2016 (9) TMI 958 - AT - Income Tax

Disallowance on account of embezzlement of cash by an employee - Held that - For the purpose of claiming a debt as bad, the conditions prescribed u/s 36(2) of the Act have to be complied with. In the case before us, the conditions prescribed u/s 36(2) of the Act were not complied with, therefore, the claim of the assessee cannot be allowed as bad debt. However, it is a loss suffered in the course of business activity and it is inevitable loss in the hands of the assessee. When the assessee trusted Shri Arumugamswamy and allowed him to manage the day-to-day affairs, embezzled the cash to the extent of ₹ 240 lakhs. The net embezzled amount comes to ₹ 1,86,24,839/-. This Tribunal is of the considered opinion that the embezzled cash by Shri Arumugamswamy in the course of business activity has to be allowed as business loss. In view of the above, this Tribunal is unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to allow the embezzled cash of ₹ 1,86,24,839/- by Shri Arumugamswamy as business loss. Addition towards excess stock - Held that - During the course of search operationo, the Revenue authorities found excess stock in the showroom of the assessee. Both the assessee and the Revenue valued the excess stock by reducing the gross profit margin from MRP value of the stock available at the end of the financial year. The Assessing Officer has also taken 14% as gross profit on the tag price for the purpose of computing the value of the stock. As rightly submitted by the ld. Representative for the assessee, while arriving at the excess stock, the Assessing Officer instead of 14% has adopted 20% as gross profit ratio which resulted in the excess stock of ₹ 3,25,16,473/-. Therefore, this Tribunal is of the considered opinion that the addition of ₹ 88,76,731/- is unwarranted. In view of the above discussion, this Tribunal is of the considered opinion that the CIT(A) has rightly deleted the addition. Therefore, this Tribunal do not find any reason to interfere with the order of the CIT(A) and accordingly, the same is confirmed. Addition on account of fall in gross profit rate - Held that - It is not in dispute that the assessee has offered excess stock of ₹ 2,36,39,742/- for taxation. This excess stock is nothing but profit of the assessee. Therefore, this excess stock has to be taken into consideration while estimating the gross profit. As rightly submitted by the ld. Representative for the assessee if the excess stock of ₹ 2,36,39,742/- was taken into consideration, the gross profit margin of the assessee would come to 21% which is admittedly more than the average gross profit ratio shown by the assessee @ 18% for the earlier assessment years. Therefore, this Tribunal is of the considered opinion that the CIT(A) has rightly deleted the addition made by the Assessing Officer. This Tribunal do not find any reason to interfere with the order of the CIT(A) and accordingly, the same is confirmed.

Summary

Issues:
1. Disallowance of loss claimed due to embezzlement by an employee.
2. Addition of excess stock.
3. Addition on account of fall in gross profit rate.

Issue 1: Disallowance of Loss Due to Embezzlement:
The assessee claimed a loss of ?1,86,24,839 due to embezzlement by an employee, which was written off as bad debt. The employee embezzled cash during business activities, leading to the loss. The Tribunal noted that while the conditions for claiming bad debt under section 36(2) were not met, the embezzled amount should be allowed as a business loss. The Tribunal directed the Assessing Officer to treat the embezzled cash as a business loss, overturning the lower authorities' disallowance.

Issue 2: Addition of Excess Stock:
The Revenue found excess stock during a search operation, leading to an addition of ?88,76,731. The dispute arose from the valuation of closing stock based on gross profit margin. The Assessing Officer used a 20% profit ratio instead of the correct 14%, resulting in an inflated excess stock figure. The Tribunal agreed with the assessee's valuation method and upheld the CIT(A)'s decision to delete the addition, as the correct profit ratio showed no excess stock warranting the addition.

Issue 3: Addition on Account of Fall in Gross Profit Rate:
The Assessing Officer added ?1,48,54,638 due to a decrease in the gross profit rate compared to previous years. The discrepancy arose from the assessee declaring a lower profit margin of 12.92% without considering excess stock offered for taxation. The CIT(A) deleted the addition, noting that considering the excess stock would result in a 21% profit margin, higher than the average of 18% in previous years. The Tribunal upheld the CIT(A)'s decision, emphasizing that the excess stock should be factored into the profit margin calculation.

In conclusion, the Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal, confirming the decisions made regarding the issues of loss due to embezzlement, addition of excess stock, and fall in gross profit rate.