M/s. M.G. Shahani & Co. (Delhi) Ltd., New Delhi V. ITO, New Delhi

ITA 4261/DEL/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53319 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 24-11-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 23-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Section: 143(3); 28

Judgement Text

ITA NO. 4261/DEL/2011 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E NEW DELHI BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 4261/DEL/2011 A.Y. : 2007-08 M/S. M.G. SHAHANI & CO. DELHI LTD., 80, TOLSTOY LANE, JANPATH, NEW DELHI 110 001 (PAN : AAACM 7007J) VS. INCOME TAX OFFICER, WARD 6(1), CR BUILDING, NEW DELHI (APPELLANT ) (APPELLANT ) (APPELLANT ) (APPELLANT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) ASSEESSEE BY : SMT. LALITA KRISHNAMURTHY, CA DEPARTMENT BY : SH. ROHIT GARG, SR. D.R. ORDER ORDER ORDER ORDER PER SHAMIM PER SHAMIM PER SHAMIM PER SHAMIM YAHYA: AM YAHYA: AM YAHYA: AM YAHYA: AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) DATED 28.7.2 011 PERTAINING TO ASSESSMENT YEAR 2007-08. 2. THE ISSUE RAISED IS THAT LD. COMMISSIONER OF INC OME TAX (APPEALS) ERRED IN SUSTAINING THE DISALLOWANCE OF 3 ,23,159/- CLAIMED ON ACCOUNT OF LOSS SUFFERED BY THE ASSESSEE COMPANY ON ACCOUNT OF MISAPPROPRIATION / EMBEZZLEMENT BY ITS EMPLOYEES. 3. IN THIS CASE THE ASSESSEE COMPANY WAS ENGAGED IN VARIOUS KIND OF BUSINESS ACTIVITIES DURING THE YEAR. IT HAD A MANUFACTURING FACILITY FOR MAKING SHAMPOOS AND LIQUID HAND WASHES. THE TR ADING AND DISTRIBUTION BUSINESS COMPRISES SELLING FINIT BRAND I NSECTICIDE AND FEW ITA NO. 4261/DEL/2011 2 COSMETIC PRODUCTS. THE ASSESSEE WAS ALSO INVOLVED I N THE BUSINESS OF OFFERING WARE HOUSING FACILITIES. 3.1 THE RETURN OF INCOME WAS FILED ON 23.10.2007 DE CLARING AN INCOME OF ` 9,97,130/-. THE RETURN WAS PROCESSED U/S 143(1) AND SUBSEQUENTLY THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S 143(2) WAS ISSUED AND SERVED. THE ASSESSMENT WAS COMPLETE D U/S 143(3) VIDE ORDER DATED 11.12.2009 MAKING ADDITIONS AMOUNT ING TO ` 5,67,821/- WHICH INCLUDED AN ADDITION OF ` 3,23,159 /- ON ACCOUNT OF LOSS ON MISAPPROPRIATION/EMBEZZLEMENT. 3.2 THE ASSESSING OFFICER HAS OBSERVED IN THE ASSE SSMENT ORDER THAT WHILE EXAMINING THE ANNEXURE TO THE AUDITORS REPORT FILED WITH THE RETURN OF INCOME, IT WAS NOTICED THAT ONE OF THE EMPL OYEES OF THE ASSESSEE COMPANY HAD COMMITTED A FRAUD BY MISAPPROPRIA TING FUNDS OF THE COMPANY, AS MENTIONED IN PARA (XXI) OF SUCH R EPORT AS UNDER: 'ACCORDING TO THE INFORMATION AND EXPLANATIONS GIVEN TO US, A FRAUD ON THE COMPANY HAS BEEN NOTICED AND REPORTED DURING THE COURSE OF THE AUDIT. MANAGER OF ONE OF THE BRANCH MISAPPROPRIATED THE FUNDS OF THE COMPANY. THE AMOUNTS REALIZED BY HIM FROM ITS CUSTOMERS WERE NOT DEPOSITED AND ACCOU NTED FOR IN THE BOOKS OF ACCOUNT BUT WERE MISAPPROPRIATED BY HIM. THE CORRECT POSITION OF SUCH MISAPPROPRIATION IS YET TO BE ASCERTAINED.' 