Appeal details
Counselvise Citation
[2014] 120 COUNSELVISE.COM (IT) 5955 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 5 month(s) 28 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
29-04-2014
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
D
Next Hearing Date
23-04-2014
Assessment Year
1997-1998
Appeal Filed On
01-11-2010
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD BEFORE SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER AND SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER ITA NO.2965 & 2966/AHD/2010 A.YS. 1996-97 & 1997-98 M/S. CHHOTABHAI JETHABHAI PATEL TABOCCO PRODUCTS COMPANY LTD. MOTAPORE, NADIAD. PAN: AAACC9614R VS DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-2, BARODA. (APPELLANT) (RESPONDENT) REVENUE BY : SHRI K.C. MATHEWS, SR.D.R., ASSESSEE(S) BY : SHRI S.N. SOPARKAR, AR / DATE OF HEARING : 23/04/2014 / DATE OF PRONOUNCEMENT: 29/04/2014 / O R D E R PER SHRI MUKUL KUMAR SHRAWAT, JUDICIAL MEMBER THESE TWO APPEALS HAVE BEEN FILED BY THE ASSESSEE ARISING FROM A CONSOLIDATED ORDER OF LEARNED CIT(A)-IV, BARODA DAT ED 19.08.2010 PERTAINING TO A.YS. 1996-97 AND 1997-98. FOR BOTH T HE YEARS THE ISSUE IS ABOUT THE ALLOWABILITY CLAIM OF EMBEZZLEMENT. THE C ONTROVERSY BEFORE US IS WHETHER IS ALLOWABLE IN A.Y. 1996-97 OR A.Y. 199 7-98. FOR THE SAKE OF COMPLETENESS GROUNDS WHICH ARE IDENTICALLY WORDED F OR THE BOTH THE YEARS ARE REPRODUCED BELOW: 1. THE LEARNED COMMISSIONER OF INCOME TAX(APPEAL) FAILED TO UNDERSTAND THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE LEARNED COMMISSIONER OF INCOME (APPEAL) FAIL ED TO UNDERSTAND AND FOLLOW THE DIRECTIONS OF HONBLE ITAT, AHMEDABAD TO ALLOW DEDUCTION OF LOSS IN THE YEAR IN WHICH IT WAS DETECTED AS PER PARA NO .8 OF APPELLATE ORDER DATED 19.09.2006 IN ITA NO.397 & 398/AHD/2002. 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL) ERRED IN HOLDING THAT THE CLAIM OF RS.17,06,282/- ON ACCOUNT OF EMBEZZLEM ENT IS NOT ALLOWABLE AS ITA NOS.2965 & 2966/AHD/2010 M/S. CHHOTABHIA J. PATEL TOBACCO PRODUCTS CO. LTD. VS. DCIT, CIRCLE-2, BARODA. A.YS.1996-97 & 1997-98 - 2 - THE APPELLANT BECOMES AWARE OF SUCH EMBEZZLEMENT AF TER 31.03.1996 AND STEPS FOR RECOVERY HAVE BEEN TAKEN THEREAFTER. THE APPELLANT CONTEND THAT IN BOOKS OF ACCOUNTS THE LOSS ON EMBEZZLEMENT WAS RECO GNIZED IN PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 1996-97. 