Unascertained Liability cannot be allowed as Embezzlement Losses in computing Business Income: ITAT [Read Order]

The Income Tax Appellate Tribunal ( ITAT ), Bangalore has held that the embezzlement loss stated by the assesse is not ascertained liability and hence cannot allow as loss in business income.

The appellant, Avijit Dewanjee is a dealer in Honda vehicles under the name and style, ‘Max Motors’. On sale of the vehicles, some of the customers had made the payments by cash which was required to be deposited into bank account, but was misappropriated by the staff to the tune of Rs. 2,24,36,701/-. The appellant hopeful of recovering the embezzled cash parked the entire sum of Rs. 2,24,36,701/- under the head ‘Debtors Suspense A/c’ in the Balance Sheet for year ending 31.03.2011. The assesse filed a Police complaint on 10.09.2011. However after finding that even after Police complaint, the recovery is difficult, the assesse filed a revised return of income and claimed the entire embezzled cash as loss in the course of business.

Further, the auditors stated that the management has informed that over a period of time there has been defalcation of cash collection and improper accounting of the transactions. The management suspects fraud by the employees and it has filed an FIR in this connection. The management has represented that they are in the course of conducting an independent investigation of the fraud committed. However, the implication of the loss on account of such fraud is not ascertainable until the final findings of the investigation have been received and it is stated that the auditors are unable to comment on the same. Thus, the Assessing Officer has given a finding that even from the above statement of the statutory Auditors of the assesse, it can be seen that the management only suspects fraud by the employees and as such a complaint has been lodged with the Police. The said fraud and the quantum have not been ascertained and confirmed by the Police. The AO hence disallowed the loss claimed on account of embezzlement of cash of Rs.2, 24, 36,701.

Aggrieved by the order of AO, assesse filed appeal before the CIT (A). Where the assesse filed written submissions along with various documentary evidences relating to the investigation of the matter by the police and claimed that consequent to the investigation the matter has reached the court and since the embezzlement has been verified by the police and crystalized. The CIT (A) observed that in this case embezzlement has happened and at the stage of finalization of Audit Report and the quantification of the exact amount is to be ascertained. Therefore, CIT (A) forwarded the entire set of written submissions for verification of the AO calling for Remand Report u/s 250(4) of the Act. Accordingly, the AO submitted his report stating that a certified copy of the charge sheet filed before the Court was called for from the assesse. The assesse submitted only FIR. In the absence of copy of the charge sheet filed before the Court, the AO stated that embezzlement of funds by staff cannot be verified and the same may be disallowed.

The copies of FIR and charge sheet were filed before the CIT (A). The CIT (A) observed that the assesse filed copies of charge sheet filed by the Police before the Court regarding embezzlement of funds by the staff. However, the CIT (A) dismissed the contentions of the assesse on the ground that there was no final conviction so as to ascertain the quantum of embezzlement as claimed by the assesse. Against this, the assesse is in appeal before ITAT.

The Coram of Sri Chandra Poojari, Accountant Member and Smt. Beena Pillai, Judicial Member held that, “it is clear that the assesse has not filed any revised P&L a/c or balance sheet incorporating the loss in books of account of assesse. The assesse in the original return has not claimed the loss on account of embezzlement of cash. Later the assesse filed a revised return of income on 27.9.2012 as against original return filed on 13.9.2012 claiming loss of Rs.49,02,585 on reason for such variation which forced assesse to file revised return claiming this loss of Rs.2,24,36,701 towards embezzlement of cash. The assesse continued to show this loss in the balance sheet as “Sundry Debtors – Debit Balance - Suspense Account” without charging it to P&L a/c and debited in Debtors account from which alleged person collected the cash. Being so, in our opinion, it is not ascertained liability in the assessment year under consideration. Accordingly, we reject the claim of assesse and the grounds raised in this regard are dismissed”.

To Read the full text of the Order CLICK HERE

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