TaxTMI 
TaxTMI 
2004 (10) TMI 64
X X X X Extracts X X X X
X X X X Extracts X X X X
....s a firm deriving income from the running of oil mill, khandsari business and the running of ice and cold storage plant. It maintains its accounts on calendar year basis. For its business, it maintains depots at various places including Calcutta, Cuttack and Haldwani. At Haldwani, the depot is utilized both as sales outlet and as purchasing agency. The depot is in the charge of a manager, assistant manager and an accountant. Some time in October 1977, the supplies of raw materials from the Haldwani depot, became irregular. While trying to find out the reasons for this irregularity of supplies, the assessee-firm came to discover considerable embezzlement at the said depot by the manager, assistant manager and the accountant. Accordingly, an employee was deputed for detailed examination of the accounts and ascertaining the extent of the embezzlement. The said employee, Shri Har Govind, completed the preliminary investigation and arrived at a rough figure of Rs. 8,50,000 as the embezzled amount. In the meanwhile the manager, the assistant manager and the accountant appeared before the partners of the assessee-firm and confessed having done the embezzlement in question. Accordingly, th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as expenses for appearing before the income-tax authorities as it pertains to retainership, etc., and even if the expenses in question was not allowable under section 37 of the Act they would be allowable under section 28 of the Act. Feeling aggrieved by the said order the Revenue preferred an appeal before the Appellate Tribunal. The Tribunal had allowed the appeal of the Revenue by holding that even if the embezzlement had taken place but the extent of the embezzlement became known to the applicant only on July 7, 1979 when the auditors submitted their report to it and as the aforesaid date falls beyond the previous year under consideration and as also the date of filing of the civil suit i.e., April 21, 1979 falls beyond the previous year under consideration it is not possible to hold that the embezzlement which took place resulted in a trading loss to the assessee during the previous year under consideration. The Tribunal had further held that the sum of Rs. 15,876 was hit by the provisions of section 80VV of the Act and, therefore, it could not have been allowed as deduction. We have heard Sri Rithik Upadhyaya learned counsel for the applicant, and Sri Shambhoo Chopra, l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed on through agents, cashiers, clerks and peons. If employment of agents-is incidental to the carrying on of business, it must logically follow that losses, which are incidental to such employment, are also incidental to the carrying on of the business. Human nature being what it is, it is impossible to rule out the possibility of an employee taking advantage of his position as such employee and misappropriating the funds of his employer, and the loss arising from such misappropriation must be held to arise out of the carrying on the business and to be incidental to it. The apex court in the case of Associated Banking Corporation of India Ltd. v. CIT [1965] 56 ITR 1 has held that it is wrong to say that irrespective of other considerations, as soon as an embezzlement of the employer's funds takes place, whether the employer is aware or not of the embezzlement, there results to trading loss. So long as there is a reasonable prospect of recovery of the amounts embezzled, trading loss in a commercial sense cannot be deemed to have resulted. Embezzlement of funds by an agent, like a speculative adventure, does not necessarily result in loss immediately when the embezzlement takes p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee in preparation of the final accounts in such a situation, so far as loss was concerned, detection was not relevant. The loss caused to the assessee by embezzlement during the relevant previous year was allowable as deduction in the computation of the income in that previous year itself. Applying the principles laid down in the aforesaid cases to the facts of the present case, we find that even though the applicant has come to know about the embezzlement having taken place in its Haldwani depot some time in October, 1977, in the preliminary investigation made by Shri Har Gobind, an employee of the applicant, a rough figure of Rs. 8,50,000 was arrived at as embezzled amount. However, the exact embezzlement loss of Rs. 11,17,014 which the applicant is claiming as business loss during the assessment year 1978-79 came to be known to it only on July 7, 1979 when M/s. S.M. Gupta and Co., chartered accountant who have been appointed to investigate and find out the exact amount of embezzlement had submitted the report. Thus, in the instant case it would be treated that the applicant had discovered the loss of Rs. 11,17,014 only on July 7, 1979 and not prior to it. In this view of ....