2. THE ORDER WAS PASSED BY THE RESPECTED CO-ORDINAT E BENCH A ITAT AHMEDABAD IN THE CASE OF THE ASSESSEE TITLED A S M/S. CHHOTABHAI JETHABHAI PATEL TOBACCO PRODUCTS COMPANY LTD. VS. T HE DCIT, BARODA (ITA NO.397 AND 398/AHD/2002, A.YS.1996-97 & 1997-9 8 DATED 19.09.2006, WHEREIN IT WAS OBSERVED AS UNDER: '8. FROM THE ABOVE CIRCULAR, IT IS CLEAR THAT THE L OSS MUST BE DEEMED TO HAVE BEEN OCCURRED TO THE COMPANY AND IT HAS COME TO KNO W ABOUT THE EMBEZZLEMENT, AND THAT THE AMOUNT EMBEZZLED COULD N OT BE RECOVERED. WE FIND THAT THE ASSESSEE COMPANY HAS IMMEDIATELY FILE D THE REVISED RETURN. THE ASSESSEE-COMPANY'S EMPLOYEE, BHARATBHAI PATEL, WAS WRITING AND MAINTAINING ACCOUNTS AND HE DEFALCATED STOCK TO THE EXTENT OF R S,11,16,949/- AND MISAPPROPRIATED AND EMBEZZLED CASH FOR RS.5,59,333/ - BY WRITING FALSE ACCOUNTS AND FORGING DOCUMENTS. SHRI BHARATBHAI PAT EL SOLD DETERGENT TO THE EXTENT OF RS. 11,16.949/- AND HAD NOT DEPOSITED THE SAID AMOUNT IN THE COMPANY. THE MANAGER ON PHYSICAL VERIFICATION FOUND THAT THERE WAS NO STOCK OF DETERGENT IN THE GODOWN. THEREFORE, THE FIR WAS LODGED WITH THE P.I., PAN BAZAR POLICE STATION, GAUHATI, COPY OF WHICH IS FIL ED AT PAGE 1 OF THE PAPER BOOK. THE COMPANY HAS FILED ITS RETURN FOR AY1996-9 7 ON 5-11-96. THE COMPANY HAS FILED ITS REVISED RETURN ON24.02.1997 A ND CLAIMED THEREIN THE LOSS OF RS 17.62.282/- ON ACCOUNT OF EMBEZZLEMENT. THE COMPANY HAS RECEIVED THE INFORMATION FROM GAUHATI OFFICE OF EMBEZZLEMENT OF STOCK AND CASH BEFORE FINALIZATION OF ACCOUNTS FOR THE YEAR ENDED ON 31-3 -96 ACCOUNTED IN ITS ANNUAL ACCOUNTS FOR AY 1996-97 A SUM OF RS.17,06,282/- BY WAY OF 'LOANS & ADVANCES TO STAFF'- SCHEDULE- 9 AS RECOVERABLE FROM EMPLOYEE, AND REVISED RETURN WAS ALSO FILED FOR AY 1997-98 THE ASSESSEE H AS ALSO FILED THE RETURN ON 17-11-97 IN WHICH NOTE WAS GIVEN THAT DURING THE PR EVIOUS YEAR THE COMPANY HAS WRITTEN OFF THE ADVANCES OF RS,17,06,282/- IN R ESPECT OF DEFALCATION OF STOCK OF DETERGENT FOR RS.11,16 949/- AND IN RESPEC T OF MISAPPROPRIATION OF CASH OF RS.5,89,333/- IN AY 1997-98 NO CLAIM FOR TH E SAID LOSS WAS MADE AS THE SAME WAS MADE IN AY 1996-97, WE FIND THAT THE A SSESSEE HAS CLAIMED THAT SHRI BHARATBHAI PATEL WAS NOT TRACEABLE AND THE COM PANY HAS MADE ALL EFFORTS TO TRACE OUT HIM BUT HE WAS NOT TRACEAB LE AND FIR IS PENDING SINCE SO MANY YEARS BEFORE THE COURT, THEREFORE, THE ASS ESSEE HAS WRITTEN OFF THE