Income Tax Appellate Tribunal - Amritsar
Income Tax Officer vs J And K Bank Ltd. [Alongwith Ita Nos. ... on 9 March, 2005
Equivalent citations: (2005)94TTJ(ASR)836
ORDER
Joginder Pall, A.M.
1. This is a bunch of six appeals--all filed by the Revenue against the respective orders of CIT(A), Jammu, with Hqrs. at Amritsar for the assessment years mentioned in the caption of this order. Since the issues involved in all these appeals are common, these were heard together and are being disposed of by this consolidated order for the sake of convenience.
2. The first common issue raised in all these appeals is that the learned CIT(A) was not justified in allowing the deduction of loss of Rs. 2,24,54,054 for the asst. yr. 1982-83 (amount of loss varies for other assessment years) as trading loss, being the difference between the cost price and the market value of securities. The facts of the case are that the assessee is a banking company. As per Section 6 of the Banking Regulation Act, 1949, all banks have to maintain a specified percentage of the deposits in securities to meet the statutory liquidity requirement (in short SLR). In order to meet such statutory requirements, banks invest part of the deposits in the form of securities. The assessee bank also maintained certain percentage of deposits in the securities. Prior to asst. yr. 1982-83, the assessee used to value these securities at book/face value. However, for the assessment year under reference, the assessee changed the method of valuation of the closing stock of securities and started valuing the closing stock either at the cost or market price, whichever was less. As a result of change in the method of valuation of securities, the assessee claimed loss of Rs. 2,24,54,054 for the asst. yr. 1982-83. Similar loss was claimed in the subsequent assessment years. However, while completing the assessment for the asst. yr. 1982-83, the AO observed that the investment in securities was not stock-in-trade as the same have been treated as capital investment in the earlier years. Therefore, he was of the view that loss arising on account of change in the method of valuation of the securities could not be allowed as trading loss. The assessee had relied on various judgments reported in Indo-Commercial Bank Ltd. v. CIT (1962) 44 ITR 22 (Mad), Investment Ltd. v. CIT (1970) 77 ITR 533 (SC), Bank of Cochin Ltd. v. CIT (1974) 94 ITR 92 (Ker), V. Hallay Mathew v. State of Kerala and Anr. (1971) 79 ITR 72 (Ker) and CIT v. National & Grindlays Bank Ltd. (1984) 145 ITR 457 (Cal) where the bona fide change in the method of valuation of closing stock which was consistently followed in the subsequent years, was accepted. Reliance was also placed on the decision of Tribunal, Chandigarh Bench, in the case of State Bank of Patiala v. ITO (1982) 67 Taxation 7 (Chd), where even the securities which were held as investments in the earlier assessment years and subsequently, the assessee changed the method of valuation of closing stock either at cost or market price, whichever was less, was accepted by the Tribunal. None of these judgments were followed by the AO and the reasons for the same were also not given. The only reason given by the AO for disallowing the loss was that securities were held as investments and not as stock-in-trade in earlier years, and, therefore, change in the method of valuation of the closing stock could not be permitted. The same reasoning was adopted for the various other assessment years.
3. Being aggrieved, the assessee impugned the disallowance of loss for the various years in appeals before the CIT(A). It was submitted before the CIT(A) that the AO was not justified in holding that the investment made in securities in the earlier years were not held as stock-in-trade and were shown as capital investment. The assessee had submitted three annual reports of the earlier assessment years where securities were shown as stock-in-trade and net profit realised on sale of such securities was shown as business profit. Thus, it was submitted that findings recorded by the AO were factually wrong. It was submitted before the CIT(A) that the assessee being a banking company, investments in securities were essential part of the banking business. It was submitted that as per Banking Regulation Act, the assessee was under statutory obligation to keep part of the deposits in the form of securities for meeting liabilities and also for ensuring liquidity. Relying on the judgment of Kerala High Court in the case of Josna Bank Ltd. v. CIT (1974) 97 ITR 72 (Ker), it was argued that holding of securities by a bank was an essential part of banking business and was therefore, constituted stock-in-trade.
