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2017 (2) TMI 1348 - AT - Income TaxDisallowance of loss of goods by theft - Held that - CBDT Circular No.25 of 1939 and Circular No. 13 of 1994 as clarified that losses arising due to embezzlement of 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 purpose of the business in the place from which it was lost. Cases of Shitla Prasad Shyam Lal vs. CIT (1990 (11) TMI 118 - ALLAHABAD HIGH COURT) and Bombay Forgings (P) Ltd. vs.CIT (1993 (9) TMI 99 - BOMBAY HIGH COURT) to be followed. - Decided in favour of assessee.
Issues:
Appeal against order of CIT(A) for assessment year 2011-12 - Disallowance of loss of goods by theft - Addition of ?4,77,500 - Legal action not taken by assessee - Justification for theft not provided - Non-production of FIR - Genuineness of loss claimed - Applicability of CBDT circular - Precedents relied upon by assessee - Turnover of assessee company - Decision in favor of assessee by higher courts. Analysis: Issue 1: Disallowance of loss of goods by theft The assessee appealed against the CIT(A)'s decision confirming the addition of ?4,77,500 for the disallowance of loss of goods by theft. The CIT(A) upheld the disallowance as the assessee failed to provide satisfactory details or justification for the theft, including the non-production of a First Information Report (FIR) or any legal action taken against the employees involved in the fraud. The Assessing Officer (AO) relied on legal precedents to support the disallowance due to lack of evidence. The assessee contended that the genuineness of the loss should not be questioned solely based on the absence of legal action, as the fact of the fraud was admitted. The assessee invoked a CBDT circular and cited relevant case laws to support the deduction of the loss due to employee embezzlement as incidental to business. The Tribunal noted that the turnover of the assessee was significant and referred to previous court judgments favoring the assessee's position. Ultimately, the Tribunal allowed the appeal, disagreeing with the lower authorities' views and citing legal principles and precedents in favor of the assessee. Issue 2: Applicability of CBDT circular and legal precedents The assessee relied on a CBDT circular and various court decisions to argue for the deduction of the loss due to employee embezzlement as incidental to business. The circular emphasized the deductibility of losses arising from employee embezzlement if the loss occurred in the normal course of business and the amount involved was kept for business purposes. The assessee also cited legal precedents, including judgments from the Supreme Court and High Courts, to support the claim that non-action against the employees involved in the fraud should not impact the genuineness of the loss claimed. The Tribunal considered these arguments, along with the turnover of the assessee company, and concluded that the appeal should be allowed based on the legal principles and precedents presented by the assessee. Conclusion The Tribunal allowed the assessee's appeal against the disallowance of loss of goods by theft, amounting to ?4,77,500, for the assessment year 2011-12. The decision was based on the assessee's arguments regarding the genuineness of the loss, the applicability of a CBDT circular, and legal precedents supporting the deduction of losses due to employee embezzlement as incidental to business. The Tribunal disagreed with the lower authorities' views and ruled in favor of the assessee, considering the legal principles and precedents cited in the appeal.
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