ITAT guides on embezzlement losses in business income

ITAT guides on embezzlement losses in business income

The Coram ruled against the assessee on grounds of implications in ascertaining the facts

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has held that the embezzlement loss stated by the assessee was not an established liability. Therefore, it could not be allowed as a loss in business income.

The appellant, Avijit Dewanjee is a dealer in Honda vehicles under the name Max Motors. On purchasing the vehicles, some customers made the payments by cash, which was to be deposited into a bank account. But, it was later discovered that the staff had misappropriated the funds amounting to Rs.2,24,36,701.

In the hope of recovering the embezzled amount, the appellant listed the total amount under the head 'Debtors Suspense Account' in the Balance Sheet for the year ending March 2011. He also filed an FIR with the police in September 2011. However, realizing that despite the police complaint, recovering the amount was difficult, the assessee filed a revised return of income. He claimed the total embezzled amount as 'loss' in the course of business.

The auditors stated that the management of the company had informed that over a period of time there had been defalcation of cash collection and improper accounting of the transactions. Suspecting fraud by the employees, they had filed an FIR and were in the course of conducting an independent inquiry in the matter. However, the implication of the loss would not be known until the investigation was over.

The assessee then filed an appeal before the Commissioner of Income Tax (Appeals). He furnished documentary evidence relating to the police investigation claiming that the matter had reached the court. However, the CIT (A) observed that the embezzlement took place at the stage of the finalization of the audit report and the quantification of the exact amount was still to be ascertained.

While the CIT (A) forwarded the documents for AO's verification, the latter submitted his report. The AO stated that a certified copy of the charge sheet was filed before the court, but the assessee had provided only an FIR copy. Thus, the CIT (A) dismissed the contentions on the ground that there was no final conviction to ascertain the quantum of pilfering. Thereafter, the assessee appealed before ITAT.

The Coram of Chandra Poojari (accountant member) and Beena Pillai, (judicial member) held, "It is clear that the assessee has not filed any revised Profit & Loss Account or Balance Sheet incorporating the loss in the books of account. The assessee, in the original return, has not claimed the loss on account of embezzlement of cash. Later, he filed a revised return of income claiming a loss."

Rejecting the claim of the assessee, ITAT ruled, "The assessee continued to show this loss in the balance sheet as Sundry Debtors–Debt Balance–Suspense Account without charging it to Profit & Loss Account and debited in the Debtors Account from which the alleged person collected the cash. Thus, it is not an ascertained liability in the assessment year under consideration."