2013 (5) TMI 51 - HC - Income Tax

System of accounting - as per AO bad and doubtful debts provisions are not allowable - additions made to the total income of the assessee - Held that - C.I.T.(A) and the I.T.A.T. accepted the method of accounting of the assessee and & relying on CIT Versus Vasisth Chay Vyapar Ltd. & others 2010 (11) TMI 88 - Delhi High Court which was in accordance with the Instruction No.9949 of the Reserve Bank of India and therefore, addition was deleted. no question of law is involved. Loss due to embezzlement by an employee - whether treated as accidental to the business - Held that - I.T.A.T. after relying upon the judgment of Dinesh Mills Ltd. Vs. C.I.T. (2001 (12) TMI 65 - GUJARAT High Court) and Harijan Evam Nirbal Varg Avas Vs C.I.T. reported in (1995 (12) TMI 2 - ALLAHABAD High Court) observed that the loss on account of theft be treated as business loss - no interference reuired - No question of law is involved.

Summary

Issues:
1. Interpretation of Section 145 of the Income Tax Act regarding accounting methods.
2. Treatment of provisions for bad and doubtful debts under Section 36(i) of the Income Tax Act.
3. Application of RBI guidelines and Section 45(ii) of the RBI Act in accounting practices.
4. Consideration of judicial precedents in determining the treatment of accounting methods.
5. Deductibility of losses due to embezzlement as business losses.
6. Application of CBDT Circular on losses due to embezzlement.
7. Judicial interpretations on treating losses due to theft as business losses.

Analysis:

1. The Assessing Officer contended that under Section 145 of the Income Tax Act, income must be realized in cash and expenses in the mercantile system. Consequently, provisions were disallowed, and an amount was added to the total income of the assessee. However, the C.I.T. (A) and the I.T.A.T. upheld the assessee's accounting method, citing the non obstante clause in Section 45(ii) of the RBI Act and following the Delhi High Court decision in a similar case. The method of accounting was found to align with RBI guidelines, leading to the deletion of the addition.

2. The issue of provisions for bad and doubtful debts under Section 36(i) of the Income Tax Act was raised. The C.I.T. (A) and the I.T.A.T. accepted the accounting method based on RBI guidelines, as instructed by the Reserve Bank of India. The decision of the Delhi High Court was considered binding, and the addition was consequently deleted.

3. Another issue arose concerning losses due to embezzlement, treated as business losses. The I.T.A.T. referred to the CBDT Circular, which allows such losses to be deducted in the year of discovery. Citing judgments from the Gujarat High Court and the Allahabad High Court, the I.T.A.T. concluded that losses from theft should be treated as business losses. The Tribunal's decision was upheld, and no legal question was found in the appeal.

4. Ultimately, the High Court found no legal issues warranting further consideration and dismissed the appeal based on the conclusions reached by the C.I.T. (A) and the I.T.A.T. regarding the accounting methods and treatment of losses due to embezzlement.