Assessee is eligible for deduction of amount embezzled by employee as trading loss u/s 28

Assessee is eligible for the deduction of the amount embezzled by the employee as a trading loss u/s 28 of the Income Tax Act

ABCAUS Case Law Citation:
ABCAUS 3103 (2019) (08) ITAT

Important case law relied upon by the parties:
Dinesh Mills Ltd. 254 ITR 673

The appeal had been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals) in confirming the disallowance of claim of bad debt/trading loss on account of embezzlement by employee.

The assessee was an individual and authorized stockiest of IOC ltd. The assessee in the year under consideration had claimed bad debts due from one of the employees who was acting as the sales representative.

The assessee claimed that such amount was collected by the employee from the customers against the sales made in the earlier Assessment Year. But the employee had not deposited said amount collected from the customer with the office. As such, the assessee submitted that the amount due to parties was embezzled by the employee against the sales made in the earlier year.

However, the AO was of the view that deduction on account of embezzlement of the fund can be claimed in the previous year in which such embezzlement was crystallized. Moreover, the AO was of the opinion that this amount of embezzlement was discovered in the earlier previous year. Therefore the same could not be allowed as a deduction in the year under consideration.

Accordingly, the AO disallowed the same and added to the total income of the assessee.

The assessee preferred an appeal to the CIT (A) who relied on the judgment of the Hon’ble jurisdictional High Court that had held that loss on account of embezzlement by an employee is allowed as deduction in the previous year in which such embezzlement is discovered and not the year in which the money is embezzled. Further the CIT(A) opined that once the debtors pays the amount, such sum losses its character as debt. Therefore, he confirmed the order of the Assessing Officer (AO).

Before the Tribunal submitted that the assessee had claimed the deduction in the year under consideration on rational that the amount became irrecoverable from the employee. Thus the impugned amount was written off in the year under consideration.

On the other hand, Revenue submitted that the impugned amount was not recoverable from the parties to whom the assessee has made sales. Therefore the same could not be claimed as bad debt.

The Tribunal observed that admittedly, the genuineness of the embezzlement of the fund by the employee had not been doubted by the authorities below. Thus such loss was incurred by the assessee in the course of the business.

The Tribunal opined that it is a settled law that the losses incurred in the course of business are allowed as deduction u/s 28 of the Act as held by the Hon’ble High Court that the assessee would be entitled to deduction of loss during the year under consideration as that was the year in which the loss on account of embezzlement was, in fact, discovered.

Further, the next question was in which year the assessee can claim the deduction on account of such losses, i.e., embezzlement of the fund.

The Tribunal noted that admittedly, the fund was embezzled by the employee of the assessee in the earlier years, but the assessee did not claim the deduction for the same till date as it was hopeful of recovering the same amount from the employee. In the year under consideration, the assessee had lost its hope for the recovery of the amount from the employee. Therefore the assessee had written off such amount as bad debt in the year under consideration.

The Tribunal opined that it was the decision of the assessee to hold the amount as irrecoverable from the employee. The Revenue could not enter into the shoes of the assessee and direct him to claim the deduction of such amount in the year in which the embezzlement was discovered/crystalized.

Accordingly, the Tribunal held that the assessee was eligible for the deduction of the amount embezzled by the employee as a trading loss.

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