4. Proceeding further, the assessee had also argued that method of valuation of securities which was bona fide and based on sound accounting principles to value the closing stock either at cost price or market price whichever was less, was permitted, as the same method had been followed consistently and regularly in all the subsequent assessment years. Reliance was also placed on the judgment of Privy Counsel in the case of Punjab Co-operative Bank Ltd. v. CIT (1940) 8 ITR 635 (PC) and other judgments reported in Indo-Commercial Bank (supra), Investment Ltd. v. CIT (supra), Bank of Cochin Ltd. (supra), Josna Bank (supra) and National & Grindlays Bank Ltd. (supra), where change in method of valuation of closing stock which was consistently followed in the subsequent years was accepted. The learned CIT(A) considered these submissions and held that the findings of the AO that investments in securities were held as capital investments in the earlier years were factually wrong. He observed that the securities were always held as stock-in-trade and resultant surplus from transactions of purchase of securities had been accounted for as profit. He also observed that the change in the method of valuation of closing stock which was subsequently followed regularly was in accordance with the ratio of the various judgments. He, therefore, held that such loss was a trading loss and assessee was entitled to such deduction. The relevant findings of the CIT(A) recorded in the impugned order for the asst. yr. 1982-83, are as under :
"From the various case-laws quoted by the learned counsel, the following position emerges :
(a) Under the Banking Regulation Act, 1949, investment in approved Government securities is considered at par with holding of gold, cash etc. and its purpose is to ensure that specified percentage of deposits on account of time and demand liabilities are kept in a liquid form or in such a form that the liquidity can be realised forthwith. The intention of the Reserve Bank to fix this percentage is to ensure that whenever somebody comes to withdraw the money, it can get the money back. In these days, banks are not expected to keep only cash and securities, As a banking company deals in money, the cash and securities will have to be considered at par and, therefore, they will have to be considered as stock-in-trade of the banking company.
(b) The appellant company had always treated the investment in securities as stock-in-trade and that is why the profit on the sale of investment securities was always credited to the P&L a/c.
(c) The appellant company, prior to asst. yr. 1982-83, had valued the investment in stock at cost, but in the assessment year under appeal, it decided to change the method of valuation of investment in securities to bring in line with the provision in the Banking Regulation Act wherein it is provided that for deciding whether a particular banking company was maintaining cash and unencumbered approved securities at a specified percentage of total deposits, the market value of the securities at the close of the business was required to be taken into consideration. In other words, for deciding whether the banking company was strictly following the liquidity ratio, the market value of the securities at the close of the business is required to be seen and not the face value of the securities. Thus, the change made by the appellant company for valuing the investment in securities will have to be considered as a bona fide change and in accordance with the intention of the Banking Regulation Act of 1949.
(d) In ITA No. 327 of 1978-79, 124 of 1979 and 380/1978-79, in the case of State Bank of Patiala v. ITO Company Circle, Patiala, the learned Tribunal while deciding appeals for the asst. yrs. 1975-76 and 1976-77, had a case which was even worse than the appellant's case because in that case the investment in securities was always considered by that assessee as capital investment but during the accounting period relevant to the assessment years under appeal, they considered the investment in securities as stock-in-trade and the learned Tribunal allowed the valuation of securities at cost or market price whichever was lower. In that case, the profit on sale of investment securities in earlier years was considered as capital gains and not as a trading profit. As per the report of the IAC of Income-tax, Jammu Range, Jammu, dt. 27th March, 1985, the Hon'ble Punjab & Haryana High Court had not admitted the appeal of the Department against the decision of the Tribunal in the case of State Bank of Patiala. Thus, the decision of the Chandigarh Bench. In the case of State Bank of Patiala has become final as far as the point at issue in the present appeal is concerned.
The IAC, Jammu Range, Jammu, vide his letter dt. 27th March, 1985, had also pointed out that in the case of State Bank of Hyderabad, the Department had considered the securities held by the bank as stock-in-trade and that bank's claim for the asst. yr. 1976-77 to 1982-83, had been allowed by the assessing authorities.
The Tribunal, Calcutta Bench-E, Camp Mangalore, in the case of Corporation Bank Ltd., vide ITA No. 195-200/279 for the asst. yrs. 1969-70 to 1975-76, held vide order dt. 23rd Sept., 1980, that it was settled law that the assessee had a right to value his closing stock at cost price or market price, whichever was lower. According to the learned Tribunal, their Lordships of the Supreme Court made it clear in the case of Chainrup Sampatram v. CIT (1953) 24 ITR 481 (SC) and Indo Commercial Bank (supra) that the option exercised by an assessee detrimental to Revenue could never be the basis for denying that option. Bearing this principle in mind, the learned Tribunal allowed the bank's claim of loss claimed on the basis of valuation of closing stock at market price.
