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TMI Blog2022 (7) TMI 171X X X X Extracts X X X X X X X X Extracts X X X X ..... of the view that the loss on account of embezzlement claimed by assessee is allowable in this year - Appeal of assessee allowed. - ITA No.: 1017/CHNY/2017 - - - Dated:- 30-6-2022 - Shri Mahavir Singh, Vice President And Shri G. Manjunatha, Accountant Member For the Appellant : Shri S. Vikram Vijayaraghavan, Advocate For the Respondent : Shri D. Hema Bhupal, JCIT ORDER PER MAHAVIR SINGH, VICE PRESIDENT: This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-9, Chennai in ITA No.65/CIT(A)-9/2010-11, order dated 10.01.2017. The assessment was framed by the ACIT, Company Circle II(2), Chennai for the assessment year 2008-09 u/s. 143(3) of the Income Tax Act, 1961 (hereinafter the Act ) vide order dated 16.12.2010. 2. The only issue in this appeal of assessee is as regards to the order of CIT(A) confirming the disallowance made by AO, claimed by assessee on account of written off relating to embezzlement amounting to Rs.1,07,35,908/-. 3. Brief facts are that the assessee company is engaged in the business of trading in automobile spare parts, etc. The assessee claimed an amount of Rs.1,07,35,908/- as written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of Hon ble Allahabad High Court in the case of Shiv Narain Karmendra Narain, 277 ITR 27 and the decision of Hon ble Supreme Court in the case of Associated Banking Corporation of India Ltd., 56 ITR 1 confirmed the action of the AO and dismissed the assessee s claim by stating that the assessee is entitled for deduction of embezzlement loss either in the year of discovery or in the year in which the amount was crystallized or the year in which the assessee realizes that the amount cannot be recovered, whichever is later. According to CIT(A), the embezzlement took place in financial year 2001-02 and this was discovered by assessee in that very year because the assessee filed a petition before bank Ombudsman on 29.10.2004. According to CIT(A), although the assessee made claim for the financial year 2007-08 relevant to assessment year 2008-09 (the present year) but assessee could not provide any proof that the bank officials made it clear in March, 2008 that the bank will not be paying any amount to the assessee company. Aggrieved, assessee preferred appeal before the Tribunal. 5. Before us, the ld.counsel for the assessee reiterated the same submissions as where placed befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Senior DR, the assessee company came to know about the embezzlement in the course of bank reconciliation carried out during the financial year 2001-02 relevant to assessment year 2002-03 and hence, claim can be allowed only in assessment year 2002-03. 7. We have heard rival contentions and gone through facts and circumstances of the case. We noted that the facts are very clear that during the financial year 2001-02, the assessee company maintained bank account with Central Bank of India and company officials namely Shri J.C. Joseph (who was employee of the assessee company from December, 1995 to January, 2002) clandestinately removed some cheque leaves, forged signature of the official of the company and withdrawn a total sum of Rs.1,07,35,908/- from this bank account. The company came to know about the embezzlement in the course of bank reconciliation and accordingly, a complaint was lodged with the Crime Branch of City Police in December, 2001. The assessee also pursued the matter with the Central Bank of India and bank also conducted internal enquiry, since there was no fault on the part of the bank, bank took a stand that it was not responsible for paying the alleged amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... larified that losses arising due to embezzlement of employees or due to negligence of employees should be allowed if the loss took place in the normal course of business and the amount involved was necessarily kept for the purpose of the business in the place from which it was lost. Since the above circulars were issued, the Supreme Court has further considered the matter and laid down the law in this regard in the following two cases :- (1) Badri Das Daga vs. CIT (1958) 34 ITR 10 (SC): TC 14R.202. (2) Associated Banking Corporation of Ltd. vs. CIT (1965), 56 ITR 1 (SC) : TC In the first case, the Supreme Court has affirmed the view that the loss resulting from embezzlement by an employee or agent of a business is admissible as a deduction under s. 10(1) of the IT Act, 1922 (corresponding to s. 28 of the IT Act, 1961) if it arises out of the carrying on of the business and is incidental to it. In the second case the decision is that loss must be deemed to have arisen only when the employer comes to know about it and realises that the amounts embezzled cannot be recovered. 2. In the light of the above decisions of the Supreme Court, the legal position now is that loss by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expression discovered has to be read in the context of Circular dated 24.11.1965 issued by Central Board of Direct Taxes. Accordingly, the second substantial question of law is answered in favour of the assessee and against the Revenue. 7.3 We have also gone through the decision of Hon ble Supreme Court in the case of Associated Banking Corporation of India, supra, wherein it was held as under:- The Tribunal has found in its supplementary report that the withdrawals and misapplication of funds by the Secretary came to the knowledge of the liquidator after the accounting year under reference, because no one suspected that the entries posted in the books of account were false entries to cover up his dealings by the Secretary. That conclusion is based on evidence and the loss must, in the circumstances of the case, be deemed to have occurred to the Bank after the liquidator came to know about the embezzlements and came to know that the amounts embezzled could not be recovered. One of the prime conditions inviting the deduction of a trading loss under s. 10(1) is therefore absent. We accordingly agree with the High Court that the amount of Rs. 10,15,000 was not a permiss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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