Advocate Akhilesh Kumar Sah
The losses occurring to an assessee due to dacoity, theft or embezzlement, etc., may be claimed as deductible while making the income chargeable to income-tax under the head “profits and gains of business or profession” under section 28. The loss by theft is not covered by section 10(2) (xv) of the Income Tax Act, 1922 [corresponding to section 37(1) of the Income Tax Act, 1961) [Motipur Sugar Factory Ltd. v. CIT (1985) 28 ITR 128 (PAT.)]. The deduction contemplated by section 10(2)(xv) of the Income Tax Act, 1922 [corresponding to section 37(1) of Income Tax Act, 1961] must arise out of a voluntary act on the part of the assessee. He must spend an amount for the purpose of the business, profession or vocation and then claim that amount as having been spent wholly and exclusively for the purpose of the business profession or vocation. When the money is lost to the business as a result of embezzlement of an employee there is no expenditure on that part of the employer. That loss is entirely involuntary, and although it may arise in the course of the business or be incidental to the business, it cannot be said that the amount represented by the loss was an amount spent wholly and exclusively for the purpose of the business. [Lord’s Dairy Farm Ltd. v. CIT (1955) 27 ITR 700 (Bom)].
The Patna High Court in Motipur Sugar Factory Ltd. v. CIT (supra) observed that deductions expressly mentioned under section 10(2) of the Income Tax Act, 1922 [corresponding to section 29 of Income Tax Act, 1961] are not exhaustive and the question of computing the “profits and gains” of a business under section 10(1) of Income Tax Act, 1922 [corresponding to section 28 of Income Tax Act, 1961] must be approached in a commercial sense. The Supreme Court in Badridas Daga v. CIT (1958) 34 ITR 10 (SC) observed (at page 15) that “…..What are chargeable to income-tax in respect of a business are the profits and gains of a year; and in assessing the amount of profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains”. Thereafter, it again observed (in the same Badridas’s case) :—
“The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), 1922 Act (corresponding to section 29 of Income Tax Act, 1961), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act.”
Again, the Supreme Court observed in Ramchander Shivanrayan v. CIT (1978) 111 ITR 263 (SC) that a businessman has to keep moneys either when he gets it as sale proceeds of the stock-in-trade or for disbursement to meet the business expenses or for purchasing stock-in-trade and if he losses such money in the ordinary course of business, the loss is a deductible trading loss. It is immaterial whether the money is a part of stock-in-trade, such as, of a banking company or a money lender, or is directly connected with other business operations. The risk is inherent in the carrying on of the business and is either directly connected with it or incidental to it. The Bombay High Court in Lord’s Dairy Farm Ltd. v. CIT (supra) held that if a loss caused to a businessman by reason of the defalcations committed by his employee is a trading loss, then he would be entitled to deduct that loss although such loss may not fall within the ambit of any of the deductions mentioned in section 10(2) of Income Tax Act, 1922 [corresponding to section 29 of the Income Tax Act, 1961].
Claiming robbery, embezzlement loss, etc., as business loss and as an admissible deduction
Loss resulting from embezzlement by an employee or agent in a business is, however, admissible as a deduction under section 10(1) of the Indian Income Tax Act, 1922 [corresponding to section 28 of the Income Tax Act, 1961], if it arises out of the carrying on of the business and is incidental to it. It makes no difference in the establishment or is an agent with large powers of management. It is a question turning on the facts of each case whether the embezzlement in respect of which deduction is claimed took place in the carrying on of the business [Badrids Daga v. CIT (supra]. In Motipur Sugar Factory v. CIT (Supra) the assessee company carrying on business in the manufacture of sugar and molasses out of sugarcane deputed an employee, in compliance with the statutory rules, with cash for distribution to sugarcane cultivators at spot of purchase. The cash was robbed on the way. The Income Tax Officer disallowed the claim of the assessee to deduct this loss from income. On a reference to Patna High Court it observed that the assessee company had to dispatch money to various purchasing centres for payment to sugarcane cultivators. That was an essential part of the business of the assessee for the sugarcane factory cannot work unless there is a supply of sugarcane. It held (Patna HC) that the loss of money was a loss which sprang from the statutory necessity of sending money to various purchasing centers, and such a loss was, therefore, incidental to the business carried on by the assessee and the assessee was entitled to deduct the loss in computing its taxable income under section 10(1) of the Income Tax Act, 1922 [corresponding to section 28 of the Income Tax Act, 1961]. Also, it has been observed by the Supreme Court in CIT v. Nainital Bank Ltd. (1965) 55 ITR 707 (SC) that where loss is incidental to the operation of a business is a question to be decided on the facts of each case, having regard to the nature of the operations carried on and the nature of the risk involved in carrying them out. The degree of the risk or its frequency is not of much relevance but its nexus to the nature of the business is material. In the above cited case, the Supreme Court on the facts and circumstances of the case, held that the loss incurred by dacoity to Bank was incidental to the carrying on of the business of banking and was deductible as a trading loss in computing the income of the respondent from banking business.