Keeping in view the legal position which has emerged in the earlier paragraphs, the ITO could not be considered justified in not allowing loss of Rs. 2,24,54,054 on account of revaluation of investment in securities. Accordingly, the addition made by him is deleted."
This order was followed in all the subsequent years. The Revenue is aggrieved by the orders of the CIT(A). Hence, these appeals before us.
5. The learned Departmental Representative strongly relied on the orders of AO. He submitted that in the case of CIT v. Lakshmi Vilas Bank Ltd. (1997) 228 ITR 697 (Mad), the Hon'ble Madras High Court held that interest on investment made in debentures in accordance with Banking Regulation Act was not interest on securities in terms of Sections 18 and 193 of the IT Act, so as to go out of purview of Interest-tax Act. Thus, he submitted that securities were held as investment and assessee was not correct in claiming that the same were stock-in-trade. Thus, he submitted that the AO was justified in disallowing the loss claimed on account of revaluation of securities by changing method of accounting. He submitted that the surplus realised or loss suffered on account of transactions of securities was liable to be treated as capital gain or capital loss and not as business loss.
6. The learned counsel for the assessee Sh. K.K. Mehra, on the other hand, heavily relied on the orders of CIT(A) and reiterated the submissions made before the authorities below. He submitted that the assessee was engaged in the business of banking. As per Banking Regulation Act and guidelines issued by the RBI, the assessee was under a statutory obligation to keep specified percentage of deposits in Government approved securities valued at price not exceeding current market price. He submitted that since securities were intrinsic part of assessee's business, profit therefrom was a business profit and not a capital gain or loss. He further submitted that findings recorded by the AO that in the earlier years, securities held by the assessee were shown as investment was factually wrong. During the course of hearing of the appeal before the CIT(A), the assessee had produced annual reports of the last three years, where net profit on sale of investments in securities was shown as profit and not as capital gain. If it was not a stock-in-trade, then the profit on sale of investments of securities would have not been credited to the P&L a/c. He relied on the following judgments in support of his contention that the securities held by a bank under the Banking Regulation Act and as per RBI guidelines, were incidental to carrying on banking business and the profit earned thereon was a business profit :
(i) Josna Bank Ltd. v. CIT (supra);
(ii) Bank of Cochin Ltd. v. CIT (supra);
(iii) United Commercial Bank v. CIT (1999) 240 ITR 355 (SC);
(iv) CIT v. Corporation Bank (1988) 174 ITR 616 (Kar);
(v) CIT v. Ramnathampur Distt. Co-operative Central Bank Ltd. (2002) 255 ITR 423 (SC);
(vi) Dy. CIT v. Nedungadi Bank Ltd. (2004) 89 TTJ (Coch) 711 : (2003) 85 ITD 1 (Coch);
(vii) CIT v. Karnataka State Co-operative Apex Bank (2001) 251 ITR 194 (SC); and
(viii) CIT v. Bank of Baroda (2003) 262 ITR 334 (Bom).
Thus, he submitted that the securities were held as stock-in-trade. He submitted that for the purpose of income-tax assessments, closing stock has to be valued either at cost or market price whichever was less. He, therefore, submitted that the change in method of valuation of closing stock of securities was rightly made, bona fide and acceptable. He submitted that the same method of accounting has been consistently followed in all the subsequent years. He also relied on the following judgments in support of his contention that if the change in method of valuation of closing stock is consistently being followed, the same is permissible :
(i) CIT v. Corporation Bank Ltd. (supra);
(ii) CIT v. Dalmia Cements (Bharat) Ltd. (1995) 215 ITR 441 (Del);
(iii) Bank of Cochin Ltd. v. CIT (supra);
(iv) National & Grindlays Bank Ltd. (supra);
(v) Para 22 of Tribunal decision in the case of Dy. CIT v. Nedungadi Bank Ltd. (supra);
(vi) Page No. 4975 of Chaturvedi & Pithisana's Income Tax Law, Fifth Edn.;
(vii) CIT v. Bharat Commerce & Industries Ltd. (1999) 240 ITR 256 (Del); and (via) CIT v. Travancore Cochin Chemicals Ltd. (2000) 243 ITR 284 (Ker).
