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TMI Blog1997 (7) TMI 195X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial controller. That the said financial controller misused some of these information copies and withdrew a sum of Rs. 1,29,47,500 by means of 43 cash orders in the name of 43 firms alleged to be bogus. That during the course of search and seizure operations on 13th Oct., 1992 at the residential premises of Shri Mahajan the tax authorities recovered FDRs of Rs. 55 lakhs and odd along with blank cheques/information copies signed by the managing director of the company. That Shri Mahajan stated before the Asstt. Director of Investigation that FDRs amounting to Rs. 35.69 lakhs belonged to the assessee company and that the managing director had physically handed these over to him for safe custody. That the Court had issued a chargesheet and criminal prosecution was pending against Shri Mahajan and further the Police had recovered Rs. 40 lakhs and odd in cash and Indira Vikas Patras from his house after his arrest. 3. On the basis of the aforesaid facts and submissions the assessee-company claimed the loss on account of misappropriation and embezzlement. 4. As against the aforesaid submissions the AO noted the following facts and drew the following inferences: (i) The informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnexure 7 and the typed balance sheet filed along with the return contained "almost" the same balances. Further there were a number of cheques, vouchers both bank and cash signed by the managing director and his mother, Smt. Krishna Rani on31st March, 1991; and (vii) The information copies found at the residence of Shri R.P. Mahajan were not in the same series as those on the basis of which the funds had been withdrawn from the bank. That information copies of the latter series had been utilised by the company on31st March, 1992and the entries duly made in the books of accounts. 5. In the final analysis, the AO rejected the claim for deduction in a sum of Rs. 1,29,47,500, plus a further amount of Rs. 15 lakhs alleged to have been embezzled from the State Bank ofPatiala, Overseas Branch atLudhianaby Shri Mahajan purportedly in connivance with Shri Ramesh Lal, accounts officer. In doing so the AO observed as under: "Actually, the fact is that the company in order to defraud revenue had debited in the books of account 1,29,47,500 for purchase of various goods. These amounts were debited in the books of account in the a/c of firms in whose names cash order were issued and bank ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lakhs. (b) Bank payment book is as under: It starts from page 188 and ends at 207 -do- -do- 169 and ends at 173 Page nos. 174 to 187 are blank. The Blank pages evidences the tampering. The assessee company has claimed that Shri R.P. Mahajan has in connivance with Shri Ramesh Lal has embezzled a sum of Rs. 15 lakhs from State Bank of Patiala, Overseas Branch, Ludhiana. The amount was withdrawn from the bank by Shri Ramesh Lal. The allegation is only in the nature of an allegation and cannot be treated as allowable expenditure. It would be allowed only when it is established that the same was embezzlement by Mr. Mahajan. A mere accusation of embezzlement does not prove a person guilty till it is substantiated by some records and facts. I do not know whether any case has been launched in this regard. Even if the case is launched, the assessee shall have to prove the same as embezzlement by Mr. Mahajan and not by some other person. Mr. Ramesh Lal is still working with the company. It would be relevant to point out here that in subsequent paragraph I have referred to certain cash adjustments of Rs. 15 lakhs in the workmans staff welfare acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er when internal enquiries were conducted by the company that the embezzlement was detected and the company lodged an FIR on 7th Dec., 1992. That the subsequent discovery of cash of Rs. 40 lakhs and odd and Indira Vikas Patras of Rs. 9 lakhs confirmed the "embezzlement"; (x) To cover up the embezzlement Shri Mahajan "fabricated" the balance sheet by inflating purchases of raw material and this did not have any effect on the bank balances shown in the balance sheet because in either case whether the amount withdrawn was against purchases or represented embezzlement the bank balance would be the same; (xi) Discovery of undated cheques and information copies signed by the managing director and his mother, Mrs. Krishna Rani, from the residence of Shri Mahajan clearly indicated his intention to misuse these documents; (xii) The information copies were being used at random without any consecutive serial numbers and that is why some of them were found at the residence of Shri Mahajan and further the supporting vouchers did not indicate any serial numbers. That the Department had not found the office copy of the information sheets during the search in the office premises along with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wards the company s tax liability thus accepting that funds of the company had been embezzled by Shri Mahajan; (xviii) That loss on account of embezzlement had come to its notice when the books of account for asst. yr. 1992-93 were still open and pending audit and finalisation and recovery at a later date in June 1993 by the Department and in May, 1994 under superdari did not belie the loss suffered by the company during the period ending 31st March, 1992; and (xix) That the AO had acted entirely on suspicion and a company of assessee s stature would not resort to a crude device of withdrawing money for its own pocket and laying the blame on its employees. 