3.3 ACCORDING TO THE ASSESSING OFFICER FROM THE SAI D NOTE IT WAS UNDERSTOOD THAT THE QUANTUM OF LOSS WAS YET TO BE FI NALIZED. THE AO OBSERVED THAT AS ON 1 ST SEPTEMBER 2007, I.E., THE DATE OF THE AUDITORS REPORT THE EXACT AMOUNT OF LOSS WAS YET TO BE DETERMI NED, HOWEVER, AS PER PROFIT AND LOSS ACCOUNT, A SUM OF ` 3,23, 159 /- WAS DEBITED ON ITA NO. 4261/DEL/2011 3 ACCOUNT OF LOSS ON MISAPPROPRIATION AND EMBEZZLEMENT U NDER, THE HEAD 'OTHER EXPENSES'. THE AO, THEREFORE, HELD THAT KEEPING IN VIEW THE AUDITORS NOTE THAT EXACT AMOUNT OF LOSS WAS IND ETERMINATE, THE CLAIM OF LOSS OF ` 3,23,159/- IN THE PROFIT AND LOSS ACCOUNT AMOUNTED TO CREATING A PROVISION ON ACCOUNT OF SUCH LOSS AND TH US ASSESSING OFFICER ASKED THE ASSESSEE COMPANY TO EXPLAIN AS TO WHY THE SAME SHOULD NOT BE DISALLOWED. 3.4 IN REPLY, THE ASSESSEE EXPLAINED THAT DURING T HE FINANCIAL YEAR 2006-07 RELEVANT TO ASSESSMENT YEAR 2007-08, A MISA PPROPRIATION AND EMBEZZLEMENT WAS DETECTED AT THE JALANDHAR BRANCH OF THE COMPANY. ON INVESTIGATION BY THE COMPANY IT TRANSPIRED THAT THE MANAGER INCHARGE, VIZ. SH. AK BHATIA (76 YEARS OLD) WORKING AS BRANCH MANAGER AT JALANDHAR SINCE LAST 40 YEARS, TOOK MONEY IN CASH FROM THE SUNDRY DEBTORS (DUES FROM THEM FROM THE SALE OF GOODS) AND KE PT THE SAME WITH HIM, OMITTING TO DEPOSIT THE COLLECTION IN TH E COMPANYS BANK ACCOUNT OR SHOW THE AMOUNT AS RECEIVED IN THE COMPANY S BOOKS. IT WAS FURTHER EXPLAINED THAT THE SUMS RECOVERABLE FR OM SH. BHATIA WAS ON ACCOUNT SALES MADE TO SUCH PARTIES AND WAS HENCE INCLUDED UNDER THE HEAD SALES DURING ASSESSMENT YEAR 2007-08 OR E ARLIER YEARS AND WAS TAXED IN THOSE PARTICULAR ASSESSMENT YEARS. 3.5 THE ASSESSEE ALSO FILED WITH THE ASSESSING OFFI CER A COPY OF A FACT FINDING REPORT SUBMITTED BY ITS EXECUTIVE DIR ECTOR. ACCORDING TO THE ASSESSING OFFICER DESPITE SUCH REPORT OF THE E XECUTIVE DIRECTOR, THE AUDITOR HAD STATED IN HIS REPORT THAT HE EXACT QUANTUM OF LOSS HAD NOT BEEN DETERMINED EVEN UPTO 1 ST SEPTEMBER, 2007. THIS ACCORDING TO HIM SHOWED THAT EVEN AFTER A LAPSE OF FIVE MONTH S, THE EXACT AMOUNT EMBEZZLED BY THE EMPLOYEE HAD NOT BEEN DETERMINE D. HE WAS ITA NO. 4261/DEL/2011 4 THEREFORE, OF THE VIEW THAT THE SUM OF ` 3,23,159/- WAS BOUND TO BE TREATED AS A MERE ESTIMATION / PROVISION MADE TO PRO VIDE FOR SUCH LOSS. ACCORDING TO HIM PROVISION OF ANY KIND ARE NOT ALLOW ED TO BE SET OFF AGAINST TAXABLE INCOME, AS EXPENDITURE ACTUALLY INC URRED DURING THE YEAR ONLY COULD BE ALLOWED AS A LEGITIMATE DEDUCTION . DURING THE COURSE OF THE ASSESSMENT PROCEEDING, THE ASSESSEE C OMPANY RELIED UPON A NUMBER OF JUDICIAL CITATIONS (LISTED BELOW) IN SUPPORT OF THEIR CONTENTION. -BADRIDAS DAGA VS. C.I.T. (1958) 34 ITR 10 -ASSOCIATED BANKING CORPORATION OF INDIA LTD. VS. C .I.T. (1965) 56 ITR 1 -SHRI RAM HARI RAM JEWELLERS VS. DY. C.I.T. (ASSTT.) ( 206 ITR 71 AT) -DINESH MILLS LTD. VS. C.I.T. (2002) 254 ITR 673 (GUJ ). 