TMI Blog2016 (8) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... - Decided in favour of assessee Treatment to Embezzlement loss - Held that:- The embezzlement claim of the assessee is genuine, legal and the loss there from is allowable. Revenue takes a stand that the assessee should have claimed the entire loss in AY 2010-11. Per contra, the assessee claims that some ray of hope was remaining to recover the part of the amount and to be on a safer side and its commercial wisdom, it was felt expedient to claim 30% for AY 2010-11 and 70% in AY 2011-12. Revenue has no objection in allowing the entire loss in AY 2010-11. This rather proves the assessee’s contention that instead of claiming in one year, by a prudent business decision it was decided to bifurcate the loss as a ray of partial recovery existed. In any case, the embezzlement amount was due from the said employee-manager Shri Rajesh Joshi. Therefore, alternatively, it becomes a debt due from Shri Rajesh Joshi, consequently, the amount is allowable either as embezzlement loss and when ray of partial recovery faded out; relevant bad debt is actually written off and thirdly as a business loss. Thus the embezzlement loss should be allowed in this year. In view of Hon’ble Supreme Court judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeals filed by the assessee and revenue respectively against the orders of the Commissioner of Income-tax (Appeals)-XX, Ahmedabad of even dated 30.09.2014 for AY 2006-07, 2007-08 2009-10 and dated 15.10.2014 for AY 2011-12, respectively. The appeal filed by the Revenue bearing ITA No. 3261/Ahd/2014 and the Cross Objection thereof bearing CO No. 327/Ahd/2014 filed by the assessee are directed against the order of the Commissioner of Income-Tax (Appeals)-XX, Ahmedabad dated 30.09.2014 for AY 2008-09. The appeals for AYs 2006-07, 07-08, 09-10 are framed consequent to reassessment proceedings u/s 147/148; AY 08-09 has been passed u/s 143(3) r.w.s 263 and AY 2011-12 is by way of a regular assessment u/s 143. Since all these appeals involve common issues, these were heard together and are being disposed of by this consolidated order for the sake of convenience. 2. Common grounds raised in the assessee s appeals are as under:- a. Assessment Years: 2006-07, 07-08, 09-10: 1. Ld. CIT (A) erred in law and on facts in dismissing the ground challenging action of AO making reassessment u/s 147 beyond a period of 4 years in absence of any failure on the part of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and amount included in the gross receipts of IRCTC the payee. Assessee being taxable at highest rate of tax Ld. CIT (A) ought not to have disallowed such difference when the license fee payments were made by account payee cheques, duly evidenced with receipts and bank statements, followed with consistent method of accounting all of which supports correctness of the expense incurred by the appellant. 8. Ld. CIT (A) erred in law and on facts in not deleting total disallowance when the appellant is subjected to same tax rate in all the years and income being in the highest slab rate, the manner of accounting at the end of payee cannot effect actual expenditure of the appellant in a particular year when duly audited books of accounts are accepted by AO. Ld. CIT(A) ought to have deleted disallowance u/s 40(a)(ia) of the Act. c. Assessment Year 2011-12:- 9. Ld. CIT(A) erred in law and on facts in: a. Confirming disallowance of ₹ 2,81,38,206/- claimed on account of cash embezzlement b. Confirming disallowance holding embezzlement loss as prior period expenses not appreciating that it is allowable as business loss in the year of claim and need not be claime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quently, the assessments for AYs 2006-07 to 2009-10 were re- opened by issuing notices u/s 148 of the Act on 28.03.2013 on the reason that license fee paid to IRCTC amounted to rendering of managerial and technical services liable for TDS u/s 194J of the IT Act. Since assessee had not deducted requisite TDS u/s 194J, provisions of Sec. 40(a)(ia) of Act were applicable and the license fee payments were to be disallowed. Assessee filed detailed replies raising various contentions to the effect that: a. The reassessment notices were bad in law; all the relevant facts about payment to IRCTC were considered by ld. AO in original assessments framed u/s 143(3). The 148 notices were issued after a period of 4 years from the end of the assessment years. There was no failure on the part of the assessee in disclosing all the relevant primary facts and reasons did not say that there was any failure on the part of the assessee in disclosing primary facts, which has been held by courts to be a