He further submitted that whenever the assessee earned profit running into crotes on account of change in the method of valuation of closing stock, the same was duly reflected in the returns filed for the subsequent assessment years. Thus, he submitted that the learned CIT(A) was justified in allowing the loss for the various assessment years claimed on account of revaluation of securities.
7. We have heard both the parties at some length and given our thoughtful consideration to the rival submissions with reference to the facts, evidence and material on record. It is not in dispute that the assessee is engaged in the business of banking. As per Banking Regulation Act and guidelines issued by the RBI, the banks are under statutory obligation to keep specified percentage of their securities in the Government approved securities. Thus, it is statutory obligation on the part of banks to keep such amounts in the specified percentage of the securities and, therefore, forms integral part of banking business. Keeping these deposits in Government securities is not the option of the bank but a business compulsion if it has to carry on banking business. Such measure is intended to provide stability and liquidity to the bank for carrying on banking operations. It is now settled position under law as held by a number of decisions of the various High Courts/Supreme Court that the securities held by the banks constituted their stock-in-trade or investment and consequently, the loss claimed by the banks on the valuation of their securities should be allowed as deduction in computing the taxable profit. The following judgments also support this view :
(i) United Commercial Bank v. CIT (supra);
(ii) CIT v. Corporation Bank (supra);
(iii) CIT v. Nedungadi Bank Ltd. (2003) 264 ITR 545 (Ker);
(iv) Mehsana District Central Co-operative Bank Ltd- v. ITO (2001) 251 ITR 522 (SC); and
(v) The ITAT, Cochin Bench in the case of Dy. CIT v. Nedungadi Bank Ltd. (supra).
Further in the case of CIT v. Karnataka State Co-operative Apex Bank (supra) and Mehsana District Central Co-operative Bank Ltd. v. ITO (supra) it has been held that the interest earned on investments made by a bank form integral part of business income qualifying for deduction under Section 80P(2)(a)(i) of the IT Act, 1961. Thus, it does not leave any doubt in our mind that the holding of securities by a bank constitute integral part of banking business and such securities constitute stock-in-trade.
7.1 As regards the judgment of Hon'ble Madras High Court in the case of CIT v. Lakshmi Vilas Bank Ltd. (supra) relied upon by the learned Departmental Representative, this judgment is with reference to Interest Tax Act, 1974, which is applicable to the interest received by banks and later extended to financial institutions. It was observed by the Madras High Court that where banks show debentures under the head "investments", the debentures are in the nature of securities. Interest on such debentures must be treated as interest on investments, which (all outside the purview of the Interest Tax Act, 1974 and not as interest on loans and advances taxable under the Interest tax Act, 1974. Thus, judgment is in different context and not with reference to the fact' whether securities held by banking company under the statutory obligation formed part of banking business and were stock-in-trade. Further, it may be noticed that earlier in the case of Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT (1996) 218 ITR 438 (SC), Bench comprising of two judges of the Hon'ble Supreme Court held that Government securities coming out of the reserve fund which cannot be easily encashed and which can be utilised only when certain contingencies arise, cannot be considered to be circulating capital or stock-in-trade. The income derived from investment in Government securities placed with the State Bank of India or the RBI cannot be regarded as an essential part of the assessee's banking activity in as much as it does not form part of its stock-in-trade or working capital. However, the Hon'ble Supreme Court in a later judgment in the case of CIT v. Bangalore District Co-operative Central Bank Ltd. (1998) 233 ITR 282 (SC) has taken a view that the income from the investment of any reserves is an integral part of banking activity and, therefore, such income is very much attributable to the activity of banking and such income was eligible for deduction under Section 80P(2)(a)(i) of the Act. Thus, the Supreme Court held that the interest from the investment made in compliance with the statutory provisions to enable it to carry on banking business was profit from banking business. Thereafter, in the case of. CIT v. Karnataka State Cooperative Apex Bank (supra), a larger Bench consisting of three judges of the Supreme Court overruled the earlier judgment in the case of Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT (supra) and affirmed the view taken in the case of CIT v. Bangalore District Co-operative Central Bank Ltd. (supra). In the case of Surat District Co-operative Bank Ltd. v. ITO (2003) 78 TTJ (Ahd)(SB) 1 : (2001) 251 ITR 1 (Ahd)(SB)(AT), Tribunal (Special Bench), Ahmedabad has held that interest on investments made by co-operative banks in Government securities attributable to utilisation of its funds from statutory reserves, income from hiring of safe deposits vaults, fixed deposits with banks, investments in Indira Vikas Patras, Kisan Vikas Patras and other approved modes of investment out of surplus funds available out of working capital including voluntary reserves are an integral part of normal banking activities carried on by the bank and such income is income from banking business. Thus, there is now no controversy about the fact that interest on securities held by the banks under the Banking Regulation Act or as per guidelines of RBI form part of the banking business and are, therefore, stock-in-trade irrespective of the fact whether such investments were made out of capital, surplus funds or voluntary reserves.
