Income Tax Appellate Tribunal - Ahmedabad
Income-Tax Officer vs A.G. Gas Agency on 31 August, 1990
Equivalent citations: [1991]38ITD589(AHD)
ORDER
M.A.A. Khan, Judicial Member
1. These appeals by and/or against the same assessee arise under the following circumstances.
2. The assessee is a registered firm engaged in the business of selling LPG cylinders of Indian Oil Corporation, burners and other accessories. It was originally constituted by two ex-servicemen viz. Col. N.K. Anklesaria and Major M.S. Gupte with equal Shares. Maj. M.S. Gupte, however, died on 3-11-1977 and, therefore, his son Sri Anil M. Gupta was taken as partner in his father's place w.e.f. 4-11-1977. The assessee-firm maintains its accounts on mercantile system. The accounting periods, relevant to the assessment years 1979-80, 1980-81 and 1981-82, ended on 31-12-78, 21-12-79 and 31-12-80 respectively.
3. The assessee-firm had employed one Sri Kiran K. Shah sometime in May 1977 to work as a cashier-cum-accountant for it. He used to write the necessary account books like ledger, cash book etc. and also used to handle day-to-day cash receipts in the normal course of the business of the assessee-firm. The assessee-firm was having the credit facility up to Rs. 28,000 from Central Bank of India, Lal Darwaza Branch, Ahmedabad. Sri Kiran K. Shah used to collect daily cash receipts and had the authority to deposit the same with the said bank in assessee's bank a/c. He also had the further authority to operate the bank account inasmuch as he could obtain the demand drafts from the bank for submission to the Indian Oil Corporation. In short, Sri Kiran K. Shah handled the cash receipts, the tasks of depositing the receipts in bank and obtaining Demand Drafts on behalf of the assessee-firm in ordinary course of assessee's business besides writing its books and maintaining relevant records.
4. It was sometimes in the last week of September 1980 that the bank authorities pointed out to the partners of the assessee-firm that their firm's cash credit a/c had exceeded the sanctioned limit of Rs. 28,000 by an amount of Rs. 1,00,000 approximately. Thereupon the partners took up the matter with the said Sri Kiran K. Shah, who, after interrogation, admitted to have misappropriated an amount of Rs. 50,000 and promised to pay the same and any further amount found due from him within a reasonable time. He even delivered to the partners a post-dated cheque for Rs. 50,000 dated 1-12-1980 drawn on Union Bank of India, Gandhi Road, Ahmedabad in favour of the assessee-firm. The said cheque was, however, not honoured by the bank and was bounced as per their letter dated 4-12-80. The services of Sri Kiran K. Shah had already been dispensed with by the assessee w.e.f. 26-9-1980.
5. It has been brought on record that the assessee-firm has already proceeded against the said Sri Kiran K. Shah by filing a criminal case on 31-12-84 in Court No. V of Metropolitan Magistrate, Ahmedabad and also Civil Suit No. 1782 of 1985 on 30-1-1985 in the City Civil Court, Ahmedabad for appropriate reliefs. It has been reported to us that nothing has been recovered so far from the said employee.
6. Soon after their coming to know of the misdeeds of Sri Kiran K. Shah the partners of the assessee-firm appointed M/s H. Rustom & Co., a firm of Chartered Accountants, to examine their accounts with a view to know the manner, method and extent of the misappropriation and defalcation committed by Mr. K.K. Shah. On investigating the matter the said firm of CAs ascertained the yearwise amounts of defalcation as under :
------------------------------------------------------------------
Accounting Period Assessment year Amount of defalcation
1-9-77 to 31-12-78 1979-80 Rs. 61,403.00
1-1-79 to 31-12-79 1980-81 Rs. 39,876.00
1-1-80 to 31-12-80 1981-82 Rs. 90,840.00
-------------
Total Rs. 1,92,119.00
------------------------------------------------------------------
The methods adopted for committing mis-appropriation (defalcation) of aforementioned amount, were, as stated, these:-
(i) Misappropriation of cash in hand,
(ii) Misappropriation of cash by altering the figures of amounts in the memos/bills,
(iii) Inflating the expenses,
(iv) Goods misappropriated by showing excess consumption in the quantity stock ledger, and
(v) Goods (Gas Cylinders) sold but sale-proceeds not accounted for in the daily cash collection statements.