mandatory condition in order to issue 148 notice after end of 4 years from the end of relevant assessment year. Consequently reasons were inadequate, without application of mind and perusal of record an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer u/s 147 of the Act. 4.1 The ld. Counsel for the assessee submits that all the original assessments were framed under section 143(3) after detailed scrutiny and calling for various elaborate details including the IRCTC license fee payments. They were duly furnished and after due verification and after proper application of mind, ld. AO took a decision to allow the IRCTC expenses. Thus, the reasons on which the reassessment proceedings were initiated are untenable since on the very issue an opinion has been exercised by ld. AO in 143(3) assessments. Assessee vehemently opposed the 147/148 notices by filing objections which are placed at paper-book 1 to 20. Attention of ld. AO was drawn to the notice under section 142(1) issued during original assessment proceedings by which proper details of License fees paid and details of TDS were furnished. Again, by reply dated 14.03.2009 complete details of explanation and information of business activity, license fee were submitted. It is pertinent to point out that the ld. AO has accepted this fact in his order (AY 2008-09) on Objections dated 19.12.2012 where he states that, .. Though the assessee has furnished details o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated that in the present case there was failure on part of the petitioner to disclose true and full material facts. [Para 12] 4.4 Thus viewed from Hon ble Gujarat High Court, it is contended that there is no justification in AO s reassessment despite this binding judgment. AO applied his mind and framed a proper opinion about the allowability license. Thus notices u/s 147/148 amount to an exercise for change of opinion and review of an order which is not permissible even within four years as held by the Supreme Court in the case of CIT vs Kelvinator Of India Ltd 320 ITR 561 (SC) approving CIT vs Kelvinator of India 256 ITR 1 (Delhi )(FB). It has been emphatically held by Hon ble Supreme Court that even after 1.04.1989 amendment in sec.147, on a change of opinion, proceedings under s. 147 were not valid. In this judgment, reassessment was sought to be made within four years (For A.Y. 1987-88, notice under s. 148 issued on 20.04.1990) whereas in assessee s case they are issued after expiry of 4 years from the assessment year. There is no mention whatsoever in reasons recorded for reopening that there is any failure on the part of the assessee in disclosing the relevant details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Hon ble Apex Court in the case of Gemini Leather Stores v ITO 100 ITR 1 (SC) holding that :- .. After this discovery the Income-tax Officer had in his possession all the primary facts and it was for him to make necessary enquiries and draw proper inference as to whether the amounts invested in the purchase of the drafts could be treated as part of the total income of the assessee during the relevant year. This the Income- tax Officer did not do. It was plainly a case of oversight, and it cannot be said that the income chargeable to tax for the relevant assessment year had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts. The Income-tax Officer had all the material facts before him when he made the original assessment. He cannot now take recourse to section 147(a) to remedy the error resulting from his own oversight . 4.8 It is contended that assessee s case stands on even better footing as ld. AO did call for the details and verified them; based thereon a view was formed to allow the expenditure. Adverting to the other aspects ld. Counsel contends that the in reasons ld. AO has recorded t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the touchstone of judgments of the Apex Court and jurisdictional and other High Courts, these reassessments deserve to be quashed. 5. The ld. Departmental Representative, on the other hand, supported the orders of the authorities below in this regard. Reliance is placed on Hon ble Madras High court judgment in the case of Sri Sakthi Textiles Ltd. v JCIT, Coimbtore 340 ITR 144 for the proposition that there is no legal necessity that for invoking section 147, there should be fresh material; even from the material available on record a subsequent officer can form a belief that there was escapement of income, such reopening of assessment is permissible. 5.1 Ld. Counsel contends that Hon ble Supreme court judgment in the case of Kelvinator India is subsequent to Sakthi Judgment and is squarely covers the facts of assessee s case, therefore, Madras High court judgment in Sri Sakthi will not apply as compared to Hon ble Supreme court judgment. 