7.2 The case of the assessee still stands on stronger footings for the reason that the contention of the assessee that it had always credited surplus realised on the securities as profit, has not been controverted by the Revenue. In fact, the assessee had produced before the CIT(A) annual reports of the last three years to prove that the securities held by the bank were always held as stock-in-trade. In the case of State Bank of Patiala v. ITO Company Circle, Patiala (supra), the securities were shown as investments in the balance sheet. Still the Tribunal, Chandigarh Bench, held that these were stock-in-trade and, therefore, got to be valued either at cost or market price whichever was less. In the case of Josna Bank Ltd. v. CIT (supra), it was held that the transactions of securities of the banking institutions will fall in the nature of trade. Thus, we hold that the learned CIT(A) was justified in treating the securities as stock-in-trade.
7.3 Now the last aspect of the case which requires to be considered is whether change in the method of valuation of closing stock of securities could be accepted by the Department. It is no doubt that earlier the assessee used to value the closing stock of securities at cost. However, this method of valuation of securities was changed in the accounting year under reference as the assessee started valuing the closing stock either at cost or market price, whichever is less. The assessee had also explained that reasons for changing the method of valuation of stock was to bring in line with the provisions in the Banking Regulation Act, as per which market value of the securities at the close was required to be considered whether the bank was maintaining specified percentage in securities or not. Thus, change in the method of valuation of closing stock made by the assessee was as per accounting principles accepted by the Department. It is also not in doubt that the same method of valuation of closing stock has been followed in all the subsequent assessment years. There is no allegation of the Department that change in method of valuation of the closing stock was not bona fide or was with an intention of evading the tax. Now, only question that requires to be considered whether such bona fide change in the method of valuation of closing stock which has been consistently followed in the subsequent assessment years could be allowed and accepted. This issue was considered by the Delhi High Court in the case of CIT v. Bharat Commerce & Industries Ltd. (supra) where it was held that change in the method of valuation of stock is permissible if it is bona fide and the same method is regularly followed thereafter. Loss arising on account of revaluation of stock as per changed method was held to be allowable. The Hon'ble Kerala High Court also considered this issue in the case of CIT v. Corporation Bank Ltd. (supra). In this case, the assessee used to value the securities at cost price in the earlier years. However, by changing the method, the assessee started valuing the securities at market price for the reason that the securities formed stock-in-trade of bank and the bank had incurred loss due to its fall in value. Loss arising on account of change in the method of valuation was not written off in the books of account. On these facts, the Hon'ble Kerala High Court held that writing off of loss was irrelevant and the assessee was justified in changing method of value of stock. While taking such a view, the Hon'ble High Court also referred to the judgment of apex Court in the case of Chainrup Sampatram v. CIT (supra), where it has held that change in the method of valuation of stock can be accepted if such change was bona fide and was, thereafter, continued year after year. In the case of Indo Commercial Bank Ltd. v. CIT (supra) on identical facts, Madras High Court held that change in method of valuation of securities at market price was justified and resultant loss was allowable.
7.4 This issue was also considered by the Tribunal, Cochin Bench, in the case of Dy. CIT v. Nedungadi Bank Ltd. (supra) where the Tribunal has held that the change in method of valuation of closing stock, if it was bona fide and the same method was followed in the subsequent assessment years, would be permissible.
