TMI Blog2018 (4) TMI 1555X X X X Extracts X X X X X X X X Extracts X X X X ..... are wholly and exclusively for the purpose of business of the appellant and, therefore, the A.O. is not correct in making - addition of this amount to the total income of the appellant for the year under consideration. Disallowing of business loss - misappropriation/embezzlement of sale proceeds of milk by its employees - Held that:- The correctness of the version of the assessee that misappropriation/embezzlement of sale proceeds has irretrievably happened is not corroborated by action taken by the assessee thus far. The assessee has neither recognized the sale proceeds as not recoverable nor has initiated any criminal action against the identifiable employees for claiming net of embezzlement on account of misappropriation etc. The assessee has failed to throw light as to what happened in the subsequent years till today on this score. Therefore, the narrative of the assessee to claim such whopping loss does not inspire any confidence. The onus for justification of claim is on assessee. The assessee has totally failed to discharge onus. We thus find that the impugned action of the AO and CIT(A) in disallowing such business loss is on a sound footing. - 3036/Ahd/2013, 2759/Ahd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the rival submissions and perused the orders of the authorities below as well as material placed on record and case-laws cited. The short issue in the captioned appeal of the Revenue is maintainability of claim of co-operative development expenses and animal breed development program expenses as revenue expenditure in the hands of the assessee. 3.5. The CIT(A) has addressed the issue in the following manner:- 4.2. During the course of appellate proceedings, the appellant made ]following submission: 1. The First ground of appeal is with regard to disallowance of ₹ 1,07,64,144/- incurred on Animal Breeding Co-operative development expenses. The learned Assessing Officer on Page 2 and 3 in Para 3, after reproducing the submission and contention of the assessee has held that these expenses are related to the efforts made to enhance milk productivity and improving the future breed of animals, therefore the assessee gets benefit of enduring nature and as such they are not revenue expenditure but are capital expenditure. This is the only base for disallowing this entire expenditure which has been consistently allowed since last many years. However, the appellant respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to further state that with the introduction of the private parties in the milk and milk products business in organized manner, it was feared that the milk producers at village level are likely to be misdirected by the private entrepreneurs and thereby the milk producers would be tempted to divert supply of milk to these private parties and it would result into reduction in, quantum of the procurement of milk and affect the business of the appellant', adversely. It was therefore essential that development of co-operative philosophy and structure should be canvassed at the village /eve/ which would increase the cooperative spirit and awareness among the members and thereby the temptation to sell to the private parties would be curbed. (3) Keeping this in mind, the appellant started the co-operative development programme since more than 25 years. l Initially, the programme was started in few Villages in the state of Gujarat wherein the signs of fall in procurement were seen. Such programme were carried out specially in the Villages which were developing in respect of milk co-operative, its financial viability, involvement of members, developmental activities in respect of fod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cleanliness drive at village level. They also carry out cleanliness audit at VDCS. In addition on 2nd October (Gandhi Jayanti day) VDCS also carry out Red Tag day-where cleaning of VDCS, surroundings, and its records-/ register is conducted. Under Cooperative Development, to improve the Breeding Services, we have implemented Artificial Insemination Services improvement-programme and imparted training to core groups at village level. To boost this movement, we have also conducted Mass Deworming campaign. We have also implemented the AI Audit Competition to identify* best performing VDCS AI Workers of these Societies to-motivate them to further improve their work. We have also implemented VDCS Chairmen Secretaries' Orientation Programme to increase their awareness about dairy industry scenario and impart leadership skills to the Chairmen Secretaries of the Village Dairy Cooperatives. To encourage the participation of women milk producers in the-Dairy Cooperative Societies and to develop their skills and enhance leadership qualities, we have conducted Self Managing Leadership .(SML) programme for women resource persons along with Chairmen and Secretaries VDCS. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion process. 3. To establish information network for animal breeding activities. 4. To improve overall health condition of milk animals Cooperative Society Selection criteria: Since more than 5 years FIP has been implemented in various DCSs having highest NPG NECO (Non Pregnant / Non Pregnant Not Even Calved Once) population as per animal survey 2005. Activities carried out under FIP: a) Village Awareness Programme (VAP) has been carried out at each of the selected villages to increase involvement of members in various activities of the project and achieve desired results for reduction of NPG NECO animals. b) Revisit of AI Module 'has been carried out at each of selected District Cooperative Societies (DCS) to improve AI quality at DCS. c) Baseline survey has been carried out to know the current status of animals, Animal Husbandry (AH) activities in villages. d) Tagging and registration of animals has been carried out to provide unique identity to all NPG BECO animals and facilitate data analysis. e) Fertility camps in each of selected villages at least four fertility camp has been carried out to treat NPG NECO animals. f) Mass deworming has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pex body. (4)To overcome the massive challenges, it became imperative to communicate to milk producers that they have to consider and operate animal husbandry as a business instead of supplementary activity to agriculture. Therefore, it was essential that development of cooperative philosophy and structure and increasing milk productivity is canvassed at village level which would increase the cooperative spirit to overall strengthening of dairy co-operative structure] in Gujarat. Co-operative Development Breed Development Programme In view of the above, as per cooperative principle Education, Training and Information , the Appellant started Co-operative Development Programme for members to prepare them for new challenges and help them to improve efficiencies and quality of life. Such Co-operative Development Programme aims at building greater member understanding of the functions of cooperatives, imbibe loyalty towards co-operatives, orienting milk producers to their role and responsibilities and promoting their participation in the functions of the co-operatives. 1.4 To summarise, the appellant has incurred the above stated expenditure for the brief purposes as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gers, give training to the members of the primary society as to how to collect milk, keep in clean and maintain the same in the storage so that poor farmers and villagers get better price to their good quality milk and various other Camps organized wholly and exclusively for such farmers and villagers and their family to procure more milk from them so that in turn will get more milk from the cows and buffaloes and in turn give it to our Dairy for a better price than other private parties. All the expenditure are incurred by the Dairy on their employees, who are visiting remote villages and giving veterinary medicines and other services of taking care of the animals, who are suppliers of our basic raw-material i.e. Milk. 1.6 In view of this it is submitted that expenditure are incurred (i) Wholly and exclusively for the purpose of business and therefore allowable u/s. 37 of the Income Tax Act. (ii) It is being incurred consistently since last several years and subsequent years. (iii) It is for maintaining the breed, i.e. Cows and Buffaloes, who can give good quality and good quantity of Milk. (iv) It is not of any enduring benefit but of yearly procurement of Milk. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one year. By incurring such expenses known new capital asset came into existents. In my opinion the test for allowance of expenditure u/s 37 is enough to show that; the money was expended out of necessity and with a view to direct a minimum benefit to the trade, but voluntarily and on the ground of commercial expediency and in order to facilitate directly or indirectly the : carrying on of the business. In deciding whether the payment of money is a taxable expenditure or otherwise one has to take into consideration not only; the commercial expediency but also the principles of ordinary commercial trading and legitimate commercial necessity for incurring such expenses. Considering all these aspects I am of the view that incurring of expenditures of ₹ 5,82,22,000/- are directly benefited to the appellant more than one way besides increase in turnover and income. Thus it can be said that this expenditure of ₹ 5,82,22,000/- on account of reimbursement of member unions against co-co. development expenses and expenses towards fertility improvement programme are wholly and exclusively for the purpose of business of the appellant and, therefore, the A.O. is not correct in makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s year, the same be allowed and the observation and finding of the CIT(A) that the loss has not been crystallized during this year is not correct and the same be not accepted. Without prejudice to the above it is submitted that notwithstanding the provision of such loss in Profit Loss Account of the Audited accounts of the appellant, the appellant Co-Operative Society has suffered the loss of ₹ 1,49,42,167/- by way of misappropriation by employees and in view of that the same be allowed as a deduction as there is no relevance with regard to the provision and accounting entry passed in the books as held by Supreme Court. 2. In the alternative the appellant submits that treatment of showing the misappropriated sales in this relevant Assessment Year as per the direction of the Co-operative Auditor be considered and such sales be reduced while computing the total income. It is submitted that on the basis of the facts and details submitted, there was no effective sales made by the appellant during this year and sales shown in Profit Loss Account on the insistence of Government Co-Operative Auditor be reduced while computing the total income. 6.2. The assessee, in esse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that the assessee has not even filed any FIR or has not initiated any legal action for alleged embezzlement loss. The AO further observed that the assessee has not even debited this alleged loss/misappropriation in its profit and loss account but, on the contrary, has shown the same as recoverable from the tainted employees. Owing to the admitted position that the matter is under investigation and thus pending, the AO observed that the alleged loss, if any, has not crystallized at all. Thus, the AO took a view that the loss so claimed by the assessee towards misappropriation is not supported by the facts and the circumstances of the case. The AO accordingly proceeded to disallow the loss of ₹ 1,49,42,167/- claimed on account of misappropriation by the assessee. 7. Aggrieved by the action of the AO, the assessee raised the grievances before the CIT(A). 8. The CIT(A) took detailed note of the submissions made by the assessee in this regard but found little merit in the claim of the assessee. The relevant operative para of the appellate order of the CIT(A) is reproduced hereunder:- 5.3 I have given my careful consideration to the facts of the case, the submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d FIR and criminal action were not initiated. The cases cited by the appellant in this regard, do not apply to the facts of the appellant's case. 5.6 It is a fact that the appellant had not recorded/accounted for this sale in its books of accounts during the immediately preceding assessment year (i.e. F.Y. 08-09, A.Y. 09-10) also and based on its accounting policies, it was for the first time accounted for in F.Y. 09-10 relevant to A.Y. 10-11. The deficiency in sales figures was detected during the current year and the same was accounted for during the current year. Appellant's plea that income had not accrued to it also does not appeal to me considering the fact that sale is effected as soon as the milk is loaded in to the supply trucks along with proper challans and bills/vouchers. At this point, sale is effected and corresponding income accrues to the appellant. Therefore, appellant's alternate plea that the sales figure for the current year should be reduced by an amount of ₹ 1,49,42,467/- cannot be accepted. When sales are accounted for, as a corollary, loss, if any, should be allowed to be written off, when the loss crystallizes. Since it has not crystall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were admittedly not initiated by the assessee against the employees since it requires approval and sanction of the District Registrar for initiating legal action against the unscrupulous employees. The Ld.AR however submitted in the same vain that notwithstanding the absence of formal legal action, the facts remains that the assessee has incurred irretrievable business loss on account embezzlement of funds collected by the employees and by not giving account for the entire quantity loaded/supplied for sale. The Ld.AR accordingly submitted that the CIT(A) has misdirected itself in law and on facts in denying the bonafide business loss claimed by the Cooperative Society. 10.3. The Ld.AR also adverted to the alternative plea that in the event, the loss on account of misappropriation sales is not allowed in the impugned assessment year, the sales reported by the assessee during this year owing to the insistence of the Government Co-operative Auditor be directed to reduce from the total income as the sales do not pertain to this year. 11. The Ld.DR, on the other hand, strongly relied upon the orders of the AO and the CIT(A). In furtherance, the Ld.DR contended that the assessee it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion/embezzlement of sale proceeds of milk by its employees in various units aggregating to ₹ 1,49,42,167/-. The assessee, while computing the taxable income seeks deduction of the aforesaid business loss saddled upon the assessee owing to embezzlement discovered during the year and thus purportedly crystallized during the year. 12.2. The revenue, on its part, claims that such loss is not allowable business loss firstly on the ground that the alleged misappropriation/embezzlement loss has not been charged to profit and loss account by the assessee itself. Secondly, the Revenue further contends that such alleged loss cannot be recognized in the absence of any legal action initiated against the unscrupulous employees. Thirdly, the assessee has admittedly recorded the unaccounted sales relevant to Financial Year (FY) 2008-09 as recorded by the assessee in FY 2009-10 (AY 2010-11 in question) on detection of error by the audit party. The assessee having recognized the sale and corresponding debt outstanding to be recovered from the employees so indulged probable impropriety, there is no scope for claiming business loss in such circumstance. 12.3. Notwithstanding the merit in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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