3.6 THE CASE LAWS RELIED UPON BY THE ASSESSEE COMPAN Y WERE TAKEN INTO ACCOUNT BY ID. ASSESSING OFFICER. THE CONTENTI ON OF THE ASSESSEE WITH REGARD TO EMBEZZLEMENT LOSS BEING INCIDENTAL T O ITS BUSINESS WAS NOT FOUND TO BE MAINTAINABLE BY THE ASSESSING OFFI CER KEEPING IN VIEW SUCH JUDICIAL PRONOUNCEMENTS. HOWEVER, HE OBSERVED THAT THE ASSESSEE COMPANY WAS UNABLE TO COUNTER THE FACT THAT THE EXACT QUANTUM OF LOSS WAS STILL TO BE DETERMINED, AS MENTIO NED BY THE AUDITOR IN HIS REPORT DATED 01.09.2007. HE HAS STAT ED EVEN OTHERWISE, RECOVERIES WERE IN PROCESS AS WAS EVIDENT FROM THE L ETTER DATED 28.8.2007 OF SHRI KAPIL ADVANI. SHRI A. K. BHATIA, THE EMPLOYEE WHO HAD ALLEGEDLY EMBEZZLED FUNDS OF THE ASSESSEE COMPANY GAVE SIX POST DATED CHEQUES OF ` 10,000/ EACH IN JANUARY, 2007. KEEPING IN VIEW SUCH FACTS HE HELD THAT THE EXACT QUANTUM OF LOSS R EMAINED UNDETERMINED AS ON 31.3.2007. HE OBSERVED THAT THE A UDITOR IN HIS ITA NO. 4261/DEL/2011 5 REPORT DATED 1.9.2007 REITERATED THE FACT THAT EXAC T QUANTUM OF MISAPPROPRIATION WAS YET TO BE ASCERTAINED. SOME REC OVERIES WERE ALSO IN PROGRESS FROM SHRI A. K. BHATIA ON THE CLOSING DA TE OF FINANCIAL YEAR 2006-07 AND BEYOND. IN LIGHT OF THESE FACTS, HE HEL D THAT THE AMOUNT CLAIMED IN THE PROFIT AND LOSS ACCOUNT FOR THE INSTA NT YEAR WAS IN FACT A PROVISION AND THE SAME WAS YET TO ASSUME THE NATURE OF AN EXPENSE INCURRED FOR THE PURPOSE OF BUSINESS. IN A NUMBER OF CITATIONS, THE ASSESSING OFFICER STATES THAT IT HAS BEEN HELD THAT LOSS HAD BEEN ALLOWED AS DEDUCTION IN THE YEAR WHEN IT IS FULLY D ISCOVERED. IN THIS REGARD, REFERENCE WAS MADE BY HIM TO THE FINDINGS GI VEN BY THE APEX COURT IN THE CASE OF ASSOCIATED BANKING CORPORATION OF INDIA LTD VS CIT [1965] 56 ITR 1. 3.7 IN THE LIGHT OF SUCH FINDINGS, THE ASSESSING O FFICER CAME TO OBSERVE THAT THE CLAIM OF LOSS OF ` 3,23,159/- REMAINED INDE TERMINATE, AS POSSIBILITY OF UNCOVERING FURTHER MISAPPROPRIATION W AS NOT RULED OUT BY THE AUDITORS AND ALSO DUE TO CHANCES OF FURTHER REC OVERY FROM THE EMPLOYEE AS ON 31.03.2007; IN BOTH THE CASES, HE STA TES THAT THE EXACT QUANTUM OF LOSS WOULD FLUCTUATE. THEREFORE, FOR ALL PRACTICAL PURPOSES THE LIABILITY ON ACCOUNT OF LOSS WAS, ACCORDING TO ID. ASSESSING OFFICER NOT CRYSTALLIZED. ANY CLAIM FOR THE SAME IN THE INS TANT ASSESSMENT YEAR HE STATES WOULD BE IN THE NATURE OF A PROVISION AND THE SAME WAS, THEREFORE, NOT ALLOWABLE AS A VALID BUSINESS EXPENS ES. ON THE ABOVE REASONING, THE CLAIM OF ` 3,23,159/- WAS DISALLOWE D BY THE ASSESSING OFFICER. 4. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCOM E TAX (APPEALS) CONSIDERED THE ISSUE AND CONFIRMED THE ACT ION OF THE ASSESSING OFFICER. LD. COMMISSIONER OF INCOME TAX (AP PEALS) OBSERVED ITA NO. 4261/DEL/2011 6 THAT HE WAS OF THE OPINION THAT IT WAS PREMATURE ON THE PART OF THE ASSESSEE TO WRITE OFF THIS AMOUNT IN THE PREVIOUS YEAR. LD. COMMISSIONER OF INCOME TAX (APPEALS) FURTHER OBSERVE D THAT THE ASSESSEE COULD NOT SUBMIT THE INTERNAL CORRESPONDEN CE WHEREBY THE LOSS WAS ALLOWED TO BE WRITTEN OFF OTHER THAN THE L ETTER DATED 28.8.2007 OF THE EXECUTIVE DIRECTOR NOR COULD IT PRODUCE CON FIRMATION OF THE DEBTORS TO SUBSTANTIATE ITS CLAIM OF EMBEZZLEMENT O F MONEY BY THE BRANCH MANAGER. ACCORDINGLY, LD. COMMISSIONER OF IN COME TAX (APPEALS) CONFIRMED THE ADDITION IN THIS REGARD. 5. AGAINST THIS ORDER THE ASSESSEE IS IN APPEAL BEF ORE US. 6. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT OF THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. WE FIND THAT IT IS THE CASE OF THE ASSESSEE THAT THERE WAS EMBEZZLEMENT BY ITS OWN EMPLOYEE WHEREBY SUM WERE COLLECTED BY THE EMPLOYEE FROM THE DE BTORS AND MISAPPROPRIATED. NOW AUTHORITIES BELOW HAVE NOT DO UBTED THE INCIDENT OF EMBEZZLEMENT. ASSESSEES CLAIM HAS BEEN DISALLOWED ONLY ON THE GROUND THAT THE LOSS CANNOT BE COMPUTED WITH EXACTITUDE. ASSESSEE HAS DULY SUBMITTED BEFORE THE LD. COMMISSIONE R OF INCOME TAX (APPEALS) THAT THE SAID EMPLOYEE SHRI AK BHATIA, HAS CONFESSED TO HAVE TAKEN AND DEFALCATED THE MONEY FROM THE PARTIES LISTED BELOW:- NAME OF THE PARTY NAME OF THE PARTY NAME OF THE PARTY NAME OF THE PARTY AMOUNT (`) AMOUNT (`) AMOUNT (`) AMOUNT (`) I. BHARAT TRADERS, PATHANKOT 67,332.00 II. KASTURI LAL AND SONS, LUDHIANA 42,448.80 III. ANAND RAM TILAK CHAND, JAMMU 75,809.00 IV. DUGGAL GENERAL STORE, PHAGWARA 44,570.00 ITA NO. 4261/DEL/2011 7 V. ASHOK DI HATTI, LUDHIANA 20,072.00 VI. GIAN CHAND DARSHAN LAL, CHANDIGARH 20,260.00 VII. OM PRAKASH RAMESH KUMAR, LUDHIANA 87,145.00 VIII. GIAN CHAND DARSHAN LAL, NAGRITA 1,874.40 IX. RATAN CHAND AHLUWALIA, KANGRA 10,000.00 X. ARORA AND SONS, BATALA 10,463.00 XI. ARORA BROTHERS, MANDI 1,035.00 3,81,009.00 3,81,009.00 3,81,009.00 3,81,009.00 6.1 THUS, IT HAS BEEN CLAIMED THAT ` 3,81,009/- WAS DEBITED TO HIS PERSONAL ACCOUNT IN THE BOOKS OF ACCOUNTS AS ON 31 .12.2006 AND WITH OTHER MISCELLANEOUS AMOUNTS DUE FROM HIM OF ` 2,150/-, THE BALANCE RECOVERABLE FROM HIM IS ` 3,83,159/-. FROM THIS A MOUNT, THE SAID PERSON SHRI AK BHATIA REPAID ` 60000/- LEAVING ` 3 ,23,159/- AS DUE FORM HIM. THIS IS THE SUM WHICH THE ASSESSEE HAS W RITTEN OFF AS SUM MISAPPROPRIATED ON ACCOUNT OF EMBEZZLEMENT. IN OUR C ONSIDERED OPINION, ASSESSEE HAS GIVEN SUFFICIENT DETAILS TO ESTABLISH THE FACT OF THE AMOUNT OF LOSS. THE QUANTUM OF LOSS HAS ALSO BEEN ASCERTAINED BY GIVING RELEVANT DETAILS. IN THIS REGARD, LD. COU NSEL OF THE ASSESSEE HAS RELIED UPON THE