ORDER
R.L. Sangani, Judicial Member
1. This appeal by the assessee arises out of the assessment proceeding for the assessment year 1972-73.
2. The assessee is a company dealing in motor spare parts. The allegation of the assessee is that in the accounting year relevant to the assessment year 1969-70, D.S. Mehta and A.K. Verma, Manager and Accountant of the Indore Branch, misappropriated cash and goods worth Rs. 51,398 in the course of the business of the assessee. A report was lodged and challans were filed by the police against those two persons in the Magisterial Court at Indore. D.S. Mehta was convicted under Section 408 of the Indian Penal Code, 1860, for criminal breach of trust on 31-3-1980 and was sentenced to rigorous imprisonment for 3 years and fine while A.K. Verma was acquitted.
3. The assessee debited Rs. 51,398 to profit and loss account in the accounting year relating to the assessment year 1969-70 on account of ‘amount and value of stocks misappropriated’.
4. The assessee claimed deduction in the assessment for the assessment year 1969-70 but it was rejected by the ITO on the ground that it was premature. In the appeal against the said rejection for the assessment year 1969-70, the AAC while confirming the order of the ITO observed that it was not known whether those two persons who committed embezzlement had assets from which amount could be realised and as such the claim was premature. This order became final.
5. The assessee again claimed deduction in the assessment year 1972-73 on the ground that the claim for recovery had become barred by time and was not realisable. The AAC sent the matter back for fresh consideration in the light of decision of the Supreme Court in Badridas Daga v. CIT [1958] 34 ITR 10. The ITO considered the matter afresh and noticed that one of the two employees had been convicted while the other had been acquitted and that misappropriation proved in criminal case was for smaller amount and that all the remedies had not been exhausted. In other words, the implied finding was that the claim was still premature.
6. The assessee again came in appeal before the AAC. The findings of the AAC which appear to be contradictory inter se may be summarised as follows :
(i) The embezzlement did take place as alleged and the loss arising out of said embezzlement was incidental to the business judgment However, quantum of loss was not fully established by the Judgments of the Criminal Courts.
(ii) The loss caused by the embezzlement was allowable as deduction not necessarily in the year in which embezzlement took place but when assessee knew about it and gave up hopes of recovering it as laid down in Associated Banking Corporation of India Ltd. v. CIT [1965] 56 ITR 1 (SC) and other cases.
(iii) The loss arising out of embezzlement arose in the accounting year relevant to the assessment year 1969-70 and right from the beginning the assessee did not have any hope of recovering anything out of the amount of Rs. 51,398 and that is the reason why the amount had been written off in the accounting year relevant to the assessment year 1969-70 and no civil suit had been filed.
(iv) The assessee was under the wrong impression that claim was allowable under Section 36(2)(III) of the Act.
(v) The assessee had not produced any evidence to show that something happened in the previous year relevant to the assessment year 1972-73 to show that amount was no longer recoverable. The amount had become irrecoverable prior to 31-3-1969.
7. The contention of the assessee is that the amount had become irrecoverable in the accounting year relevant to the assessment year 1972-73 and, hence, was eligible for deduction. The learned departmental representative relies on the reasons given in the order of the AAC.
8. It is not disputed that embezzlement by the employees did take place in the course of business Judgment It is now well established that loss caused by embezzlement which is incidental to the business and which is non-capital in nature is allowable as deduction on ordinary commercial principles of computing the profits.-Badridas Daga’s case (supra) and CIT v. Nainital Bank Ltd. [1965] 55 ITR 707 (SC).
9. It is equally well settled that loss caused by embezzlement is allowable as deduction not necessarily in the year in which embezzlement takes place but when there is no reasonable chance of obtaining restitution and the amount is found to be irrecoverable.
10. In the present case embezzlement took place in the accounting year relevant to the assessment year 1969-70. The assessee was prompt to make report to the police and the police in turn filed challans in the Criminal Court against the delinquent employees. There could be a ray of hope in the assessment year 1969-70 that the concerned employees might repent and make good the loss But they did not. There is no reason to disbelieve the assessee when it claims that the concerned employees had no assets from which the amount could be recovered. In the accounting year relevant to the assessment year 1972-73, the limitation for institution of suit had expired. Hence, no further, legal remedy was available. The concerned employees were contesting the criminal proceeding and they were not willing to pay any amount voluntarily. They had no assets from which recovery could be made and it was futile to institute civil suit for recovery and incur unnecessary expenses. In the circumstances, it must be held that no chance of restitution had survived in the accounting year relevant to the assessment year 1972-73 and the amount had become irrecoverable in that year and as such amount representing said loss was liable to be deducted.
11. The question is as to what the loss was. The accounts of the company are audited in accordance with law and as such the amount shown in the accounts may be prima taken to be the amount representing the loss However, from the orders of the ITO and the AAC it appears that the amount has not been duly verified in the course of assessment. Consequently, it is necessary to direct the AAC to allow the said deduction after due verification.
12. Before parting we may observe that the mere fact that criminal prosecution was for a smaller amount or that criminal breach of trust proved in the criminal case was for a smaller amount would not mean that embezzlement was for smaller amount. The criminal case was prosecuted by the police and the assessee was not a direct party to the case. In the criminal case, benefit of any doubt goes to the accused and dispute of civil nature is not subject-matter of adjudication by the said Court. The factor of institution of criminal case is relevant only to lend assurance to the allegation that the embezzlement did take place. What the amount of embezzlement is, has to be determined on the basis of accounts and for that determination standard of proof required in a Criminal Court is not to be applied. Normally the assessing authorities should be satisfied from the audit report. However, they are entitled to verify if they entertain any doubt about the quantum.
13. We direct the AAC to verify the quantum of loss due to embezzlement in the light of what is stated above and allow the same as deduction after due verification.
14. The appeal is, accordingly, allowed.
