ORDER
Kathuria, Accountant Member
1. This appeal by the assessee pertains to assessment year 1985-86. As many as four grounds have been raised. Ground No. 4 is regarding the charging of interest under Section 215 of the Income-tax Act at Rs. 36,181. At the time of hearing it was submitted by Shri I.C. Verma, the learned Counsel for the assessee, that this ground was merely consequential in nature. We accordingly direct the Assessing Officer to allow consequential relief, if any, as a result of this order of ours.
2. The other three grounds relate to one issue, namely, the upholding of disallowance of Rs. 15,30,201 claimed on account of alleged embezzlement by the Accountant. Brief facts of the case are these. The assessee is a registered firm whose accounting period relevant to assessment year 1985-86 ended on 31-3-1985. The assessee-firm derives income from manufacture and sale of rolled steel products. For assessment year 1985-86, the assessee-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:–
Assessment 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 other words, in addition to the loss of Rs. 4 lacs claimed on account of em bezzlement in the year under consideration, the assessee claimed such loss for the immediately three preceding years at Rs. 11,30,201, aggregating in all to Rs. 15,30,201. The Assessing Officer, for the reasons mentioned by him in the assessment order, held that the loss of Rs. 15,30,201 could not be allowed in the year under consideration because it had not been discovered and had not become irrecoverable. He further held that it was too premature to determine whether there was any embezzlement at all in this case. He was also of the opinion that the assessee’s claim was not in accordance with the civil suit filed which was only for Rs. 11,80,000 as against the claim of Rs. 15,30,201.
3. The learned CIT(Appeals) observed that the assessee-firm consisted of 10 partners who were all educated and it was inconceivable that such a huge amount of Rs. 15,30,201 had been embezzled by a mere accountant of the assessee-firm in a small place like Amloh during the transactions at a small branch of the State Bank of Patiala at Amloh without the connivance of the partners. He also gave weight to the fact that when the Assessing Officer insisted on the production of two partners, namely, Shri Om Parkash and Shri Kulwant Rai, only one partner, Shri Kulwant Rai, was produced. He accordingly held that it was not a case of embezzlement by an employee of the assessee-firm but a case of fraud by partners in connivance with the accountant of the assessee-firm. He accordingly recorded a finding that the Assessing Officer was justified in disallowing the amount of Rs. 15,30,201 on account of alleged embezzlement by the accountant, Shri Narinder Kumar.
4. Assuming though not admitting that the embezzlement had actually taken place, the learned CIT(Appeals) further held that since the assessee-firm had filed civil and criminal proceedings against the accountant Shri Narinder Kumar, the embezzled amount was in the process of realisation and there was still a ray of hope that the assessee-firm would be able to recover the lost amount. He, therefore, rejected the claim of the assessee on this ground as well.
5. Shri Verma, the learned Counsel for the assessee submitted that the lower authorities had not appreciated the matter in proper perspective. It was submitted that Shri Narinder Kumar had joined the assessee-firm as an accountant-cum-clerk in 1978 and had left the assessee-f irm 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 pointed out that in the said ledger in the account of Punjab and Sind Bank Ltd., instead of showing a sum of Rs. 1,50,000, a sum of Rs. 50,000 actually was credited. It was, therefore, submitted that on the basis of this information, the assessee-firm discovered that there was a fraud committed by Shri Narinder Kumar. It was submitted that for purposes of determining the quantum of such fraud, the account books of the assessee were given for audit to M/s. Datta Singla and Co., Mandi Gobindgarh. It was vehemently and again and again argued that the partners had already discovered the embezzlement made by the accountant, in February 1985 itself and what was done by the Chartered Accountants was a mere quantification of the embezzled amount. It was, therefore, submitted that the entire amount of Rs. 15,30,201 had been rightly claimed as a loss in the year under consideration.
