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TMI Blog2017 (9) TMI 318X X X X Extracts X X X X X X X X Extracts X X X X ..... n law and the expression “discovery” has to be interpreted so as to mean that loss must be deemed to have arisen only when employer comes to know about it and realizes that the amount embezzled cannot be recovered and not merely from the date of acquiring knowledge in which that embezzlement has taken place. Accordingly, the first substantial question of law is answered in favor of the assessee and against the Revenue. Loss by embezzlement being incidental to the banking business - allowed as deduction in the year of its detection or discovered - Held that:- The second substantial question of law framed by this Court is answered by stating that loss by embezzlement being incidental to the banking business should be allowed as deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income for the Assessment year 1997-1998 in which it claimed embezzlement loss of ₹ 1,65,000/-. The Assessing Officer vide order dated 18.03.2003 inter alia held that although the embezzlement came to the notice of the assessee on earlier dates yet the assessee has claimed the deduction in the assessment year 1997-1998. It was further held that the assessee had noted the details of occurrence of loss and had detected the loss in the previous accounting year. Therefore, the deduction is not admissible. Accordingly, the Assessing Officer disallowed the loss of ₹ 1,15,000/- for the Assessment Year 1997-1998 and amount of ₹ 50,000/- was disallowed by processing the return under Section 143(1)(a) of the Act. On similar facts, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uent year i.e. the date of discovery. Therefore, the loss should be allowed as deduction from income in the year in which it was discovered. In support of the aforesaid submission, learned counsel for the assessee has referred to the decision of the Supreme Court in the case of Associated Banking Corporation of India Ltd. V. Commissioner of Income Tax (1965) 56 ITR 0001 as well as a Division Bench decision of High Court of Allahabad in the case of Shiv Narain Karmendra Narain vs. Commissioner of Income Tax, (2005) 277 ITR 27 (All) as well as Circular issued by the Central Board of Direct Taxes dated 24.11.1965. On the other hand, learned counsel for the Revenue has supported the order passed by the Tribunal and has submitted that in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey were then unknown to the Bank. Even after the embezzlements came to the knowledge of the Liquidator, trading loss cannot be deemed to have resulted. The proposition that irrespective of other considerations, as soon as the embezzlement takes place of the employer's funds, whether the employer is aware or not of the embezzlement, there results a trading loss is not tenable. So long as there was a reasonable prospect of recovering the amounts embezzled by the Bank, trading loss in a commercial sense may not be deemed to have resulted. 7. The Central Board of Direct Taxes has issued a circular dated 24.11.1965 by taking note of the decision of the Supreme Court in the case of Associated Banking Corporation of India ltd (supra) and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental to a business and this loss should be allowed as deduction in the year in which it is discovered. 8. From a conjoint reading of the decision of the Supreme Court in the case of Associated Banking Corporation of India Ltd supra as well as circular dated 24.11.1965 issued by the Central Board of Direct Taxes, it is evident that loss by embezzlement by employees should be treated as incidental to a business and this loss should be allowed as deduction in the year in which it was discovered. In Badri Das Daga supra, the Supreme Court has held that loss resulting from embezzlement by employee or agent of a business as deduction under Section 10(1) of the Act if it arises out of carrying on of business and is incidental to it. In the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expression discovery has to be interpreted so as to mean that loss must be deemed to have arisen only when employer comes to know about it and realizes that the amount embezzled cannot be recovered and not merely from the date of acquiring knowledge in which that embezzlement has taken place. Accordingly, the first substantial question of law is answered in favour of the assessee and against the Revenue. On the same analogy, the second substantial question of law framed by this Court is answered by stating that loss by embezzlement being incidental to the banking business should be allowed as deduction in the year it is discovered and the expression discovered has to be read in the context of Circular dated 24.11.1965 issued by Cent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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