Shri Poojan K. Patel, Ahmedabad V. The Asstt. Commissioner of Income Tax, Circle-10, Ahmedabad

ITA 1539/AHD/2016

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 6803 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 1 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2008-2009
• Appeal Filed On: 09-06-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RICHA RASTOGI
• Assessee Lawyers: M K PATEL
• Keywords: Business expenditure; Set aside
• Section: 143(3); 28

Judgement Text

PAGE 1 OF 7 , IN THE INCOME TAX APPELLATE TRIBUNAL , SMC BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND MS . MADHUMITA ROY , JUDICIAL MEMBER ./ ITA NO. 1539/AHD/2016 / ASSTT. YEAR : 2008 - 2009 SHRI POOJAN K. PATEL, 4, JALDARSHAN, OPP. NATRAJ CINEMA , ASHRAM ROAD , AHMEDABAD . PAN: AAWPP1146Q VS . A.C.I.T. , CIRCLE - 10 , AHMEDABAD. (APPLICANT) ( RESPON D ENT ) ASSESSEE BY : SHRI M.K. PATEL , A. R REVENUE BY : MS . RICHA RASTOGI , SR. D.R / DATE OF HEARING : 16 / 07 / 201 9 / DATE OF PRONOUNCEMENT: 25 /07 /2 01 9 / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE LEARNED COMMISS IONER OF INCOME TAX (APPEALS) , AHMEDABAD - 5, DATED 13/04 /2016 ( IN SHORT LD.CIT(A) ) ARISING IN THE MATTER OF ASSESSMENT ORDER PASSED UNDER S. 143(3) OF THE INCOME TAX ACT, 1961 ( HERE - IN - AFTER REFERRED TO AS 'THE ACT') DT. 27 / 09 /2010 RELEVANT TO THE ASSESSMENT YEAR 2008 - 20 09 . ITA NO.1539/AHD/2016 ASSTT. YEARS 2008 - 09 2 PAGE 2 OF 7 THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL; 1. THAT ON FACTS AND IN LAW, THE LEARNED CIT(A) HAS GRIEVOUSLY ERRED IN CONFIRMING THE DISALLOWANCE OF CLAIM OF BAD DEBT/TRADING LOSS OF RS.4,66,444/ - 2. THAT IN THE ALTERNATE, AND WITHOUT PREJUDICE TO THE ABOVE GROUND, DIRECTION OUGHT TO HAVE BEEN GIVEN TO ALLOW THE DEDUCTION IN APPROPRIATE ASSESSMENT YEAR, SINCE THE GENUINENESS OF CLAIM IS NOT IN DOUBT. 3. THAT ON FACTS AN IN LAW, THE LERNED CIT(A) HAS GRIEVOUSLY ERRED IN CONFIRMING THE DISALLOWANCE OF DEDUCTION OF RS.3,60,122/ - BY INCORRECTLY HOLDING THAT IT IS NOT ALLOWABLE U/S.36(I)(II) OF THE ACT. 4. THAT ON FACTS, EVIDENCE ON RECORD, AND IN LAW, THE ENTI RE PAYMENT OUGHT TO HAVE BEEN ALLOWED AS A BUSINESS EXPENDITURE AS CLAIMED FOR. 5. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND ANY GROUND OF APPEAL. THE FIRST ISSUE RAISED BY THE ASSESSEE IS THAT ''LD.CIT (A)'' ERRED IN CONFIRMING THE ORDER OF THE AO BY SUSTAINING THE DISALLOWANCE OF RS. 4,66,444/ - ONLY ON ACCOUNT OF BAD DEBT/TRADING LOSS. 2 . BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IN THE PRESENT CASE IS AN INDIVIDUAL AND AUTHORIZED STOCKIEST OF I.O.C . LTD. THE ASSESSEE IN THE YEAR UNDER CONSIDERAT ION HAS CLAIMED BAD DEBT AMOUNTING TO RS. 4,66,444/ - DUE FROM ONE OF THE EMPLOYEE S, NAMELY SHRI MAULIK D. PATHAK WHO WAS ACTING AS THE SALES REPRESENTATIVE. THE ASSESSEE CLAIM ED THAT SUCH AMOUNT WAS COLLECTED BY THE EMPLOYEE FROM THE CUSTOMERS AGAINST THE SALES MADE IN THE EARLIER ASSESSMENT YEAR. BUT THE EMPLOYEE HAS NOT DEPOSITED SAID AMO UNT COLLECTED FROM THE CUSTOMER WITH THE OFFICE . AS SUCH , THE ASSESSEE SUBMITTED THAT THE AMOUNT DUE TO PARTIES WAS EMBEZZLED BY THE EMPLOYEE AGAINST THE SALES MADE IN TH E EARLIER YEAR . T HEREFORE THE ASSESSEE DEBITED SUCH AMOUNT TO THE EMPLOYEE ACCOUNT AFTER CREDITING THE ACCOUNT OF RESPECTIVE PARTIES. THE ITA NO.1539/AHD/2016 ASSTT. YEARS 2008 - 09 3 PAGE 3 OF 7 ASSESSEE ALSO SUBMITTED THAT SUCH EMBEZZLEMENT OF FUND PERTAINS TO FINANCIAL YEAR 2002 - 03 AND 2003 - 04. 2.1 HOWEVER, T HE AO WAS OF THE VIEW THAT DEDUCTION ON ACCOUNT OF EMBEZZLEMENT OF THE FUND CAN BE CLAIMED IN THE PREVIOUS YEAR IN W HICH SUCH EMBEZZLEMENT WAS CRYS TALLIZED. MOREOVER, THE AO WAS OF THE OPINION THAT THIS AMO U NT OF EMBEZZLEMENT WAS DISCOVERED IN THE EARLIER PREVIOUS YEAR. THEREFORE THE SAME CANNOT BE ALLOWED AS A DEDUCTION IN THE YEAR UNDER CONSIDERATION . A CCORDINGLY , HE DISALLOWED THE SAME AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 3. THE A GGR IE VED ASSESSEE PREFERRED AN APPEAL TO THE ''LD.CIT (A)'' WHO HAS CONFIRMED THE ORDER OF THE AO BY OBSERVING AS UNDER: 3.3.1 THE FACTS OF THE CASE AND THE SUBMISSIONS ARE CONSIDERED. MR. MAULIK PATHAK SALES REPRESENTATIVE OF THE ASSESSEE HAD RECOVERED AMOUNTS DUE FORM SUNDRY DEBTORS AND DIDN T DEPOSIT THE SAME TO T HE OFFICE OF THE ASSESSEE. THE ASSESSEE CAME TO KNOW OF THIS FACT IN F.Y. 2002 - 03. THE ASSESSEE HAS ALSO TRANSFERRED THE AMOUNTS DUE FROM SUCH PARTIES TO MAULIK PATHAK ACCOUNT DURING THE F.Y. 2002 - 03. THIS SHOWS THAT FRAUD DONE BY MR. MAULIK PATHAK WAS IN THE KNOWLEDGE OF THE ASSESSEE IN THE F.Y, 2002 - 03, HOWEVER, THE ASSESSEE HAS RIOT CLAIMED THIS AS A LOSS DUE TO EMBEZZLEMENT IN THE A.Y. RELEVANT TO A.Y. 2002 - 03. THE CONTENTION OF THE APPELLANT THAT LOSS IS CRYSTALLIZED DURING THE YEAR UNDER APPEAL IS NO T TENABLE. IN THE CASE OF DINESH MILLS LTD. 254 ITR 673 THE HON'BLE JURISDICTION! HIGH COURT HAS HELD THAT LOSS ON ACCOUNT OF EMBEZZLEMENT BY AN EMPLOYEE IS ALLOWED AS DEDUCTION IN THE PREVIOUS