6. Shri Verma argued at length that the real test for claiming the loss on account of embezzlement, fraud, etc., was to claim it in the year in which such fraud, embezzlement, etc., had actually been discovered or detected. Reliance in this regard was placed on the circular of the Central Board of Direct Taxes being circular No. 35D(XLVH-27) dated 24-11-1965 in which the Board in the light of the Supreme Court decisions in the cases of Badridas Daga v. CIT [1958] 34 ITR 10 and Associate Banking Corpn. of India Ltd. v. CIT [1965] 56 ITR 1 clarified that loss by embezzlement by employees should be treated as incidental to a business and this loss should be allowed as deduction in the year in which it is discovered. The learned Counsel for the assessee also placed reliance on the Supreme Court decision in the case of Associate Banking Corpn. of India Ltd. (supra) in which it was held that the loss on account of embezzlement had to be allowed in the year in which such loss was detected. The learned Counsel for the assessee also placed reliance on the observations of the Punjab and Haryana High Court in the case of Punjab Steel Stockholders Syndicate Ltd. v. CIT[1980] 125 ITR 519. It was submitted that though that case was ultimately remanded by the High Court to the Tribunal, certain principles enunciated by the High Court were relevant and one such principle was that loss has to be allowed in the year in which such loss comes to be known.
7. The learned Counsel for the assessee also relied on the 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 Ahmedabad Bench of the Tribunal, the embezzlement had been accepted by the employee and in the present case, the Court had held that Shri Narinder Kumar had embezzled the amounts. It was also pointed out that in both the cases, the Chartered Accountants had been appointed to ascertain the manner, method and extent of the embezzlement. It was highlighted that in the present case, the Chartered Accountants had been appointed in February 1985 which date fell during the year relevant to assessment year 1985-86. It was submitted that the modus operandi adopted by the accountant was manipulation of entries in the account books by drawing more cash from the bank but showing less in the account books and by depositing less amount in the bank but showing more in the account books and so on. It was submitted that in the case before the Ahmedabad Bench also there was misappropriation of cash and inflation of expenses. In short, it was submitted that both the cases being identical, the loss had to be allowed in the year in which embezzlement was discovered which fell in the year relevant to assessment year 1985-86 and hence the entire loss of Rs. 15,30,201 had to be allowed in the year under consideration.
9. The learned Counsel for the assessee submitted that after the account books had been audited and loss on account of embezzlement had been quantified by the Chartered Accountants, the assessee revised the returns for assessment years 1982-83, 1983-84, 1984-85 and 1985-86. It was submitted that for assessment year 1982-83, original return filed on 31-7-1982 disclosed income of Rs. 1,43,390 against which assessment was made on 28-2-1985 on total income of Rs. 1,46,000. It was submitted that later on, the assessee took advantage of the Amnesty Scheme and filed a revised return on 13-3-1987 showing total income of Rs. 3,76,200 which was accepted by the Revenue. As regards the assessment year 1983-84, it was submitted that the return initially filed on 31-12-1985 disclosed the income at Rs. 1,37,500 which was revised on 29-12-1986 to Rs. 5,37,500 and the assessment was made on total income of Rs. 5,62,000. As regards the assessment year 1984-85, it was submitted that the original return filed on 21-8-1984 declared net income of Rs. 1,39,680 and that later on taking advantage of the Amnesty Scheme, the assessee filed a revised return on 17-2-1987 declaring net income of Rs. 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 Additional Senior Sub-Judge, Amloh dated 15-6-1992 in Civil Suit No. 498 instituted on 24-12-1985;
(ii) Copy of the report of the Questioned Documents Examiner dated 14-10-1989; and
(iii) A certificate dated 22-10-1994 from Chartered Accountants M/s. Datta Singla and Co. confirming that the audit was entrusted to them during the financial year 1984-85.
It was submitted that the judgment in the civil proceedings, a copy of which has been filed before us, was delivered late and was not available when the lower authorities passed their orders and since this judgment was very crucial in certain respects, the same may be admitted. Similarly, as regards the report of the Questioned Documents Examiner, it was submitted that the same was also relevant and since it had been received subsequent to the orders of the authorities below, the same may also be admitted. As regards the certificate from M/s. Datta Singla & Co., Chartered Accountants, it was submitted that the same had to be obtained because the lower authorities had given a finding that the embezzlement had not been detected in the financial year 1984-85.
