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TMI Blog2017 (9) TMI 318X X X X Extracts X X X X X X X X Extracts X X X X ..... d below for the facility of reference. "i) Whether the loss on account of embezzlement can be claimed when information of the embezzlement is acquired or when the embezzlement is discovered? Whether the terms detection and discovery has the same connotations? ii) Whether the loss by embezzlement being incidental to the banking business should be allowed as deduction in the year of its detection or in the year it is discovered" 2. Since the appeals were admitted on common substantial questions o f law, they were heard analogously and are being decided by this order. For the facility of reference, facts from ITA No.17/2007 are being referred to. 3. The assessee filed the return of income for the Assessment year 1997-1998 in which it clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that loss should be claimed in the year as soon as the same is detected and the case was remitted to the Assessing Officer to decide the claim in terms of the direction that the loss can be allowed if the same is claimed in the year it is detected notwithstanding whether the same has got crystallized and accordingly allowed the appeal preferred by the Revenue. In the aforesaid factual background, the assessee has filed this bunch of appeals. 5. Learned counsel for the assessee submitted that the loss on account of embezzlement may come to the knowledge of the assessee in a particular year but the exact amount may be ascertained after investigation in a subsequent year i.e. the date of discovery. Therefore, the loss should be allowed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not necessarily result in loss immediately when the embezzlement takes place, or the adventure is commenced. Embezzlement may remain unknown to the principal, and the assets embezzled may be restored by the agent or servant. Again it cannot be said that in all cases when the principal obtains knowledge of the embezzlement the loss results. The erring servant may be persuaded or compelled by process of law or otherwise to restore wholly or partially his ill-gotten gains. Therefore so long as a reasonable chance of obtaining restitution exists, loss may not in a commercial sense be said to have resulted. Embezzlements of funds of the Bank took place in 1946. They were then unknown to the Bank. Even after the embezzlements came to the know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he first case, the Supreme Court has affirmed the view that the loss resulting from embezzlement by an employee or agent of a business is admissible as a deduction under s. 10(1) of the IT Act, 1922 (corresponding to s.28 of the IT Act, 1961) if it arises out of the carrying on of the business and is incidental to it. In the second case the decision is that loss must be deemed to have arisen only when the employer comes to know it and realizes that the amounts embezzled cannot be recovered. 2. In the light of the above decisions of the Supreme Court, the legal position now is that loss by embezzlement by employees should be related as incidental to a business and this loss should be allowed as deduction in the year in which it is discover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with contextual use. The work "discovers" has been interpreted by English Courts to means "comes to the conclusion from the examination the Inspector makes, and from any information he may choose to receive" or "has reason to believe" or "finds or satisfied himself" or "honestly comes to the conclusion from information before him." [ See: Commissioner of Income Tax, Punjab, Himachal Pradesh and Bilaspur, Shimla v. Shree Jagannath Maheshwari Amritsar AIR 1957 PUNJAB 226 (V 44 C 87 Oct.]. 10. In view of aforesaid enunciation of law, we hold that the expression detection and discovery have different and distinct connotations in law and the expression "discovery" has to be interpreted so as to mean that loss must be deemed to have arisen only ..... X X X X Extracts X X X X X X X X Extracts X X X X
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