Principal Commissioner Of Income Taxcentral 2No v. M/S. Saravana Selvarathnam Trading &Manufacturing Pvt. Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HON'BLE DR.JUSTICE VINEET KOTHARIANDTHE HON'BLE MR.JUSTICE C.V.KARTHIKEYAN Tax Case Appeal No. 195 of 2017 Principal Commissioner of Income TaxCentral 2No.108, Mahatma Gandhi RoadChennai – 600 034.Appellant / Respondent Vs. M/s. Saravana Selvarathnam Trading &Manufacturing Pvt. Ltd.,No.14, Ranganathan Street,T.Nagar, Chennai – 600 017.PAN: AAG CS 3757 J Respondent / Appellant ----- Tax Case Appeal filed under Section 260A of the Income TaxAct, 1961 against the order of the Income Tax AppellateTribunal, Madras 'B' Bench, Chennai, dated 11.08.2016 made inITA No.2202/Mds/2015, against the proceedings of theCommissioner of Income Tax (Appeals) dated:23.09.2015 made inITA No.296/13-14, and against the Assessment order of theAssistant Commissioner of Income Tax dated 24.03.2014 for theAssessment year 2012-13. -----For Appellant : M/s. K.G.Usha Rani Senior Standing Counsel The Revenue has filed this Appeal under Section 260-A ofthe Act raising the following purported substantial questions oflaw arising from the order of the learned Tribunal dated11.08.2016:- https://hcservices.ecourts.gov.in/hcservices/ “1.On the facts and in thecircumstances of the case and in law,whether the ITAT is correct inallowing the amount claimed by theassessee towards bad debts, as lossarising out of embezzlement of cash?; 2.On the facts and in thecircumstances of the case and in law,whether the ITAT is correct inallowing the loss towards embezzlementof the cash in the assessment year2012-13 whereas the claim relates tothe Assessment year 2007-08?; 3.Whether the ITAT is correctin directing the Department to allowloss towards embezzlement in theassessmentyear2012-13notwithstanding the fact that thecivil/criminal proceedings initiatedby the assessee for recovery of theamount from the concerned employeeDirector have not reached finality?” 2.The learned Tribunal had allowed business loss to theextent of Rs.1,86,24,839/- which represented the amountallegedly embezzled by a Director representing the workmen onthe Board of the Company, who was dealing with the day todayaffairs of the Company business. Upon such embezzlement beingfound out by the internal audit procedure, he was not onlyremoved from the Board of Directors, but was also prosecuted byfiling a criminal complaint in the Court of XVII MetropolitanMagistrate, Chennai, which is said to be still pending. 3.The relevant findings of the learned Tribunal arequoted below for ready reference:- “5.We have considered the rival submissionson either side and also perused the materialavailable on record. During the course ofinternal audit check, the Assessee found thatone of the employee Director embezzled anamount of Rs.240 lakhs. Immediately the saidemployee was removed from directorship andsteps were taken to recover the amount by wayof civil and criminal proceedings. TheAssessee has filed a criminal complaint beforethe XVII Metropolitan Magistrate, Chennai.The prosecution is still pending before the 3.The relevant findings of the learned Tribunal arequoted below for ready reference:- “5.We have considered the rival submissionson either side and also perused the materialavailable on record. During the course ofinternal audit check, the Assessee found thatone of the employee Director embezzled anamount of Rs.240 lakhs. Immediately the saidemployee was removed from directorship andsteps were taken to recover the amount by wayof civil and criminal proceedings. TheAssessee has filed a criminal complaint beforethe XVII Metropolitan Magistrate, Chennai.The prosecution is still pending before the Metropolitan Magistrate. The question arisesfor consideration is when there was anembezzlement of cash by the employee of theassessee in the course of the businessactivity whether it could be allowed as a baddebt or not? For the purpose of claiming adebt as bad, the conditions prescribed underSection 36(2) of the Act have to be compliedwith. In the case before us, the conditionsprescribed under Section 36(2) of the Act werenot complied with, therefore, the claim of theAssessee cannot be allowed as bad debt.However, it is a loss suffered in the courseof business activity and it is inevitable lossin the hands of the Assessee. When theAssessee trusted Shri Arumugamswamy andallowed him to manage the day-to-day affairs,embezzled the cash to the extent of Rs.240lakhs. The net embezzled amount comes toRs.1,86,24,839/-. This Tribunal is of theconsidered opinion that the embezzled cash byShri Arumugamswamy in the course of businessactivity has to be allowed as business loss.In view of the above, this Tribunal is unableto uphold the orders of the lower authorities.Accordingly, the orders of the lowerauthorities are set aside and the AssessingOfficer is directed to allow the embezzledcash of Rs.1,86,24,839/- by Shir Arumugamswamyas business loss.” 4.The learned counsel for the Appellant/Revenue submittedthat that since the conditions prescribed under Section 36(2) ofthe Act to claim the said deduction by way of bad debt were notcomplied with by the Assessee and also since there was a legalopinion obtained by the Assessee that the amount embezzled isrecoverable, the same had therefore not turned as bad debt. Itwas urged that the learned Tribunal had erred in allowing thesame as business loss in the hands of the Assessee. 5.The learned counsel for the Assessee supported theimpugned order and opposed the submissions of the learnedcounsel for the Revenue. 6.Having heard the learned counsel for the parties, weare satisfied that no substantial question of law arises in thepresent case and the findings of the fact arrived at by thelearned Tribunal cannot be said to be perverse in any manner. https://hcservices.ecourts.gov.in/hcservices/ 7.The embezzlement by one of the Directors or an employeeof the business of the Assessee Company during the ordinarycourse of business can be a business loss of the Assesseeirrespective of criminal prosecution of the accuseddirector/employee of the Company. The final fate of thecriminal proceedings or recovery of the amount in question wouldnot determine the claim of the Assessee in the present yearwriting off the same as a business loss. 8.In our opinion the learned Tribunal had rightly held itto be a business loss as it was treated to be only a pilferageof the company funds by an employee or a Director on the Boardof Company. Therefore, such findings of facts by the Tribunal donot give rise to any substantial question requiring our furtherconsideration under Section 260-A of the Act. Thus we do notfind any merits in the Appeal filed by the Revenue and the sameis liable to be dismissed. 8.In our opinion the learned Tribunal had rightly held itto be a business loss as it was treated to be only a pilferageof the company funds by an employee or a Director on the Boardof Company. Therefore, such findings of facts by the Tribunal donot give rise to any substantial question requiring our furtherconsideration under Section 260-A of the Act. Thus we do notfind any merits in the Appeal filed by the Revenue and the sameis liable to be dismissed. 9. Accordingly, the Appeal filed by the Revenue isdismissed. No costs. Sd/- Assistant Registrar (CS-VIII) //True Copy// Sub Assistant RegistrarvsgTo1)The Registrar,Income Tax Appellate Tribunal, Madras 'B' Bench, Chennai,2)The Commissioner of Income Tax (Appeals)-18,Chennai – 34.3)The Assistant Commissioner of Income TaxCentral Circle – IV(2),Chennai – 34.+1 cc to Mr.R.Sivaraman, Advocate, S.R.No.24309 Tax Case Appeal No. 195 of 2017 PPA(CO)SSM(12/04/2019).SSM(07/05/2019).