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2004 (10) TMI 64 - HC - Income TaxEmbezzlement loss - Even though the applicant has come to know about the embezzlement having taken place some time in October, 1977, in the preliminary investigation made by an employee of the applicant, a rough figure of Rs. 8,50,000 was arrived at as embezzled amount. However, the exact embezzlement loss of Rs. 11,17,014 which the applicant is claiming as business loss during the AY 1978-79 came to be known to it only on July 7, 1979 Thus, Tribunal was justified in holding that the aforesaid amount of embezzlement loss could not have been claimed as business loss during the assessment year 1978-79 as the aforesaid trading loss was not fall in that year. Further, we held that Tribunal was justified in law in upholding the disallowance under section 80VV
Issues Involved:
1. Allowability of trading loss due to embezzlement for the assessment year 1978-79. 2. Justification of disallowance of Rs. 11,474 under section 80VV of the Income-tax Act, 1961. Detailed Analysis: Issue 1: Allowability of Trading Loss Due to Embezzlement for the Assessment Year 1978-79 The applicant, a firm engaged in various businesses, discovered an embezzlement at its Haldwani depot in October 1977. Initially, a rough figure of Rs. 8,50,000 was estimated as the embezzled amount. Subsequently, a chartered accountant firm, S.M. Gupta and Co., was appointed to ascertain the exact loss, which was reported as Rs. 11,17,014 on July 7, 1979. The applicant claimed this amount as a business loss for the assessment year 1978-79. The Tribunal disallowed the claim, reasoning that the exact amount of embezzlement was determined only on July 7, 1979, which falls beyond the previous year under consideration. The Tribunal held that the embezzlement did not result in a trading loss for the assessment year 1978-79. The court referred to precedents, including the apex court's ruling in Badridas Daga v. CIT [1958] 34 ITR 10, which established that losses incidental to business operations, such as embezzlement by employees, are deductible. However, the court also noted the principle from Associated Banking Corporation of India Ltd. v. CIT [1965] 56 ITR 1, stating that a trading loss is not considered to have occurred as long as there is a reasonable prospect of recovery. Applying these principles, the court concluded that the applicant discovered the exact embezzlement loss only on July 7, 1979. Therefore, the Tribunal was justified in holding that the loss could not be claimed for the assessment year 1978-79. Issue 2: Justification of Disallowance of Rs. 11,474 Under Section 80VV The applicant incurred Rs. 20,876 for payments to income-tax advisers and others for representing its case before various income-tax authorities. The Assessing Officer allowed Rs. 5,000 and disallowed the balance of Rs. 15,876 under section 80VV of the Act, which caps such expenses at Rs. 5,000. The Tribunal upheld the disallowance, interpreting section 80VV to mean that the ceiling of Rs. 5,000 applies to all expenses incurred in the previous year for any proceedings before income-tax authorities or courts. The court disagreed with the Gujarat High Court's interpretation in Saurashtra Cement and Chemical Industries Ltd. [1995] 213 ITR 523, which suggested that the ceiling applies to each proceeding separately. Instead, the court held that section 80VV covers all expenses incurred in the previous year for any proceedings, and the Rs. 5,000 ceiling applies collectively. Thus, the Tribunal was correct in disallowing the sum of Rs. 15,876. Conclusion The court answered both questions in the affirmative, ruling in favor of the Revenue and against the assessee. The embezzlement loss was not allowable for the assessment year 1978-79, and the disallowance of Rs. 15,876 under section 80VV was justified. There was no order as to costs.
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