10. After hearing the learned representatives of both the parties, copy of the judgment of the Additional Senior Sub-Judge, Amloh dated 15-6-1992 was admitted for the reason that it was essential in considering certain facts and because the judgment had been delivered much later though the civil suit had been instituted as early as 24-12-1985. As regards the report of the Questioned Documents Examiner, it was decided not to admit the same because such a report was not furnished earlier and at any rate, such a report was a mere expression of opinion of an expert. The certificate of M/s. Datta Singla & Co. was also not admitted because it was not shown as to why it could not be obtained during the course of the assessment proceedings and as to why it was obtained much later on 27-10-1994.
11. On the basis of the judgment of the Additional Senior Sub-Judge, Amloh referred to above, it was submitted by Shri Verma that the civil court had been pleased to hold that it was Shri Narinder Kumar, the accountant-cum-clerk who had misappropriated/embezzled the suit amount of Rs. 11,80,131 and the suit for the recovery of a sum of Rs. 11,80,131 with costs and future interest at the rate of 6 per cent per annum was passed in favour of the assessee-firm. On the basis of 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 was there any chance of receiving any amount from the said accountant and the entire loss of Rs. 15,30,201 was actual and real and had to be allowed as a deduction from the total income of the assessee in the year under consideration.
13. During the course of proceedings before the Tribunal, it was pointed out to the assessee as to why the loss for the earlier three years, namely, assessment years 1982-83,1983-84 and 1984-85 be not held to be allowable in those years instead of assessment year 1985-86 in view of the Bombay High Court decision in the case of Bombay Forgings (P.) Ltd. v. CIT[1994] 206 ITR 562. Shri Verma submitted that the facts before the Bombay High Court in the case of Bombay Forgings (P.) Ltd. (supra) were distinguishable because in that case, the embezzlement had been made in the stock-in-trade whereas in the instant case, embezzlement had been made by way of cash by resorting to various subterfuges as enumerated above. It was also submitted that in the present case, the manipulation had been done by the accountant not with a view to saving the tax of the assessee but for embezzlement. It was submitted that in the present case since the embezzlement was discovered in February 1985, the entire loss of Rs. 15,30,201 was allowable as a deduction for the assessment year under consideration.
14. The learned D.R. forcefully submitted that in the present case, embezzlement had been done with the connivance of the partners. It was also submitted that the claim of the assessee was not allowable for the simple reason that the assessee had already been allowed to recover a sum of Rs. 11,80,131 and there were chances of recovery from the accountant of the allegedly embezzled amount. The learned D.R. submitted that though the f actum of embezzlement was not admitted but even assuming for the sake of arguments that such embezzlement had taken place, the same had not taken place in the year under consideration but much later. It was submitted that in February 1985, if at all, the assessee asked the Chartered Accountants to audit its books of account, it was not with a view to determining any embezzlement but with a view to getting the books of account audited. The learned D.R. emphasised that it may be that the assessee had come to know that there were certain discrepancies in the account books but the charge of embezzlement had not yet crystallised in the mind 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 Kolhari & 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 do certain transactions which are not faithfully recorded in the books of account. The manner in which the amounts had been withdrawn from the bank and deposited in the bank in the present case shows that this could not be at the behest of the partners of the assessee-firm. One of the points which has swayed the departmental authorities is that Shri Om Parkash partner was not produced for examination. In this connection, it has been submitted on behalf of the assessee that the time given for production of Shri Om Parkash partner was rather short, that Shri Kulwant Rai partner who was available was produced and Shri Om Parkash partner could not be produced was not because there was any resistance to his being produced but because it was not physically possible to do so at a short notice. In our opinion, the onus was on the Revenue to prove that the embezzlement in the present case was done collusively which has not been discharged in the present case. The Additional Senior Sub-Judge, Amloh, in his judgment dated 15-6-1992 has clearly held that Shri Narinder Kumar who had rather humble beginnings and modest sources of known income, had amassed huge wealth in his own name and in benami names and that could be possible only because he was embezzling the funds of the firm. We, therefore, do not accept the argument of the learned D.R. that the embezzlement in the present case was as a result of connivance of the partners.