6. We have heard the rival contentions, perused the material available on record and gone through the orders of the lower authorities. Adverting to the validity of reassessment proceedings in AY 2006-07, 2007-08 and 2009-10, relevant fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07, 2007-08 2009-10 also. 7.1 Adverting to merits, the ld. Counsel contends that the action of ld. AO and ld. CIT(A) in this behalf is assailed on following alternative counts:- a. The IRCTC payments are neither for technical service nor contract payments, consequently no TDS is deductible u/s 194J and 194C. b. IRCTC for all legal purposes is Govt. which is exempt from TDS deduction. c. IRCTC having offered the license fee as income, there is no TDS liability on assessee in view of the amendment. a. The payments to IRCTC were for license fee simpliciter. The contractor is IRCTC and assessee is a contractee, this is a peculiar contract where reverse methodology is followed i.e. the license fee is paid by contractee to contractor for availing the license to serve food on trains. The simple payment of license fee can by no stretch of imagination be assumed to for availing any managerial or technical services rendered by IRCTC as contemplated by sec. 194J. b. Besides normally the TDS is deductible u/s 194C by contractor out of payments to any contractee. Whereas it is a reverse case and contractee has no liability for TDS u/s 194C. License confers a mere right of ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agerial, technical or consultancy services. No services much less any managerial, technical or consultancy services are provided by IRCTC while issuing the license of vending food on trains. Hon ble supreme court judgment in the case of CIT, Mumbai v Kotak Securities Ltd. 67 taxmann.com 356 reversed Bombay High court judgment and elucidated the nature and scope of technical and managerial services by following observations:- In this case Bombay High Court initially held that the transaction charges paid by a member of BSE on sale and purchase of shares amounted to payment of a fee for technical services which was liable for TDS u/s 194J. TDS was not deducted by assessee, the entire amount paid to BSE was not allowable u/s 40(a)(ia). Hon ble Supreme Court reversed the High Court order, gist if as under: (i) Managerial and consultancy services and, therefore, necessarily technical services , would obviously involve services rendered by human efforts. This has been the consistent view taken by the courts including Supreme Court in Bharti Cellular Ltd. 330 ITR 97. (ii) The automated services made available by the BSE are available to all members for transaction effected t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g any specialized services or passing on of any managerial or technical skill or service. Viewing from the parameters laid down by Hon ble Supreme court in the above cases of Kotak securities and Bharti Cellular, there is neither any element of service or rendering of technical service whatsoever in simple payment of license fee, sec. 194J is not at all applicable.sec. 194J rather confounded the issue by holding that if 194J is not applicable than 194C may applicable, since there is one or other liability of TDS the license fee payment is one way or other disallowable u/s 40(a)(ai). It is contended that basis of allotment of catering rights on license fee involves peculiar features. The IRCTC is the contractor who awards rights and assessee is the contractee obliged to pay license fee for availing the rights conferred. Ld. CIT(A) has completely misconstrued the facts and by erroneous understanding has assumed that assessee is the contractor and IRCTC is the Contractee and therefore, sec. 194C is applicable. The entire basis is misconceived, misdirect and the liability has been fastened by wrong understanding of basic facts. This simple payment of license fee by contractee to contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red under the Companies Act, 1956 and does not fall within the prescription of sub-clause (b) of section 80IA(4)(i) of the Act. As per the Revenue, though the entire share capital in the said company is owned either by the Central or the State Government, yet it can only be called a Government company but it does not come within the purview of the entities specified in sub-clause (b) of clause (i) of section 80IA(4) of the Act. The Revenue has supported its plea by referring to the judgement of the Hon ble Supreme Court in the case of Steel Authority of India Ltd. vs. Shri Ambica Mills Ltd. Ors., AIR 1998 SC 418. In terms of the said