ORDER
R. M. MEHTA, A.M. :
This appeal is directed against the order passed by the CIT(A) raising for the consideration of the Tribunal numerous grounds, but by far the most contested was the issue pertaining to “loss on embezzlement” claimed at a figure of Rs. 1,44,47,500. This ground is now discussed and disposed off in the succeeding paras.
2. The appellant is a closely held company engaged in manufacturing activities having two units i.e. “Carbon Black Unit” and “Cycle Unit”. In the course of the assessment proceedings the AO came across a claim for deduction to the tune of Rs. 1,29,47,500 on account of embezzlement. The case made out was to the effect that the managing director of the company, Mr. Sanjeev Pahwa used to remain out of Ludhiana for long spells and in his absence it was necessary to ensure the smooth working of the company and with this in mind blank cheques/information copies signed by the managing director and his mother, Smt. Krishna Rani were handed over to Shri R. P. Mahajan, the financial controller. That the said financial controller misused some of these information copies and withdrew a sum of Rs. 1,29,47,500 by means of 43 cash, orders in the name of 43 firms alleged to be bogus. That during the course of search and seizure operations on 13th October, 1992 at the residential premises of Shri Mahajan the tax authorities recovered FDRs of Rs. 55 lakhs and odd along with blank cheques/information copies signed by the managing director of the company. That Shri Mahajan stated before the Asstt. Director of Investigation that FDRs amounting to Rs. 35.69 lakhs belonged to the assessee company and that the managing director had physically handed these over to him for safe custody. That the Court had issued a chargesheet and criminal prosecution was pending against Shri Mahajan and further the Police had recovered Rs. 40 lakhs and odd in cash and Indira Vikas Patras from his house after his arrest.
3. On the basis of the aforesaid facts and submissions the assessee-company claimed the loss on account of misappropriation and embezzlement.
4. As against the aforesaid submissions the AO noted the following facts and drew the following inferences :
(i) The information copies on the basis of which the funds were withdrawn were signed by the managing director, Mr. Sanjeev Pahwa and Mr. Jasbir Singh the finance manager and these contained a written request to the effect “Please issue cash orders in favour of parties as per list attached” but enquiry from the bank revealed that the list was not traceable with the bank and it was surprising how cash orders in respect of 43 “bogus” firms were issued without the list :
(ii) That as per seized record it was clear that the daily bank transactions were entered in the cash-book by the employee of the company and thereafter checked by Mr. Jasbir Singh, the then finance manager and also seen by the managing director. That the bank transactions for the relevant period had also been seen by the managing director;
(iii) That cash and bank vouchers for the month of February and March, 1992 had been signed by either the managing director or his mother Smt. Krishna Rani as a director and this proved that the day-to-day financial transactions whether in cash or through the bank were controlled by them;
(iv) That there was an adequate internal audit control system in operation during the financial year 1991-92 as stated by the auditors in their report to the accounts of the company and it was unbelievable that the withdrawal of such a huge amount from the bank had escaped detection;
(v) That there were deposits and transfers of huge funds from one bank account to another on 30th March, 1992 and 31st March, 1992 and it was inconceivable that the managing director and finance manager who were scrutinising the bank statements on a daily basis were not aware of it and it was contended that the Managing director came to know of the alleged embezzlement only on 7th December, 1992.
(vi) A specific query was raised from the managing director as to why even after the search in October, 1992 when he came to know that Mr. R. P. Mahajan had conceded that FDRs amounting to Rs. 35.69 lakhs seized from his residence belonged to the company, he took another month to come to the conclusion that funds were embezzled. That the explanation that there was no entry in the books of accounts of the withdrawals from the bank was not tenable on the ground that the bank account of the company was reconciled on 31st March, 1992 and which was evident from the fact that the seized register (annexure : 4), typed balance sheet in annexure 7 and the typed balance sheet filed along with the return contained “almost” the same balances. Further there were a number of cheques, vouchers both bank and cash signed by the managing director and his mother, Smt. Krishna Rani on 31st March, 1991; and
(vii) The information copies found at the residence of Shri R. P. Mahajan were not in the same series as those on the basis of which the funds had been withdrawn from the bank. That information copies of the latter series had been utilised by the company on 31st March, 1992 and the entries duly made in the books of accounts.
