Embezzlement loss due to siphoning of funds of assessee company by the employees is a business loss allowable u/s. 28 of the Act. The fact that there is embezzlement in the assessee company is not in dispute. The fact that the employees have siphoned off the funds of the assessee company and the assessee has filed criminal complaints against the employees for the frauds committed by them is also not in dispute. Thus, the order passed by the Ld.CIT(A) is a well-reasoned order based on the reliance of various High Courts including the Jurisdictional High Court and the Supreme Court. None of the findings of the Ld.CIT(A) have been controverted by the Revenue. In the circumstances we uphold the order of the Ld.CIT(A) and rejected the grounds of Revenue.
Full Text of the ITAT Order is as follows:-
1. This appeal is filed by the Revenue against the order of the Learned Commissioner of Income Tax (Appeals) -17, Mumbai dated 29.01.2015 for the Assessment Year 2010-11.
2. Revenue in its appeal raised the following grounds: –
1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs.1,08,80,401/- on account of bogus purchases by holding that the loss on account of embezzlement is an allowable loss without appreciation that the said loss was not wholly and exclusively incurred for the purpose of business within the meaning of Sec.37(1) of the I.T. Act.
2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs.15,32,573/- on account of travelling expenses by holding that the loss on account of embezzlement is an allowable loss without appreciation that the said loss was not wholly and exclusively incurred for the purpose of business within the meaning of Sec.37(1) of the I.T. Act.
3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs.15,32,573/- on account of travelling expenses even though the assessee itself agreed that these expenses were incurred by the CFO in their personal capacity.”
3. Briefly stated the facts are, the assessee filed its return of income originally on 05.10.2010 declaring income of Rs.9,56,84,279/- which was revised to rs.9,57,09,928/- by filing revised return on 05.10.2010. The assessment was completed u/s. 143(3) on 28.03.2013 determining the income of the assessee at Rs..16,58,44,110/-. The Assessing Officer while completing the assessment made addition of Rs..1,08,80,401/- as unexplained expenditure being the purchases made by the assessee from four parties referred to in Page No.6 of the Assessment Order and treated them as bogus purchases. Further, Assessing Officer disallowed travelling expenses of Rs.15,32,573/- incurred by CFO of the company Ms. Saumyalatha Shetty and her family members in their personal capacity.
4. In the course of the Assessment Proceedings assessee was required to explain the genuineness of the purchases and the allowability of expenses towards travelling incurred by CFO and their family members in their personal capacity and not for the purpose of business. The assessee made detailed submissions by letter dated 15.03.2013 stating that there was an embezzlement by the senior employees of the company including the CFO of the company. It was submitted that the senior employees were involved in misappropriation of companies’ funds and properties by recording various bogus transactions in the Books of Accounts of the company. It was submitted that the management on realizing that the company’s funds were misappropriated by these senior employees lodged a complaint with the police and they were detained into the custody for 90 days before getting bail in the matter and the Economic Offence Wing of criminal branch is investigating the matter. It was submitted that the primary charge sheet has already been filed on the issue on which the investigation is completed. Economic Offence Wing is further investigating the matter and supplementary/additional charge sheet will be filed by them in due course as soon as the investigation in the other matter is completed by them. It was submitted that these fraudulent employees have not only removed, destroyed various documents and supporting’s but also tried to siphon off the funds by making false provisions in the books of the assessee company and wherever the management could found such excess/inappropriate provisions the same were reversed in subsequent years in the books and offered for tax u/s. 41(1) of the Act. It was further submitted that as far as the assessee company is concerned it is a loss caused by embezzlement during the course of carrying on its business and as such is allowable deduction u/s. 37(1) or as business loss u/s. 28 of the Act.
5. However, not convinced with the submissions of the assessee the Assessing Officer made addition of ₹.1,08,80,401/- in respect of purchases recorded from four parties mentioned at Page No.6 of the Assessment Order treating them as bogus purchases. According to the Assessing Officer the assessee could not prove the genuineness of the purchases made from those parties since according to him those parties were providing only accommodation entries without transportation of goods as found out by the Sales Tax Department in their investigations. Assessing Officer also disallowed travelling expenses incurred by CFO observing that the expenses were incurred for personal purposes by the CFO and her family members but not for the purposes of business of the assessee.
6. On appeal Ld.CIT(A) deleted the addition/disallowance made by the Assessing Officer towards bogus purchases and the travelling expenses of the CFO and her family members accepting the contentions of the assessee that there is an embezzlement in assessee’s company by the employees, where employees have siphoned off the funds of the assessee company by making various provisions, entries in the Books of Accounts fraudulently and siphoned off the assessee’s funds and such embezzlement by the employees is clearly a business loss u/s. 28 of the Act which is deductible in computing the income of the assessee. Against this decision the Revenue is in appeal before us.
7. The Ld. DR supported the orders of the Assessing Officer in treating the bogus purchases as unexplained expenditure as the assessee could not prove the genuineness of the purchases made by it from the parties appearing in the Website of the Sales Tax Department. Similarly the Ld.DR have submitted that Assessing Officer is perfectly justified in disallowing the personal expenses of the CFO which were incurred on travelling by CFO and her family members. Learned Counsel for the assessee strongly placed reliance on the order of the Ld.CIT(A).
8. We have heard the rival submissions, perused the orders of the authorities below. The Assessing Officer rejected the submissions of the assessee that embezzlement taken place in the assessee company where the funds of the assessee company were siphoned off by senior employees and therefore the loss on account of embezzlement is allowable as business loss, observing that loss caused by committing serious crimes under various sections of IPC were not allowable under Income Tax Act. The Ld.CIT(A) taking note of various decisions of the courts and the fact that the assessee company has taken criminal action against the employees of the company for the embezzlement that took place in the assessee company held that the loss suffered by the assessee is clearly a business loss which is deductible u/s. 28 (i) of the Act in the computation of income observing as under: –
“3.3.1 I have carefully considered the submissions and contention of the Ld. AR of the appellant and also carefully gone through the facts and records. The appellant during the course of the assessment proceeding filed a copy of FIR and the first chargesheet filed by the police authority in the court of Metropolitan Magistrate, 19th Court, Esplanade, Mumbai under the purview of EOW, Mumbai, against a lady accused namely Saumyalata Shyama Shetty, being employed as General Manager (Commerce and Finance) in the aforesaid companies and in such capacity being entrusted with and having dominion over the funds of the company by way of being authorized signatory for operating the bank accounts of the company has committed mentioned offences in the charge sheet. It was clearly brought out in the charge sheet that she had signed fraudulently cheques the details of which were given in the charge sheet itself. It was also stated in the chargesheet that with a dishonest intention the said employee produce forged Board Resolution of the Company and other documents of Haldyn Glass Ltd to Tata Capital Ltd. and use them as genuine and thereby fraudulently obtained vehicle loan of Rs.44,65,000/- for purchase of the Mercedes Benzh E 350 bearing the registration No. MH02CH5500 in her personal name. The Processing Fee and equated monthly installments to the tune of Rs.9,09,500/- in respect of the said vehicles were fraudulently paid by her from the bank account of the company thereby committed a punishable crime under section 465,467,468,471 of IPC. In the second chargesheet which is a detail one and is placed on record along with the paper book, there has been details of fraud committed by the employees of the appellant including purchase of a flat No. 1602A and 1602B in Orion I Building. Further there has been details of bogus purchases made by the employees and cheques were issued to the fraudulent parties namely Bright Corporation, Pravesh Enterprises, Universal Enterprises, Om Enterprises, Classic Enterprises, Suman Trading Co., Sagar Enterprises, Indira Steel Industries, Macto Enterprises, Krishna Steel lmpex, Kundan Jewellers., H.G.Mehta and Company and Trinity Air Travel & Tours Private limited. The police have investigated the entire invoices relating to these parties on the basis of intimation extracted from these employees and found that there has been a misappropriation of funds by them by claiming bogus purchase bills amounting to Rs.3,30,25,787/-. The police authorities have investigated the entire matter and came to the conclusion that the entire money after being paid was returned back to the concerned employee after deduction of 7% Commission to the parties from whom such bills were received. According to the police investigation it appears that large number of employees were involved in the entire transactions. Therefore, it has been established by the investigating authorities that the I fraud has been committed by a group of employees on the appellant.
