1983 (10) TMI 85 - AT - Income Tax

Summary

Issues:
1. Deduction claimed by the assessee for embezzlement losses in the assessment year 1972-73.
2. Determination of the quantum of loss due to embezzlement.
3. Allowability of deduction for irrecoverable losses in the business.

Analysis:
The judgment by the Appellate Tribunal ITAT BOMBAY-D involved the assessee, a company dealing in motor spare parts, claiming a deduction for embezzlement losses in the assessment year 1972-73. The embezzlement occurred in the accounting year relevant to the assessment year 1969-70, where two employees misappropriated cash and goods worth Rs. 51,398. One employee was convicted, and the other was acquitted. The assessee debited the amount to the profit and loss account in the relevant accounting year. Initially, the deduction claim was rejected as premature, but the issue resurfaced in the assessment year 1972-73 as the claim was considered time-barred and non-recoverable.

The Appellate Tribunal noted that loss caused by embezzlement, incidental to the business and non-capital in nature, is allowable as a deduction based on commercial principles. The deduction is permissible not necessarily in the year of the embezzlement but when restitution is unlikely and the amount is deemed irrecoverable. In this case, the embezzlement occurred in the accounting year relevant to 1969-70, and the assessee had exhausted legal remedies by the assessment year 1972-73, making recovery improbable.

The Tribunal emphasized that the amount representing the loss should be verified before allowing the deduction. It clarified that the criminal case's outcome does not dictate the embezzlement amount for tax purposes, as the criminal court's standard of proof differs from that required in tax assessments. The assessing authorities should rely on audit reports but can verify further if doubts arise about the quantum of loss.

Ultimately, the Tribunal directed the Appellate Authority to verify the quantum of loss due to embezzlement and allow the deduction after proper verification. The appeal was allowed, acknowledging the irrecoverable loss and the eligibility for deduction based on established legal principles and the specific circumstances of the case.