It was in the above background that the assessee-firm had filed its returns of income for the three years under consideration claiming loss of the aforementioned defalcated amount of Rs. 1,92,119.00 (which had been debited in a "cash and goods misappropriation account" in the books) in the following manner :
------------------------------------------------------------------
S.No. Accounting period Assessment year Revenue loss Date of
claimed filing
return
------------------------------------------------------------------
Rs.
1. (i) 1-9-77 to 3-11-77 (First period) 1979-80 7035.00 24-3-82
(ii) 4-11-77 to 31-12-78 (IInd period,) -do- 54368.00 26-3-82
2. 1-1-79 to 31-12-79 1980-81 39876.00 6-5-82
3. 1-1-80 to 31-12-80 1981-82 90840.00 21-6-82
----------
Total Rs. 1,92,119.00
-----------------------------------------------------------------
7. However, the ITO disallowed the aforesaid claims of the assessee-firm on the grounds that (i) the employee was not proceeded against for realising the amounts of defalcation, (ii)the claim was premature and (iii) the loss claimed had not been debited to profit and loss a/c in the years under consideration. The assessee-firm appealed to the CIT(A) for all the three years.
8. During the pendency of the appeals before the CIT(A) Col. N.K. Anklesaria, partner, filed an affidavit to the effect that though civil and criminal proceedings, as stated above, had already been launched against Sri K.K. Shah, yet there was no hope of recovery of any amount from him. He also gave an undertaking to the department that as and when recovery of the embezzled amount or part thereof could be effected the same would be communicated to the department so that the same might be brought to tax as assessee's income under the provisions of Section 41(i) of the IT Act, 1961 (the Act). The act of not reflecting the defalcated amount in the P & L A/c and instead, debiting the same to 'cash and goods misappropriation account' was thus explained in that manner. It was, therefore, contended before the learned CIT(A) on behalf of the assessee-firm that the loss of the amounts of defalcation was allowable as trading loss in the three years under consideration in the manner stated above.
9. In his detailed and well-reasoned order, passed in the appeal for Assessment year 1981-82, the learned CIT(A) held that (i) the assessee-firm had suffered loss of the defalcated amount of Rs. 1,92,119.00 in the normal course of its business, (ii) the loss suffered was in the nature of trading loss and hence allowable as such, (iii) no recovery of the embezzled amount was/had been possible and that (iv) the loss was required to be considered as having been occurred to the assessee when the same came to the knowledge of its partners on 25-9-80. Therefore, relying on Supreme Court decision in the case of Associated Banking Corporation of India Ltd. v. CIT [1965] 56 ITR l, the learned CIT(A) directed the ITO to allow the entire embezzled amount of Rs. 1,92,119.00 in Assessment year 1981-82. Accordingly he dismissed assessee's appeals for Assessment years 1979-80 and 1980-81 but allowed its appeal for Assessment year 1981-82. That is how revenue is in appeal against CIT(A)'s order for Assessment year 1981 -82 and the assessee against his order for Assessment years 1979-80 and 1980-81.
10. It. has been mainly urged before us on behalf of the department that since the assessee had not taken appropriate action or steps to realise the defalcated amount and had also not written off the same in its books the same could not have been allowed to it in Assessment year 1981-82. Reliance in this behalf was placed on Gujarat High Court decision in the case of Vithaldas H. Dhanjibhai Bardanwala v. CIT [1981] 130 ITR 95. It was also submitted that excepting the misappropriation of cash in hand the other amounts misappropriated through alteration, manipulation of the account book and other relevant documents had already affected the position of assessee's income and, therefore, those were not required to be further considered as that would amount to double deduction of the same amount.