YEAR IN WHICH SUCH EMBEZZLEMENT IS DISCOVERED AND NOT THE YEAR IN WHICH THE MONEY IS EMBEZZLED. FURTHER ONCE THE DEBTORS HAD PAID THE AMOUNT, THE SAID SUM HAS LOST ITS CHARACTER AS DEBT. THE SAID SUM WAS NOT RECOVERED BY THE ASSESSEE DUE TO FRAUD DONE BY MR. MAULIK PATHAK EMPLOYEE OF THE ASSESSEE. CONSIDERING ALL THE SE THE CLAIM MADE BY THE ASSESSEE OF BAD DEBT IN THE YEAR UNDER APPEAL CANNOT BE ACCEPTED AND RIGHTLY DISALLOWED BY THE A.O. THUS THE GROUND RAISED BY THE APPELLANT TO THIS EXTENT IS DISMISSED. BEING AGGRIEVED BY THE ORDER OF THE ''LD.CIT (A)'' THE ASSESSEE IS IN APPEAL BEFORE US. ITA NO.1539/AHD/2016 ASSTT. YEARS 2008 - 09 4 PAGE 4 OF 7 5 . THE LD.AR, BEFORE US , FILED A PAPER BOOK RUNNING FROM PAGES 1 TO 3 7 A ND SUBMITT ED THAT THE ASSESSEE HA D CLAIMED THE DEDUCTION IN THE YEAR UNDER CONSIDERATION ON R ATIONAL THAT THE AMOUNT BECAME IRRECOVERABLE FROM THE EMP LOYEE . T HUS THE IMPU GN ED AMOUNT WAS WRITTEN OFF IN THE YEAR UNDER CONSIDERATION . 5.1 THE LD.AR, ALTERNATIVELY ALSO SUBMITTED THAT A DIRECTION SHOULD BE ISSU E D TO THE REVENUE TO ALLOW THE CLAIM OF THE ASSESSEE FOR THE DEDUCTION IN THE RELEVANT YEARS IN WHI CH SUCH EMBEZZLEMENT WAS DISCOVERED/CRY STALIZED 6 . ON THE OTHER HAND , LD.DR SUBMITTED THAT THE IMPUGNED AMOUNT WAS NOT RECOVERABLE FROM THE PARTIES TO WHOM THE ASSESSEE HAS MADE SALES. THEREFORE THE SAME CANNOT BE CLAIMED AS BAD DEBT. 7. THE LD.DR VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHOR ITIES BELOW. 8 . WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE RELEVANT MATERIALS AVAILABLE ON RECORDS. THE ISSUE IN THE INSTANT CASE RELATES TO THE DEDUCTION OF LOSS INCURRED BY THE ASS ESSEE D UE TO EMBEZZLEMENT BY THE EMPLOYEE. ADMITTEDLY, THE GENUINENESS OF THE EMBEZZLEMENT OF THE FUND BY THE EMPLOYEE HAS NOT BEEN DOUBTED BY THE AUTHORIT I ES BELOW . T HUS SUCH LOSS WAS INCURRED BY THE ASSESSEE IN THE COURSE OF THE BUSINESS. IT IS A SETTLED LAW THAT THE LOSSES INCURRED IN THE COURSE OF BUSINESS ARE ALLOWED AS DEDUCTION U/S 28 OF THE ACT. IN THIS REGARD , WE FIN D SUPPORT AND GUIDANCE FROM THE JUDGMENT OF HON BLE GUJARAT HIGH COURT IN THE CASE OF DINESH MILLS LIMITED V/S. CIT REPORTED IN 254 IT R 673 WHEREIN IT WAS HELD AS UNDER: IT WAS TO BE HELD THAT THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION OF LOSS DURING THE YEAR UNDER CONSIDERATION AS THAT WAS THE YEAR IN WHICH THE LOSS ON ACCOUNT OF EMBEZZLEMENT WAS, IN FACT, DISCOVERED . ITA NO.1539/AHD/2016 ASSTT. YEARS 2008 - 09 5 PAGE 5 OF 7 8.1 