M/S Dlf Universal Ltd. vs Commissioner Of Income Tax
2010 Latest Caselaw 4073 Del

                                                                  R-181

                                 Reportable

*            IN THE HIGH COURT OF DELHI AT NEW DELHI

                           ITR No. 495 OF 1992


%                                             Date of Decision: 01.09.2010.

M/S DLF UNIVERSAL LTD.                                   . . . Appellant

                        Through :         Mr. P.N. Monga, Advocate

                              VERSUS

COMMISSIONER OF INCOME TAX                            . . .Respondent

                        Through:          Ms. Prem Lata Bansal, Advocate


CORAM :-


      HON'BLE MR. JUSTICE A.K. SIKRI
      HON'BLE MS. JUSTICE REVA KHETRAPAL


      1.     Whether Reporters of Local newspapers may be allowed
             to see the Judgment?
      2.     To be referred to the Reporter or not?
      3.     Whether the Judgment should be reported in the Digest?


A.K. SIKRI, J. (ORAL)

1. The following question of law is referred for opinion of this Court:-

"Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the loss of Rs. 2,08,774/- incurred due to embezzlement made by the employee at the Ahemdabad Branch was not allowable in the assessment year 1982-83 in which year it was discovered."

2. The facts leading to the raising of the aforesaid question are as under:-

In the return filed by the assessee for the assessment year 1982-83,

the assessee had claimed a loss of Rs. 2,08,774/- on account of

embezzlement by one of its employees at Ahemadabad Branch. The

Assessing Officer, however, disallowed the same on the ground that it

was not connected with the normal business activities. In the appeal filed

by the assessee before the CIT (A), this view of the Assessing Officer was

found absurd. The Commissioner (Appeal) held that loss of money due to

embezzlement by the employee while handling the funds of the business

in discharging his duties was allowable deduction. However, at the same

time, CIT (A) was of the opinion that this loss could not be allowed in the

assessment year 1982-83, inasmuch as, the assessee had not proved that

despite all means exhausted by it, it would not be in a position to recover

the aforesaid amount from the employee who had embezzled the same.

The Tribunal has upheld this view of the CIT (A). While doing so, the

Tribunal has placed reliance on the judgment of the Supreme Court in

Associated Banking Corporation of India Ltd. Vs. CIT, 56, ITR 1. In

the said judgment, the Supreme Court took the view that before treating

the amount embezzled by the employees as a loss, it is necessary for the

assessee to prove that inspite of all possible measures taken by the

assessee for recovery of the amount, it is not possible to recover the said

amount. The Supreme Court was of the view that the amount cannot be

allowed as deduction in the year in which embezzlement took place but it

can be claimed only in the year when it is found that the said amount has

become unrecoverable inspite of taking all possible measures to recover

the same. Following observations of the Supreme Court taking this view

in the aforesaid judgment may be quoted:-

"It is wrong to say that irrespective of other considerations, as soon as an embezzlement of the employer's funds takes place, whether the employee is aware or not of the embezzlement, there results a trading loss. So long as there is a reasonable prospect of recovery of the amounts embezzled, trading loss in a commercial sense cannot be deemed to have resulted.

Embezzlement of the funds by an agent, like a speculative adventure, does not necessarily result in loss immediately when the embezzlement takes place, or the adventure is commenced. Embezzlement may remain unknown to be principal, and the assets embezzled may be restored by the agent or servant. In such a case in the commercial sense no real loss has occurred. Again it cannot be said that in all cases when the principal obtains knowledge of the embezzlement loss results. The erring servant may be persuaded or compelled by process of law or otherwise to restore wholly or partially his illgotten gains. Therefore, so long as a reasonable chance of obtaining restitution exists, loss may not ina commercial sense be said to have resulted."

3. Applying the aforesaid proposition of law to the facts of the present

case, the Tribunal arrived at a finding that there was nothing to show that

the steps taken by the assessee for the recovery of the aforesaid amount

had been completely exhausted and there was no possibility or any ray of

hope of recovery of the embezzled funds. The Tribunal also noted that

the CIT (A) directed the Assessing Officer to allow the claim of the

assessee in the year where it could be proved that despite all means

being exhausted, the loss could not be recovered.

4. As finding of fact is recorded in the year in question that the

assessee was not in a position to prove that there was no possibility of

recovering the amount embezzled by the employees, the claim was

rightly disallowed in that year. We, therefore, answer the question in

favour of the revenue and against the assessee.

(A.K. SIKRI) JUDGE

(REVA KHETRAPAL) JUDGE SEPTEMBER 1, 2010 skb