11. In reply Mr. J.P. Shah, Advocate for the assessee submitted that the CIT(A) has rightly allowed the loss in question in view of the CBDT Circular No. 36-D(XLVII-20) [F.No. 10/48/65-IT (A-I), dated 24-11-65]. It was further submitted by the learned counsel that since the department has already accepted CIT(A)'s order in respect of Assessment years 1979-80 and 1980-81 it should not be open to it to challenge the order for Assessment year 1981-82 and that too to the extent of Rs. 90,840 only thereby conceding the allowance of the rest of the amount of Rs. 1,01,279. In the end it was contended that the case relied upon by the learned D.R. was not applicable to the facts of the instant case and, instead, the Supreme Court decision, relied upon by the CIT(A), covers the issue involved here.
12. In our opinion the learned CIT(A), in his very well written order, has decided the issue, involved in these appeals, in a most judicious and legal manner. It is not in dispute that as a result of the act of defalcation/embezzlement committed by its cashier-curn-accountant, the assessee had suffered a loss of Rs. 1,92,119.00, over a period of three years, in the normal course of its business. On the face of it the loss suffered would be a trading loss and this position was not challenged before us. The pertinent question, however, is as to when a trading loss, like the one in the instant case can be said to be allowable as deduction in the computation of the income of an assessee under Section 8 of the Act.
13. In the case of Associated Banking Corpn. of India Ltd. (supra) the Supreme Court observed that "a claim to deduct an amount lost to the assessee because of embezzlement by his agent does not fall within the description of any allowance under clasues (i) to (xv) of Sub-section (2) (of Section 0 of 1922 Act); to be admissible it must, if at all, fall within Sub-section (1) (of Section 0 of 1922 Act)". As held by Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala (supra) the provisions of Section 0(2)(xi) of the Act of 1922, insofar as they required actual writing off the concerned debt as irrecoverable in the books of account of the assessee, are in pari materia with the present provisions of Section 6(2)(i)(b). It, therefore, follows that the fulfilment of the requirement of writing off the concerned debt in the books of account is a condition precedent for the allowance thereof under Section 6(2)(i)(b) but certainly not for a claim to deduct an amount lost to the assessee because of embezzlement by his agent or employee, as the case may be.
14. A loss occasioned from embezzlement must stand at a footing different from the loss resulted from a debt rendered irrecoverable for the purposes of application of the provisions of Section 6(2)(i)(b). The distinction between the two is fine but real. For the allowance of the former what is required is that it must be established that the trading loss of that nature has been suffered by the assessee. Once that fact is established the question of allowance thereof in a particular Assessment year would arise. And that question now stands answered by the circular of the CBDT which requires the IT authorities to treat loss by embezzlement by employees as incidental to business and to allow the same as deduction in the year in which it is discovered. In issuing this circular the CBDT has taken into consideration the Supreme Court decisions in the cases of Badridas Daga v. CIT [1958] 34 ITR 10 and Associated Banking Corporation of India Ltd. (supra). The fulfilment of requirement of writing off the same in books of account is thus not a condition precedent for allowance of such a loss, as held by the Supreme Court in the later decision. For the allowance of the later i.e. bad debt, the writing off of the concerned debt in the books of account is a condition precedent for its allowability, as held by the Gujarat High Court in Vithaldas H. Dhqnjibhai Bardanwala' s case (supra).
15. In the instant case the fact of loss by embezzlement by its employee, Shri K.K. Shah, came to the knowledge of assessee in September 1980. The loss by embezzlement by Shri K.K. Shah was thus discovered by the assessee in Assessment year 1981 -82. The assessee did not simply rest with that discovery but it tried to realise the lost amount by obtaining a post-dated cheque dated 1-12-1980 from its said employee. The cheque was, however, dishonoured on 4-12-80. The assessee immediately appointed a firm of C.As to investigate into extent of embezzled amount. Criminal and civil litigations were launched, though at a later stage. Nothing has been reportedly recovered so far by the assessee from its said employee. On these facts and under these circumstances we are convinced that the learned CIT(A) has rightly held that the entire amount of embezzlement is allowable in Assessment year 1981-82 and not in earlier Assessment years.
