Bombay High Court
Plas-Fab. Pvt. Ltd. vs Commissioner Of Income-Tax on 13 March, 1993
Equivalent citations: [1994]208ITR154(BOM)
JUDGMENT
V.A. Mohta J.
1. The following questions are referred to this court under section 256(1) of the Income-tax Act, 1961, at the instance of the assessee :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the assessee is not entitled to the deduction of the sum of Rs. 4,10,648 being the sum claimed by the assessee as the amount embezzled by its former managing director, the late Shri P. N. Mehta, for the assessment year 1972-73 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal further erred in holding that the assessee's above claim of loss of embezzlement was not allowable as a deduction pertaining to the previous year 1971, relevant for the assessment year 1972-73 ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in declining to admit and deal with the assessee's ground regarding its claim for deduction of the sum of Rs. 4,10,648 for the assessment year 1973-74 ?"
2. The assessee is a private limited company. The relevant assessment years are 1972-73 and 1973-74. The late Mr. P. N. Mehta was appointed as its managing director, in the first instance, for a period of five years, vide resolution dated April 1, 1966. The appointment was continued from time to time. He died in harness on June 14, 1971. After his death, his wife, Mrs. F. P. Mehta, was appointed as the managing director. There was a raid by the income-tax authorities on the premises of the assessee on December 18, 1971. The account books were seized. The managing director applied in January, 1972, to the Commissioner of Income-tax, under section 271(4A) of the Income-tax Act, 1961, for settlement making a disclosure that the payments shown to have been made by the assessee to Shri Kantilal R. Khokhani were not genuine payments of commission for commercial reasons, but were payments by way of accommodation.
3. The assessee filed its return of income for the assessment year 1972-73 on July 31, 1972, showing a loss of Rs. 5,29,689. Computation of income attached to the return showed a loss of Rs. 3,00,964 as per profit and loss account and Rs. 2,28,725 as amount assessed to tax as per settlement with the Commissioner of Income-tax on the basis of the above application under section 271(4A). Scrutiny of profit and loss account revealed that Rs. 4,25,070 had been claimed as a loss due to embezzlement by the managing director, Shri P. N. Mehta. This amount comprised of Rs. 2,28,725 as commission wrongly debited to the assessee's account which was offered for settlement, and Rs. 1,19,345 withdrawn by him. The Income-tax Officer disallowed the claim of Rs. 2,28,725 on the ground that it was a duplicate claim. Claim of Rs. 1,19,345 was disallowed on the grounds : (i) that embezzlement was not proved, and (ii) that even if there was embezzlement, there was no material to indicate that it was incidental to the business. The Appellate Assistant Commissioner as well as the Tribunal upheld the order.
4. Now, the assessee has neither produced the terms and conditions under which Shri Mehta was appointed as managing director nor has proved the same by any other mode. It cannot be presumed that whatever was done by the managing director was in the ordinary course of business and was incidental thereto. Article 135 of the articles of association of the company, no doubt, refers to the powers exercised by the managing director but article 132 indicates clearly that the appointment is made on such terms and conditions in relation to the duties as may be fixed by the board of directors. Moreover, this appointment is subject to the general control and supervision of the board. The assessee has not proved the terms of the agreement appointing Shri Khokhani as their commission agent. Shri Khokhani has not supported the case of the assessee. The petition for settlement filed before the commissioner of Income-tax clearly indicates that the major shareholding of the assessee was Shri Mehta and his family members. In this background, it is difficult to accept that the amount alleged to have been misappropriated by Shri Mehta, in such a fiduciary capacity would amount to a loss incurred in carrying on the business or incidental to the business in order to claim deduction.
5. The assessee had offered some amounts by way of taxation for having made a false claim of deduction by way of bogus commission in January, 1972. In July, 1972, it tried to make it back by making a claim for deduction by way of embezzlement by the managing director. This could not be legally allowed and the Tribunal was right in disallowing the claim.
6. Hence, question No. 1 is answered in the affirmative and in a favour of the Revenue. In view of his answer, question Nos. 2 and 3 do not arise.
7. There will be no order as to costs.