M/s. Chimanlal Dosabhai narodia, Ahmedabad V. The Income tax Officer,Ward-2(4), Ahmedabad

ITA 2206/AHD/2009

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9041 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2009
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2003-2004
• Appeal Filed On: 14-07-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: M C PANDIT
• Assessee Lawyers: S N DIVATIA
• Keywords: Business expenditure; Bad and doubtful debts
• Section: 143(1); 250; 143(2); 147; 148; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH AHMEDABAD (BEFORE S/SHRI H. L. KARWA, JM AND N. S. SAINI, AM) ITA NO.2206/AHD/2009 A. Y.: 2003-04 M./S. CHIMANLAL DOSABHAI NARODIA, 420, CHOKHA BAZAR, KALUPUR, AHMEDABAD PA NO. AABFC 0910 C VS THE INCOME TAX OFFICER, WARD 2 (4), AHMEDABAD (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI S. N. DIVATIA, AR DEPARTMENT BY SHRI M. C. PANDIT, DR O R D E R PER H. L. KARWA: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT(A)-VII, AHMEDABAD DATE D 15-05-2009 RELATING TO ASSESSMENT YEAR 2003-04. 2. IN THIS APPEAL, THE REVENUE HAS TAKEN THE FOLLOW ING GROUNDS: 1.1 THE ORDER PASSED U/S. 250 OF THE ACT ON 15.5.2 009 FOR A. Y. 2003-04 BY CIT(A)-VII, ABAD UPHOLDING THE DISALLOW ANCE OF LOSS OF RS.1,69,294/- BY MISAPPROPRIATION IS WHOLLY ILLEGAL, UNLAWFUL AND AGAINST THE PRINCIPLES OF NATURAL JUST ICE. 1.2 THE LD. CIT(A) HAS GRIEVOUSLY ERRED IN UPHOLDIN G THE DISALLOWANCE OF RS.1,69,294 WITHOUT CONSIDERING FUL LY AND PROPERLY THE EXPLANATION OFFERED AND EVIDENCE PRODU CED BY THE APPELLANT. 2.1 THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) OUGHT NOT TO HAVE UPHELD THE DISALLOWANCE OF RS.1,6 9,294/-. ITA NO.2206/AHD/2009 CHIMANBHAI DOSABHAI NARODIA 2 3.1 THE LD. CIT(A) HAS GRIEVOUSLY ERRED IN LAW AND ON FACTS IN UPHOLDING THE DISALLOWANCE OF LOSS OF RS.1,69,294/- ON ACCOUNT OF MISAPPROPRIATION BY EMPLOYEE. IT IS THEREFORE PRAYED THAT THE LOSS OF RS.1,69,29 4/- MAY PLEASE BE ALLOWED. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A PARTNERSHIP FIRM AND IS ENGAGED IN THE BUSINESS OF FOOD GRAINS. FOR THE ASSESSMENT YEAR 2003-04, THE ASSESSEE FILED ITS RET URN OF INCOME ON 23-10-2003 DECLARING TOTAL INCOME OF RS.24,320/-. T HE RETURN WAS PROCESSED U/S 143(1) OF THE INCOME TAX ACT (IN SHOR T THE ACT) ON 9-1-2004 WHICH RESULTED INTO REFUND OF RS.1,63,364/ -. THE AO OBSERVED THAT ON VERIFICATION OF THE CASH RECORDS IT WAS NOT ICED THAT THE ASSESSEE HAD CLAIMED LOSS OF CASH OF RS.1,69,294/- IN THE PR OFIT & LOSS ACCOUNT. HOWEVER, NO PROOF FOR LOSS OF CASH I.E. FIR IN THE POLICE STATION FILED BY THE ASSESSEE WAS FURNISHED. IT WAS ALSO NOTICED BY THE AO THAT THE SAID AMOUNT WAS COLLECTED FROM SEVERAL PARTIES BY ONE SH RI SANJABHAI MODI, WHO WAS AN EMPLOYEE OF THE ASSESSEE FIRM HAD NOT DE POSITED IN THE