1982 (4) TMI 117 - AT - Income Tax

Tribunal ruling on embezzlement loss and interest disallowance

The Tribunal upheld the disallowance of the embezzlement loss, ruling it as misappropriation of trade receivables rather than embezzlement. However, the ... Business Deduction Issues:1. Disallowance of loss due to embezzlement by an employee.2. Disallowance of interest on debit balances of partners.Analysis:Issue 1: Disallowance of loss due to embezzlement by an employeeThe case involved an appeal by the assessee, a partnership firm, regarding the disallowance of a loss of Rs. 1,80,356 by the Income Tax Officer (ITO) and confirmed by the Commissioner (Appeals). The loss was a result of embezzlement by the firm's accountant, Mangat Ram Sharma, who operated a bogus account under a fictitious name. The fraud was detected, and Sharma surrendered assets worth Rs. 1,90,659 to the firm, leaving a net loss of Rs. 66,863. The assessee claimed this loss as embezzlement, but the department argued it was a case of misappropriation of trade receivables. The Tribunal held it to be a case of embezzlement, citing the Supreme Court's decision in Associated Banking Corporation, emphasizing that until the embezzlement is known and recovery chances are exhausted, a trading loss does not occur. The Tribunal confirmed the order disallowing the loss.Issue 2: Disallowance of interest on debit balances of partnersThe second issue pertained to the disallowance of interest amounting to Rs. 39,722 by the ITO, which was reduced to Rs. 35,240 by the Commissioner (Appeals). The disallowance was based on debit balances of four partners and a loan advanced to another partner without charging any interest. The Tribunal noted that the assessee had a credit facility with a supplier, and the partners withdrew funds from this facility, resulting in debit balances. The Tribunal directed the ITO to reconsider the disallowance, taking into account the net debit balances of all partners, as some partners had credit balances. The issue was remanded to the ITO for recomputation, and the assessee's contention was treated as allowed for statistical purposes. As a result, the appeal was partly allowed.In conclusion, the Tribunal upheld the disallowance of the embezzlement loss and directed a reassessment of interest disallowance based on net debit balances of all partners.