2019 (10) TMI 1060 - AT - Income Tax

Claim of expenses / loss towards misappropriation of funds by the director - misuse of the authority by the director of the company - allowable business loss or not - HELD THAT - As per material placed on record, we found that the claim is made on account of misappropriation of funds by the ex-director of the company. The said director misused his authority while holding the position and incurred various expenses from the company's funds which were of personal in nature. The fact that out of ₹ 95.44 lakhs, the assessee company is claiming only ₹ 55.18 lakhs proves the bonafideness of the assessee in recovering part of the money and writing off the balance. Thus we found that the aforesaid loss has incurred in the course of business of the company and therefore should be allowed as a business loss. Addition being arbitration award granted in favour of Advani group by the Arbitral Tribunal constituted by NSE - HELD THAT - One of the procedure is by filing an arbitration claim by the parties to the dispute. Pursuant thereto Advani group filed arbitration proceedings against the assessee company for recovery of the shares belonging to the Advani group and held by the assessee company. The Arbitral Tribunal vide its order dated 13th December 2011 allowed the claim of the Advani group. In para 6 of the said Award the Tribunal has given a finding that the transaction in dispute arises from the business of the assessee company. The Tribunal directed the assessee company to pay a sum of ₹ 20,15,097/- to the Advani group along with interest of ₹ 83,959/-. The said Arbitral Award became final by the assessee company withdrawing its arbitration petition before the Hon'ble High Court on 28th August 2012 by entering into consent terms with Advani group. We direct the A.O. to allow a sum as business loss arising out of business of the assessee company. It has been very well discussed in the arbitration award under NSE Act and Rules. Accordingly the A.O. was not justified in coming to the conclusion that the said claim is not arising out of the business of the assessee company.

Summary

Issues:
1. Disallowance of amount on account of misappropriation of funds by a director.
2. Disallowance of claimed amount as Bad Debts/Business Loss.
3. Disallowance of arbitration award granted in favor of a group.

Issue 1: Disallowance of amount on account of misappropriation of funds by a director.
The assessee claimed a sum as business loss due to misappropriation of funds by a former director. The AO disallowed the claim as personal expenses of the director. The CIT(A) upheld this decision. However, the ITAT found that the director had misused company funds for personal expenses, leading to a loss of ?55.18 lakhs. The ITAT considered this loss as incurred in the course of business and allowed it as a business loss, citing relevant legal precedents. The ITAT directed the AO to allow the claimed amount as a business loss.

Issue 2: Disallowance of claimed amount as Bad Debts/Business Loss.
The assessee's claim of ?55.18 lakhs as Bad Debts/Business Loss was disallowed by the CIT(A) on the grounds of being personal expenses. However, the ITAT found that the loss was a result of misappropriation by the director and was incurred in the course of business. The ITAT directed the AO to allow the claimed amount as a business loss, based on legal precedents and the circumstances of the case.

Issue 3: Disallowance of arbitration award granted in favor of a group.
The AO disallowed an arbitration award of ?20.99 lakhs granted in favor of a group, stating it was not related to business. The CIT(A) upheld this decision. However, the ITAT examined the arbitration proceedings and found that the award arose from a business transaction under the NSE Act and Rules. The ITAT directed the AO to allow the amount as a business loss, as it was related to the business activities of the assessee company. The ITAT concluded that the AO's decision to disallow the claim was not justified, and allowed the appeal of the assessee.

In conclusion, the ITAT allowed the appeals of the assessee, directing the AO to allow both the claimed amounts as business losses. The judgment emphasized that the losses were incurred in the course of business activities and should be treated as such, overturning the decisions of the lower authorities.