TADALAM G. DWARAKANATH & CO. VS COMMISSIONER OF INCOME-TAX
2001 P T D 2318
[239 I T R 831]
[Karnataka High Court (India)]
Before V. K. Singhal, J
TADALAM G. DWARAKANATH & CO.
Versus
COMMISSIONER OF INCOME‑TAX
Writ Petition No. 10212 of 1994, decided on 26/05/1999.
Income‑tax‑‑‑
‑‑‑‑Business loss‑‑‑Embezzlement‑‑‑Loss is deductible‑‑‑Loss must be deemed to have occurred when embezzlement was discovered‑‑‑Indian Income Tax Act, 1961.
The Supreme Court held in Badridas Daga v. CIT (1958) 34 ITR 10 (SC) that the loss sustained by the assessee as a result of misappropriation by an employee/agent was one which was incidental to the carrying on of the business and should, therefore, be deducted in computing the profits of business. In Associated Banking Corporation of India Ltd. v. CIT (1965) 56 ITR 1, the Supreme Court observed that the loss by embezzlement must be deemed to have occurred when the assessee came to know about the embezzlement and realised that the amounts embezzled could not be recovered.
Held accordingly, that the observation of the Commissioner of Income‑tax that the embezzlement which related to an earlier year could not be claimed in the subsequent year, was contrary to the observation of the apex Court. The petitioner was made aware of the audit report of the loss in the assessment year 1986‑87 and it was on the said amount becoming irrecoverable that a loss could be claimed. The order passed by the Commissioner of Income‑tax was not valid.
Associated Banking Corporation of India Ltd v. CIT (1965) 56 ITR 1 (SC); Badridas Daga v. CIT (1958) 34 ITR 10 (SC) and Chokshi Metal Refinery v. CIT (1977) 107 ITR 63 (Guj.) ref.
M.V. Javali for Petitioner.
E.R. Indra Kumar for Respondent.
JUDGMENT
The petitioner is aggrieved by the order of the Commissioner of Income‑tax, dated December 31, 1993, by which, the revision under section 264 of the Income‑tax Act was rejected, on the ground that the amount of Rs.5,00,913 in respect of embezzlement loss relating to earlier year cannot be allowed in the assessment year 1986‑87. The petitioner was maintaining the books of account. In respect of the accounting period ending on June 30, 1984, books were audited by the auditor and it was found that the embezzlement started from 1982‑83 to 1984‑85. Year wise break‑up has been given in the order, of the Commissioner. The Assistant Commissioner of Income‑tax, observed:
"Embezzlement loss incurred during the year ending June 30, 1985, amounting to Rs.28,025 is allowed. The assessee is not allowed to carry forward of previous years embezzlement losses pertaining to the assessment year 1984‑85 and previous assessment years for the reasons mentioned in the assessment order for 1985‑86. "
The return filed by the petitioner was for the loss of Rs.3,77,175, whereas, the income computed in the assessment order was Rs.1,63,900. The Income‑tax Officer allowed the embezzlement loss for the year ending June 30, 1985, to the extent of Rs.28,025 only and the assessee was not allowed to carry forward the loss of embezzlement pertaining to the earlier years. This order of the Assistant Commissioner of Income‑tax was revised by the Commissioner under section 263 which was challenged by the petitioner before the Income‑tax Appellate Tribunal. While dealing with the matter, it was observed that the entire loss can be said to have taken place during the previous year, 1986‑87 and, as such, the order of the Income‑tax Officer allowing deduction to the extent of Rs.28,025 was found correct. Against the order of the assessing authority, the petitioner has not filed any appeal, but after the order passed by the Tribunal on December 31, 1993, a revision was preferred before the Commissioner of Income‑tax. The reasons given by the Commissioner of Income‑tax were that the loss pertaining to the earlier years cannot be considered in the subsequent year. It was further observed that the claim of the petitioner has to be dismissed for the reason for which the Tribunal has dismissed the claim of the petitioner. The submission of learned counsel for the petitioner is that, the loss was detected by the auditors in the year 1984 and there being no possibility of recovery as found by the Tribunal, the entire loss should have been allowed in that assessment year. It is submitted that, the claim of the entire loss was made in the returns for 1986‑87 and, therefore, the Commissioner of Income‑tax was not justified in treating the loss of the previous year, as not allowable in the year 1986‑87. Reliance is placed on the Central Board of Direct Taxes Circular No.35‑D (XLVII‑20) of 1965‑F. No. 10/48/65‑I‑T.(AI), dated November 2, 1965, which reads:
"Allowance of embezzlement loss:
Losses by embezzlement by employees. ‑‑Treatment of, for the purposes of income‑tax assessments.‑‑A reference is invited to the instructions on the above subject contained in Board's Circular No.25 of 1939 and Circular No. 13 of 1944. In these circulars it was clarified that losses arising due to embezzlement by employees or due to negligence of employees should be allowed if the loss took place in the normal course of business and the amount involved was necessarily kept for the purposes of the business in the place from which it was lost. Since the above circulars were issued, the Supreme Court has further considered the matter and laid down the law in this regard in the following two cases:
(a) Badridas Daga v. CIT (1958) 34 ITR 10 (SC); and
(b) Associated Banking Corporation of India Ltd. v. CIT (1965) 56 ITR 1 (SC).
