1993 (6) TMI 120 - AT - Income Tax

Summary

Issues Involved:
1. Whether the loss of Rs. 26,500 claimed by the assessee firm was allowable as a business loss under the head 'profits and gains of business or profession'.

Issue-Wise Detailed Analysis:

1. Allowability of the Loss as Business Loss:

Arguments by Assessee:
The assessee, a firm of Chartered Accountants, claimed a deduction of Rs. 26,500 as a business loss due to fraudulent withdrawal from its bank account. The fraudulent act involved forging the signature of one of the partners, Shri B.R. Maheshwari. The assessee argued that this loss was incidental to its profession. They lodged a police report immediately upon discovering the fraud but had not recovered the money even after 8 years. The assessee's counsel cited several judicial precedents, including CIT v. Nainital Bank Ltd, Ramchander Shivnarayan v. CIT, and others, to support the claim that embezzlement losses are allowable as business losses.

Arguments by Revenue:
The Departmental Representative contended that the loss was not incidental to the business of the assessee. It was argued that the assessee did not lodge any complaint against the bank personnel and still had hope of recovery. Therefore, the loss could not be allowed as a business loss. The representative distinguished the cited cases, particularly Associated Banking Corpn. of India Ltd v. CIT, arguing they were not applicable to the current facts.

Judicial Member's Analysis:
The Judicial Member considered the principles laid down in cases like Nainital Bank Ltd and Ramchander Shivnarayan, emphasizing that losses due to embezzlement, theft, or fraud are incidental to the carrying on of business if they are connected with business operations. The Judicial Member noted that the loss occurred due to the fraudulent withdrawal by forging the signature of a partner and that there was no hope of recovery after 8 years. Hence, the loss was incidental to the business and should be allowed as a business loss.

Accountant Member's Analysis:
The Accountant Member disagreed, stating that the money was lying in the bank and not in the assessee's possession. He argued that it was the bank's responsibility to exercise care and caution. The Accountant Member noted that the assessee did not take any legal steps against the bank for recovery and thus, the loss was not incidental to the profession. He upheld the Revenue authorities' view that the loss was not allowable.

Third Member's Analysis:
The Third Member analyzed the principles laid down by the Supreme Court in Ramchander Shivnarayan, which stated that losses due to embezzlement or fraud are allowable if they are connected with business operations. The Third Member disagreed with the Accountant Member's view, emphasizing that the loss had a direct connection with the business operations of the assessee. The Third Member noted that the money lost was from the fees collected and deposited in the bank, making it a business asset. Therefore, the loss was incidental to the profession and should be allowed as a business loss.

Conclusion:
The Third Member agreed with the Judicial Member that the loss of Rs. 26,500 was incidental to the business carried on by the assessee and should be allowed as a business loss. Consequently, the appeal was allowed, and the Income-tax Officer was directed to allow the loss as a business loss.

Final Order:
The appeal by the assessee was allowed, and the Income-tax Officer was directed to allow the loss of Rs. 26,500 as a business loss. The matter was referred to the regular Bench for disposal in accordance with the majority opinion.