judgement, it is sought to be canvassed that although capital of SAIL was entirely owned by Government of India, but by virtue of its incorporation under the Companies Act, 1956 its personality was held to be distinct than that of the Government of India. Similarly, reliance has been placed on the judgement of the Hon ble Supreme Court in the case of Heavy Engineering Mazdoor Union vs. State of Bihar, AIR 1970 SC 82 for the proposition that in the absence of statutory provisions, a commercial corporation acting on its own behalf, though controlled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain tests in this context and the relevant portion of the Head notes of judgement is as under :- 2. Some of the tests laid down by this Court for deciding whether a body is State within the meaning of Article 12 are : (i) If the entire share capital of the corporation is held by Government, it would go a long way towards indicating that the corporation is an instrumentality or agency of the Government. (ii) A finding of State financial supports plus an unusual degree of control over the management and policies might lead, one to characterize an operation as State action. (iii) The existence of deep and pervasive State control may afford an indication that the Corporation is a State agency or instrumentality. (iv) Whether the corporation enjoys monopoly status which is State conferred or State protected is a relevant factor. (v) If the functions of the corporation are important public functions and related to governmental functions it would be a relevant factor in classifying the corporation as instrumentality or agency of the Government. (vi) If a department of Government is transferred to a corporation, it would be a strong factor supportiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xt test is whether the corporation enjoys monopoly status which is otherwise conferred on a State. The objects to be pursued by the SSNNL, the powers conferred on it, as revealed by the Memorandum of Association clearly suggest that SSNNL is in the activity of executing, operating and maintaining the Sardar Sarovar project comprising of a dam across river Narmada, a canal system, the Sardar Sarovar power houses at the foot of the said dam, etc.. All these aspects clearly show that SSNNL is involved in carrying out State monopoly functions, like operation of Airports, Ports, Railways, etc.. The next test is whether the functions performed are important public functions related to governmental functions. In the case of SSNNL, it is quite obvious that apart from executing, operating and maintaining the Sardar Sarovar project it is also involved in promoting schemes in the State of Gujarat for flood control in the Narmada river, irrigation and water supply schemes for utilization of water from Sardar Sarovar. All these are essentially government functions and obligations, which are being performed by SSNNL. The next test is if a Department of a Government is transferred to a corporatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deleted. 7.11 Assessee at this juncture craved leave to admit additional ground for these years as under: Without prejudice to the other grounds, the disallowance made under section 40(a)(ia) deserves to be deleted in view of the second proviso to section 40(a)(ia) as the appellant is not to be deemed to be in default under the first proviso to sub- section (1) of section 201 since the payee IRCTC has included the payment of license fees in its return of income and consequently it is deemed that tax is duly deducted and paid hence no disallowance under section 40(a)(ia) in the case of appellant is called for. It may be so held and addition be deleted. 7.12 It is contended that this ground is purely legal in nature, based on Govt. information, requires no verification of new facts and is imperative for proper decision of these appeals. Reliance is placed on Supreme Court judgment in NTPC 229 ITR 283. 7.13 Ld. DR is heard, after hearing both parties, respectfully following Hon ble Supreme court judgment in the case of NTPC judgment we are inclined to admit the additional ground. In view thereof the prayer to admit relevant letter addressed to IRCTC to forward the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a set of legal obligations flowing from license. Viewing from the parameters laid down by Hon ble Supreme court in the cases of Kotak securities and Bharti Cellular, there is neither any element of service or rendering of technical services whatsoever. In our considered view sec. 194J is not applicable to assessees case. b. Similarly sec. 194C is also not applicable since the basis of allotment of catering rights on license fee involves peculiar