2015 (10) TMI 469 - AT - Income Tax

Disallowance of alleged loss due to embezzlement suffered by the assessee - Held that - As the very basic issue of admissibility of deduction in respect of the loss die to embezzlement is required to be, in the light of the above discussions, required to be decided afresh, we donot consider it appropriate to deal with other peripheral issues raised in the orders of the authorities below. Suffice to say that the matter will be decided afresh, uninfluenced by the findings in the first round of proceedings (which have come to a naught due to the matter having been restored to the file of the Assessing Officer due to the proceedings in the first round having been held to be vitiated in law due to violation of principles of natural justice), by way of a speaking order on a standalone basis, after taking into account all such documents, including documents relating to legal proceedings, as the assessee may rely upon and after giving a fair and reasonable opportunity of hearing to the assessee. We consider it appropriate to clarify that, on merits, the assessee is at liberty to raise all such arguments as he may deem fit and proper. For the reasons set out above, we once again remit the matter to the file of the Assessing Officer for fresh adjudication de novo, in terms of our directions above, inter alia in the light of the legal proceedings in respect of the embezzlement that the assessee claims to have suffered. With these directions, the matter stands restored to the file of the Assessing Officer. - Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Correctness of the order passed by the CIT(A) regarding the assessment under section 143(3) r.w.s. 147 and 250 of the Income Tax Act, 1961.
2. Disallowance of Rs. 5,16,480 in respect of the alleged loss due to embezzlement suffered by the assessee.

Issue-wise Detailed Analysis:

1. Correctness of the Order Passed by the CIT(A):
The assessee appellant challenged the correctness of the CIT(A)'s order dated 3rd October 2007, which pertained to the assessment year 1991-92 and was conducted under section 143(3) read with sections 147 and 250 of the Income Tax Act, 1961. The original assessment was reopened based on inquiries by the DDIT (Investigation), indicating that the company had booked bogus purchases resulting in suppressed profits. The CIT(A) upheld the disallowance of Rs. 5,16,480, which the assessee claimed as a loss due to embezzlement.

2. Disallowance of Rs. 5,16,480 Due to Alleged Embezzlement:
The case against the assessee was that part of the purchases booked was bogus, and the payments made by the assessee by cheques were allegedly returned in cash. The assessee contended that the embezzlement was carried out by K B Thakkar, who managed the company's affairs. The Tribunal had previously remitted the matter back to the Assessing Officer for fresh adjudication, directing that a copy of K B Thakkar's statement be furnished to the assessee.

In the resultant assessment proceedings, the Assessing Officer declined the claim of deduction for the loss due to embezzlement, stating that the loss did not arise in the normal course of business and was not fully irrecoverable as the matter was sub judice. The CIT(A) agreed with the Assessing Officer, stating that the assessee was aware of the bogus bank accounts used for inflating purchases and that the claim of loss by embezzlement was not convincing.

The Tribunal noted that the Assessing Officer heavily relied on findings from the first round of proceedings, which were remitted due to a violation of natural justice principles. The Tribunal emphasized that findings from the first round could not be considered final as the assessment order was vitiated in law. The Tribunal found no material to conclusively prove that the assessee had full knowledge of the dubious transactions or that the assessee received cash in lieu of cheques.

The Tribunal highlighted that the statement of K B Thakkar, while important, could not be the sole basis for deciding the issue against the assessee. The entire issue needed to be examined holistically, including the surrounding factors and the proceedings initiated by the assessee. The Tribunal also clarified that the taxability of the embezzled amount in the hands of the alleged embezzler should not affect the deductibility of the loss in the hands of the assessee.

Conclusion:
The Tribunal remitted the matter back to the Assessing Officer for fresh adjudication, instructing that the issue of admissibility of deduction for the embezzlement loss be considered afresh and objectively. The Tribunal directed that the matter be decided uninfluenced by the findings from the first round of proceedings and based on a speaking order with appropriate reference to all relevant documents and legal proceedings. The appeal was allowed for statistical purposes, with the matter restored to the file of the Assessing Officer for a de novo adjudication.

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