Bombay High Court
Bombay Forgings Pvt. Ltd. vs Commissioner Of Income-Tax on 3 September, 1993
Equivalent citations: [1994]206ITR562(BOM)
JUDGMENT Dr. B.P. Saraf, J.
1. This is a cross-reference under section 256(1) of the Income-tax Act, 1961, at the instance of the assessee as well as the Revenue :
At the instance of the assessee :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding an addition to the total income of a sum of Rs. 6,54,777 representing the loss of stock-in-trade due to embezzlement by the employee discovered long after the end of the previous year, i.e., some time in the year 1976, notwithstanding that such loss already stood reflected in the books of account for the previous year ended December 31, 1974 ?"
2. At the instance of the Revenue :
"2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of section 40(c) of the Income-tax Act, 1961, and not the provisions of section 40A(5) of the said Act, apply in the case of an employee-director ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 41,000 representing additional payment by way of penalty levied under section 36(3) of the Maharashtra Sales Tax Act for the delayed payment of sales tax is an expenditure allowable as deduction in computing the assessee's income ?"
3. The assessee is a private limited company and this reference relates to the assessment year 1975-76. The assessee submitted its return of income for this assessment year on July 5, 1975, declaring total income of Rs. 4,43,123. A revised return was filed on July 30, 1975, declaring a total income of Rs. 2,30,583. In the year 1976, the assessee suspected the commission of a fraud by two of its principal officers, viz., Messrs. M. V. Gokarn and H. M. Sanghani, Sales Manager and Chief Accountant and Secretary, respectively. The matter was referred to a detective agency which submitted its report in February, 1977. It was found that during the relevant previous year these employees had embezzled or misappropriated goods worth Rs. 6,54,777. It was done by manipulating the accounts and as a result the aforesaid goods were neither reflected in the closing stock nor as goods in transit, nor were their value credited to the sales. The result was that though the goods worth Rs. 6,54,777 were embezzled by the above two employees, the fact of embezzlement did not come to the notice of the assessee-company during the previous year. All the same, because of their clever manipulation of accounts, the loss resulting on account of such embezzlement was duly taken care of in the accounts of the relevant year itself. Thus, though the assessee-company had no knowledge as such of the loss by embezzlement in the previous year, the loss has been suffered inasmuch as goods had been surreptitiously taken out of the assessee's stock without crediting the sales account and, consequently, the loss was reflected in the books of account. The assessee-company having come to know of the embezzlement some time in the year 1976, referred the matter to a detective agency which submitted its report in February, 1977, which confirmed the fact of embezzlement in the previous year and determined the total loss by embezzlement at Rs. 9,07,230 out of which Rs. 6,54,777 related to the previous year under consideration. The Income-tax Officer was of the opinion that though the loss by embezzlement was caused to the assessee during the relevant previous year, the detection having taken place subsequently, the claim for deduction of the amount of loss can be allowed only in the year when the detection took place and the final report was submitted by the detective agency. He, therefore, added back to the income of the assessee a sum of Rs. 6,54,777 representing the value of the goods embezzled by the two employees during the relevant previous year which was not reflected in the books of account of that year. The order of the Income-tax Officer was confirmed by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal. The Tribunal was also of the opinion that the loss of Rs. 6,54,777 suffered by the assessee during the relevant previous year on account of embezzlement could not be allowed as a deduction in that year as the detection thereof had taken place subsequently. Hence at the instance of the assessee, question No. 1 has been referred by the Tribunal to this court.
4. We are told at the Bar that both the questions referred at the instance of the Revenue are already covered by the decisions of the Supreme Court and this court. We shall deal with them a little later. First, we shall deal with question No. 1 referred to us at the instance of the assessee; the facts regarding which have already been set out above.
5. There is no dispute in the instant case about the fact that the embezzlement of good worth Rs. 6,54,777 took place during the previous year under consideration and the loss caused as a result thereof was reflected in the books of account of that year. It is also not in dispute that the loss was incidental to the business of the assessee and deductible in the computation of its income from business. There is also no controversy about the fact that no deduction was claimed by the assessee in the year when the embezzlement was suspected or was confirmed by the detective agency. The only question for consideration is whether the Tribunal was justified in holding that this loss was allowable as a deduction not in the year in which it took place but in the year when it was suspected.
6. We have carefully considered the facts of the case and the order of the Tribunal. We find it difficult to uphold the decision of the Tribunal particularly in view of the admitted position that the embezzlement had taken place during the relevant previous year and the same was duly reflected in the books of account by omission of the value of such goods from the sales as well as the closing stock of the assessee in preparation of the final accounts. In our opinion, there is no justification in such a situation to add back the amount of such loss to the profits of the assessee for that year on the ground that it could be claimed as a deduction only when it was detected by the assessee. In fact, in a situation like this, so far as loss is concerned, detection was not relevant. It was relevant only for the purpose of finding the culprits and recovery from them, if possible.
7. Under the circumstances, we are of the clear opinion that the loss caused to the assessee by embezzlement during the relevant previous year was allowable as a deduction in the computation of the income in that previous year itself. The first question is, therefore, answered in the negative, that is, in favour of the assessee and against the Revenue.
8. So far as the second question is concerned, it is agreed by counsel for the parties that having regard to the ratio of the decision of the Supreme Court in CIT v. Indian Engg. and Commercial Corporation P. Ltd. [1993] 201 ITR 723, this question has to be answered in favour of the assessee and against the Revenue.
9. Counsel for the parties are also agreed that the third question is covered in favour of the Revenue by the decision of this court in Jairamdas Bhagchand v. CIT [1988] 171 ITR 545. In that view of the matter, we answer the said question in the negative, that is, in favour of the Revenue and against the assessee.
10. Under the facts and circumstances of the case, we make no order as to costs.