Justices Alok Aradhe and B. S Walia, in a significant ruling, held that under the provisions of the Income Tax Act, the loss by embezzlement, being incidental to the banking business should be allowed as deduction in the year it is discovered.
In the present case, Assessees’ claim for deduction of loss incurred due to misappropriation of funds by its employee was denied by the Assessing Officer by holding that although the embezzlement came to the notice of the assessee on earlier dates yet the assessee has claimed the deduction in the assessment year 1997-1998. He noted that the claim is not admissible since the assessee had noted the details of occurrence of loss and had detected the loss in the previous accounting year.
It was contended on behalf of the assesse that the loss should be allowed as deduction from income in the year in which it was discovered for the reason that though it came to the knowledge of the assessee in a particular year, the exact amount may be ascertained after investigation in a subsequent year i.e. the date of discovery.
Citing a plethora of Apex Court rulings and the CBDT circular dated 24.11.1965, loss must be deemed to have arisen only when employer comes to know about it and it realizes that the amount embezzled cannot be recovered.
“The date of discovery in view of circular issued by CBDT has to be treated as the date from which the employer comes to know that the amount embezzled cannot be recovered,” the bench noted.
Therefore, the loss by embezzlement being incidental to the banking business should be allowed as deduction in the year it is discovered and the expression “discovered‟ has to be read in the context of Circular dated 24.11.1965 issued by Central Board of Direct Taxes.
Based on the above findings, the bench held that the expression detection and discovery have different and distinct connotations in law and the expression “discovery‟ has to be interpreted so as to mean that loss must be deemed to have arisen only when employer comes to know about it and realizes that the amount embezzled cannot be recovered and not merely from the date of acquiring knowledge in which that embezzlement has taken place.
Read the full text of the Judgment below.
