Messrs GRINDLAYS BANK P.L.C., KARACHI VS COMMISSIONER OF INCOME TAX, CENTRAL ZONE `C', KARACHI
2006 P T D 1319
[Karachi High Court]
Before Muhammad Mujeebullah Siddiqui and Sajjad Ali Shah, JJ
Messrs GRINDLAYS BANK P.L.C., KARACHI
Versus
COMMISSIONER OF INCOME TAX, CENTRAL ZONE `C', KARACHI
I.T.C.. Nos. 64 to 67 and 69 to 70 of 1993, decided on 14/03/2006.
Income Tax Ordinance (XXXI of 1979)---
----S. 23(1)(xviii)---Deduction of amount embezzled by employee of assessee-Bank, claim for---Disallowance of such claim by Assessing Officer and Tribunal for its being inadmissible---Validity---Amount embezzled in the course of business would be admissible deduction, though there was no specific provision in such regard, but such claim could not be laid unless and until efforts for recovery thereof made Through process of law and those made for compelling its restitution, had failed---NO material was placed before Assessing Officer regarding report from F.I.A. that such employee was not traceable; and that suit filed against employee, if decreed, amount embezzled would not be recovered---Such last condition had not been met---High Court answered reference in affirmative.
Associated Banking Corporation of India Ltd. v. CIT (1965) 56 ITR 1 and Badridas Daga v. Commissioner of Income Tax (1958) 34 ITR 10 ref.
Iqbal Salman Pasha for Applicant.
Aqeel Ahmed Abbasi for Respondent.
Date of hearing: 14th March, 2006.
JUDGMENT
MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---In all these Reference Applications a common question has been pressed by Mr. Iqbal Salman Pasha Advocate which pertains to the disallowance of claim at Rs.32,12,735.00 preferred on account of embezzlement made by an employee of applicant-Bank namely M.L. Fernandez. The question is as follows:--
"Whether the Tribunal could lawfully confirm the disallowance of Rs.32,12,735 misappropriated by an employee of the applicant-Bank who flew away from the country and was untraceable with no tangible assets left in Pakistan?
Heard learned counsel for the applicant and the learned counsel for the Respondent.
Mr. Iqbal Salman Pasha has submitted that the amount was not claimed under any particular para of section 23(1) of the Income Tax Ordinance, 1979 as none of them specifically deal with the claim pertaining to embezzlement by an employee. He has submitted that the amount was entrusted to the employee of bank during the course of business and consequently it will fall within the purview of section 23 subsection (1)(xviii) which provides that any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business or profession shall be allowed as a deduction while computing the income under the head `income' from `business' and `profession'. Before the Tribunal reliance was placed by the Department on the judgment of Indian Supreme Court in the case of Associated Banking Corporation of India Ltd. v. CIT (1965) 56 ITR 1 "wherein it has been held that ifany employee of an assessee commits any embezzlement then notwithstanding, the fact that no specific provision has been made the claim shall be allowed to assessee on the condition that it is found that the embezzled amount has become irrecoverable. So long as there is a reasonable prospect of recovery of the amount embezzled, trading loss in a commercial sense cannot be deemed to have resulted. It was further observed that the erring servants 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.
Learned counsel for the applicant has placed reliance on another judgment of Supreme Court of India in the case of Badridas Daga v. Commissioner of Income Tax "(1958) 34 ITR 10. A principle has been laid down in this case that when a claim is made for deduction for which there is no specific provision the question of admissibility shall depend on the fact whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and be incidental to it. The loss for which a deduction is claimed must be one that springs directly from the carrying on the business and is incidental to it, and not any loss sustained by the assessee even if it has some connection with his business. If that is established, then the deduction must be allowed, provided that there is no provision against it, express or implied, in the Act.
It was further observed that the loss sustained by a business by reasons of embezzlement by an employee or agent is not. an admissible deduction under section 10(2)(xi) of the Indian Income Tax Act, 1922 for when an agent or employee misappropriates moneys belonging to his employer in fraud of him and in breach of his obligations to him, it cannot be said that he owes these moneys under an agreement. Nor can a claim for deduction of loss by embezzlement be admitted under section 10(2)(xv), because moneys which are withdrawn by the employee out of the business till without authority and in fraud of the employer can in no sense be said to be an "expenditure laid out or expended wholly or exclusively" for the purpose of the business. The provisions referred to by the Supreme Court of India is analogous to the provisions contained in section 23(1)(xviii) of the Income Tax Ordinance, 1979. It was further held that loss resulting from embezzlement by an employee or agent in a business is, however, admissible as a deduction under section 10(1) of the Indian Income-tax Act if it arises out of the carrying on of the business and is incidental to it. It makes no difference in the admissibility of the deduction whether the employee occupies a subordinate position in the establishment or is an agent with large power of management. It is a question turning on the facts of each case whether the embezzlement in respect of which deduction is claimed took place in the carrying on of the business.
Mr. Pasha has submitted that in the facts and circumstances of the present case the embezzled amount was entrusted to the employee in the course of business and consequently it is admissible claim.
Learned counsel for the Respondent/Department has contended that the claim has not been disallowed by the Assessing Officer or the Tribunal on account of inadmissibility but on account of fact that a suit was filed for the recovery of said amount and said suit was still pending and therefore it was not established that there was no ray of hope for the recovery of the said amount.
Mr. Pasha has contended in rebuttal that the FIA has reported that said M.L. Fernandez who left Pakistan is not traceable and consequently the amount is not recoverable. Mr. Salman Pasha is not aware about the result of suit filed in the High Court for the recovery of embezzled amount from said M.L. Fernandez.
A perusal of the entire record produced before us does not show that any material was placed before the Assessing Officer with reference to the report from the FIA that said M.L. Fernandez is not traceable and consequently the amount embezzled by him is not recoverable even if the suit filed in the High Court is decreed.
In the above circumstances, we are of the opinion that the amount embezzled in the course of business is admissible deduction notwithstanding that there is no specific provision in this behalf but for this purpose the claim cannot be laid in the year when the embezzlement is made or in any subsequent year until and unless it is established that all efforts have been made for the recovery of the amount through the process of law and all efforts for compelling the restitution of the amount have failed. The amount can be claimed on fulfillment of the later condition. In the present case we do not find that the later condition has been met and consequently the finding of the Tribunal upholding the disallowance is maintained. The question, referred to us pertaining to the disallowance of the claim and confirmation thereof by the Tribunal is answered in affirmative.
However, before parting with this judgment we would like to clarify that the Appellant is still entitled to furnish the claim provided it is able to meet the condition, as above, and the claim has not become barred under any law.
All these Reference Applications stand disposed of accordingly.
S.A.K./G-10/K??????????????????????????????????????????????????????????????????????? Answer in affirmative