5. In the final analysis, the AO rejected the claim for deduction in a sum of Rs. 1,29,47,500, Plus a further amount of Rs. 15 lakhs alleged to have been embezzled from the State Bank of Patiala, Overseas Branch at Ludhiana by Shri Mahajan purportedly in connivance with Shri Ramesh Lal, accounts officer. In doing so the AO observed as under :
“Actually, the fact is that the company in order to defraud revenue had debited in the books of account 1,29,47,500 for purchase of various goods. These amounts were debited in the books of account in the a/c of firms in whose names cash order were issued and bank account were credited by the amount. 43 cash orders were made in the name of those factious parties and the same amount must have been debited in the books of account in respect of purchase of raw materials/goods. The purpose of making cash orders were to square tip those accounts, otherwise, cheques would have appeared “issued but not presented for payment”. The seized documents referred to in annexure to the order A-II, A-III, A-IV all the three indicates that the company was to make an adjustment of Rs. 129.48 lakhs and which was to be routed through the bank and all these three documents were written by Mr. Rarnesh Lal, accounts officer who has confirmed in his statement. Mr. Ramesh Lal stated that these adjustments were asked to be made by Mr. R. P. Mahalan, the then finance controller.
“It would also be relevant to point out that the purchase of raw material has been reduced exactly to Rs. 129 lakhs in the P&L A/c submitted along with return of income vis-a-vis seized balance sheet.
This proves that where as it was decided to make entry of purchase of Rs. 129 lakhs and withdraw the same amount from the bank but when the assessee knew that it is in the knowledge of the Department that the company has withdrawn the fund by making factious purchase entries, immediately it turned around and removed all the entries from the books of accounts regarding the purchase of the goods and in its place an entry of embezzlement was entered in the books of account.
Reference is drawn to the following two books which was shown to Mr. Mehta during the course of proceedings and which have been impounded. It would be evident from the statement and from perusal of the books that both the books have been tampered with. The reason is simple :
(a) If an assessee has to make a payment for the purchase, entry in the bank payment books shall be as follows :
Party Account debited
Bank account credited
Therefore, the bank books had to be tampered.
In order to make an entry that embezzlement took place it had to make an entry in the journal book therefore that book also had to be tampered. The tampering is evident from the following features :
(a) The summary of the month which was taken on page 59 has been replaced by some other page 85 and stapled to page 58 & 60 in the journal book and thereafter at page 66 voucher No. 701 entry is made regarding embezzlement of Rs. 129.47 lakhs.
(b) Bank payment book is as under It starts from page 188 and ends at 207 -do- -do- 169 and ends at 173 Page nos. 174 to 187 are blank. The Blank pages evidences the tampering.
The assessee company has claimed that Shri R. P. Mahajan has in connivance with Shri Ramesh Lal has embezzled a sum of Rs. 15 lakhs from State Bank Of Patiala, Overseas Branch, Ludhiana. The amount was withdrawn from the bank by Shri Ramesh Lal. The allegation is only in the nature of an allegation and cannot be treated as allowable expenditure. It would be allowed only when it is established that the same was embezzlement by Mr. Mahajan. A mere accusation of embezzlement does not prove a person guilty till it is substantiated by some records and facts. I do not know whether any case has been launched in this regard. Even if the case is launched, the assessee shall have to prove the same as embezzlement by Mr. Mahajan and not by some other person. Mr. Ramesh Lal is still working with the company. It would be relevant to point out here that in subsequent paragraph I have referred to certain cash adjustments of Rs. 15 lakhs in the workman staff welfare account. In this respect, the order in subsequent paragraph may be seen.
On the facts and circumstances of the case, it is held that the assessee- company cannot claim deduction in respect of embezzlement.
I am not making any observations regarding the persons who were parties in the embezzlement of the fund. The fact is that the Government has lost tax on a revenue which it deserve to get. It is in this connection that I am holding that the assessee companys claim of embezzlement is not allowable”.