EMBEZZLED AMOUNTS. THEREFORE, IT MUST BE ALLOWED ITS DEDUCTION. WE FIND THAT THE ASSESSEE IS ENTITLED FOR THE CLAIM OF LOSS IN THE YEAR IN WHICH IT WAS DETECTED. WE FIND THAT THE CLT(A) HAS NOT DEAL T WITH THIS ISSUE IN DETAIL AND HE HAS NOT ALLOWED THE LOSS IN EITHER OF THE TWO YEARS. THEREFORE, WE HAVE NO ALTERNATIVE EXCEPT TO REVERSE THE FINDINGS OF THE CIT(A) FOR BOTH THE ITA NOS.2965 & 2966/AHD/2010 M/S. CHHOTABHIA J. PATEL TOBACCO PRODUCTS CO. LTD. VS. DCIT, CIRCLE-2, BARODA. A.YS.1996-97 & 1997-98 - 3 - YEARS, AND RESTORE THE ISSUE TO THE FILE OF THE CIT (A) TO BE DECIDED AFRESH AS PER THE CBDT CIRCULAR AS AFORESAID. 3. SINCE, THE MATTER WAS RESTORED BACK TO THE FILE OF LEARNED CIT(A), THEREFORE, THE IMPUGNED ISSUE WAS DECIDED AFRESH BU T IN FAVOUR OF THE REVENUE. LEARNED CIT(A) HAS HELD THAT THERE WAS A R EASONABLE PROSPECT OF RECOVERY OF THE AMOUNT EMBEZZLED; HENCE, THERE W AS NO QUESTION OF ALLOWING THE LOSS IN A.Y. 1996-97. EVEN FOR A.YS.19 97-98, LEARNED CIT(A) HAS HELD THAT APPELLANT WAS NOT IN A POSITIO N TO ESTABLISH THAT THE EMBEZZLED AMOUNT COULD NOT BE REALIZED AT ALL. THE RELEVANT OBSERVATION OF LEARNED CIT(A) ARE REPRODUCED BELOW: 2.2. I HAVE CAREFULLY CONSIDERED THE MATTER. THE C BDT CIRCULAR IN QUESTION WAS ISSUED ONLY TO CLARIFY LEGAL POSITION FOR ALLOW ABILITY OF LOSS ARISING DUE TO EMBEZZLEMENT BY EMPLOYEES AS PER DECISIONS OF THE S UPREME COURT IN THE CASES OF BADRIDAS DAGA VS. CIT (1958) 34 ITR 10 AND ASSOCIATED BANKING CORPORATION INDIA LTD VS. CIT (1965) 56 ITR 1. REGA RDING WHEN THE LOSS CAN BE DEEMED TO HAVE ARISEN, HON'BLE SUPREME COURT IN THE CASE OF ASSOCIATED BANKING CORPORATION OF INDIA LTD, HELD AS UNDER: 'THE PROBLEM AS TO WHEN LOSS RESULTING FROM MISAPPL ICATION OF FUNDS BY AN AGENT OCCURS MUST BE VIEWED LIKE MANY OTHER P ROBLEMS ARISING UNDER THE IT ACT ON A CONSPECTUS OF ALL THE FACTS A ND CIRCUMSTANCES IN THE CONTEXT OF PRINCIPLES OF COMMERCIAL TRADING. EMBEZZLEMENT OF FUNDS BY AN AGENT, LIKE A SPECULATIVE ADVENTURE, DOES NOT NECESSARILY RESULT IN LOSS IMMEDIATELY WHEN THE EMBEZZLEMENT TAKES PLACE, OR THE ADVENTURE IS COMMENCED. EMBEZZLEMENT MAY REMAIN UNKNOWN TO THE PRINCIPAL, AND THE ASSETS EMBEZZLED MAY BE RESTORED BY THE AGENT OR SERVANT. IN SUCH A CASE IN A COMMERCIAL SENSE NO RE AL LOSS HAS OCCURRED. AGAIN IT CANNOT BE SAID THAT IN ALL CASES WHEN PRINCIPAL OBTAINS KNOWLEDGE OF THE EMBEZZLEMENT THE