3.3.2 The appellant durian the course of the assessment proceeding had also made a claim before the Ld.AO that the fraud has been committed by the group of employees and it had filed a FIR, the Ld.AO did not believe the version of the appellant stating interalia that the fraud was not committed on appellant during the course of conduct of its business. It was stated by the Ld.A.O that receipt of bogus bill is not the business of the appellant. The said argument of the Ld.AO is out of context as the appellant is in the process of manufacturing and the purchases are part and parcel of the appellant business. The items so purchased by the appellants are of such nature as being purchased on day to day basis and the same has been also included in the normal receipt register and are included a part of the closing stock. Further it is also a fact that as against the discovery made by the police authorities of the fraud of Rs. 3.30 crores the Ld.AO could unearth a bogus bill of. 1.08 crores indicating therein that the remaining bogus bills of more than 2 crores have been allowed by him which means that a part of the fraud committed by the employees stand allowed to the appellant without it being discovered by the Ld.AO during the course of assessment proceeding. Further, as against the four parties the bills of which have been suspected as bogus bill based on the information of Sale Tax Department, the police authorities could discover 13 parties as mentioned above which clearly proves that the fraud committed is much more than what has been discovered by the L.d.A0 based on the information of the sales tax authorities.
3.3.3. Having come to the conclusion that a fraud has been committed on the appellant by its own employee who have been entrusted with the work by the management of the company and funds embezzled, the next question arises, is the loss allowable to. the appellant under such circumstances or not. In the case of Sassoon J. David & Co: (P) Ltd vs. CIT (1975) 98 ITR. 50 (BOM) wherein the facts were that at the material time the assessee-company was dealing in shares and securities, was acting as an agent for a textile company and an insurance company and had a business in ‘cotton yarn; (ii) 25 per cent of its share capital was held by P; (iii) The remaining 75 per cent of the share capital was held by a trust of which P was the sole beneficiary; (iv) A joined the company in 1925, became a director in 1931 and held one share as the nominee Of P; (v) P and A were the only two directors of the company; (vi) P resided out of India at all material times; (vii) Under a general power of attorney dated the 1st of Feb., 1929, executed by the company in favour of A the latter was authorised to manage the company’s business, to deposit in the bank moneys which would come to his hands as an agent of the company, to withdraw the amounts standing to the credit of the company in its bank account and to invest the same in the name and for the benefit of the company; (viii) A was in sole charge of the business from 1929 to 1943; (ix)He withdrew a sum of Rs. 27-1/2 lakhs from the company’s account with the Bank of India between 15th March and 1st of Dec., 1943, and utilised that amount for his private ends; (x) He was adjudicated insolvent on 20th Feb, 1951, and (xi) A sum of Rs. 9 lakhs from out of the amount embezzled by him was legitimately written off by the company at the close of the accounting year corresponding to the asst. yr. 1958-59. The Hon’ble Court after placing reliance on the decisions of Badridas Daga vs. CIT (1958) 34 ITR 10 (SC) and Lord’s Dairy Farm Ltd. vs. CIT (1955) 27 ITR 700 (Bom) held that the embezzlement committed cannot be likened to a partner over drawing his account. with the firm. Had the withdrawals been made. during the course and for the purpose of business of the company, there would be no embezzlement and, therefore, while considering the admissibility of the deduction it is irrelevant that the particular withdrawal had nothing to do with the trading activities of the firm. The. assessee is not a private individual who may or may not employ an agent to carry on his business, depending on the extent and exigencies of that business, but the assessee is company which cannot act in its own person, for it has no physical personality. It can only act through an agent, be he the director or anyone else. Then again, the share capital of the company was held partly by P and partly by the trust for his benefit. P who was, also a director of the company was at all material times residing out of India and, therefore, there was no option for the company save to appoint an agent for carrying on its, business activities in India. The employment of an agent was, therefore, incidental to the carrying on of its business in India. The company appointed A as agent for its business in 1929, which-was four years after he joined the company. In 1931, he became a director of the company but that did not affect his position as an agent of the company one way or the other. He discharged his duties honestly and faithfully till 1943— in any case there is nothing to indicate to the contrary. In 1943, he embezzled a large amount during a span of about nine months. He withdrew the amount as if the withdrawal was for. the purpose of the business of the company and then pocketed it. In other words, he withdrew the amount in the purported exercise or under colour of authority conferred upon him by the power of attorney and misappropriated it. In these circumstances, it seems to us clear that the loss to the company arose out of the carrying on of its business and is incidental to it. It cannot be disputed. that A was in the sole and exclusive charge of the company’s business in India. But the contention that for that reason or for any other, he could be said to be in the position of a proprietor cannot be accepted. There is no substance in the contention that the loss in the instant case cannot be allowed as a deduction as the amount was withdrawn by the agent after it was collected and credited in the company’s account in the bank. The loss caused to the company on account of the ’embezzlement committed by its agent A must be deducted while computing the company’s assessable profits under S.10(1). Therefore, the loss caused to the company on account of the embezzlement committed by the agent must be deducted while computing the company’s assessable profit under s.10(1) of the 1922 Act.