HONBLE GUJRAT HIGH DECISION IN THE CASE OF DINESH MILLS LTD. VS. C.I.T. 122 TAXMAN 384 (GUJ) WHEREIN IT WAS HELD THAT WHEN THERE WAS EMBEZZLEMENT LOSS INCURRED BY ASSESSE E BECAUSE OF THE EMPLOYEE THE SAME WAS TO BE TREATED INCIDENTAL T O BUSINESS AND DEDUCTION HAD TO BE ALLOWED IN THE YEAR IN WHICH LO SS WAS DISCOVERED. ITA NO. 4261/DEL/2011 8 6.2 FURTHER, LD. COUNSEL OF THE ASSESSEE HAS SUBMITTE D THAT CBDTS CIRCULAR NO. 35-D (XLVII-20) ISSUED VIDE F.NO. 10/48 /65-IT(A-I), DATED 24.11.1965 STATES AS UNDER:- LOSS ARISING DUE TO EMBEZZLEMENT WHETHER IT SHOUL D BE TREATED AS INCIDENTAL TO BUSINESS AND SHOULD BE ALL OWED AS DEDUCTION IN THE YEAR IN WHICH IT IS DISCOVERED. 1. A REFERENCE IS INVITED TO THE INSTRUCTIONS ON THE ABOVE SUBJECT CONTAINED IN THE BOARDS CIRCULAR NO. 25 OF 1939 A ND CIRCULAR NO. 13 OF 1944 (CLARIFICATION 2). IN THESE CIRCUL ARS IT WAS CLARIFIED THAT LOSSES ARISING DUE TO EMBEZZLEMENT OF EMPLOYEES OR DUE TO NEGLIGENCE OF EMPLOYEES SHOULD BE ALLOWED IF THE LOSS TOOK PLACE IN THE NORMAL COURSE OF BUSINESS AN D THE AMOUNT INVOLVED WAS NECESSARILY KEPT FOR THE PURPOSE OF BUSINESS IN THE PLACE FROM WHICH IT WAS LOST. SINC E THE ABOVE CIRCULARS WERE ISSUED, THE SUPREME COURT HAS FURTHE R CONSIDERED THE MATTER AND LAID DOWN THE LAW IN THIS REGARD IN THE FOLLOWING TWO DECISIONS IN BADRIDAS DAGA V. C.I .T. (1958) 34 ITR 10 AND ASSOCIATED BANKING CORPORATION OF I NDIA LTD. VS. C.I.T. (1965) 56 ITR 1. IN THE FIRST CASE, THE SUPREME COURT HAS AFFIRMED TH E VIEW THAT THE LOSS FROM EMBEZZLEMENT BY AN EMPLOYEE OR AGENT OF A BUSINESS IS ADMISSIBLE AS A DEDUCTION UNDER SECTION 10(1) OF THE 1922 ACT [CORRESPONDING TO SECTION 28 OF THE 19 61 ACT] IF IT ARISES OUT OF THE CARRYING ON OF THE BUSINESS AND IS INCIDENTAL TO IT. IN THE SECOND CASE, THE DECISION IS THAT LO SS MUST BE DEEMED TO HAVE ARISEN ONLY WHEN THE EMPLOYER COMES TO ITA NO. 4261/DEL/2011 9 KNOW ABOUT IT AND REALIZES THAT THE AMOUNTS EMBEZZLED CANNOT BE RECOVERED. 2. IN LIGHT OF THE ABOVE DECISIONS OF THE SUPREME COUR T, THE LEGAL POSITION NOW IS THAT LOSS BY EMBEZZLEMENT BY EMPLOY EES SHOULD BE TREATED AS INCIDENTAL TO A BUSINESS AND THIS LOSS SHOULD BE ALLOWED AS DEDUCTION IN THE YEAR WHICH I T IS DISCOVERED. 7. IN LIGHT OF THE ABOVE AFORESAID DISCUSSIONS, PRECEDENTS AND CBDT CIRCULAR, IN OUR CONSIDERED OPINION ASSESSEE S CLAIM OF EMBEZZLEMENT OF LOSS OF ` 3,23,159/- IS COGENT ENOUGH AND THE SAME HAS TO BE ALLOWED. HENCE, WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DECIDE THE ISSUE IN FAVOUR OF THE ASSESSE E. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30/11/2011, U PON CONCLUSION OF HEARING. SD/- SD/- [ [[ [A.D. JAIN A.D. JAIN A.D. JAIN A.D. JAIN] ]] ] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 30/11/2011 SRB COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES