9911796707
TMI Blog1995 (9) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee-firm filed its return of income on 30-9-1985 declaring net income of Rs. 81,340. The aforesaid figure of Rs. 81,340 was arrived at after debiting to the profit and loss account a sum of Rs. 4 lacs on account embezzlement relating to assessment year 1985-86. The assessee-firm, however, filed a revised return on 9-7-1987 in which as against the net income of Rs. 81,340 declared originally, loss of Rs. 10,48,860 was declared. The revised return was filed by claiming loss on account of embezzlement in the three immediately preceding years as per the following details :- Asst. year Amount claimed as embezzled 1982-83 Rs. 3,50,201 1983-84 Rs. 4,00,000 1984-85 Rs. 3,80,000 ------------ Rs.11,30,201 ------------ In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee-firm as an accountant-cum-clerk in 1978 and had left the assessee-firm in December 1984. It was submitted that in his capacity as accountant-cum-clerk, Shri Narinder Kumar was not only maintaining the account books of the assessee-firm but was also having dealings with the bank by way of depositing or withdrawing the amounts from the State Bank of Patiala, Amloh. It was submitted that since the partners had full faith in him, Shri Narinder Kumar betrayed the confidence and trust of the partners and defalcated and misappropriated the aforesaid amount. It was submitted that during the course of assessment proceedings for assessment year 1982-83, the Assessing Officer required a certificate from the Punjab and Sind Bank Ltd., Mandi Gobindgarh which was produced before that authority. Referring to a copy of the certificate dated 21-2-1985 placed at page 63 of the assessee's compilation, it was submitted that the amount withdrawn vide cheque No. 499629 dated 31-3-1982 as per the certificate issued by the Manager of the bank was Rs. 1,50,000. Referring to ledger page No. 369 in the books of the assessee, a copy of which is appearing at page 64 of the assessee's compilation, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Delhi High Court decision in the case of CIT v. Mohan Trading Co. [1990] 182 ITR 101. It was submitted that though the question before the High Court was whether the question involved was a question of law, the observations of the High Court were relevant. It was submitted that in that case, the chances of recovery as per the department were still good, but the High Court held that the loss had to be allowed in the year in which it was discovered and no question of law arose. The learned Counsel for the assessee also relied on the decision of the Ahmedabad Bench of the Tribunal in the case of ITO v. A.G. Gas Agency [1991] 39 TTJ 623. It was submitted that in that case, the Tribunal had relied on the board's circular dated 24-11-1965 referred to above and come to the conclusion that the loss was allowable when it was discovered. 8. The learned Counsel for the assessee has filed a chart showing similarity in the facts of the case which was before the Ahmedabad Bench of the Tribunal and the case of the assessee before us. It was submitted that in both the cases, the embezzlement was by an employee having identical nature of duties. It was pointed out that in the case before the Ahm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,39,910 against which the income assessed was Rs. 7,40,455 after appeal effect. Similarly, it was pointed out that for assessment year 1985-86, the original return declared net income of Rs. 81,340 but a revised return was filed on 4-7-1987 declaring a loss of Rs. 10,48,601. It was submitted that the assessee had got its books of account audited and straightened and had offered for assessment the income which was truly assessable in all these years, in spite of the mess created by the accountant Shri Narinder Kumar. It was submitted that since embezzlement had been detected and discovered by the assessee in February 1985, the entire loss of Rs. 15,30,201 had been legitimately claimed by the assessee in the year under consideration. Shri Verma stoutly repelled the charge of collusion between the partners of the assessee firm and the accountant and submitted that it was a case of embezzlement simpliciter and not of collusive embezzlement as alleged by the lower authorities. In this regard Shri Verma referred to an application filed on behalf of the assessee-firm requesting for the admission of the following documents by way of additional evidence:---- (i) Copy of judgment of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the said judgment, it was pleaded that the question of there being any collusion between the partners of the assessee-firm and the accountant did not arise. It was submitted that in any case, such a collusion had to be established by