7.5 In the case of CIT v. Travancore Cochin Chemicals Ltd. (supra), the Hon'ble Kerala High Court also took the same view that change in method of valuation of stock was valid where the same method has been followed in the subsequent assessment years.
7.6 Thus, from the detailed discussions in the preceding paragraphs, the position that emerges is that the bona fide change in the method of valuation of closing stock is permissible if the same method has been followed regularly and consistently in the subsequent assessment years. It is not the charge of the Revenue that the same method of valuation was not followed in the subsequent assessment years or change in the method of valuation was not bona fide. Thus, respectfully following the ratio of various judgments cited above, we are of the considered, opinion that the learned CIT(A) was justified in accepting the change in the method of valuation of closing stock and allowing loss claimed by the assessee on account of revaluation of securities for the abovementioned assessment years. Thus, we do not find any merit in the submissions of the Revenue. We confirm the orders of the CIT(A) and reject the respective grounds of appeal of the Revenue for the various assessment years.
8. The next common ground for the asst. yrs. 1983-84 and 1984-85, relates to the fact that the learned CIT(A) was not justified in allowing deduction of Rs. 4,24,000 for the asst. yr. 1983-84 and Rs. 3,20,000 (out of Rs. 3,90,975) being loss on account of embezzlement. The facts of the case for the asst. yr. 1983-84, are that during the course of assessment proceedings for the- asst. yr. 1983-84, the assessee claimed embezzlement loss of Rs. 40,000 in branch at Anantnag which occurred on 4th June, 1982 and was detected on the same day. This fell in the accounting year under reference. However, on complaint made to the police, the culprit was apprehended and the matter was pending before the Court. The AO observed that the loss was premature and, therefore, the same cannot be allowed as deduction.
8.1 As regards the loss of Rs. 2 lakhs at Residency Road, Srinagar, the AO observed that such loss occurred on 1st July, 1981 and was also detected on the same day. The AO observed that the matter was now pending with the sub-Judge, Srinagar. Therefore, the loss was premature. He also observed that the loss occurred in the accounting year relevant to the asst. yr. 1982-83 and was also detected in the same period. Therefore, even if assessee's version was accepted that the loss had been claimed in the year when the same was detected, the assessee was not entitled to the same.
8.2 As regards the loss of Rs. 1.84 lakhs at Kupwara branch, the AO also noted that such loss occurred in December, 1981 and was also detected in the same year. Therefore, the assessee was not entitled to deduction of the same for the reason mentioned for loss at Residency Road branch, Srinagar. Accordingly, the AO disallowed the entire loss of Rs. 4.24 lakhs.
9. As regards the asst. yr. 1984-85, the AO observed that such loss occurred in 8 branches. He disallowed the claims of the assessee on the ground that such claims were premature and in most of the cases, such loss had occurred prior to the assessment year under reference,
10. Being aggrieved, the assessee impugned the disallowance of loss in appeals for both the assessment years before the CIT(A). It was submitted before the CIT(A) that the assessee was entitled to such loss because it was incidental to assessee's business. Reliance was also placed on the two judgments of Hon'ble Supreme Court in the cases of Badridas Daga v. CIT (1958) 34 ITR 10 (SC) and Associated Banking Corporation of India Ltd. v. CIT (1965) 56 ITR 1 (SC). It was also contended that the assessee had claimed the loss on account of embezzlement for the assessment years under reference when the same had been detected. Reliance was also placed on CBDT's Instructions issued vide Circular No. 35D of 1965, dt. 24th Nov., 1965, as per which it was clarified that the loss of embezzlement by employees should be treated as incidental to business and be allowed as deduction in the year in which it is discovered. The learned CIT(A) considered these submissions and observed that the claim of loss of Rs. 4.24 lakhs for the asst. yr. 1983-84, was justified because the same had been detected in that assessment year and for the asst. yr. 1984-85, the learned CIT(A) observed that out of loss of Rs. 3,90,975, the loss of Rs. 3,20,000 was detected during the accounting year under reference. As regards the loss of Rs. 70,976, he observed that the same did not relate to the assessment year under reference because it was detected in the earlier assessment year. He, therefore, sustained the disallowance of Rs. 70,796. The Revenue is aggrieved by the orders of the CIT(A). Hence, these appeals before us.
