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2016 (9) TMI 958 - AT - Income TaxDisallowance on account of embezzlement of cash by an employee - Held that:- For the purpose of claiming a debt as bad, the conditions prescribed u/s 36(2) of the Act have to be complied with. In the case before us, the conditions prescribed u/s 36(2) of the Act were not complied with, therefore, the claim of the assessee cannot be allowed as bad debt. However, it is a loss suffered in the course of business activity and it is inevitable loss in the hands of the assessee. When the assessee trusted Shri Arumugamswamy and allowed him to manage the day-to-day affairs, embezzled the cash to the extent of ₹ 240 lakhs. The net embezzled amount comes to ₹ 1,86,24,839/-. This Tribunal is of the considered opinion that the embezzled cash by Shri Arumugamswamy in the course of business activity has to be allowed as business loss. In view of the above, this Tribunal is unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to allow the embezzled cash of ₹ 1,86,24,839/- by Shri Arumugamswamy as business loss. Addition towards excess stock - Held that:- During the course of search operationo, the Revenue authorities found excess stock in the showroom of the assessee. Both the assessee and the Revenue valued the excess stock by reducing the gross profit margin from MRP value of the stock available at the end of the financial year. The Assessing Officer has also taken 14% as gross profit on the tag price for the purpose of computing the value of the stock. As rightly submitted by the ld. Representative for the assessee, while arriving at the excess stock, the Assessing Officer instead of 14% has adopted 20% as gross profit ratio which resulted in the excess stock of ₹ 3,25,16,473/-. Therefore, this Tribunal is of the considered opinion that the addition of ₹ 88,76,731/- is unwarranted. In view of the above discussion, this Tribunal is of the considered opinion that the CIT(A) has rightly deleted the addition. Therefore, this Tribunal do not find any reason to interfere with the order of the CIT(A) and accordingly, the same is confirmed. Addition on account of fall in gross profit rate - Held that:- It is not in dispute that the assessee has offered excess stock of ₹ 2,36,39,742/- for taxation. This excess stock is nothing but profit of the assessee. Therefore, this excess stock has to be taken into consideration while estimating the gross profit. As rightly submitted by the ld. Representative for the assessee if the excess stock of ₹ 2,36,39,742/- was taken into consideration, the gross profit margin of the assessee would come to 21% which is admittedly more than the average gross profit ratio shown by the assessee @ 18% for the earlier assessment years. Therefore, this Tribunal is of the considered opinion that the CIT(A) has rightly deleted the addition made by the Assessing Officer. This Tribunal do not find any reason to interfere with the order of the CIT(A) and accordingly, the same is confirmed.
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