Prospects of recovery of the amounts/things gone and attempts by the assessee to recover the same
It has been held by the Supreme Court in Associated Banking Corporation of India Ltd. v. CIT (1961) 65 ITR 1 (SC) that it is wrong to say that irrespective of other considerations, as soon as an embezzlement of the employer’s funds takes place, whether the employer is aware or not of the embezzlement, there results a trading loss. So long as there is a reasonable prospect of recovery of the embezzlement, trading loss in a commercial sense cannot be deemed to have resulted. In Hopkin and Williams (Travancore) Ltd. v. CIT (1967) 64 ITR 76 (Ker) it was held that deduction claimed was an admissible deduction if it was not possible to recover the loss from the persons responsible for the same. If the assessee has made the necessary attempts to recover the loss from the persons concerned and had failed or if the assessee did not make such attempts because it was useless to make them in view of the financial position of the persons concerned, then and then alone the loss could be allowed. In CIT v. Ashwani Kumar Liladhar (1997) 140 Taxation 385 (All) on the facts and circumstances of the case it was held by the Allahabad High Court that sufficient evidence was not produced by the assessee to prove the loss was due to embezzlement and assessee had not made the necessary attempts to recover the loss as such (that) loss was not deductible as business loss. Of course, assessee’s books of accounts must show relevant stock/cash to substantiate the loss due to embezzlement, robbery claimed by him. In Gopi Krishna & Co. v. CIT (1999) 56 Taxman 53 (All) assessee firm was dealer in gold and silver ornaments and silver coins. It claimed deduction in respect of silver bars handed over to munim which were robbed from him and an FIR was lodged with police in that connection. It also claimed deduction in respect of silver coins handed over by one (M) to it for sale which were also allegedly robbed from said munim. It was found that munim was not assessee’s employee and that on date of robbery assessee did not have sufficient stock in its books of account. Assessee was also fond to be not doing any commission business. It was further found that M would not have handed over coins to assessee as on that date, in market, silver price was declining and M was not in need of money. There was also no receipt issued to M at time of taking delivery of coins by assessee. The Allahabad HC, on the facts & circumstances of the case, negotiated the claim of the assessee.
Mixed question of fact and law/onus of proof
The question when loss by embezzlement can be said to occur is a mixed question of fact and law. A decision on this point would rest on the facts and circumstances of each case, the basic principle to be considered in this connection being that the loss must be actual and present [Kothari and Sons v. CIT (1966) 61 ITR 23 (Mad)]. It is settled that the burden to prove a loss, lies on the assessee who is seeking deductions. If the assessee does not prove the loss, the inference goes against him [CIT v. Ashwani Kumar Liladhar (supra)]. When a businessman writes off an amount as a loss, there is primafacie evidence that the amount is irrecoverable. The department can rebut the prima facie inference by drawing attention to the circumstances or by leading some evidence to suggest that the position taken up by the assessee was not correct [Lord’s Dairy Farm Ltd. v. CIT (supra)].