7. The CIT(A) rejected the claim for deduction adopting the following line of reasoning : "I have considered the rival submissions. Appellant-company has made a claim for loss due to embezzlement to the extent of Rs. 1.44 crores (Rs. 1,44,47,500 to be precise). Both sides agree and there is no dispute that Sh. R.P. Mahajan is a party to siphoning off this amount. The dispute is as to whether the managing director, Shri Sanjeev Pahwa, along with Sh. Mahajan and others attempted to inflate purchases and expenses and on disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l-gotton gains. Therefore, so long as a reasonable chance of obtaining restitution exists loss may not in a commercial sense be said to have resulted. Further, loss was held by Supreme Court as to have occurred when appellant came to know of it. Therefore, on this ground alone the claim is not allowable this year as appellant claims that it come to know of it long after the close of the accounting year. It has been stated on behalf of the appellant that Sh. R.P. Mahajan has various plots and share certificates other than the recovery of approximately Rs. 55 lakhs in FDRs and approximately Rs. 40 lakhs in cash and Rs. 9,10,000 in I.V.Ps. Therefore the condition that there is no reasonable chance of obtaining restitution is absent. In the facts and circumstances, therefore, the claim of loss is disallowed and the addition of Rs. 1,44,47,500 is sustained. As regards the culpability of the managing director, the Department is at liberty to examine in detail this issue in proceedings under s. 271(1)(c) of the IT Act, already initiated by the AO and or take recourse to proceedings under s. 276C of the IT Act." 8. We must mention, at the outset, that there is some contradiction and lack ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various locations including the residence of the managing director and of Shri Mahajan took place in October, 1992 the entries of withdrawals from the bank were in the year of appeal and the books in respect of which were open; (iv) The criminal cases were still pending in the Court and no further recovery had been made till date; (v) In a commercial sense the loss was of the year under appeal and it should be accordingly allowed; (vi) The Hope of recovery" was a term quite different from "attempt to recovery" and filing of a suit was not a negation of the "hope of recovery"; (vii) The claim for deduction in entirety could be allowed in the year of appeal and the subsequent recoveries could be brought to tax in the respective assessment years under s. 41(1). Alternatively, the amount still to be recovered could be allowed; (viii) That the FDRs found at the residence of Shri R.P. Mahajan had been assessed as his income and further all other assets found in his possession had been attached; (ix) That the year of detection was not relevant as the loss had to be related back to the previous year to which it pertained; (x) The current law of bad debts was quite liberal si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. After considering the rival submissions, we are of the view that the CIT(A) has not tackled the real issue before him, but has skirted the same by making certain observations which are contradictory in nature. The AO had recorded numerous facts in support of the addition and the assessee s counsel advanced lengthy arguments with reference to the material on record challenging these facts, but the CIT(A) has not dealt with any of them. 14. The assessee s counsel categorically stated that no asset was found either at the residence of the directors or at the business premises, but substantial assets in the form of cash, FDRs. I.V. Ps were found from the possession of Shri R.P. Mahajan. There was also a reference to the relevant records being missing from the bank and there being a possible connivance of bank staff. Then again, there were no vouchers prepared by the accounts department of the assessee-company for withdrawal of the sum of Rs. 129.48 lakhs. Further undated cheques and information copies signed by the managing director and his mother were found at the residence of Shri R.P. Mahajan. That no discrepancy had been detected in the purchases and observations of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We can go on and on but in our opinion the discussion in the preceding paras leaves us in no doubt that the CIT(A) has not examined the issue in proper perspective and to enable him to do so, we set aside his order and restore the matter to his file for a decision de novo on merits, after giving reasonable opportunity to the parties. 19. Ground No. 3 in the appeal, reads as under: "3. That the learned CIT(A) erred on facts and in law in confirming the disallowance of an expenditure of Rs. 1,25,00,000 incurred in connection with the preservation of the business factory and establishment of the company. 3.1 That the sum of Rs. 1,25,00,000 paid by the assessee-company to terrorists inPunjabfor safeguarding and preserving its business was clearly a revenue expenditure allowable while computing the business income of the assessee. 3.2 That on the basis of the evidence on record that aforesaid sum having been gone out of the coffers of the company, was clearly deductible from the business income of the company". 20. We have heard both the parties and have also perused the orders passed by the tax authorities. The case before the tax authorities was to the effect that the payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 in the appeal, reads as under: "4. That the learned CIT(A) ought to have allowed the trading liability on account of trade bonus of Rs. 1,13,60,814 while computing the business income of the assessee as the same was claimed on accrual basis according to the mercantile system of accounting adopted by the assessee. 4.1 The learned CIT(A) erred in directing the AO to allow this claim after verification on actual payment basis notwithstanding the mercantile system of accounting followed by the assessee". 24. Both the tax authorities have referred to the earlier assessment orders as also the orders passed by the first appellate authority. The learned counsel for the assessee stated that in the preceding assessment years the appeals were pending before the Tribunal and it would be in the fitness of things if the AO be asked to pass an order in conformity with the decision of the Tribunal whenever delivered. The learned Departmental Representative did not oppose the aforesaid submissions made on behalf of the assessee. In the light of this accepted position we would direct the AO to pass an order as soon as the matter has been decided by the Tribunal in the preceding assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X
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