for ascertaining the loss. We do not think that there can be any other better method adopted by assessee except reconciling the entire stock and thereafter filing the FIR for arriving at the actual loss. We, therefore, do not find any basis for concluding that t he loss claimed by assessee to the extent of Rs. 37,59,297/- was not on scientific basis. However, for the balance amount being Rs. 40,00,000 – 37,59,297= 2,40,703/-, the assessee has not provided any basis and, therefore, provision can be held to be disallowable to this extent only.
As far as allowability of embezzlement amount is concerned, Hon’ble Supreme Court in the case of Badridas Daga (supra) has, inter alia, observed as under: “Loss resulting from embezzlement by an employee or agent in a business is, however, admissible as a deduction under section 10(1) of the Indian Income- tax Act if it arises out of the carrying on of the business and is incidental to it. It makes no difference in the admissibility of the deduction whether the employee occupies a subordinate position in the establishment or is an agent with large powers of management, It is a question turning on the facts of each case whether the embezzlement in respect of which deduction is claimed took place in the carrying on of the business”.
Further, in the case of Associated Banking Corporation of India Ltd. (supra), the Hon’ble Supreme Court has observed that so long as there is a reasonable prospect of recovery of the amounts embezzled, trading loss in a commercial sense cannot be deemed to have resulted.
In the present case, the contention of ld. counsel for the assessee is that there was no reasonable prospect of recovery of the amounts inasmuch as the assessee was compelled to file FIR.
Further, in the case of Punjab Steel Stockholders Syndicate Ltd. (supra), Hon’ble Punjab & Haryana High Court has, inter alia, observed as under: “If an embezzlement is proved by tin assessee, the same can be claimed as business loss. Embezzlement is a criminal offence, and if, in a given case, criminal proceedings have been launched, it "may be one of the relevant pieces of evidence for proving the loss but the culmination of such proceedings in the conviction of the accused is not necessary to prove the loss. If an assessee is able to place relevant material before the authorities for proving the loss irrespective of the fact whether the accused charged with embezzlement has been convicted or not the authorities cannot refuse to consider the material o~ the ground that the conviction of the person accused of embezzlement has not been recorded.”
In view of above discussion, the assessee’s appeal is partly allowed and the AO is directed to allow the loss to the extent of Rs. 37,59,297. 46. In the result, assessee’s appeal is partly allowed. Order pronouncement in open court on 29/07/2016.