The Haryana State Cooperative Supply ... vs Assessee

The Haryana State Cooperative Supply Vs. The Addl.CIT, and Marketing Federation Limited, Panchkula Range, Panchkula. Panchkula. PAN: AAAJH0022R (Appellant) (Respondent)

Appellant by : Shri Harish Nayyar Respondent by : Dr.Amarveer Singh, DR

Date of hearing : 13.04.2015 Date of Pronouncement : .04.2015

PER BHAVNESH SAINI, J.M. :

This appeal filed by the assessee is directed

against the order of learned Commissioner of Income

Tax(Appeals), Panchkula dated 11.1.2012 for assessment

year 2008-09, challenging the disallowance of Rs.3.19

crores under the head "embezzlement and shortage".

2. Briefly, the facts of the case are that during the

course of assessment proceedings, the assessee was asked

to submit the statutory Audit Report which is done by the

Auditor, Cooperative Societies. In the Audit Report placed

on record, summary of some serious irregularities was 2

noticed during the course of audit of HAFED units/offices

for the year 2007-08. In Part-B it is mentioned that

"embezzlement and shortage worth Rs.3.19 crores was

noticed against Shri Shalesh Kumar Gupta, Accountant C-

grade working manager, WSD Hodal booked as suspense

recoverable account needs immediate attention of the

management". The assessee was confronted on this fact

and the assessee stated that there was embezzlement to the

tune of Rs.3.10 crores at WSD, Hodal Faridabad by Shri

Shalesh Kumar Gupta, Ex. Accountant during the year

2006-07. As soon as the scam came to the notice, FIR

No.197 dated 20.7.2006 was lodged by the D.O., HAFED,

Faridabad at Police Station, Hodal against Shri Shalesh

Kumar Gupta. The Assessing Officer on submission of the

assessee found that the embezzlement relates to the

assessment year 2007-08 and was detected in the same year

as is evident from the FIR filed. As the assessee follows

mercantile system of accounting, this expenditure relates to

assessment year 2007-08 and even if it had to be claimed by

the assessee, should have been made in the previous year.

The Assessing Officer accordingly disallowed Rs.3.19 crores

and added to the income of the assessee.

3. During the appellate proceedings, the assessee in

the written submission stated that the amount of Rs.3.19

crores on account of embezzlement detected has neither

being claimed as expenditure for income tax purposes prior

to assessment year 2008-09 nor claimed thereafter. It was 3

claimed that the liability arose during this year, therefore,

deduction may be allowed. The learned CIT (Appeals)

considering the submission of the assessee found that the

liability on account of embezzlement amounting to 3.19

crores pertains to the earlier assessment year i.e. 2007-08.

The assessee is following mercantile system of accounting.

Therefore, the expenditure cannot be claimed in the

assessment year 2008-09 under appeal. This ground was

accordingly dismissed.

4. We have heard the learned representatives of both

the parties and perused the material available on record.

It is not in dispute that the Auditor of the Cooperative

Societies found irregularities in the course of the audit of

HAFED units/offices and it was found that there was an

embezzlement committed of Rs.3.19 crores by the employee

of the assessee. The learned counsel for assessee also

admitted that the embezzlement to the tune of Rs.3.19

crores was noticed in the financial year 2006-07 and FIR

was lodged with the concerned Police Station on 20.7.2006.

Therefore, the embezzlement was found to have been related

to the preceding assessment year 2007-08 when the

embezzlement was detected and FIR was registered on

20.7.2006. It is also admitted fact that the assessee is

following mercantile system of accounting. Therefore, the

assessee shall have to book the expenditure in the year

when such embezzlement was discovered. The Hon'ble 4

Gujrat High Court in the case Dinesh Mills Ltd. Vs. CIT, 254

ITR 673 (Guj.) held as under :

"The assessee carried on business in textiles maintained me r c a n t i l e system of accounting. The assessee incurred a loss of Rs.13,40,000 on account of e mb e z z l e me n t b y i t i s e m p l o y e e b e t we e n J a n u a r y 2 9 , 1974 and April 26, 1976. The assessee discovered the l o s s d u r i n g t h e a s s e s s me n t y e a r 1 9 7 7 - 7 8 a n d c l a i m e d the entire loss as deduction in that year. T he Assessing Off icer d i s a l l o we d t h e c l a i m o n t h e g r o u n d t h a t t h e extent of loss remained indeterminate or u n k n o wn d u r i n g t h e a s s e s s me n t y e a r i n q u e s t i o n a n d t h e a m o u n t o f a c t u a l l o s s c o u l d b e k n o wn o n l y wh e n t h e a s s e s s e e e n t e r e d i n t o a c o m p r o m i s e d e c r e e wi t h t h e d e f a u l t e r e mployee in the calendar ye ar 1980. The Commissioner ( A p p e a l s ) c o n s i d e r e d t h e wh o l e a m o u n t o f e mb e z z l e me n t in t wo parts, one wh i c h could be reasonably be e s t i m a t e d t o b e r e c o v e r a b l e a n d t h e o t h e r wh i c h c o u l d not be reasonably expected to be recoverable and ascertained the position at the end of the previous year, v i z . , a s o n D e c e mb e r 3 1 , 1 9 7 6 . Based on this, the Commissioner (Appeals) held that the assessee could have reasonably hoped to recover a sum of Rs.7,20,000 wh i l e the balance of Rs.6,20,000 wa s lost by the a s s e s s e e f o r a l l t i m e t o c o me a n d g r a n t e d d e d u c t i o n o f a s u m o f R s . 6 , 2 0 , 0 0 0 i n t h e a s s e s s me n t y e a r 1 9 7 7 - 7 8 . T h e T r i b u n a l a c c e p t e d t h a t t h e l o s s wa s i n c i d e n t a l t o the business and upheld the order of the Commissioner (Appeals). On a ref erence :