11. The learned Departmental Representative, heavily relied on the orders of the AO.
12. The learned counsel for the assessee, on the other hand, relied on the orders of the CIT(A). He also relied on the judgment of Hon'ble Gujarat High Court in the case of Dinesh Mills Ltd v. CIT (2002) 254 ITR 673 (Guj), where it has been held that embezzlement loss should be allowed in the accounting year relevant to the assessment year when such loss was in fact discovered.
13. We have heard both the parties and carefully considered the rival submissions. We have also examined the facts, evidence and material placed on record and gone through the orders of the authorities below. The assessee is engaged in the banking business and such business is being run from various branches. The embezzlement loss is incidental to assessee's business and is allowable in view of the judgment of Hon'ble Supreme Court in the case of Badridas Daga v. CIT (supra). However, it is the claim of the assessee that the embezzlement loss is being claimed in the year when the same was discovered. No doubt in the case of Associated Banking Corporation of India Ltd. v. CIT (supra), the Hon'ble Supreme Court has observed that it cannot be said that the loss results at a time when the assessee obtains the knowledge of the same. Still an employee may be persuaded or compelled by process of law or otherwise to restore wholly or partially such ill-gotton amount. Therefore, so long as a reasonable chance of obtaining restitution exists, loss may not in a commercial sense be said to have resulted. However, the CBDT considered the ratio of two judgments of Hon'ble Supreme Court in the cases of Badndas Daga v. CIT (supra) and Associated Banking Corporation of India Ltd. v. CIT (supra) and clarified the position vide their circular dt. 24th Nov., 1965, that the loss by embezzlement by employees should be treated as incidental to business and the same should be allowed as deduction in the year in which it is discovered. Such instructions are binding on the authorities below. By referring to such instructions, the Hon'ble Gujarat High Court in the case of Dinesh Mitts Ltd. v. CIT (supra) held that the embezzlement loss by an employee should be allowed in the year in which it was discovered by the assessee. Therefore, respectfully following the decision of the Hon'ble Gujarat High Court and by referring to the aforesaid instructions of the Board, we hold that the assessee would be entitled to claim deduction of such loss in the year when the same had been detected.
14. Now we find from pp. 13 to 16 of the assessment order for 1983-84 that, out of embezzlement loss of Rs. 4.24 lakhs, the loss amounting to Rs. 40,000 had occurred and was detected in the accounting year under reference. However, the remaining loss of Rs. 3,84,000 relating to two other branches took place in the earlier assessment years and was also detected in the earlier assessment years. The attention of the learned counsel was drawn to the findings recorded by the AO on p. 14 of the assessment order. He could not controvert the findings recorded by the AO which were based on the inspection of the relevant files. Thus, the learned CIT(A) was not justified in allowing embezzlement loss of Rs. 3.84 lakhs for the asst. yr. 1983-84. Accordingly, we set aside the order of the CIT(A) and restrict the deduction to Rs. 40,000 and confirm the disallowance of Rs. 3.84 lakhs. This ground of appeal is partly allowed.
15. As regards the asst. yr. 1984-85, the AO has observed that in almost all the cases, such loss had occurred prior to the previous year. The learned CIT(A) held that only out of Rs. 3,90,975, embezzlement loss of Rs. 70,000 occurred and detected in the earlier year. This finding appears to be contrary to the finding recorded by the AO. In any case, this is a question of fact which can easily be verified, as relevant facts relating to this issue have not been placed before us. We accordingly set aside the order of the CIT(A) and restore the issue to the file of the AO with the direction that the disallowance should be made only in respect of loss which occurred and was detected in the earlier/subsequent year. If the loss related to earlier year, what was detected in the assessment year under reference, the assessee would be entitled to claim deduction for the same. Needless to say that the assessee shall be allowed reasonable opportunity while deciding the matter. We, order accordingly. This ground of appeal is partly allowed for statistical purposes.
16. In the result, the appeals for the asst. yrs. 1983-84 & 1984-85, are partly allowed and appeals for the asst. yrs. 1982-83, 1985-86, 1991-92 and 1988-89 are dismissed.