LOSS RESULTS. THE ERRING SERVANT MAY BE PERSUADED OR COMPELLED BY PROCESS OF LAW OR OTHERWISE TO RESTORE WHOLLY OR PARTIALLY HIS ILL-GOTTEN GAINS. THEREFORE, SO LONG AS A REASONABLE CHANCE OF OBTAINING RESTITUTION EXISTS, LOSS MAY NOT IN A COMMERCIAL SENSE BE SAID TO HAVE RESULTED. THE EMBEZZLEMENT OF FUNDS OF THE BANK TOOK PLACE IN 1946. THEY WERE THEN UNKNOWN TO THE BANK. EVEN AFTER THE EMBEZZLEME NTS CAME TO THE KNOWLEDGE OF THE LIQUIDATOR, TRADING LOSS CANNOT BE DEEMED TO HAVE RESULTED. THE PROPOSITION THAT IRRESPECTIVE OF OTHE R CONSIDERATIONS, AS SOON AS THE EMBEZZLEMENT TAKES PLACE OF THE EMPLOYE R'S FUNDS, WHETHER THE EMPLOYER IS AWARE OR NOT OF THE EMBEZZLEMENT, T HERE RESULTS A TRADING LOSS IS NOT TENABLE. SO LONG AS THERE WAS A REASONABLE ITA NOS.2965 & 2966/AHD/2010 M/S. CHHOTABHIA J. PATEL TOBACCO PRODUCTS CO. LTD. VS. DCIT, CIRCLE-2, BARODA. A.YS.1996-97 & 1997-98 - 4 - PROSPECT OF RECOVERING THE AMOUNTS EMBEZZLED BY THE BANK, TRADING LOSS IN A COMMERCIAL SENSE MAY NOT BE DEEMED TO HAVE RESULTED. THUS, THE SUPREME COURT HELD THAT SO LONG AS THERE WAS A REASONABLE PROSPECT OF RECOVERING THE AMOUNTS EMBEZZLED, TRADING LOSS I N A COMMERCIAL SENSE MAY NOT BE DEEMED TO HAVE RESULTED. THE APPELLANT CAME TO KNOW ABOUT THE EMBEZZLEMENT HAVING OCCURRED ONLY AFTER 31.3.2006 A ND THEN LODGED POLICE COMPLAINT DURING F.Y.1996-97. THE APPELLANT DID NOT EVEN KNOW ABOUT THE EMBEZZLEMENT DURING F.Y. 1995-96. REMEDIAL STEPS WE RE TAKEN BY THE APPELLANT IN NEXT FINANCIAL YEAR ONLY FOR RECOVERIN G THE EMBEZZLED AMOUNT. THERE IS NO QUESTION OF ALLOWING THE LOSS IN A.Y. 1 996-97. IT IS HELD THAT THE EMBEZZLEMENT LOSS OF RS. 17,06,282/- IS NOT ALLOWAB LE IN A.Y. 1996-97. 2.2.1. AS FAR AS A.Y. 1997-98 IS CONCERNED, DURING ENTIRE FINANCIAL YEAR 2006- 07, THE MATTER WAS PURSUED THROUGH POLICE COMPLIANT AND IN THE COURT FOR RECOVERING THE EMBEZZLED AMOUNT. LOSS WAS QUANTIFIE D BY THE AUDITOR ONLY ON 23.3.1997. TILL 31.3.1997, APPELLANT COULD NOT HAVE COME TO A CONCLUSION THAT THE EMBEZZLED AMOUNT WAS NOT REALIZABLE AT ALL. IN THE CASE OF ASSOCIATED BANKING CORPORATION OF INDIA LTD., THE HON'BLE COUR T HELD THAT THE LOSS CANNOT BE DEEMED TO HAVE RESULTED TILL THERE IS A R EASONABLE CHANCE TO RECOVER THE AMOUNT EMBEZZLED. DURING F.Y.1996-97, THOUGH TH E APPELLANT BECAME AWARE OF THE EMBEZZLEMENT DONE BY ITS EMPLOYEE, REA SONABLE PROSPECTS OF RECOVERY CANNOT BE SAID TO HAVE BECOME NON EXISTENT DUE TO ONGOING POLICE ENQUIRY AND PENDING CASE IN COURT AGAINST THE EMPLO YEE, WHO WAS RELEASED ON BAIL. IN FACT, A.Y.1996-97 WAS THE FIRST YEAR OF THE CASE IN COURT, AFTER EMPLOYER'S ARREST AND IT COULD NOT BE SAID ON 31.3. 