2022 (7) TMI 171 - AT - Income Tax

Appeal granted for embezzlement loss deduction in 2008-09 assessment year. Loss deemed deductible when recovery became impossible.

The Tribunal allowed the appeal, permitting the deduction of the embezzlement loss in the relevant assessment year 2008-09. The assessee's claim for the ... Disallowance on account of written off relating to embezzlement - amount embezzled from account by way of forged cheques by employee of the assessee company - HELD THAT:- As decided in Associated Banking Corporation of India [1964 (10) TMI 7 - SUPREME COURT] held that loss must be deemed to have arisen only when the employer comes to know about it and realized that the amount embezzled cannot be recovered, no doubt, it came to its knowledge prior. We noted that in the present case also, the assessee came to know of embezzlement in 2001-02 but he tried his level best for recovery of embezzled amount by filing police complaints and even the matter was referred to CBI by filing FIR against the accused persons as noted above. The assessee also pursued the matter with the Banking Ombudsman and the bank officials, when finally everybody refused and there was no chance of recovery, the assessee reversed this amount in the accounts of the assessee for assessment year 2008-09, when finally discovered that this amount is not recoverable. Hence, in such circumstances, we are of the view that the loss on account of embezzlement claimed by assessee is allowable in this year - Appeal of assessee allowed. Issues Involved:1. Disallowance of embezzlement loss claimed by the assessee.Issue-wise Detailed Analysis:1. Disallowance of Embezzlement Loss:Facts of the Case:The assessee, engaged in trading automobile spare parts, claimed a write-off of Rs.1,07,35,908/- due to embezzlement discovered during the financial year 2001-02. The embezzlement involved forged cheques withdrawn from the company's account at the Central Bank of India. Despite lodging complaints with the Chennai City Police and pursuing the matter with the bank and the Banking Ombudsman, the bank denied responsibility. The company ultimately wrote off the amount in the financial year 2007-08, relevant to the assessment year 2008-09.Assessment Officer's (AO) Stand:The AO did not dispute the embezzlement's occurrence but disallowed the claim, arguing that the loss should have been claimed in the assessment year 2002-03 when the embezzlement was discovered.Commissioner of Income Tax (Appeals) [CIT(A)]'s Decision:The CIT(A) upheld the AO's decision, citing CBDT Circular No.035D (XL VII-20), F.No.10/48/65-IT(AI) dated 24.11.1965, and judicial precedents. The CIT(A) concluded that the loss should be claimed in the year of discovery, which was 2001-02, not 2008-09.Tribunal's Analysis and Judgment:The Tribunal reviewed the facts and legal precedents, including the CBDT Circular and judgments from the Hon'ble Supreme Court and High Courts. The Tribunal noted that the loss should be allowed as a deduction in the year it is discovered and when it is realized that the amount cannot be recovered. Despite discovering the embezzlement in 2001-02, the assessee continued efforts to recover the amount until March 2008. The Tribunal emphasized that the loss is deemed to have occurred when it is realized that recovery is not possible.Key Legal References:- CBDT Circular No.035D (XL VII-20), F.No.10/48/65-IT(AI) dated 24.11.1965: Loss by embezzlement should be allowed as a deduction in the year it is discovered.- Hon'ble Supreme Court in Associated Banking Corporation of India Ltd. vs. CIT, 56 ITR 1: Loss must be deemed to have arisen when the employer realizes that the embezzled amounts cannot be recovered.- Hon'ble Jammu & Kashmir High Court in J and K Bank Ltd.: The term 'discovered' means realizing that the embezzled amount cannot be recovered, not merely when the embezzlement is detected.Conclusion:The Tribunal concluded that the assessee legitimately wrote off the embezzled amount in the assessment year 2008-09, as it was the year when it was finally realized that the amount could not be recovered. Thus, the Tribunal allowed the appeal, permitting the deduction of the embezzlement loss in the relevant assessment year 2008-09.Final Order:The appeal of the assessee is allowed, and the embezzlement loss is deductible in the assessment year 2008-09.Pronouncement:The order was pronounced in the open court on 30th June 2022 at Chennai.