RBI-guided banking accounts and embezzlement loss were both treated as allowable business positions, defeating the revenue challenge.

Accounts maintained by a banking assessee in accordance with binding RBI directions could not have the provision for bad and doubtful debts disallowed merely on the Assessing Officer's contrary view; the deletion of the addition was upheld. Loss arising from embezzlement was treated as an incidental business loss allowable in the year of discovery, and that allowance was also sustained. On both issues, the challenge failed and no substantial question of law arose.

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Issues: (i) Whether the addition made on account of provision for bad and doubtful debts was sustainable when the assessee maintained accounts in accordance with Reserve Bank of India guidelines and the relevant banking law had overriding effect; (ii) Whether loss arising from embezzlement could be allowed as a deductible business loss in the year of discovery.

Issue (i): Whether the addition made on account of provision for bad and doubtful debts was sustainable when the assessee maintained accounts in accordance with Reserve Bank of India guidelines and the relevant banking law had overriding effect.

Analysis: The appellate authorities accepted the assessee's method of accounting on the basis that the accounts were maintained according to Reserve Bank of India instructions and that the banking law contained an overriding provision. They also followed binding High Court precedent holding that the claim could not be disallowed on the reasoning adopted by the Assessing Officer.

Conclusion: The addition was not sustainable and the finding stood in favour of the assessee.

Issue (ii): Whether loss arising from embezzlement could be allowed as a deductible business loss in the year of discovery.

Analysis: The Tribunal treated the embezzlement loss as an incidental business loss, relying on the CBDT circular and judicial authority recognising theft or embezzlement loss as allowable when discovered. No legal infirmity in that approach was found.

Conclusion: The embezzlement loss was allowable as a business loss and the finding stood in favour of the assessee.

Final Conclusion: No substantial question of law arose, and the revenue's challenge to the deletion of the addition and allowance of the loss failed.

Ratio Decidendi: A banking assessee's accounts maintained in accordance with binding RBI directions cannot be disallowed merely on the Assessing Officer's contrary view, and loss caused by embezzlement is allowable as a business loss when discovered.

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