2001 PLP 2318 (PTD)

Losses by embezzlement by employees. ‑‑Treatment of, for the purposes of income‑tax assessments.‑‑A reference is invited to the instructions on the above subject contained in Board's Circular No.25 of 1939 and Circular No. 13 of 1944. In these circulars it was clarified that losses arising due to embezzlement by employees or due to negligence of employees should be allowed if the loss took place in the normal course of business and the amount involved was necessarily kept for the purposes of the business in the place from which it was lost. Since the above circulars were issued, the Supreme Court has further considered the matter and laid down the law in this regard in the following two cases: (a) Badridas Daga v. CIT (1958) 34 ITR 10 (SC); and (b) Associated Banking Corporation of India Ltd. v. CIT (1965) 56 ITR 1 (SC). In the first case, the Supreme Court has affirmed the view that the loss resulting from embezzlement by an employee or agent of a business is admissible as a deduction under section 10(1) of the Indian Income‑tax Act, 1922 (corresponding to section 28 of the Income Tax Act, 1961), if it arises out of the carrying on of the business and is incidental to it. In the second case the decision is that loss must be deemed to have arisen only‑when the employer comes to know about it and realises that the amounts embezzled cannot be recovered. In the light of the above decisions of the Supreme Court, the legal position now is that loss by embezzlement by employees should be treated as incidental to a business and this loss should be allowed as deduction in the year in which it is discovered. " Reliance is also placed on the Central Board of Direct Taxes Circular No. 14(XI‑35) of 1955, dated April 11, 1955, which reads: "Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the Department; for it would inspire confidence in him that he may be sure of getting a square deal from the Department. Although, therefore, the responsibility of claiming refunds and reliefs rests with the assessee on whom it is imposed by the law; officers should: (a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reasons or other; (b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs. C.B.R. Bulletin, Volume No.l‑‑‑June Quarter 1955, P.25 (printed at page 1435 of Income‑tax Law by Pithisaria and Chaturvedi, fifth edition)‑‑Choksi Metal Refinery v. CIT (1977) 107 ITR 63 (Guj.)." Reliance is also placed on the decision given in Badridas Daga v. CIT (1958) 34 ITR 10 (SC), wherein, it was observed (headnote): "The loss sustained by the appellant/assessee as a result of mis?appropriation by employee/agent was one which was incidental to the carrying on of the business and should, therefore, be deducted in computing the profits under section 10(1) of the Indian Income‑tax Act, 1922. " The observations in Associated Banking Corporation of India Ltd. v: CIT (1965) 56 ITR 1 (SC) are to the following effect: "Loss when to be allowed.‑‑‑That the loss by embezzlement must be deemed to have occurred to the bank after the liquidator came to know about the embezzlement and realised that the amounts embezzled could not be recovered." Heard arguments of learned counsel for both the parties. The order of the Income‑tax Appellate Tribunal is perused to examine the fact whether the petitioner was not entitled to claim deduction in the year 1986‑

87. It appears that the Commissioner of Income‑tax has not properly interpreted the order of the Tribunal. Learned counsel for the Department has submitted that the question of maintainability of the revision petition is not examined by the Commissioner and that the assessee has not filed a valid revision. I have considered over the matter. At this stage, I will not examine the question of maintainability of revision which has to be examined by the Commissioner of Income‑tax. Suffice it to observe the observation that the embezzlement related to earlier year, cannot be claimed in the subsequent year, is contrary to the observations of the apex Court. The petitioner was made aware of the audit report for the loss in the assessment year 1986‑87 and it is on the said amount becoming irrecoverable that a loss could be claimed. In these circumstances, the order passed by the Commissioner of Income‑tax is set aside. It is directed that the Commissioner would consider the entire matter afresh including the maintainability of revision and pass appropriate orders in accordance with law. Writ petition is disposed of accordingly. M.B.A/267/FC ?????????????????????????????????????????????????????????????????????????????????? Order accordingly.