ASSESSEES ACCOUNT. THE AO REOPENED THE ASSESSMENT U/S 147 OF THE ACT BY ISSUING NOTICE U/S 148 OF THE ACT. THE AO ISSUED NOTICE U/S 143(2) OF THE ACT ON 11-9-2007. IN RESPONSE TO THE SAID NOTIC E, THE ASSESSEE VIDE HIS LETTER DATED 9-10-2007 FURNISHED CONFIRMATION F ROM THE PARTIES WHO HAD GIVEN MONEY TO SHRI SANJAYBHAI MODI. THE ASSESS EE ALSO FILED AN AFFIDAVIT FROM SHRI SANJAYBHAI MODI STATING THAT HE WAS WORKING AS SALESMAN CUM CLERK WITH THE ASSESSEE FIRM FOR 5/6 Y EARS. IN HIS AFFIDAVIT, SHRI SANJAYBHAI MODI ALSO STATED THAT HE UTILIZED THE AMOUNT OF RS.1,69,294/- WHICH WAS COLLECTED FROM DIFFERENT B UYERS FOR THE TREATMENT OF HIS AGED PARENTS. HE HAS ALSO STATED T HAT NOW HE IS WORKING WITH PATEL MARKET, 2/19, DARSHAN COMPLEX, AHMEDABAD AND HIS MONTHLY INCOME IS RS.30,000/- THEREFORE, HE WAS NOT IN A PO SITION TO REPAY THE AMOUNT TO THE ASSESSEE FIRM. THE AO DID NOT ALLOW T HE CLAIM OF THE ASSESSEE STATING THAT THERE IS NO PROVISION IN THE INCOME TAX ACT TO ALLOW ITA NO.2206/AHD/2009 CHIMANBHAI DOSABHAI NARODIA 3 SUCH LOSS OF CASH AS BUSINESS EXPENSES. HE, THEREFO RE, DISALLOWED THE LOSS OF CASH DEBITED IN THE PROFIT & LOSS ACCOUNT O F RS.1,69,294/- AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 4. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE CA RRIED THE MATTER IN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A) THE ASS ESSEE FURNISHED WRITTEN SUBMISSIONS WHICH READS AS UNDER: THE FIRST EFFECTIVE GROUND OF APPEAL RELATES TO TH E DISALLOWANCES OF LOSS OF CASH OF RS.1,69,294/- ON A CCOUNT OF EMBEZZLEMENT. IT WAS EXPLAINED BY THE APPELLANT THA T ONE SHRI SANJAY KANTILAL MODI, WHO WAS WORKING WITH THE APPE LLANT FOR LAST ABOUT 5-6 YEARS AS SALES-MAN AND COLLECTION CL ERK HAD NOT HANDED OVER THE CASH RECEIVED FROM THE DEBTORS AND THE CASH SALES BECAUSE HE WAS IN ACUTE FINANCIAL CRISIS DUE TO THE ILLNESS OF HIS PARENTS. WHENEVER, THE PARTNER ENQUI RED ABOUT THE LIST OF DEBTORS AND COLLECTIONS, HE USED TO DIS CLOSE THE CASH RECEIVED FROM OTHER PARTIES (WHICH IN ACCOUNTANCY P ARLOUR IS CALLED TEEMING AND LADING METHOD. BUT, WHEN THE A PPELLANT FIRM ALMOST CLOSED THE BUSINESS AND MADE INQUIRIES WITH THE DEBTORS ABOUT NON-PAYMENTS OF DUES, IT CAME TO KNOW THAT THE COLLECTIONS WERE ALREADY MADE BY SAID MR. MODI AND HENCE HE WAS INTERROGATED. HE HANDED OVER THE LIST OF THE PA RTIES WHOSE COLLECTION WAS MISAPPROPRIATED BY HIM. HE WAS EXPEL LED FROM THE SERVICES. UNDER THE ABOVE CIRCUMSTANCES, THE APPELLANT SUBMIT S THAT THE CASH COLLECTIONS MISAPPROPRIATED BY THE SA ID COLLECTION CLERK IS BUSINESS LOSS, SINCE IT IS INCI DENTAL TO AND ARISE OUT OF THE BUSINESS. THE A. O. HAS NOT DOUBTE D THE EXPLANATION OFFERED BY THE APPELLANT NOR THE AFFIDA VIT GIVEN BY THE SAID MR. MODI. IT IS ALSO NOT DISPUTED BY A. O. THAT THE IMPUGNED LOSS DOES NOT ARISE OUT OF THE BUSINESS OF THE APPELLANT. THE ONLY REASON ADVANCED BY THE A. O. RE LATES TO THE ABSENCE OF ANY PROVISION IN THE ACT. HOWEVER, I N VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F BADRI DAS DAGA VS. CIT (34 ITR 10) AND ASSOCIATED BANKING CORPORATION OF INDIA LTD. VS. CIT (56 ITR 1) WHEREI N IT HAS BEEN CLEARLY HELD THAT THE LOSS THROUGH EMBEZZLEMEN T WAS ALLOWABLE U/S. 10(2)(XV) OF 1992 ACT CORRESPONDING TO SECTION 28 OF 1961 ACT. THE A. O. HAS FAILED TO APPRECIATE THAT WHAT IS CHARGEABLE U/S. 28(1) OF THE ACT IS THE PROFITS AND GAINS OF BUSINESS OR PROFESSION AND HENCE THE TERM PROFIT WOULD ITA NO.2206/AHD/2009 CHIMANBHAI DOSABHAI NARODIA 4 MEAN THE PROFIT, I.E. EXCESS OF INCOME OVER EXPENDI TURE AS UNDERSTOOD IN COMMERCIAL SENSE BY A TRADER AND THER EFORE IN ORDER TO ARRIVE AT THE PROFIT OR LOSS, THE DEDUCTIO N OF LOSS, BAD DEBTS ETC., HAS TO BE ALLOWED. THE APPELLANT FURTHER SUBMITS THAT EVEN CBDT CIRCU LAR NO.35D DATED 24/1/1965 STATES THAT LOSS BY EMBEZZLE MENT BY EMPLOYEES SHOULD BE TREATED AS INCIDENTAL TO BUS INESS AND THIS LOSS SHOULD BE ALLOWED AS DEDUCTION IN THE YEA R IN WHICH IT IS DISCOVERED. NOW, THE PRESENT CASE, IT WOULD B E NOTICED FROM THE LIST OF COLLECTION THAT ALMOST ENTIRE SALE S PERTAINS TO THE YEAR UNDER APPEAL AND THE COLLECTION THEREOF WA S MISAPPROPRIATED BY THE SAID MR. MODI. EVEN GUJARAT HIGH COURT IN THE CASE OF DINESH MILLS LTD. VS. CIT (254 ITR 673) HAS HELD THAT LOSS ON ACCOUNT OF EMBEZZLEMENT BY AN EMPLOYEE WAS ALLOWABLE, FURTHER IT WAS ALLOWABLE DU RING THAT YEAR AS NO DEDUCTION HAS BEEN ALLOWED IN ANY SUBSEQ UENT YEAR. IT WILL ALSO BE APPRECIATED THAT THE FINANCIA L POSITION OF SAID MR. MODI WAS SUCH THAT IT WAS NOT COMMERCIAL P RUDENT TO EITHER FILE ANY FIR BEFORE POLICE OR FILE SUIT FOR RECOVERY OF AMOUNT. IN VIEW OF ABOVE, THE APPELLANT SUBMITS THAT THE DISALLOWANCE OF LOSS ON ACCOUNT OF EMBEZZLEMENT SHO ULD BE ALLOWED. 5. ON APPEAL, THE CIT(A) REJECTED THE CLAIM OF THE ASSESSEE OBSERVING AS UNDER: 3.1 IN VIEW OF THE ABOVE WRITTEN SUBMISSIONS, IT IS CLAIMED BY THE A. R. THAT THE LOSS HAS INCURRED TO THE APPELLANT IS GENUINE. HOWEVER, IF THE SAID AMOUNT IS RECOVERE D BY THE ASSESSEE THE SAME WILL BE OFFERED FOR TAX PURPOSE. THEREFORE, THE LOSS CLAIMED BY THE APPELLANT MAY BE ALLOWED. 3.2 THE SUBMISSIONS MADE BY THE A. R. HAVE BEEN CONSIDERED. THE CASE LAWS RELIED UPON BY THE A. R. HAS ALSO BEEN VERIFIED. HAVING VERIFIED THE FACTS AND CIRCUM STANCES OF THE CASE, IT APPEARS TO ME THAT THE APPELLANT HAD I NCURRED THE ALLEGED LOSS FROM ITS EMPLOYEE WHO IS STATED TO HAV E COLLECTED THE CASH FROM THE CUSTOMERS AND UTILIZED FOR PERSON AL PURPOSE AND DID NOT RETURN THE SAME TO THE APPELLANT. IT IS ALSO CLAIMED BY THE APPELLANT THAT THE INCIDENT OCCURRED IS BEYO ND THE APPELLANTS CONTROL AND THE SAME HAD HAPPENED DURIN G THE ITA NO.2206/AHD/2009 CHIMANBHAI DOSABHAI NARODIA 5 BUSINESS TRANSACTIONS WHICH IS INCIDENTAL TO THE BU SINESS, THEREFORE, THIS GROUND OF APPEAL HAS TO BE ALLOWED. 