2010 (9) TMI 64 - HC - Income Tax

Embezzlement - claim of loss due to embezzlement made by the employee - connection with the normal business activity - CIT(A) allowed the claim of loss - ITAT disallowed the claim of loss - Held that - the assessee was not in a position to prove that there was no possibility of recovering the amount embezzled by the employees, the claim was rightly disallowed in that year - Associated Banking Corporation of India Ltd. Vs. CIT 1964 -TMI - 49328 - SUPREME Court

Summary

Issues:
1. Allowability of loss incurred due to embezzlement in the assessment year 1982-83.

Analysis:
The case involved a question of law regarding the allowability of a loss of Rs. 2,08,774 incurred due to embezzlement by an employee at the Ahemdabad Branch in the assessment year 1982-83. The Assessing Officer disallowed the claim, stating it was not connected with normal business activities. However, the Commissioner (Appeal) found this view absurd and held that the loss was allowable as it occurred while the employee was handling business funds. The Commissioner also noted that the loss could not be allowed in the same year unless it was proven that recovery efforts were unsuccessful. The Tribunal upheld this view, citing the Supreme Court judgment in Associated Banking Corporation of India Ltd. Vs. CIT, 56, ITR 1. The Supreme Court emphasized the need for the assessee to prove the impossibility of recovery despite exhaustive efforts before claiming the amount as a loss.

The Tribunal, applying the Supreme Court's proposition, found that the assessee had not exhausted all means to recover the embezzled amount and there was still a possibility of recovery. As the assessee failed to prove the impossibility of recovery in the assessment year in question, the claim was rightfully disallowed. The Tribunal noted that the CIT (A) directed the Assessing Officer to allow the claim in the year when it could be proven that recovery efforts were futile. Based on the factual finding that recovery was still possible, the question was answered in favor of the revenue and against the assessee.

In conclusion, the judgment clarified that the loss due to embezzlement can only be claimed as a deduction when it is established that despite all efforts, recovery is not feasible. The case highlighted the importance of proving the impossibility of recovery before claiming such losses, as per the legal precedent set by the Supreme Court.