2019 (7) TMI 1220 - HC - Income Tax

Allowability of business loss - embezzlement of the cash by director/employee of the Company - ITAT allowed the claim of the assessee - HELD THAT - The embezzlement by one of the Directors or an employee of the business of the Assessee Company during the ordinary course of business can be a business loss of the Assessee irrespective of criminal prosecution of the accused director/employee of the Company. The final fate of the criminal proceedings or recovery of the amount in question would not determine the claim of the Assessee in the present year writing off the same as a business loss. Tribunal had rightly held it to be a business loss as it was treated to be only a pilferage of the company funds by an employee or a Director on the Board of Company. Therefore, such findings of facts by the Tribunal do not give rise to any substantial question requiring our further consideration u/s 260A. Thus we do not find any merits in the Appeal filed by the Revenue and the same is liable to be dismissed.

Summary

Issues:
1. Allowance of bad debts as a loss due to embezzlement of cash.
2. Timing of allowance of loss related to embezzlement.
3. Direction to allow loss despite ongoing civil/criminal proceedings.

Analysis:

*Issue 1: Allowance of bad debts as a loss due to embezzlement of cash*
The Revenue appealed questioning the correctness of the ITAT's decision to allow the amount claimed by the assessee as bad debts resulting from embezzlement. The Tribunal noted that the embezzlement occurred during the business activity and, although not meeting the conditions of Section 36(2) of the Act for bad debts, it constituted an inevitable loss for the assessee. The Tribunal deemed the embezzled cash as a business loss rather than a bad debt, emphasizing that the embezzlement was a direct consequence of the employee's actions during business operations. Therefore, the Tribunal directed the Assessing Officer to allow the embezzled amount as a business loss, rejecting the Revenue's argument that the embezzled amount was recoverable and not a bad debt.

*Issue 2: Timing of allowance of loss related to embezzlement*
The Revenue contended that the ITAT erred in allowing the loss related to embezzlement in the assessment year 2012-13 when the claim pertained to the assessment year 2007-08. However, the Tribunal justified its decision by emphasizing that the embezzlement occurred during the business activities and was an unavoidable loss for the assessee, regardless of the year in which the claim was made. The Tribunal's focus was on the nature of the loss incurred by the assessee due to the embezzlement, rather than the specific assessment year in question.

*Issue 3: Direction to allow loss despite ongoing civil/criminal proceedings*
The Revenue argued that the ongoing civil/criminal proceedings against the accused employee should prevent the allowance of the embezzled amount as a business loss. However, the Tribunal held that the embezzlement by a director or employee during business operations could be considered a business loss for the assessee, irrespective of the status of the legal proceedings. The Tribunal emphasized that the ultimate outcome of the criminal proceedings or recovery efforts did not impact the assessee's claim for writing off the embezzled amount as a business loss. Therefore, the Tribunal dismissed the Revenue's appeal, upholding its decision to treat the embezzled cash as a business loss.

In conclusion, the High Court dismissed the Revenue's appeal, finding no substantial question of law in the case and supporting the Tribunal's decision to allow the embezzled amount as a business loss incurred by the assessee during the ordinary course of business operations.