2017 (10) TMI 1144 - AT - Income Tax

Allowance of loss incurred on account of theft of jewellery - claim made to the insurance company had been rejected - Held that - Hon ble Jurisdictional High Court in the case of G. G. Dandekar Machine Works Ltd. vs. CIT 1993 (1) TMI 40 - BOMBAY High Court has clearly held whether any loss from theft dacoity embezzlement etc. is deductible or not what is material is whether the loss incurred by theft dacoity etc. is incidental to the carrying on of the business. It does not make much difference whether such act is committed by the employees of the assessee or by strangers. It is difficult to draw a distinction between embezzlement of the amount from the bank and theft of the amount from the cash box of the businessman from his sales counter or business premises. What is material is whether the loss was caused to the assessee in the course of his business activity. In the case of Badridas Daga vs. CIT (1958 (4) TMI 2 - SUPREME Court) the Hon ble Apex Court took a view that loss resulting from embezzlement by an employee or agent in a business is admissible as a deduction under section 10(1) of the Indian Income-tax Act if it arises during the course of carrying on of the business and is incidental to it. This is a case where theft has taken place in respect of the trading asset of the assessee and during the course of carrying on the business by it. Merely because the insurance company has not compensated the assessee and did not accept the claim of the assessee does not mean that the assessee has not incurred loss or theft has not taken place. We therefore confirm the order of the CIT(A) and dismiss the appeal of the Revenue

Summary

Issues Involved:
1. Whether the loss claimed by the assessee as trading loss due to theft of jewellery is allowable.
2. Whether the CIT(A) erred in allowing the loss claimed by the assessee despite the insurance company rejecting the claim.

Issue-wise Detailed Analysis:

1. Allowance of Loss Claimed by Assessee as Trading Loss:
The primary issue is whether the loss incurred by the assessee on account of theft of jewellery is allowable as a trading loss. The assessee, engaged in the business of manufacturing and dealing in gold jewellery, claimed a loss of ?93,69,402/- due to theft. The Assessing Officer (AO) disallowed this loss, citing insufficient documentary evidence and the improbability of a prudent businessman sending a significant portion of his stock via bus. However, the CIT(A) appreciated the facts, including the FIR, stock statement, and vouchers showing the issue of gold ornaments. The CIT(A) observed that the loss occurred during the course of business and was supported by substantial evidence, including police reports and the magistrate's order releasing the employees from charges. The Tribunal upheld the CIT(A)'s decision, emphasizing that the loss was incidental to the business and supported by credible evidence.

2. Relevance of Insurance Company's Rejection of Claim:
The second issue is whether the CIT(A) erred in allowing the loss despite the insurance company's rejection of the claim. The insurance company had rejected the claim due to deficiencies in the registers maintained by the assessee, such as the lack of itemized details of the gold ornaments and incomplete wage records. The CIT(A) found these deficiencies irrelevant to the actual occurrence of the loss. The Tribunal agreed, noting that the rejection of the insurance claim does not negate the fact that the loss occurred. The Tribunal cited legal precedents, including the Hon'ble Jurisdictional High Court's decision in G. G. Dandekar Machine Works Ltd. vs. CIT, which held that losses from theft or embezzlement are deductible if they are incidental to the business. The Tribunal concluded that the loss was incurred during the course of business and was therefore allowable, regardless of the insurance company's stance.

Conclusion:
The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s order that allowed the loss claimed by the assessee. The Tribunal emphasized that the loss was incidental to the business and supported by substantial evidence, including police reports and legal precedents. The rejection of the insurance claim was deemed irrelevant to the allowance of the trading loss.