6. On further appeal before the CIT(A) the following main arguments were tendered on behalf of the assessee :
(i) There was no reason for the managing director Mr. Sanjeev Pahwa to convert white money into black and save only 50 per cent. thereof as tax in case the claim made for embezzlement was allowed;
(ii) Every asset like FDRs, cash etc. was found from the residence of Mr. R. P. Mahajan;
(iii) The question of “hope of recovery” was to be considered from the view point of the assessee and not the IT Department;
(iv) The various documents pertaining to the embezzlement were mostly written by Shri Ramesh Lal, an employee in the accounts division at the “instance” of Mr. R. P. Mahajan and besides a further sum of Rs. 15 lakhs were embezzled by Mr. Mahajan in connivance with Mr. Ramesh Lal in whose name an account was opened in the Punjab National Bank and the said amount withdrawn on 9th May, 1991 by getting necessary papers and cheques signed by Shri Ramesh Lal;
(v) That the list of 43 “fictitious” firms was missing from the bank records and this indicated the collusion between the bank officials and Shri R. P. Mahajan;
(vi) No vouchers were prepared for withdrawal of Rs. 129.48 lakhs by the accounts and finance departments of the assessee company;
(vii) Mr. R. P. Mahajan took advantage of the blank cheques/information copies signed by the directors of the company, the latter reposing complete trust in him and not anticipating that these would be misutilised;
(viii) Transfer of funds from one bank to another was not an unusual event as even on earlier occasions such transfers had taken place;
(ix) During the period of search at various premises including the residence of Shri R. P. Mahajan, the managing director of the company did not realise that FDRs seized from the residence of Shri Mahajan were obtained from the funds embezzled and it was only later when internal enquiries were conducted by the company that the embezzlement was detected and the company lodged an FIR on 7th December, 1992. That the subsequent discovery of cash of Rs. 40 lakhs and odd and Indira Vikas Patras of Rs. 9 lakhs confirmed the “embezzlement”;
(x) To cover up the embezzlement Shri Mahajan “fabricated” the balance sheet by inflating purchases of raw material and this did not have any effect on the bank balances shown in the balance sheet because in either case whether the amount withdrawn was against purchases or represented embezzlement the bank balance would be the same;
(xi) Discovery of undated cheques and information copies signed by the managing director and his mother, Mrs. Krishna Rani, from the residence of Shri Mahajan clearly indicated his intention to misuse these documents;
(xii) The information copies were being used at random without any consecutive serial numbers and that is why some of them were found at the residence of Shri Mahajan and further the supporting vouchers did not indicate any serial numbers. That the Department had not found the office copy of the information sheets during the search in the office premises along with the list of fictitious parties in whose favour cash orders were directed to be made nor were these found entered anywhere in the books of accounts and this clearly showed that they were misused by Shri Mahajan;
(xiii) The AO erred in stating that the amount of Rs. 1.29 crores and odd had been debited in the books of accounts in respect of purchase of raw material etc. or that the 43 fictitious parties had been debited by crediting the bank account, since the AO on checking did not come across any discrepancy in the purchase figure shown in the ledger, trial balance etc. filed along with the return, That this was also applicable to other items of expenditure and when the accounts were audited the amount had to be debited as a loss on account of embezzlement;
(xiv) That the substantial money drawn from the bank was converted into FDRs which were later found at the residence of Shri R. P. Mahajan by the Department besides cash of Rs. 40 lakhs and I.V. Ps. amounting to Rs. 9 lakhs recovered by the police;
(xv) That Shri Mahajan also withdrew a sum of Rs. 15 lakhs using the name of his subordinate Shri Ramesh Lal in the shape of a pay order from State Bank of India, Overseas Branch, Ludhiana, which in turn was deposited with a branch of the Punjab National Bank at Ludhiana in the account of Shri Ramesh Lal and subsequently withdrawn through bearer cheques. Further Shri Ramesh Lal was a dummy of Shri Mahajan and during search at the latters residence blank cheques and documents signed by Shri Ramesh Lal were also recovered;
(xvi) That no unaccounted cash or other incriminating material was found either from the residence of the directors or from the companys premises and if the AOs contention that it was done by the directors was correct then some part of the un-accounted money etc. would have been found from their possession;
(xvii) That the Honble Punjab & Haryana High Court in the case of R. P. Mahalan vs. Ralson India Ltd. (1995) 211 ITR 828 (P&H), had upheld the release of Rs. 40.48 lakhs recovered in cash from Shri Mahajan to the assessee-company under Superdari and this established that Shri Mahajan had embezzled the amount. Further the Supreme Court had dismissed the SLP against the order of the High Court. Further the IT Department had appropriated a sum of Rs. 43 lakhs on 9th June, 1993 out of FDRs seized from the residence of Shri Mahajan towards the companys tax liability thus accepting that funds of the company had been embezzled by Shri Mahajan;
(xviii) That loss on account of embezzlement had come to its notice when the books of account for asst. yr. 1992-93 were still open and pending audit and finalisation and recovery at a later date in June 1993 by the Department and in May, 1994 under superdari did not belie the loss suffered by the company during the period ending 31st March, 1992; and
(xix) That the AO had acted entirely on suspicion and a company of assessees stature would not resort to a crude device of withdrawing money for its own pocket and laying the blame on its employees.
7. The CIT(A) rejected the claim for deduction adopting the following line of reasoning :
“I have considered the rival submissions. Appellant-company has made a claim for loss due to embezzlement to the extent of Rs. 1.44 crores (Rs. 1,44,47,500 to be precise). Both sides agree and there is no dispute that Sh. R. P. Mahajan is a party to siphoning off this amount. The dispute is as to whether the managing director, Shri Sanjeev Pahwa, along with Sh. Mahajan and others attempted to inflate purchases and expenses and on discovery due to search by IT Deptt. attempted to wriggle out of it. According to the appellant a criminal suit is pending against Sh. R. P. Mahajan for embezzlement. Another suit is also pending against Shri R. P. Mahajan for recovery of the embezzled amount. A part of the sum of Rs. 55 lakhs (Rs. 55,53,129 according to the order of Punjab and Haryana High Court in R. P. Mahajan vs. Ralson India Ltd. & Ors. (1995) 211 ITR 828 (P&H), seized from the residence of Sh. Mahajan out of the embezzled amount has already been adjusted against the tax according to the AO. A further sum of Rs. 40,58,214 was recovered from the possession of Shri R. P. Mahajan, the accused, by the police along with I.V. Ps valued at Rs. 9 lakhs. This sum of Rs. 40,58,414 was ordered to be released to the appellant on superdari by the additional sessions judge, as the amount was held to be disproportionate to the ostensible means of Sh. R. P. Mahajan by the additional sessions judge who further held that the appellant company shall appear to be entitled to the custody of the amount lying in the custody of the Court as it would not be just and proper to keep such a huge amount locked in sealed boxes thereby keeping it out of circulation resulting in national loss. The appellant was however asked to give a bank guarantee in this regard. This order has been confirmed by the High Court in the case of Sh. R. P. Mahajan vs. Ralson India Ltd. & Ors. (supra).
The question now is whether the appellant-company is entitled to a deduction of whole or the balance amount which is not yet recovered or adjusted by the IT Department. As discussed above, the claim of appellant for deduction is on account of loss of entire amount due to embezzlement by Shri R. P. Mahajan, an employee. The Supreme Court in the case of Associated Banking Corpn. of India Ltd. vs. CIT (1965) 56 ITR 1 (SC) has held that embezzlement of funds by an agent does not necessarily result in a loss immediately when the embezzlement took place. The embezzlement may remain unknown to the principal and the assets embezzled may be restored by the agent or servants. In such a case in a commercial sense no real loss has occurred. Again it cannot be said that in all cases when the principal obtained knowledge of the embezzlement, the loss results. The erring servants may be persuaded or compelled by a process of law or otherwise to restore wholly or partly his ill-gotton gains. Therefore, so long as a reasonable chance of obtaining restitution exists loss may not in a commercial sense be said to have resulted. Further, loss was held by Supreme Court as to have occurred when appellant came to know of it. Therefore, on this ground alone the claim is not allowable this year as appellant claims that it come to know of it long after the close of the accounting year. It has been stated on behalf of the appellant that Sh. R. P. Mahajan has various plots and share certificates other than the recovery of approximately Rs. 55 lakhs in FDRs and approximately Rs. 40 lakhs in cash and Rs. 9,10,000 in I.V. Ps. Therefore the condition that there is no reasonable chance of obtaining restitution is absent. In the facts and circumstances, therefore, the claim of loss is disallowed and the addition of Rs. 1,44,47,500 is sustained. As regards the culpability of the managing director, the Department is at liberty to examine in detail this issue in proceedings under s. 271(1)(c) of the IT Act, already initiated by the AO and or take recourse to proceedings under s. 276C of the IT Act.”
8. We must mention, at the outset, that there is some contradiction and lack of clarity in the order passed by the CIT(A). We have underlined certain observations of the CIT(A) in the preceding para and he, at one point, gives a categorical finding of fact to the effect that “Shri R. P. Mahajan is a party to siphoning off this amount” whereas in the same breath he states that the dispute is about the persons involved and whether these include the managing director and there being an attempt on their part to inflate the purchases and expenses and on discovery by the IT Department to wriggle out of it. Then again, in the same para the CIT(A) frames another question and this being to the effect whether the company is entitled to a deduction of the whole of the balance amount which is not yet recovered or adjusted by the IT Department. Then again, at the end of the para the CIT(A) refers to the “culpability of the managing director” whereas the AO categorically stated in the assessment order that he was not making any observations regarding the persons, who were parties to the embezzlement. We must mention that in ground No. 2 raised before the Tribunal the assessee-company has taken objection to the observation of the CIT(A) vis-a-vis the “culpability of the managing director” and the further reference to provisions of s. 271(1)(c) and 276-C of the IT Act.
9. Taking up at this stage ground No. 2, we, after hearing the parties, are of the view that these observations are not called for as these are likely to prejudice the mind of the AO in the various connected proceedings. We would accordingly ask the AO not to be guided by the aforesaid observations.
10. In reverting back to the main issue, we have already highlighted the aforesaid apparent contradictions in the order of the CIT(A) and would now deal with the arguments advanced by the learned counsel for the assessee and these being more or less identical to those tendered before the tax authorities.
The following points were highlighted by the learned counsel :
(i) The FDRs found at the house of Shri R. P. Mahajan had been adjusted by the Department against the tax demand of the assessee and the cash found in the same premises released on superdari to the assessee company;
(ii) There was no finding by the CIT(A) to the effect that the amount of Rs. 1.29 lakhs had not been embezzled;
(iii) The amount related to the year under appeal and although the search by the Department at various locations including the residence of the managing director and of Shri Mahajan took place in October, 1992 the entries of withdrawals from the bank were in the year of appeal and the books in respect of which were open;
(iv) The criminal cases were still pending in the Court and no further recovery had been made till date;
(v) In a commercial sense the loss was of the year under appeal and it should be accordingly allowed;
(vi) The Hope of recovery” was a term quite different from “attempt to recovery” and filing of a suit was not a negation of the “hope of recovery”;
(vii) The claim for deduction in entirety could be allowed in the year of appeal and the subsequent recoveries could be brought to tax in the respective assessment years under s. 41(1). Alternatively, the amount still to be recovered could be allowed;
(viii) That the FDRs found at the residence of Shri R. P. Mahajan had been assessed as his income and further all other assets found in his possession had been attached;
(ix) That the year of detection was not relevant as the loss had to be related back to the previous year to which it pertained;
(x) The current law of bad debts was quite liberal since mere passing of entries in the books of accounts was good enough and the question of hope of recovery was not relevant anymore; and
(xi) The judgment of the Honble Supreme Court reported in (1965) 56 ITR 1 (SC) (supra) was distinguishable since in that case entries were not made in the books of accounts whereas in the case of the present assessee the entries had been duly passed.
11. In support of the aforesaid arguments as also the arguments raised before the tax authorities and vehemently contending that the claim was allowable in the year under appeal, the learned counsel placed reliance on the following judgments :
(i) Rajinder Pal Mahajan vs. Ralson India Ltd. & Ors. (supra);
(SLP rejected by the Honble Supreme Court as agreed by the parties and as mentioned in the order of the CIT(A) at page 12);
(ii) Bombay Forgings Pvt. Ltd. vs. CIT (1994) 206 ITR 562 (Bom);
(iii) G. G. Dandekar Machine Works Ltd. vs. CIT (1993) 202 ITR 161 (Bom), and
(iv) Shitla Prasad Shyam Lal vs. CIT (1991) 188 ITR 514 (All).