1997 THAT THERE WAS NO CHANCE OF RECOVERY AT ALL. IT IS HELD THAT THE CLAI M OF LOSS OF RS.17,62,282/- IS NOT ALLOWABLE IN A.Y.1997-98 AS PER SUPREME COURTS DECISION IN THE CASE OF ASSOCIATED BANKING CORPORATION OF INDIA LTD., 56 IT R 1 (SC). 4. HAVING HEARD THE SUBMISSION OF BOTH THE SIDES, W E ARE OF THE VIEW THAT THE LEARNED CIT(A) HAS NOT JUDICIOUSLY FOLLOWE D THE DIRECTIONS OF THE TRIBUNAL AS CITED SUPRA. THE OBSERVATION OF THE TRI BUNAL WAS THAT, QUOTE WE FIND THAT THE ASSESSEE IS ENTITLED FOR THE CLAI M OF LOSS IN THE YEAR IN WHICH IT WAS DETECTED UNQUOTE. WE HAVE ALSO NOTED THAT LEARNED CIT(A) HAS IGNORED CBDT CIRCULAR NO.599 DATED 24.03.1991, WHEREIN THE DIRECTIONS WERE AS UNDER: 162 LOSS ARISING DUE TO EMBEZZLEMENT - WHETHER IT S HOULD BE TREATED AS INCIDENTAL TO BUSINESS AND SHOULD BE ALLOWED AS DED UCTION IN THE YEAR IN WHICH IT IS DISCOVERED. ITA NOS.2965 & 2966/AHD/2010 M/S. CHHOTABHIA J. PATEL TOBACCO PRODUCTS CO. LTD. VS. DCIT, CIRCLE-2, BARODA. A.YS.1996-97 & 1997-98 - 5 - 1. A REFERENCE IS INVITED TO THE INSTRUCTIONS ON TH E ABOVE SUBJECT CONTAINED IN THE BOARD'S CIRCULAR NO. 25 OF 1939 AND CIRCULAR NO . 13 OF 1944 [CLARIFICATION 2]. IN THESE CIRCULARS, IT WAS CLARI FIED THAT LOSSES ARISING DUE TO EMBEZZLEMENT OF EMPLOYEES OR DUE TO NEGLIGENCE OF E MPLOYEES SHOULD BE ALLOWED IF THE LOSS TOOK PLACE IN THE NORMAL COURSE OF BUSINESS AND THE AMOUNT INVOLVED WAS NECESSARILY KEPT FOR THE PURPOSE OF TH E BUSINESS IN THE PLACE FROM WHICH IT WAS LOST. SINCE THE ABOVE CIRCULARS WERE I SSUED, THE SUPREME COURT HAS FURTHER CONSIDERED THE MATTER AND LAID DOWN THE LAW IN THIS REGARD IN THE FOLLOWING TWO DECISIONS IN BADRIDAS DAGA V CIT [195 8] 34 ITR 10 AND ASSOCIATED BANKING CORPORATION OF INDIA LTD V. CIT [1965] 56 ITR 1. IN THE FIRST CASE, THE SUPREME COURT HAS AFFIRMED T HE 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 TH E 1922 ACT [CORRESPONDING TO SECTION 28 OF THE 1961 ACT] IF IT ARISES OUT OF THE CARRYING ON OF THE BUSINESS AND IS INCIDENTAL TO IT. IN THE SECOND CASE, THE DE CISION IS THAT LOSS MUST BE DEEMED TO HAVE ARISEN ONLY WHEN THE EMPLOYER COMES TO KNOW ABOUT IT AND REALISES THAT THE AMOUNTS EMBEZZLED CANNOT BE RECOV ERED. 2. IN THE LIGHT OF THE ABOVE DECISIONS OF THE SUPRE ME COURT, THE LEGAL POSITION NOW IS THAT LOSS BY EMBEZZLEMENT BY EMPLOYEES SHOUL D BE TREATED AS INCIDENTAL TO A BUSINESS AND THIS LOSS SHOULD BE ALLOWED AS DE DUCTION IN THE YEAR IN WHICH IT IS DISCOVERED. 