16. It had also been urged on behalf of the assessee that whereas the CIT(A) had allowed the entire amount of loss by embezzlement at Rs. 1,92,119.00 in Assessment year 1981-82, the revenue has challenged the said loss to the extent of Rs. 90,840 only meaning thereby that the department had accepted CIT(A)'s order to the allowance of loss of Rs. 1,01,279 in this year. In our opinion the mistake of mentioning the figure of loss at Rs. 90,840 instead of that at Rs. 1,92,119.00 allowed by CIT(A) was a bona fide mistake of fact committed in good faith by the officer drafting the grounds of appeal. We have not been influenced with such mistake in deciding this appeal in the manner we have done and in view of the findings recorded and conclusions arrived at by us above we see no necessity of further comments on the point.
17. We, however, find some force in D.R.'s argument that the assessee-firm should not get double deduction of the same amount of embezzlement or part thereof which might have resulted, firstly through the manipulated entries in the relevant books and records and secondly under the order of the CIT(A) as confirmed by us. Though we do not visualise the possibility of a double deduction having been given by the ITO in compliance of the order of the learned CIT(A) as he may reasonably be expected to have been alive to that aspect while determining the loss by embezzlement, at assessment stage, yet to protect the interest of revenue we direct the ITO to reconsider that aspect of the case while giving effect to this order. With these observations we would like to dismiss revenue's appeal.
18. Now coming to assessee's appeals for Assessment years 1979-80 and 1980-81, we find that those are barred by limitation by 729 days i.e. almost two years. Ordinarily such an inordinate delay hardly deserves condonation. But the peculiar facts attending on this inordinate delay require the exercise of our discretion in a judicial and judicious manner.
19. Through his affidavit dated 27-7-90 filed in support of assessee's applications for condonation dated 20-1-88, which was filed along with the appeals, Col. N.K. Anklesaria, partner, has solemnly affirmed that since the entire amount of loss by embezzlement had been allowed by the CIT(A) in Assessment year 1981-82, the assessee had not considered the necessity of filing the appeals for Assessment years 1979-80 and 1980-81. It was only on the receipt of the notice under Section 52(4) by the assessee on 16-1-88 from the Registry of the Tribunal that the assessee came to know that the department had filed the appeal against CIT(A)'s order for Assessment year 1981 -82. Therefore, in order to safeguard its interest for allowabil-ity of the proportionate loss in Assessment years 1979-80 and 1980-81, in case the Tribunal happened to take the view that loss was allowable in three years and not in one year but in the absence of appeals for the earlier, two years the Tribunal would not be in a position to award proper relief to ihe assessee, the appeals for Assessment years 1979-80 and 1980-81 were filed. In the fact and circumstances of the case the assessee, in our opinion, could have entertained a bona fide belief that since the entire loss had been allowed by the CIT(A) in Assessment year 1981-82, it was not required to file appeals for Assessment years 1979-80 and 1980-81. Board's circular, cited supra, could have strengthened such a belief. The late service of the notice under Section 52(4) issued in Revenue's appeal also could have contributed to the late filing of appeals by the assessee-firm. Looking to all these facts and circumstances we feel inclined to accept assessee's explanation and condone the delay in filing its appeals. Delay is accordingly condoned.
20. But the condonation of delay on principles confers no benefit upon the assessee. The order passed by the CIT(A) for Assessment year 1981-82 having been upheld by us thereby allowing the entire loss by embezzlement in that year, the appeals preferred by the assessee are bound to fail.
21. In the result, appeals of both the parties are dismissed.