12. The learned Departmental Representative, on the other hand, strongly supported the orders passed by the tax authorities. It was stated, at the outset, that the CIT(A) had ignored certain crucial facts which had been noted by the AO. The further submission was to the effect that the matter was pending in Courts and Rs. 55 lakhs and odd had already been adjusted against the tax demand of the assessee and substantial amount of cash had been released to it on superdari. It was further contended that the FDRs of Shri R. P. Mahajan and others were not related to the withdrawals of the amounts from the assessees bank accounts. The learned Departmental Representative also referred to the facts of the case pertaining to the assets of Shri R. P. Mahajan as also the subsequent recoveries made for the argument that the “hope of recovery” was not lost and the claim merited rejection vis-a-vis the year under appeal. In support of the aforesaid arguments, the learned Departmental Representative placed reliance on the following decisions :
(i) Tubes and Malleables Ltd. vs. CIT (1995) 216 ITR 5 (Mad);
(ii) Plas-Fab Pvt. Ltd. vs. CIT (1994) 208 ITR 154 (Bom);
(iii) Associated Banking Corporation of India Ltd. vs. CIT (supra)
(iv) Unreported decision of the Tribunal in the assessees own case for asst. yr. 1987-88 in ITA No. 3565 (Del) of 1991 dt. 28th February, 1996.
13. After considering the rival submissions, we are of the view that the CIT(A) has not tackled the real issue before him, but has skirted the same by making certain observations which are contradictory in nature (see paras 7 & 8 of this order). The AO had recorded numerous facts in support of the addition and the assessees counsel advanced lengthy arguments with reference to the material on record challenging these facts, but the CIT(A) has not dealt with any of them.
14. The assessees counsel categorically stated that no asset was found either at the residence of the directors or at the business premises, but substantial assets in the form of cash, FDRS. & I.V. Ps were found from the possession of Shri R. P. Mahajan. There was also a reference to the relevant records being as, missing from the bank and there being a possible connivance of bank staff. Then again, there were no vouchers prepared by the accounts department of n the assessee-company for withdrawal of the sum of Rs. 129.48 lakhs. Further undated cheques and information copies signed by the managing director and his mother were found at the residence of Shri R. P. Mahajan. That no discrepancy had been detected in the purchases and observations of the AO in this respect were incorrect. There was also a submission to the effect that Shri Mahajan “fabricated” the balance sheet by “inflating purchases”. That although the embezzlement took place during the previous year under consideration when the amounts were withdrawn from the books the realisation dawned on the assessee-company including its managing director only when the raids took place in October, 1992 and internal enquiries were conducted leading to an FIR being filed on 7th October, 1992.
15. Before us, the learned counsel has cited authorities for the proposition that under the aforesaid circumstances the loss is allowable in the year under appeal. He has also attempted to distinguish the decision of the Honble is n Supreme Court in the case of Associated Banking Corpn. of India Ltd. (supra) of relied upon by the CIT(A).
16. As against this the CIT(A) has also ignored various facts noted by the AO and which was a point raised before us by the learned Departmental Representative in her submissions. We only need refer to the observations pertaining to the existence of an “adequate internal audit control system in operation” as reported by the companys auditors. Further the cash and bank vouchers for the months of February and March, 1992 had been signed by the managing director or his mother and this “proved that the day-to-day financial transactions whether in cash or through the bank were controlled by them”. The AO has also appended various annexures to the assessment order to support Revenues case.
17. It may also be appreciated that the purported “embezzlement” took place in 1992 and it was stated before us that criminal proceedings are pending against Shri R. P. Mahajan in the Court. We have not been told by the parties as to What is the present position. Then again, substantial recoveries have been effected from Shri R. P. Mahajan in subsequent years and there is no indication as to what treatment has been given since one of the submissions made before us was to the effect that the entire claim be allowed in the year of appeal, and subsequent recoveries be taxed. The CIT(A) has also stated that “Both sides agree and there is no dispute that Shri R. P. Mahajan is a party to siphoning off this amount”. All that we would like to say is that a fact cannot be ascertained on an agreement between the parties, but it has to be found on evidence and material.
18. We can go on and on but in our opinion the discussion in, the preceding paras leaves us in no doubt that the CIT(A) has not examined the issue in proper perspective and to enable him to do so, we set aside his order and restore the matter to his file for a decision de novo on merits, after giving reasonable opportunity to the parties.