5. IN THE LIGHT OF THE ABOVE, NOW WE HAVE TO EXAMIN E THE YEAR OF ALLOWABILITY OF THE CLAIM. WE HAVE NOTED THAT THE A PPELLANT HAD FILED FIR AGAINST THE EMPLOYEE WITH THE POLICE OF 16 TH JULY, 1996, I.E., FOR THE ACCOUNTING PERIOD ENDED ON 31 ST MARCH, 1997. A CASE WAS FILED AND THE EMPLOYEE WAS GRANTED BAIL BY THE COURT ON 10.10.199 6. THE AUDITOR HAD, THEREFORE, QUANTIFIED THE LOSS OF EMBEZZLEMENT ON 2 3 RD OF MARCH, 1997. THE SAID EMPLOYEE, NAMELY, SRI BHARATBHAI S/O SRI K ANTIBHAI PATEL WAS ENTERESTED WITH THE SALE DEPOT. FOR THE REGION NORT H LAKHIMPUR NOWGAON, ETC. WHO HAD SOLD THE DETERGENT, ETC. OF NIRMA PROD UCT. HOWEVER, EMBEZZLED THE CASH OF RS.5,59,333/-. HE HAS ALSO EM BEZZLED THE STOCK TO THE EXTENT OF RS.11,16,949/- BY WRITING FALSE ACCOU NTS AS WELL AS FORGED THE DOCUMENTS. THAT EMBEZZLEMENT WAS NOTICED BY THE MANAGER GAUHATI BRANCH AND THE MODUS OPERANDI WAS INTIMATED IN THE COMPLAINT FILED ON ITA NOS.2965 & 2966/AHD/2010 M/S. CHHOTABHIA J. PATEL TOBACCO PRODUCTS CO. LTD. VS. DCIT, CIRCLE-2, BARODA. A.YS.1996-97 & 1997-98 - 6 - 16 TH JULY, 1996. A COMPLAINT WAS LODGED ON THAT DATE WI TH PAN BOZAR P.S. GAUHATI, ASSAM. SEVERAL CORRESPONDENCES THEREAFTER WERE MADE BUT AS PER THE STATEMENT OF THE ASSESSEE NOTHING WAS RECOV ERED. WE, THEREFORE, HOLD THAT IN THE LIGHT OF THE ORDER OF THE RESPECTE D CO-ORDINATE BENCH AND THE CBDT CIRCULAR WHEREIN AN ORDER OF THE HONBLE A PEX COURT HAS BEEN MENTIONED, THE ASSESSEE IS ENTITLED FOR THE CLAIM F OR A.Y. 1997-98. THE OUTCOME OF THE ABOVE VERDICT IS THAT THE GROUND FOR A.Y.1996-97 IS HEREBY DISMISSED. HOWEVER, THE GROUNDS FOR A.Y. 199 7-98 ARE HEREBY ALLOWED. 6. IN THE RESULT, APPEAL FOR A.Y. 1996-97 IS DISMIS SED AND APPEAL FOR A.Y.1997-98 IS ALLOWED. SD/- SD/- (ANIL CHATURVEDI) ( MUKUL KR. SHRAWAT) ACCOUNTANT MEMBER JUD ICIAL MEMBER AHMEDABAD; DATED 29/04/2014 PRABHAT KR. KESARWANI, SR. P.S. / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A)-III, AHMEDABAD 5. , , / DR, ITAT, AHMEDABAD 6. / GUARD FILE. / BY ORDER, / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD
