Kerala High Court
Yoosuf Sagar Abdulla And Sons (P.) Ltd. vs Commissioner Income-Tax on 30 March, 1990
Equivalent citations: [1990]185ITR371(KER)
Author: K.S. Paripoornan
Bench: K.S. Paripoornan
JUDGMENT K.S. Paripoornan, J.
1. At the instance of an assessee, a private limited company, the Income-tax Appellate Tribunal (in short, "the Tribunal") has referred the following three questions of law for the decision of this court:
"(1) Whether the Tribunal was right in law in holding that the reopening of the assessment under Section 147(a) of the Income-tax Act was valid ?
(2) Whether the amounts misappropriated by the directors of the company should not be treated as business loss in computing the income of the applicant ?
(3) Whether the Tribunal was right in law in holding that the assessee had not established that it has incurred the loss ?"
2. The references relate to six years--1968-69 to 1973-74. The respondent is the Revenue. In July, 1976, the business premises of the assessee (a private limited company) as well as the residence of some of its directors were raided by the Revenue. Certain documents and letters were seized. A statement was recorded from Mr. Damodaran Nambiar (a resident director). These letters and documents, as also Mr. Nambiar's statement, clearly revealed that the assessee had earned profit, which was not brought into the books of account, nor disclosed in the returns filed in the original assessment proceedings. This resulted in initiation of proceedings under Section 147 of the Act. The Income-tax Officer, the Commissioner of Income-tax (Appeals) and the Appellate Tribunal concurred in holding that, by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts in the original assessment proceedings, income chargeable to tax in the sum of Rs. 2.5 lakhs had escaped assessment. It was further held that the reopening of the assessment under Section 147(a) was warranted and justified. The undisclosed profit was estimated in various figures for the six years. Before the Commissioner of Income-tax (Appeals) and also before the Tribunal, it was contended that the proceedings under Section 147(a) of the Act are invalid. It was also contended that, in the alternative, the sum of Rs. 2.5 lakhs was either taken by Yakub Sagar Abdulla, one of the directors, or distributed under his directions to some persons in Calicut and so the said unauthorised appropriation should be considered to be a business loss of the company, in computing its income. The Tribunal, in its order dated June 28, 1985, negatived both the pleas. It held that the seized letters and documents, as also the statement of Sri Nambiar, would clearly show that the undisclosed profit made by the company has not been brought into the books of account. It was also found that the proceedings under Section 147(a) were warranted since the company failed to disclose truly and fully all material facts necessary for the assessments. Adverting to the alternate contention, the Tribunal held that after the income was earned by the company, it was either taken away by Yakub Sagar Abdulla or it was distributed to some other persons in Calicut under his directions. Once the income was earned by the company, it was assessable in its hands. The unauthorised appropriation by Yakub Sagar Abdulla cannot, in any way, deter the company from taking steps for getting restitution and it cannot be stated that any legal action was taken against him for recovery of the amount; The Tribunal further held that no loss was incurred by the company. The mere fact that the directors appropriated the income earned cannot be said to constitute a loss incurred by the company. Incidentally, it was also found that Sri Yakub Sagar Abdulla and his sons hold 155 shares out of the 161 shares of the company which was subsequently sold. It was thereafter, at the instance of the assessee, that the three questions of law, formulated hereinabove, have been referred for the decision of this court.
3. We heard counsel for the applicant (assessee) as also counsel for the respondent (Revenue).
4. Counsel for the assessee did not seriously press question No. 1, especially in the light of the express finding by the Tribunal that the letters seized and the evidence of Sri. Nambiar clearly showed that the undisclosed profit made by the company had not been brought by the company into the books of account. On a perusal of the order of the Tribunal, we are satisfied that the assessee made unaccounted profit on the sale of import licences which was not brought into the books of account and it was not disclosed in the returns filed for the original assessments. It is clear that, by the omission or failure on the part of the assessee in disclosing truly and fully all facts necessary for the assessment, initiation of proceedings under Section 147(a) of the Income-tax Act is warranted. In this view of the matter, we answer question No. 1 in the affirmative, against the assessee and in favour of the Revenue.
5. The main thrust of the argument of the assessee centred round question No. 2. Counsel pleaded that once it is evident that the company had not the benefit of such unaccounted profit, which was diverted away by one of the directors, Mr. Yakub Sagar Abdulla, the said amount should be construed as business loss of the company. In this connection, our attention was drawn to the decision of the Supreme Court in Associated Banking Corporation of India Ltd. v. CIT [1965] 56 ITR 1 and the passages at page 12 of the report The plea was that the amounts so lost should be equated to an embezzlement by an agent and it should be treated as a permissible business loss. We are unable to accept this plea either. It is clear that income was earned by the company. It was assessable in its hands. It may be that one of the directors, Sri Yakub Sagar Abdulla, who held 155 out of 161 shares, unauthorisedly appropriated it or diverted it. There is no plea, much less any material to show, that the company and its officers were unaware of it. There is no plea or material either even to show that any proceedings were taken against such unauthorised diversion of profit. It is equally clear that there was no material to point out that there is no reasonable chance of obtaining restitution of the amounts so unauthorisedly diverted by one of the directors. In this state of affairs, the Tribunal was justified in holding that there is no question of allowing any loss, as no loss has been incurred by the company. It is only the case of one of the directors appropriating the income earned.
6. We are of the view that the ratio of the decision of the Supreme Court in Associated Banking Corporation of India Ltd.'s case [1965] 56 ITR 1 is totally inapplicable herein. In this view, we hold that the amount appropriated by the director, Sri Yakub Sagar Abdulla, cannot be treated as a business loss in computing the income of the applicant. We answer question No. 2 in the negative, against the assessee and in favour of the Revenue.
7. It follows from our discussion in answering question No. 2 that the assessee had not incurred, much less established that it had incurred, any loss. We, therefore, answer question No. 3 in the affirmative, against the assessee and in favour of the Revenue.
8. The references are answered as above.
9. A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.