features. The IRCTC is the contractor who awards rights and assessee is the contractee obliged to pay license fee for availing those rights. Sec. 194C fastens liability on contractor when amount is paid to contractee and not vice versa. Therefore payment of license fee by contractee to contractor can by no stretch of imagination be assumed to come under the purview of sec. 194C. There being no TDS liability either u/s 194C or 194J, license fee paid cannot be disallowed under sec. 40(a)(ia) of Act under any circumstances. c. The license fee payment is not covered u/s 28(va) also, which is specifically for payments to sharing any know how, patent , copy right , trade mark, license, franchise or any other business or commercial right o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be disallowed u/s. 40(a)(ia). Thus we allow the assessee grounds on merits also in this behalf and dismiss relevant revenue grounds in the impugned years. 8.2 Since the reassessments for AYs. 2006-07, 2007-08 and 2009-10 have been already quashed; there is no need to go into other grounds raised by both sides. Similarly in AY 2008-09, there is no other ground except IRCTC payments which on merits we have held that assessee was not liable for TD, consequently IRCTC license fee payments cannot be disallowed u/s 40(a)(ia). In view thereof for AY 2008-09 Revenue s appeal is dismissed and that of assessee is allowed. 9. Now we advert to remaining grounds of assessee for 2011-12. Apropos Ground No.7 of the assessee s appeal which is pertained to embezzlement loss; the facts, contentions and conclusions from the Assessing Officer s level are as under:- 6.2. The submission of the assessee has been verified, but the same is not found convincing. The assessee himself states that the embezzlement was occurred during the F.Y.2008-09 relevant to A.Y.2009-10 and F.Y.2009-10 relevant to A.Y.2010- 11. The assessee has claimed a part of the amount in the A.Y.2010-11 and the remai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scrutiny of the claim of the assessee reveals that there was no embezzlement took place during the current assessment year, i.e. A.Y.2011-12 (F.Y.2010-11). In this regard, the CBDT has issued a Circular No.35-D dated 24.11.1965, which envisages that the loss arising due to embezzlement by employees should be allowed as deduction in the year in which it is discovered. 6.4. The assessee came to know' about the fraud by its employee by 16.03.2010 (i.e. the date of filing complaint with Police authorities). The fraud was noticed much before the date of audit of the firm for the F.Y. 2009-10 as it is noticed that the audit of the firm for the F.Y. 2009-10 relevant to A.Y.2010-11 was conducted in the month of September 2010. Thus, there was ample time available with the assessee to estimate the quantum of embezzlement and claim the same in the return filed for A.Y.2010-11 itself. The assessee is following mercantile system of accounting. For the purpose of computing yearly profits and gains for assessment to Income-tax, each year is a separate and self-contained period of time and losses and expenses incurred before its commencement and after its expiry cannot be the subject of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis. Thus the case laws relied upon by the appellant are also not identical on facts and accordingly not applicable. In view of the aforesaid discussion, the claim of embezzlement made by the appellant which was disallowed by the AO is found correct and justified and the same is confirmed. Thus, the ground of appeal is dismissed. 9.2 Ld. Counsel for the assessee vehemently argues that the factum of the embezzlement and its genuineness has been accepted by the lower authorities. Assessee held talks with the accused Manager Shri Rajesh Joshi, who gave an indication that part of the embezzlement money will be returned by him; therefore, there was a ray of hope that part of the amount will be recovered. In view thereof, based on a prudent business decision which is in conformity with mercantile system of accounting, the assessee debited 30% in AY 2010-11 hoping that balance will be recovered subsequently. In the impugned year, the assessee exhausted all his ways and means and came to a business decision that no amount will be recoverable and wrote off the balance amount. Ld. Counsel contends that Circular No.35-D dated 24.11.1965 is very old and reliance on Hon ble Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Corporation of India vs CIT, 56 ITR 1. The Apex Court in the judgment of Associated Banking Corporation, 56 ITR 1 has observed that ...... Even after the embezzlements came to the knowledge of the liquidator, trading loss cannot be deemed to have