16. As regards there still being a ray of hope for recovery, suffice it to say that the decision of the Additional Senior Sub-Judge, Amloh has come after seven years of filing of the suit and in spite of the fact that suit for recovery h as been ordered of a sum of Rs. 11,80,131, the assessee has not received a penny so far and the accountant is still denying having committed any embezzlement or fraud. The assessee had filed FIR on 30-8-1985 and then a suit on 24-12-1985. These steps clearly show that the assessee was keen to recover the amount from the accountant who left the services of the assessee in December 1984. The very fact that the assessee had not been able to realise a single penny so far shows that there was no hope of any recovery of amount. In any case whether the assessee is finally able to recover any amount or not, would not be very relevant because what has to be seen is whether there has been an embezzlement in this case or not. 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 exchanged between the Chartered Accountants and the assessee-firm which have been placed before us. We have also gone through the relevant material in this regard. It appears that all the discrepancies that have occurred are in respect of the deposits in and withdrawals from the State Bank of Patiala, Amloh. It is, therefore, not possible to follow that the assessee would have come to know from a certificate dated 21-2-1985 issued by the Manager of Punjab and Sind Bank that there was an embezzlement of Rs. 1 lac. The material placed before us does not show that the accountant had, in fact, embezzled this amount of Rs. 1 lac for assessment year 1982-83 because the transaction is with the Punjab and Sind Bank and not with the State Bank of Patiala. Be that as it may, this could raise only a suspicion in the minds of the partners of the assessee-firm that there were discrepancies in the books of account but in February 1985 the assessee could not conclude that the embezzlement had been definitely committed in the present case. No evidence had been produced before the lower authorities that the Chartered Accountants had been asked in February 1985 to determine the embezzlement committed in this case. It appears to be a case of getting the books of account audited particularly after sensing certain discrepancies in the account books. This would be amply clear from the correspondence that passed between the Chartered Accountants and the assessee-firm, copies of which have been placed before us. For assessment year 1982-83, there is Auditors’ report dated 4-3-1987 in which a sum of Rs. 3,50,201.50 as per details enclosed in annexure ‘A’ has been debited by the Chartered Accountants to Narinder Kumar’s embezzlement account. For assessment year 1983-84, there is a letter from the Chartered Accountants to the partners of the assessee-firm dated 12-3-1986. The letter refers to certain discrepancies in the bank reconciliation and excess withdrawals vis-a-vis cash book but the Chartered Accountants towards the end of the letter wrote as follows :–
You are requested to explain the above and inform as at your earliest to enable us to proceed further with the audit. We would also like to bring to your kind notice that there are totalling and posting differences in many accounts.
If the Chartered Accountants had been assigned the task of quantifying the embezzlement, then they 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 report thereon”. This also shows that the assessee had not asked the Chartered Accountants to determine or quantify the amount of embezzlement and what the Chartered Accountants were asked was only to finalise the audit of account books.
21. It is also pertinent to note that the audited reports are stated to have been received by the assessee-firm much later than 31-3-1985 as would be clear from the following information submitted before us by the learned Counsel for the assessee :–
Assessment year Date of the audit
report
1982-83 4-3-1987
1983-84 29-11-1985
1984-85 4-2-1987
1985-86 20-7-1985
From the above, it is clear that the embezzlement had been discovered at the earliest on 20-7-1985 and thereafter the assessee-firm filed FIR before the police authorities on 30-8-1985. In fact, the said FIR refers to the assessee's having first filed a report on 25-7-1985 which was not found to be in order and hence the FIR was filed subsequently on 30-8-1985.
22. We accept the argument of the learned Counsel for the assessee that the loss on account of embezzlement has to be allowed in the year of discovery/detection. This is as per the case law cited by the learned Counsel for the assessee and is also in accordance with the circular issued by the Central Board of Direct Taxes referred to supra. There is also no dispute about the quantum of embezzlement either. But the point to be decided, however, is as to whether embezzlement in the present case was detected in the year relevant to assessment year 1985-86 or not.
23. In view of the foregoing discussion, we are clear in our mind that embezzlement had not been discovered/detected in the year under consideration, i.e., up to 31-3-1985 and hence the loss as a result of embezzlement could not be allowed as a deduction for assessment year 1985-86. On this ground alone, the matter is decided against the assessee and in favour of the Revenue.
24. In the result, the appeal is dismissed.