THE NEXT QUE STION ARISE S IN WHICH YEAR THE ASSESSEE CAN CLAIM THE DEDUCTION ON ACCOUNT OF SUCH LOSSES , I.E ., EMBEZZLEMENT OF THE FUND. ADMITTEDLY, THE FUND WAS EMBEZZLED BY THE EMPLOYEE OF THE ASSESSEE IN THE EARLIER YEARS , BUT THE ASSESSEE DID NOT CLAIM THE DEDUCTION FOR THE SAME TILL DATE AS IT WAS HOPEFUL OF RECOVERING THE SAME AMOUNT FROM THE EMPLOYEE. IN THE YEAR UNDER CONSIDERATION , THE ASSESSEE HAS LOST IT S HOPE FOR THE RECOVERY OF THE AMOUNT FROM THE EMPLOYEE . T HEREFORE THE ASSESSEE HAS WRITTEN OFF SUCH AMOUNT AS BAD DEBT IN THE YEAR UNDER CONSIDERATION . IN OUR CONSIDERED VIEW , IT IS THE DECISION OF THE ASSESSEE TO HOLD THE AMOUNT AS IRRECOVERABLE FROM THE EMPLOYEE. THE R EVENUE CANNOT ENTER INTO THE SHOES OF THE ASSESSEE AND DIRECT HIM TO CLAIM THE DEDUCTION OF SUCH AMOUNT IN THE YEAR IN WHICH THE EMBEZZLEMENT WAS DISCOVERED/CRYST A LIZED. 8.2 WE ALSO NOTE THAT THE CASE - LAW REFERRED BY THE AUTHORITIES BELOW ARE DISTINGUISHABLE FROM THE PRESENT FACT OF THE CASE . T HEREFORE WE ARE RELUCTANT TO PLACE OUR RELIANCE ON S UCH JUDGMENT. 8.3 AFTER CONSIDERING THE FACTS IN TOTALITY AS DISCUSSED ABOVE, WE NOTE THAT THE ASSESSEE IS ELIGIBLE FOR THE DEDUCTION OF THE AMOUNT EMBEZZLED BY THE EMPLOYEE AS A TRADING LOSS. HENCE, THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. THE NEXT ISSUE RAISED BY THE ASSESSEE IS THAT THE ''LD.CIT (A)'' ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 3,60,122/ - ON ACCOUNT OF BONUS/COMMISSION U/S. 36( 1 )(II) OF THE ACT. 9. THE AO , BASED ON THE AUDIT REPORT FILED BY THE ASSESSEE , FOUND THAT THE ASSESS EE HAS CLAIMED AN EXPENSE OF RS. 3,60,122/ - WHICH WAS PAID TO THE ITA NO.1539/AHD/2016 ASSTT. YEARS 2008 - 09 6 PAGE 6 OF 7 EM PLOYEES AS BONUS INCENTIVES IN PLACE OF PROFITS/DIVIDENDS . T HEREFORE HE WAS OF THE VIEW THAT THE ASSESSEE IS NOT ENTITLED TO THE DEDUCTION OF SUCH AMOUNT. O N A QUESTION BY THE AO , THE ASSE SSEE SUBMITTED THAT THE A MOUNT DESCRIBED ABOVE WAS NOT REPRESENTING AS BONUS/COMMISSION IN THE FORM OF PROFIT OR DIVIDEND. ACCORDINGLY , THE ASSESSEE CLAIM ED TH AT IT IS ELIGIBLE DEDUCTION U/S 36( 1 )(II) OF THE ACT. 9.1 HOWEVER, THE AO FOUND THAT THE ASSESSE E HAS NOT BROUGHT ANY DOCUMENTARY EVIDENCE TO JUSTIFY THAT SUCH AMOUNT OF BONUS/COMMISSION W A S NOT PAYABLE IN THE FORM OF PROFIT OR DIVIDEND . A CCORDINGLY , THE AO DISALLOWED THE SAME AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 10. THE A GGR IE VED ASSESSEE PREFERRED AN APPEAL TO THE ''LD.CIT (A)''. THE ASSESSEE