Year of allowability of loss
The decisions in Badridas Daga v. CIT (supra) & Associated Banking Corporation of India v. CIT (supra), and the CBDT vide its Circular No. 35D (XLVII-20) dated 24-11-1965 have clarified that loss by embezzlement by employee should be treated as incidental to a business and this loss should be allowed as deduction in the year in which it is discovered. In CIT v. Durga Jewellers (1988) 172 ITR 134 (MP) a theft had taken place in the business premises of the assessee on 13-8-1974. The FIR was lodged by the assessee on 14-8-1974, indicating the extent of the property which had been stolen. The police was successful in recovering the major portion of the property stolen which was returned to the assessee. The second FIR was lodged by the assessee on 22-9-1974, giving details of such of the properties which had yet to be recovered. A final report, however, was made by the police in the matter on 21-11-1974. The assessee claimed deduction of Rs. 25.000 as value of unrecovered goods which has been stolen. The Income Tax Officer disallowed the deduction. The Income Tax Officer disallowed the deduction. The Income Tax Officer and the Commissioner of Income Tax (Appeals) took the view that since the assessment year 197677 in the case corresponded to the period between 14-11-1974. and 3-11-1974, and the assessee was following the mercantile system of accounting, the loss could be claimed by him not in the assessment year 1967-77 but in the assessment year 1967-77. On a reference it was held by the Madhya Pradesh High Court that the second FIR was lodged by the assessee on 22-9-1974, indicating the extent of the properties which has not yet been recovered. This indicated that the assessee was still hopeful of recovery being made of the remaining properties. The final report was made by the police on 21-11-1974. It could not be said that the assessee was unjustified in entertaining the hope that the remaining properties would also be recovered till 21-11-1974, fell within the assessee’s accounting year relevant to the assessment year 1976-77, the amount of Rs. 25,000 was deductible in the assessment year 1976-77.
The loss due to embezzlement, theft, dacoity, etc. can be an allowable deduction if it can be proved to have arisen out of the carrying on of the business and the same must be incidental to it, but it will depend on the facts & circumstances of the case. What is material is whether the loss caused to the assessee is in the course of his business activity and closely connected with his business. If that is so, it (loss) will be an allowable deduction in computing the “profits” [G.G.Dandekar Machine Work Ltd. v. CIT (1993) 114 CTR 190 (Bom)]. CBDT vide its Circular No. 13 (C. No. 27 (29-IT/43), dated 24-5-1994 has clarified that losses arising by theft of cash by outsiders or due to negligence of the employees should be allowed if the loss took place in the normal course of business and/or the amount involved was necessarily kept for the purpose of the business in the place form which it was lost. It is impossible to lay down a more precise test than the general one that would apply to all cases and each case must be dealt with on its own facts and circumstance. In applying the general test, care should, however, be taken to see that the claim is bonafide and that there is unimpeachable evidence to support the actual loss. Where the Income Tax Officer is not fully satisfied on these two points the claim should be refused.
The assessee should make possible efforts to recover the loss occurred due to theft embezzlement, etc. It has been held by the Allahabad High Court in U.P. Vanaspati Agency v. CIT (1968) 68 ITR 120 (All) that a dispossessing would become loss only after the recovery becomes of impossible or the chances of recovery become very remote.
The Supreme Court in Ramchander Shivnarayan vs. CIT (1978) 111 ITR 263 has held that it is open to the assessee to claim the loss if it has a proximate connection with its business. Hence, it is settled that the loss arising by embezzlement of money by a stranger to the business is also a trading loss and the loss is liable to be allowed as deduction provided the loss is incidental to the normal operation of the business (George Maijo & Co. vs. CIT (2003) 176 Taxation 388 (Mad.) at page 401.
Loss to the assessee due to the embezzlement of sales proceeds by employee was held to be deductible on the facts and circumstances of the case (CIT vs. Smt. Pukhraj Wati Buddhev (2008) 296 ITR 290 (P&H).
Loss by embezzlement must be deemed to have accrued when the assessee came to know about the embezzlement and realized that the amounts embezzled could not be recovered (Tadalam G. Dukrakanath & Co. vs. CIT (2000) 13 SITC 332 (Kar.)).