2017 (11) TMI 1346 - AT - Income Tax

Tribunal allows deletion of bogus purchases, CFO's expenses; Embezzlement losses deductible

The Tribunal upheld the CIT(A)'s decision to allow the deletion of the addition on account of bogus purchases and the deletion of disallowance on account ... Embezzlement loss due to siphoning of funds of assessee company by the employees - whether a business loss? - Held that:- No infirmity in the order passed by the Ld.CIT(A) in holding that the embezzlement loss due to siphoning of funds of assessee company by the employees is a business loss allowable u/s. 28 of the Act. The fact that there is embezzlement in the assessee company is not in dispute. The fact that the employees have siphoned off the funds of the assessee company and the assessee has filed criminal complaints against the employees for the frauds committed by them is also not in dispute. Thus, the order passed by the Ld.CIT(A) is a well-reasoned order based on the reliance of various High Courts including the Jurisdictional High Court and the Supreme Court. None of the findings of the Ld.CIT(A) have been controverted by the Revenue. In the circumstances we uphold the order of the Ld.CIT(A) and rejected the grounds of Revenue. Issues Involved:1. Deletion of addition on account of bogus purchases.2. Deletion of disallowance on account of traveling expenses incurred by the CFO and her family members.Issue-wise Detailed Analysis:1. Deletion of Addition on Account of Bogus Purchases:The Revenue contested the deletion of an addition of Rs. 1,08,80,401/- by the CIT(A), which was made by the Assessing Officer (AO) on the grounds of bogus purchases. The AO treated the purchases from four parties as unexplained expenditure, citing that these parties were providing accommodation entries without actual transportation of goods, as discovered by the Sales Tax Department. The assessee argued that these transactions were part of a larger embezzlement scheme by senior employees, including the CFO, who misappropriated company funds and recorded bogus transactions in the company's books. The CIT(A) accepted the assessee's contention, supported by FIR and charge sheets filed by the police, which detailed the fraudulent activities and misappropriation of funds by the employees. The CIT(A) concluded that the loss due to embezzlement is a business loss deductible under Section 28 of the Income Tax Act. The Tribunal upheld the CIT(A)'s decision, noting that the loss was indeed a business loss, as it arose from the carrying on of the business and was incidental to it. The Tribunal found no infirmity in the CIT(A)'s order, which was based on various judicial precedents, including decisions from the Supreme Court and High Courts.2. Deletion of Disallowance on Account of Traveling Expenses:The AO disallowed traveling expenses of Rs. 15,32,573/- incurred by the CFO and her family members, stating that these were personal expenses and not for business purposes. The assessee contended that these expenses were part of the embezzlement scheme by the CFO. The CIT(A) accepted this explanation, treating the embezzlement as a business loss deductible under Section 28 of the Act. The Tribunal upheld the CIT(A)'s decision, agreeing that the loss due to embezzlement by employees is an allowable business loss. The Tribunal noted that the police investigation and charge sheets corroborated the assessee's claim of fraud and misappropriation by the employees, which included the fraudulent traveling expenses.Conclusion:The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order that the losses due to embezzlement by employees, including bogus purchases and personal traveling expenses, are deductible as business losses under Section 28 of the Income Tax Act. The Tribunal found the CIT(A)'s decision well-reasoned and based on substantial judicial precedents, and the Revenue failed to controvert the findings effectively.