resulted. We are unable to countenance the proposition that irrespective of other considerations, .as soon as the embezzlement takes place of the employer's funds, whether the employer is aware or not of the embezzlement, there results a trading loss. So long as there was a reasonable prospect of recovering the amounts embezzled by the bank, trading loss in a commercial sense may not be deemed to have resulted... The CBDT has considered this judgment of the Supreme Court in the said circular that loss arises only when the employer comes to know about it and realises that the amounts embezzled cannot be recovered. It was thus in this background that the CBDT issued a circular that loss should be allowed in the year in which it is discovered. It is not to be understood that if assessee honestly expects chance of part recovery, he must write off and claim entire amount in the year of detection. This is the concession given by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es P Ltd Income Tax ref No. 229/1099 judgment dated 6. 05.2008 in which the observations of Nagri Mills Ltd case are reproduced by Delhi High Court. In view of above, the disallowance made deserves to be deleted. It be deleted now. Alternatively, direction be given to allow the same in the assessment year 2010- 11. 9.3 Alternatively, it is claimed that the embezzlement is ultimately a trading loss which is incurred in the regular course of business, the amount was bifurcated by a prudent businessmen s decision and the Revenue Authorities cannot step into the shoes of businessmen as to how and when such loss can be decided to be incurred. Reliance is placed on the Hon ble Supreme Court judgment in the case of Associated Banking Corporation of India vs. CIT, 56 ITR 01. Further reliance is placed on the Hon ble Supreme Court judgment in the case of CIT vs. Excel Industries Ltd, (2013) 358 ITR 0295 to the effect that if the assessee is chargeable to tax on the same rate, preponement or postponement of liability is revenue neutral and should not be agitated by the Revenue in appeals. In view of the Hon ble Supreme Court judgment, the embezzlement loss may be allowed in this ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 for AY 2011-12, the Assessing Officer made a lump-sum disallowance of ₹ 50,00,000/- for possible coverage of leakage of revenue which has been reduced by ld. CIT(A) to ₹ 5 lacs again to plug any leakage of revenue. 12. We have heard both the parties and are of the firm view that there is no concept of plugging any possible leakage of revenue which becomes a general and sweeping way of disallowance not contemplated by the law. Any disallowance should be specific and properly quantified. In view of these facts, we are unable to sustain this presumptive and ad-hoc addition based on an outlandish consideration of plugging possible leakage or revenue; consequently the same is deleted. Thus, this ground of the assessee is allowed and that of revenue dismissed. 13. Apropos assessee s Ground No.11 for AY 2011-12, i.e., confirmation of addition of ₹ 2,82,020/- u/s 40A(3), ld. Counsel for the assessee contends that the expenditure in question is incurred by the staff on moving train staff at various stations having a stoppage of 3 to 5 minutes. It is impossible to pay cheque during mobility and the payments are necessarily to be made in cash to cope up with the mobi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld coverage on moving train on day today basis. It is normal in its business that some goods are ordered whose bills are received but by the time the goods arrived, the train starts moving and then that amount is not paid. If the assessee has any malafide intention it would rather claim the bills as an expenditure which would reduce its profits. Therefore, the presumption drawn by ld. CIT(A) is bereft of business exigencies, it amounts self injury by not claiming the bills and expenditure; this is so because each and every transaction is in record of the assessee; therefore, there is no justification in disallowing such purchases which have not been effected due to non-delivery of goods u/s 69C. 17. We have heard the rival contentions, perused the material available on record and gone through the orders of the lower authorities. We find considerable merits in the submissions of the ld. Counsel for the assessee. In our considered view, the assessee cannot adopt such a self defeating approach, human conduct, surrounding circumstances and business exigencies on a moving train; the contention of the assessee is reasonable and acceptable and cannot be disregarded on presumption. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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