1985 (5) TMI 63 - AT - Income Tax

Accounting Year, Assessment Year, Business Loss, Deductions In Respect, Industrial Undertaking, Own Capital, Profits And Gains

Issues Involved:
1. Quantification of relief under section 80J of the Income-tax Act, 1961.
2. Disallowance of provision for misappropriation by an employee amounting to Rs. 71,124.

Issue-wise Detailed Analysis:

1. Quantification of Relief under Section 80J:

The primary issue revolves around the quantification of relief under section 80J of the Income-tax Act, 1961, for a company with investments from both the State and Central Government, engaged in trading, manufacturing, and having various subsidiaries. The company claimed relief for its pesticides unit, maintaining separate books for this unit. The Income Tax Officer (ITO) observed that the head office had both borrowed and own funds and questioned the allocation of these funds to the new unit. The ITO applied a proportionate method, granting relief based on 58% of own capital, resulting in relief on Rs. 44,35,189.

On appeal, the assessee argued that the capital employed in the unit came solely from own funds, supported by a cash flow statement. The Commissioner (Appeals) disagreed, maintaining that the assets were not exclusively financed by own funds and applied a ratio to determine eligible capital at Rs. 52,23,438.

During the hearing, the assessee's counsel argued that an amount of Rs. 1,05,86,335, an unsecured loan from the Gujarat Government, should not be considered as it was transferred to Gujarat Agro Service Products Ltd. The departmental representative supported the Commissioner (Appeals), emphasizing the need to consider head office borrowings.

The Tribunal found no dispute regarding the Rs. 76 lakhs credit balance in the head office account but questioned the inclusion of borrowings. They noted sufficient internal accruals and government funds to cover the capital employed in the pesticides unit. The Tribunal concluded that liabilities related to the industrial undertaking only should be considered, and no further deductions were justified without clear evidence of diversion of borrowings. They set aside the Commissioner (Appeals)' decision and directed the ITO to grant relief on Rs. 76,46,882, amounting to Rs. 5,73,516.

2. Disallowance of Provision for Misappropriation:

The second issue concerns the disallowance of a provision for misappropriation by an employee amounting to Rs. 71,124. The employee misappropriated fertilizer stocks valued at Rs. 76,936.67, with only Rs. 5,853 recovered. The remaining amount was written off in the profit and loss account for the assessment year 1980-81.

The ITO disallowed the claim, and the Commissioner (Appeals) upheld this, stating the loss pertained to an earlier year when it was discovered in August 1978. The Commissioner relied on the Supreme Court decision in Associated Banking Corpn. of India Ltd. v. CIT, asserting the loss occurred when the assessee became aware of it.

The assessee argued that the amount was debited to the employee's account, and the inquiry concluded in July 1979, justifying the write-off in the 1979-80 accounting year. They cited decisions from the Punjab and Haryana High Court and the Gujarat High Court supporting their claim.

The Tribunal reviewed the inquiry report and charge sheet, noting the employee admitted the misappropriation in February 1978. Despite this, the amounts were debited to the employee's account, indicating a non-conclusive loss. The Tribunal found no evidence of recovery prospects and noted the company's accounts were audited by the Controller and Auditor General of India, supporting the write-off in the current year. They allowed the assessee's claim, holding the deduction as a business loss under section 28 of the Act.

Conclusion:

The appeal filed by the assessee is allowed in part, granting relief under section 80J and allowing the provision for misappropriation. The appeal filed by the revenue is dismissed.

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