the Revenue which it had miserably failed to do. 12. As regards the objection of the Revenue authorities that no steps had been taken to recover the amount from the accountant or that there was still a ray of hope for recovery, it was submitted that the assessee had filed FIR before the police authorities as early as 30-8-1985 charging the accountant Shri Narinder Kumar with misappropriation/defalcation/embezzlement of funds of the assessee-firm. It was submitted that the assessee-firm had also taken civil proceedings against the said accountant and the civil court vide order dated 15-6-1992 had already allowed the assessee's suit for the recovery of a sum of Rs. 11,80,131 with costs. It was pointed out that for assessment year 1982-83, the suit could not be filed because of legal advice as the assessee was told that the suit for that year had already become barred by limitation. It was submitted that so far the assessee had not received a penny nor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind of the assessee-firm and hence the loss could not be allowed as a deduction in assessment year 1985-86. It was submitted that at best it could be said that the assessee had discovered the embezzlement on 30-8-1985 when FIR was filed against Shri Narinder Kumar. It was submitted that as 30-8-1985 fell outside the assessment year 1985-86, the loss of Rs. 15,30,201 was not allowable in the year under consideration. The learned D.R. relied on the Madras High Court judgment in the case of Kothari & Sons v. CIT [1966] 61 ITR 23 for the proposition that the question when loss by embezzlement can be said to occur was a mixed question of fact and law and in the present case, such embezzlement, if at all, had taken place only on 30-8-1985. 15. We have carefully considered the submissions of both the sides. The charge of collusive embezzlement levelled by the Revenue authorities remains unsubstantiated. It is also not understood as to why 10 partners of a firm, admittedly educated, would commit a foolish act of misappropriating or embezzling the funds of the firm by taking an accountant into confidence. It can be understood that a firm may do business outside the books of account or may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. From the evidence on record, it is clear that the embezzlement had taken place in this case and it was not the case of a collusive embezzlement between the accountant and the partners of the assessee-firm. 17. The next question that arises for consideration is as to the point of time when the embezzlement was detected/discovered. Shri Verma started by saying that during the course of assessment proceedings for assessment year 1982-83, the assessee was asked to give a copy of certificate from the Punjab and Sind Bank and that it was discovered from the certificate dated 21-2-1985 that the amount withdrawn from the said bank amounted to Rs. 1,50,000 whereas in the books of account, the amount shown to have been withdrawn was a sum of Rs. 50,000. On this basis it was submitted that the assessee-firm had come to know as early as 21-2-1985 that the embezzlement had taken place in the year under consideration. It has, therefore, been submitted that the further act of the assessee in asking the Auditors to quantify the amount of embezzlement could not mean that the loss had to be allowed in the year of quantification. 18. We have very carefully gone through the copies of the letters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y would not be informing the assessee about the discrepancies and asking for its explanation. 19. Similarly for assessment year 1984-85, there is a letter from the Chartered Accountants dated 10-12-1985 in which they have observed certain discrepancies with regard to the entries pertaining to the State Bank of Patiala, Amloh which are enumerated in the letter as per annexures 'A' and 'B' and at the end, the partners of the assessee-firm are requested "to look into the matter and inform us as to how it has happened". This clearly shows that till 10-12-1985, the Chartered Accountants had not been informed of the embezzlement, if any. They had perhaps only been asked to audit the accounts which appeared to be full of discrepancies. 20. Similarly, there is a letter dated 20-7-1985 from the Chartered Accountants to the partners of the assessee-firm for assessment year 1985-86 in which certain discrepancies have been referred to and at the end of the letter, the partners of the assessee-firm have been requested "to look into the matter and inform us as to how it has happened and where the money misappropriated has been accounted for so as to enable us to finalise your accounts and our ..... X X X X Extracts X X X X X X X X Extracts X X X X
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