Held, that in view of the statement made on behalf of the assessee to the eff ect that no deduction had been a l l o we d i n a n y s u b s e q u e n t y e a r , t h e a s s e s s e e wo u l d b e entitleld to deduction of l o s s d u r i n g t h e a s s e s s me n t y e a r i n q u e s t i o n a s t h i s wa s t h e y e a r i n wh i c h t h e l o s s o n a c c o u n t o f e m b e z z l e me n t wa s i n f a c t , d i s c o v e r e d .

5 The Tribunal had to ascertain the a l l o wa b i l i t y or o t h e r wi s e of e m b e z z l e me n t loss in the light of the s t a t e m e n t m a d e o n b e h a l f o f th e a s s e s s e e a n d t h e n allo w deduction of the balance amount of loss in the year under consideration."

5. The Hon'ble Gujarat High Court in the case of

Dinesh Mills Ltd., as noted above, held that the assessee

would be entitled to deduction of loss during the assessment

year in question as this was the year in which the loss on

account of embezzlement was in fact discovered. In the

aforesaid judgment the submissions of the parties have also

been recorded and the assessee referred to before the

Tribunal the CBDT Circular No.35-D of 1965 dated

24.11.1965 and last para of the Circular was reproduced by

the Tribunal in which two aspects have been provided in the

Circular ; first, that such embezzlement loss incurred by the

assessee because of the employees had to be treated to be

incidental to the business and the second part was that the

deduction have to be allowed in the year in which the loss

was discovered. Considering the facts of the present case

it is clear that the loss on account of embezzlement was

discovered by the assessee in the financial year 2006-07

and FIR was registered on 20.7.2006. Therefore, since the

assessee is following mercantile system of accounting,

therefore, the loss on account of embezzlement was

discovered and was related to the assessment year 2007-08

i.e. the preceding assessment year and not the assessment

year 2008-09 under appeal. The assessee merely submitted

before the learned CIT (Appeals) that the expenditure is 6

claimed in assessment year under appeal i.e. the 2008-09

and no expenditure have been claimed in earlier year or

subsequent year. This contention of the assessee has no

force because the assessee cannot choose to claim deduction

of the expenditure of their own in any of the assessment

year because the assessee shall have to claim deduction of

the expenditure only in accordance with law and the

expenditure should relate to the assessment year relevant to

the previous year in which such embezzlement has been

discovered.

6. The learned counsel for assessee also submitted

that after lodging the FIR on 20.7.2006 the matter was

taken with the concerned Criminal Court and the judgment

was pronounced on 17.4.2007 by the Judicial Magistrate,

1st Class, Palwal whereby Shri Shalesh Kumar Gupta, the

employee was convicted of the offence under section 420.

The learned counsel for assessee, therefore, submitted that

since the criminal case is decided on 17.4.2007, therefore,

the deduction was correctly claimed in assessment year

2008-09. This contention of the learned counsel for

assessee is also not relevant because once the loss on

account of embezzlement has been discovered on 20.7.2006

by lodging FIR against the concerned employee and the

assessee followed mercantile system of accounting,

therefore, the loss on account of embezzlement would

pertain to the preceding assessment year 2007-08. It has

no connection, whatsoever, with the conviction of the 7

employee by the Criminal Court on later date. The learned

counsel for assessee in the written submission also referred

to some decisions of other Benches of the Tribunal on the

proposition of crystallization of the prior period

expenditure, which has nothing to do with the matter in

issue and are clearly distinguishable on facts. The

judgment of the Hon'ble Gujarat High Court in the case

Dinesh Mills Ltd. (supra) is directly on the point in issue.

Therefore, no precedence can be given on the decisions of

the Tribunal which too are not applicable to the facts of the

case.

7. Considering the facts and circumstances of the

case and above discussion, we do not find any merit in the

appeal of the assessee. The same is accordingly dismissed.

8. In the result, the appeal of the assessee is

dismissed.

Order pronounced in the open court on this 17th day

of April, 2015.

Sd/- Sd/- (T.R.SOOD) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated : 17 t h April, 2015

*Rati*

Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.

Assistant Registrar, ITAT, Chandigarh