3.3.5 Similarly in the case of G.G. Dandekar Machine Works Ltd vs. CIT (1993) 202 ITR 161 (Bom) relying on the decision of CIT vs. Nainital Bank Ltd. (1965) 55 FIR 707 (SC),Ramchandar Shivnarayan vs. CIT (1978) 111 ITR 263 (SC), Sassoon J. David Co, (P) Ltd.vs. CIT (1975) 98 ITR 50 (Bom), CIT vs.P.V.Gore &. Co. (1983) 143 ITR 922(Bom) and Badridas Daga vs. CIT(1958) 34 ITR 10 (SC) , it was held that the real controversy that falls for determination in such cases is whether the loss is incidental to the operation of the business and. this question evidently has to be decided on the facts of each case having regard to the nature of the business and the operations carried on by the assessee. If the loss incurred by the assessee is found to be incidental to the carrying on of his business, it will be deductible as a trading loss in computing the profits of the assessee from the said business. The loss caused to assessee in this case was by embezzlement from its bank account The account in the bank was a Current account maintained for the running of the business. The amount kept there was also the amount required for the purpose of the business. There is no dispute that by forging the signature of the secretary of the company the amount in question was withdrawn by some unknown person which resulted in a loss to the assessee to that extent. Looking from a businessman’s angle, it is difficult to hold that such a loss is not incidental to the business of the assessee. It is difficult to draw a distinction between embezzlement of the amount from the bank and theft of the amount from the cash box of the businessman from his sales counter or business premises. What is material is whether the loss was caused to the assessee in the course of his business activity and closely connected with his business. If that is so, it will be an allowable deduction in computing the “profits”. in the instant case, it is so and that being so, the loss suffered by the assessee is clearly a loss which is deductible in the computation of income under s 28(i) of the Act
3.3.6 In view of the foregoing, it is evident that the loss has been caused to the appellant by its employees during the course of the appellant business. It is a trite law that loss by misappropriation by employees in the course of business is an allowable loss. It is also equally trite law that the act of fraud is punishable in the competent court of law on the basis of charges framed by the Prosecution. The Police Authority after nearly three years have filed the charge sheet against the employees of the appellant for embezzlement of funds. The police authority in the chargesheet have also not indicated the recovery of any asset however it is evident that they have attached the immovable property of the employees and during the course of the search operation on the premises of the employees some immovable properties have also been seized, however that being the case property has not yet been handed over to the appellant. According to learned AR of the appellant there is a little hope that the money or any asset could be recovered from the employees in the near future as the case is likely to take more time, the filing of the chargesheet itself took almost 3 years. it is also submitted by the appellant that in case if any losses are recovered the same will be offered to tax in the year of recovery as per the extant provision of the Act. Looking to the entire facts and circumstances of the appellant’s case and the case laws relied upon by the learned AR of the appellant, the loss caused to the appellant was due to embezzlement by the employees of the company and therefore is an allowable expense. Taking into consideration the detailed chargesheet filed by the police authority before the competent court of law and also perusing the various charges made therein, it is evident that the loss is caused to the appellant during the normal course of its business and as such this loss is allowable. In view of the foregoing, the addition made by the Ld.AO is deleted and these grounds of appeal are allowed.”
9. On a careful reading of the observations and decision arrived at by the Ld.CIT(A), we do not see any infirmity in the order passed by the Ld.CIT(A) in holding that the embezzlement loss due to siphoning of funds of assessee company by the employees is a business loss allowable u/s. 28 of the Act. The fact that there is embezzlement in the assessee company is not in dispute. The fact that the employees have siphoned off the funds of the assessee company and the assessee has filed criminal complaints against the employees for the frauds committed by them is also not in dispute. Thus, the order passed by the Ld.CIT(A) is a well-reasoned order based on the reliance of various High Courts including the Jurisdictional High Court and the Supreme Court. None of the findings of the Ld.CIT(A) have been controverted by the Revenue. In the circumstances we uphold the order of the Ld.CIT(A) and rejected the grounds of Revenue.
10. In the result, appeal of the Revenue is dismissed. Order pronounced in the open court on the 11th October, 2017.