BEFORE THE ''LD.CIT (A)'' SUBMITTED THAT THE AMOUNT OF BONUS/COMMISSION WAS PAID TO THE EMPLOYE WHICH WAS CLAIMED AS AN EXPENDITURE. A SUCH THERE WAS NO DOCUMENTARY EVIDENCE JUSTIFYING TH AT ASSESSEE HAS PAID SUCH AMOUNT OF BONUS/COMMISSION IN PLACE OF PROFITS/DIVIDENDS . H OWEVER THE ''LD.CIT (A)'' DISREGARDED THE CONTENTION OF THE ASSESSEE AND CONFIRMED THE ORDER OF THE AO BY OBSERVING AS UNDER: 3.4.1 THE FACTS OF THE CASE AND THE SUBMISSIO N ARE CONSIDERED. THE AUDITOR IN HIS REPORT CLEARLY STATED THAT THESE PAYMENTS ARE PURELY CUSTOMARY IN NATURE. THE APPELLANT HAS SIMPLY SAID THAT THE AUDITOR DIDN T MEAN THAT THE SAME WAS IN THE NATURE OF DISTRIBUTION OF PROFITS OR DIVIDEND TO THE EMPLOYEE S WITHOUT FURNISHING ANY SUPPORTING DETAILS OR EVIDENCES. THEREFORE, THE ACTION OF THE AO IS FOUND TO BE JUSTIFIED AND TH ADDITION MADE IS CONFIRMED. THUS, THE GROUND RAISED BY THE APPELLANT TO THIS EXTENT IS DISMISSED. BEING AGGRIEVED BY THE ORDER OF TH E ''LD.CIT (A)'' THE ASSESSEE IS IN APPEAL BEFORE US. 11. THE LD.AR, BEFORE US , REITERATED THE SUBMISSION AS MADE BEFORE THE AUTHORITIES BELOW. ITA NO.1539/AHD/2016 ASSTT. YEARS 2008 - 09 7 PAGE 7 OF 7 12. ON THE OTHER HAND , THE LD. DR VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. 13. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORDS. IN THE INSTANT CA S E , THE AO HAS MADE THE ADDITION OF THE BONUS/COMMISSION EXPENSES INCURRED BY THE ASSESSEE ON THE GROUND THAT SUCH AMOU N T WAS PAID IN PLACE OF THE PRO FIT/DIVIDEND WHICH IS NOT ALLOWABLE DEDUCTION U/S 36( 1 )(III) OF THE ACT. THE AO HAS MADE THE ADDITION BASED ON THE REMARKS PUT BY THE AUDITORS IN THE TAX AUDIT REPORT . I N OUR CONSIDERED VIEW , THE REMARKS PUT BY THE AUDITORS AS BONUS PLUS INCENTIVES PAID TO STAFF OF RS. 3,60,122/ - IS PURELY CUSTOMARY IN NATURE DOESN T SUGGEST THAT ASSESSEE HAS PAID ANY DIVIDEND/PROFIT TO THE STAFF . T HEREFORE WE ARE OF THE VIEW THAT THE AO HAS MADE THE ADDITION ON THE WRONG ASSUMPTION OF FACT S. T HEREFORE , W E ARE NOT INCLINED TO UPHO LD THE ORDER OF THE A UTHORITIES BELOW . A CCORDINGLY , WE SET ASIDE THE ORDER OF THE ''LD.CIT (A)'' AND DIRECT THE AO TO DELETE THE ADDITION MADE BY HIM. HENCE , THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 14. IN THE RESULT, THE APPEAL OF TH E ASSESSEE IS ALLOWED. O RDER PRONOUNCED IN THE COURT ON 25 /07 / 2019 AT AHMEDABAD. - SD - - SD - ( MS . MADHUMITA ROY ) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (TRUE COPY) A HMEDABAD; DATED 25 / 07 /2019 M ANISH