1995 (9) TMI 103 - AT - Income Tax

Tribunal denies deduction for embezzlement not discovered in assessment year. Losses should be claimed in discovery year.

The Tribunal dismissed the appeal, ruling that the embezzlement was not discovered within the assessment year 1985-86, therefore disallowing the claimed ... Amnesty Scheme, Assessing Officer, Penalty Proceedings Issues Involved:1. Charging of interest under section 215 of the Income-tax Act.2. Disallowance of Rs. 15,30,201 claimed on account of alleged embezzlement by the Accountant.Issue-wise Detailed Analysis:1. Charging of interest under section 215 of the Income-tax Act:At the time of hearing, the learned Counsel for the assessee submitted that this ground was merely consequential in nature. The Tribunal directed the Assessing Officer to allow consequential relief, if any, as a result of this order.2. Disallowance of Rs. 15,30,201 claimed on account of alleged embezzlement by the Accountant:Facts of the Case:The assessee is a registered firm deriving income from the manufacture and sale of rolled steel products. For the assessment year 1985-86, the assessee filed its return declaring a net income of Rs. 81,340, which included a debit of Rs. 4 lacs for embezzlement. A revised return was later filed, declaring a loss of Rs. 10,48,860, claiming additional embezzlement losses for the preceding three years, totaling Rs. 15,30,201.Assessing Officer's Findings:The Assessing Officer disallowed the claim, stating that the loss had not been discovered and had not become irrecoverable. He also noted inconsistencies in the claim amount and the civil suit filed, which was only for Rs. 11,80,000.CIT (Appeals) Findings:The CIT (Appeals) observed that the partners of the firm were educated and found it inconceivable that such a large amount could be embezzled by an accountant without their connivance. He also noted that only one of the two partners requested for examination was produced. He concluded that it was a case of fraud by the partners in connivance with the accountant and upheld the disallowance.Assessee's Arguments:The learned Counsel for the assessee argued that the embezzlement was discovered in February 1985 and that the Chartered Accountants were only quantifying the amount. He cited various legal precedents and a circular from the Central Board of Direct Taxes, which stated that losses due to embezzlement should be allowed in the year they are discovered.Tribunal's Findings:The Tribunal admitted the judgment of the Additional Senior Sub-Judge, Amloh, which held that the accountant had embezzled the amount. However, it did not admit the report of the Questioned Documents Examiner and the certificate from the Chartered Accountants due to their late submission.Key Points Considered:- The Tribunal found no evidence of collusion between the partners and the accountant.- The Tribunal noted that the embezzlement was discovered at the earliest on 20-7-1985, as indicated by the audit reports and the filing of the FIR.- The Tribunal accepted the principle that embezzlement losses should be allowed in the year of discovery but concluded that the discovery did not occur in the assessment year 1985-86.Conclusion:The Tribunal dismissed the appeal, concluding that the embezzlement had not been discovered within the assessment year 1985-86 and thus, the loss could not be allowed as a deduction for that year.