3.3 AT IS COULD BE SEEN FROM THE ABOVE FACTS THAT THE APPELLANT HAD NOT MADE ANY EFFORTS TO RECOVER THE S AID UNRETURNED AMOUNT. THE EXPLANATION AS SUCH OFFERED APPEARS TO BE SELF SERVING. THE WAY THE EMPLOYEE HAS GIVEN THE AFFIDAVIT ADMITTING THE ALLEGED EMBEZZLEMENT OF CAS H AND THE APPELLANT NOT TAKING ANY ACTION ONLY EXPLAINS THAT THE APPELLANT IS ONLY SYMPATHETIC TO THE EMPLOYEE WHO H AD ALLEGEDLY MISUSED THE APPELLANTS MONEY. HOWEVER, T HE EXPLANATION OFFERED IS NOT CONVINCING TO TREAT THE SAME ALLEGED EMBEZZLEMENT OF CASH BY THE EMPLOYEE AS A LOSS. THE REFORE, I AM INCLINED TO SUSTAIN THE ADDITION MADE BY THE A. O. THIS GROUND OF APPEAL IS, THEREFORE, DISMISSED. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS. SHRI S. N. DIVATIA, LEARNED COUNSEL FOR THE ASSESSEE VEHEMENTLY ARGUED THAT THE LOSS CLAIMED BY THE ASSESSEE MAY BE ALLOWED. HE ALSO REITERATED THE SUB MISSIONS MADE BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES. ON THE OTHER HAND, SHRI M. C. PANDIT, LEARNED DR HEAVILY RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. THE DICTIONARY MEANING OF EMBEZZLEMENT IS FRAUDULEN T APPROPRIATION OF OTHERS PROPERTY. THERE IS NO MATERIAL ON RECORD TO PROVE THAT SHRI SANJAYBHAI MODI HAS ACTUALLY APPROPRIATED ASSESSEE S ENTRUSTED MONEY FRAUDULENTLY. HAD IT BEEN A CASE OF EMBEZZLEMENT, T HE ASSESSEE SHOULD HAVE FILED A COMPLAINT AGAINST SHRI SANJAYBHAI MODI , WHO HAS ALLEGEDLY APPROPRIATED ASSESSEES MONEY FRAUDULENTLY. WE FULL Y AGREE WITH THE OBSERVATIONS OF THE CIT(A) THAT THE WAY THE EMPLOYE E HAS GIVEN THE AFFIDAVIT ADMITTING THE ALLEGED EMBEZZLEMENT OF THE CASH OF THE ASSESSEE , NOT TAKING ANY ACTION ONLY EXPLAINS THAT THE ASSESS EE IS ONLY SYMPATHETIC TO THE EMPLOYEE WHO HAS ALLEGEDLY MISUSED THE ASSES SEES MONEY. THERE IS NO MATERIAL ON RECORD TO SHOW THAT THE ASSESSEE HAD TAKEN ANY ACTION AGAINST THE EMBEZZLER. IN OUR VIEW, THE EXPLANATION OFFERED BY THE ASSESSEE IS NOT CONVINCING TO TREAT THE ALLEGED EMB EZZLEMENT OF CASH BY THE EMPLOYEE AS A LOSS. THUS, CONSIDERING THE ENTIR E FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE FULLY IN AGREEMEN T WITH THE LOWER ITA NO.2206/AHD/2009 CHIMANBHAI DOSABHAI NARODIA 6 AUTHORITIES THAT THE CLAIM OF THE ASSESSEE CANNOT B E ACCEPTED AS GENUINE CLAIM. THEREFORE, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE GROUND OF APPEAL OF THE ASSESSEE. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DISMIS SED. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON (N. S. SAINI) ACCOUNTANT MEMBER (H. L. KARWA) JUDICIAL MEMBER DATE : LAKSHMIKANT/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR, ITAT, AHMEDABAD