2015 (8) TMI 985 - HC - Income Tax

Addition under the head of fraud payment - Held that - The Court notices that Clause 3.5 of the agreement between the Assessee and IHCL, titled Handling of Financials , stipulates that the membership fee collected by way of cash will be deposited on the same day with the cashier of IHCL. Cheques could be collected in the name of IHCL. In the light of the above clauses, the explanation offered by the Assessee that some of its employees had effected sales of Diners Club cards of and failed to deposit the amount collected appears to be plausible and ought to have been accepted by the AO and the CIT (A). There was a legal liability on the Assessee in terms of the agreement entered into with IHCL to ensure that the money collected on sale of the Diners Club cards was deposited with the IHCL. The failure by the Assessee s employees to do so resulted in a legal liability on the Assessee to make good the loss to IHCL. Consequently, the money paid by the Assessee to IHCL should have been allowed as business loss by the AO and the CIT(A). In the circumstances, the ITAT was justified in directing the AO to allow the deduction claimed by the Assessee. - Decided in favour of assessee.

Summary

Issues:
1. Delay in re-filing the appeal
2. Interpretation of business loss under Income Tax Act, 1961
3. Treatment of embezzled funds as bad debts or business expenditure

Delay in re-filing the appeal:
The High Court condoned a delay of 35 days in re-filing the appeal based on the reasons stated in the application, ultimately disposing of the application.

Interpretation of business loss under Income Tax Act, 1961:
The appeal by the Revenue under Section 260A of the Income Tax Act, 1961 was against an order passed by the Income Tax Appellate Tribunal. The Assessee, engaged in marketing loyalty cards, debited a sum under 'fraud payment'. The Assessing Officer added this amount back to the total income, rejecting the Assessee's contention to write it off as bad debts. The CIT(A) also rejected this plea, concluding that the financial transaction did not make the Assessee financially liable to the company. However, the ITAT agreed with the Assessee that there was no hope of recovery from former employees who embezzled the funds, directing the AO to allow the loss as claimed by the Assessee.

Treatment of embezzled funds as bad debts or business expenditure:
The Court noted the agreement between the Assessee and the company, which stipulated the handling of financials. It found the explanation plausible that employees failed to deposit collected amounts, creating a legal liability on the Assessee to make good the loss. The Court distinguished a previous case, stating that in this scenario, the embezzled money did not belong to the Assessee but to the company. Consequently, the Court upheld the ITAT's decision to allow the deduction claimed by the Assessee, dismissing the appeal as no substantial question of law arose.