19. Ground No. 3 in the appeal, reads as under :
“3. That the learned CIT(A) erred on facts and in law in confirming the disallowance of an expenditure of Rs. 1,25,00,000 incurred in connection with the preservation of the business factory and establishment of the company.
3.1 That the sum of Rs. 1,25,00,000 paid by the assessee-company to terrorists in Punjab for safeguarding and preserving its business was clearly a revenue expenditure allowable while computing the business income of the assessee.
3.2 That on the basis of the evidence on record that aforesaid sum having been gone out of the coffers of the company, was clearly deductible from the business income of the company”.
20. We have heard both the parties and have also perused the orders passed by the tax authorities. The case before the tax authorities was to the effect that the payment was made to safeguard the interest of the company and to ensure smooth running of the business. As regards evidence, certain photographs and newspaper cuttings were filed contending in the process that Shri Sanjeev Pahwa, the managing director of the company had been attacked by some terrorists in July, 1991. As against this the AO noted that the alleged payment of Rs. 1.25 crores was purported to have been made to unknown persons after a period of 8 months from the date of claimed attack on Shri Sanjeev Pahwa. It was further noted that no kidnapping or abduction had taken place with the further observation that such payments not only encouraged terrorism, but constituted an illegal act. The AO further observed that the cash book of the company had been tampered with and by referring to the opening and closing cash balances he reached a conclusion that the payment of Rs. 1.25 crores could not have been made from this account. In para 23 of the appellate order, the CIT(A) has summarised the arguments advanced on behalf of the assessee in support of the claim and in para 25 the case of the Revenue is stated. The CIT(A) further referred to the arguments of the assessees, counsel to the effect that in the absence of proof, cognizance should be taken of circumstantial evidence. A reference was also made to the fact that there was sufficient cash balance throughout the year, but the entire payment was shown on the last day of the previous year although the payments “had been made periodically”.
21. The aforesaid submissions did not find favour with the CIT(A) who proceeded to uphold the order of the AO rejecting the claim. According to him, the only circumstantial evidence cited in support was the attack on Shri Sanjeev Pahwa in July, 1991 and it could not be said that payment made to save Shri Pahwa was for preserving the business of the company. The CIT(A) specifically highlighted the making of one consolidated entry although it was the assessees case that payments had been made periodically.
22. After examining the rival contentions, we are of the view that there is no merit for the assessee vis-a-vis the facts and circumstances of the present case. As rightly noted by the CIT(A) the so-called circumstantial evidence is not at all ample for justifying the claim for deduction and in this view of the matter, the disallowance is confirmed.
23. Ground No. 4 in the appeal, reads as under :
“4. That the learned CIT(A) ought to have allowed the trading liability on account of trade bonus of Rs. 1,13,60,814 while computing the business income of the assessee as the same was claimed on accrual basis according to the mercantile system of accounting adopted by the assessee.
4.1 The learned CIT(A) erred in directing the AO to allow this claim after verification on actual payment basis notwithstanding the mercantile system of accounting followed by the assessee”.
24. Both the tax authorities have referred to the earlier assessment orders as also the orders passed by the first appellate authority. The learned counsel for the assessee stated that in the preceding assessment years the appeals were pending before the Tribunal and it would be in the fitness of things if the AO be asked to pass an order in conformity with the decision of the Tribunal whenever delivered. The learned Departmental Representative did not oppose the aforesaid submissions made on behalf of the assessee. In the light of this accepted position we would direct the AO to pass an order as soon as the matter has been decided by the Tribunal in the preceding assessment years for which appeals are stated to be pending before the Tribunal. Ground No. 4 is accordingly treated as disposed off.
25. Ground Nos. 5 and 6 pertaining to the disallowance under s. 43B were not pressed and these are being rejected.
26. Ground Nos. 7 and 8 in the appeal, read as under
“7. That the learned CIT(A) erred in not allowing deduction under s. 8OHHC of the Act on the basis of the assessed income of the assessee.
8. That interest under s. 234(B) of the Act has wrongly been levied”.
27. Both the parties agreed and stated that these grounds are consequential vis-a-vis the relief that may become available as a result of the disposal of the earlier grounds. We would accordingly direct the AO to allow consequential relief if available at the time of giving appeal effect to our order.
28. In the result, the appeal is partly allowed, for statistical purposes.