In the first case, the Supreme Court has affirmed the 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 the Indian Income‑tax Act, 1922 (corresponding to section 28 of the Income Tax Act, 1961), if it arises out of the carrying on of the business and is incidental to it. In the second case the decision 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 recovered.
In the light of the above decisions of the Supreme Court, the legal position now is that loss by embezzlement by employees should be treated as incidental to a business and this loss should be allowed as deduction in the year in which it is discovered. "
Reliance is also placed on the Central Board of Direct Taxes Circular No. 14(XI‑35) of 1955, dated April 11, 1955, which reads:
"Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the Department; for it would inspire confidence in him that he may be sure of getting a square deal from the Department. Although, therefore, the responsibility of claiming refunds and reliefs rests with the assessee on whom it is imposed by the law; officers should:
(a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reasons or other;
(b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.
C.B.R. Bulletin, Volume No.l‑‑‑June Quarter 1955, P.25 (printed at page 1435 of Income‑tax Law by Pithisaria and Chaturvedi, fifth edition)‑‑Choksi Metal Refinery v. CIT (1977) 107 ITR 63 (Guj.)."
Reliance is also placed on the decision given in Badridas Daga v. CIT (1958) 34 ITR 10 (SC), wherein, it was observed (headnote):
"The loss sustained by the appellant/assessee as a result of mis?appropriation by employee/agent was one which was incidental to the carrying on of the business and should, therefore, be deducted in computing the profits under section 10(1) of the Indian Income‑tax Act, 1922. "
The observations in Associated Banking Corporation of India Ltd. v: CIT (1965) 56 ITR 1 (SC) are to the following effect:
"Loss when to be allowed.‑‑‑That the loss by embezzlement must be deemed to have occurred to the bank after the liquidator came to know about the embezzlement and realised that the amounts embezzled could not be recovered."
Heard arguments of learned counsel for both the parties.
The order of the Income‑tax Appellate Tribunal is perused to examine the fact whether the petitioner was not entitled to claim deduction in the year 1986‑87. It appears that the Commissioner of Income‑tax has not properly interpreted the order of the Tribunal. Learned counsel for the Department has submitted that the question of maintainability of the revision petition is not examined by the Commissioner and that the assessee has not filed a valid revision.
I have considered over the matter. At this stage, I will not examine the question of maintainability of revision which has to be examined by the Commissioner of Income‑tax. Suffice it to observe the observation that the embezzlement related to earlier year, cannot be claimed in the subsequent year, is contrary to the observations of the apex Court. The petitioner was made aware of the audit report for the loss in the assessment year 1986‑87 and it is on the said amount becoming irrecoverable that a loss could be claimed. In these circumstances, the order passed by the Commissioner of Income‑tax is set aside. It is directed that the Commissioner would consider the entire matter afresh including the maintainability of revision and pass appropriate orders in accordance with law.
Writ petition is disposed of accordingly.
M.B.A/267/FC ?????????????????????????????????????????????????????????????????????????????????? Order accordingly.