2019 (10) TMI 1222 - AT - Income Tax

Disallowance on account of bad debt/trading loss - deduction of loss incurred by the assessee due to embezzlement by the employee - HELD THAT - Admittedly, the genuineness of the embezzlement of the fund by the employee has not been doubted by the authorities below. Thus such loss was incurred by the assessee in the course of the business. It is a settled law that the losses incurred in the course of business are allowed as deduction u/s 28 of the Act. As decided in Dinesh Mills Limited v/s. CIT 2001 (12) TMI 65 - GUJARAT HIGH COURT assessee would be entitled to deduction of loss during the year under consideration as that was the year in which the loss on account of embezzlement was, in fact, discovered. Which year the assessee can claim the deduction on account of such losses, i.e., embezzlement of the fund. Admittedly, the fund was embezzled by the employee of the assessee in the earlier years, but the assessee did not claim the deduction for the same till date as it was hopeful of recovering the same amount from the employee. In the year under consideration, the assessee has lost its hope for the recovery of the amount from the employee. Assessee has written off such amount as bad debt in the year under consideration. In our considered view, it is the decision of the assessee to hold the amount as irrecoverable from the employee. The Revenue cannot enter into the shoes of the assessee and direct him to claim the deduction of such amount in the year in which the embezzlement was discovered/crystalized. Case-law referred by the authorities below are distinguishable from the present fact of the case. Therefore we are reluctant to place our reliance on such judgment. We note that the assessee is eligible for the deduction of the amount embezzled by the employee as a trading loss. Hence, the ground of appeal of the assessee is allowed. Disallowance on account of bonus/commission u/s. 36(1)(ii) - addition based on the remarks put by the auditors in the tax audit report - HELD THAT - Remarks put by the auditors as bonus plus incentives paid to staff is purely customary in nature doesn t suggest that assessee has paid any dividend/profit to the staff. Therefore we are of the view that the AO has made the addition on the wrong assumption of facts. Therefore, we are not inclined to uphold the order of the authorities below - direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is allowed.

Summary

Issues involved:
1. Disallowance of bad debt/trading loss
2. Disallowance of deduction under section 36(1)(ii) of the Income Tax Act

Issue 1: Disallowance of bad debt/trading loss:
The appellant contested the disallowance of a claim of bad debt/trading loss amounting to ?4,66,444. The case involved an individual, an authorized stockiest of I.O.C. Ltd., who claimed bad debt from an employee, Shri Maulik D. Pathak, acting as a sales representative. The employee collected money from customers but did not deposit it with the office, leading to the claim of embezzlement against the employee. The Assessing Officer (AO) disallowed the claim stating it should have been deducted in the previous year when the embezzlement was discovered. The Commissioner of Income Tax (Appeals) upheld the AO's decision, citing precedents. The appellant argued that the amount was irrecoverable and written off in the current year. The Tribunal found in favor of the appellant, stating that the loss was genuine and allowable as a trading loss, emphasizing the year of discovery as crucial for deduction.

Issue 2: Disallowance of deduction under section 36(1)(ii) of the Income Tax Act:
The second issue pertained to the disallowance of a deduction of ?3,60,122 under section 36(1)(ii) of the Act, claimed as bonus/commission. The AO disallowed the deduction, assuming it was paid in lieu of profits/dividends. The appellant argued that the payment was not in the form of profit or dividend, thus eligible for deduction under the said section. The AO's decision was based on the auditor's report, stating the payment was customary. The Commissioner upheld the AO's decision without concrete evidence of profit/dividend distribution. The Tribunal disagreed, finding the AO's assumption incorrect based on the auditor's remarks. The Tribunal directed the AO to delete the addition, ruling in favor of the appellant.

In conclusion, the Tribunal allowed the appeal of the assessee, overturning the disallowances made by the authorities below. The judgment emphasized the genuineness of losses and the correct interpretation of relevant tax provisions in determining allowable deductions.