28 November 2007
in a pvt. ltd. co. during the year 07 - 08 rs. 37000/- was stallen, out of building premises.FIR files in local police station. so this exp. allowed in enpenditure or not.
28 November 2007
Loss arising due to embezzlement - Whether it should be treated as incidental to business and should be allowed as deduction in the year in which it is discovered
clarification 1
1. A reference is invited to the instructions on the above subject contained in the Board’s Circular No. 25 of 1939 and Circular No. 13 of 1944 [Clarification 2]. In these circulars it was clarified that losses arising due to embezzlement of employees or due to negligence of employees should be allowed if the loss took place in the normal course of business and the amount involved was necessarily kept for the purpose of the business in the place from which it was lost. Since the above circulars were issued, the Supreme Court has further considered the matter and laid down the law in this regard in the following two decisions in Badridas Daga v. CIT [1958] 34 ITR 10 and Associated Banking Corporation of India Ltd. v. CIT [1965] 56 ITR 1.
In the first case, the Supreme Court has affirmed the view that the loss resulting from embezzlement by an employee or agent of a business is admissible as a deduction under section 10(1) of the 1922 Act [corresponding to section 28 of the 1961 Act] if it arises out of the carrying on of the business and is incidental to it. In the second case, the decision is that loss must be deemed to have arisen only when the employer comes to know about it and realises that the amounts embezzled cannot be recovered.
2. In the light of the above decisions of the Supreme Court, the legal position now is that loss by embezzlement by employees should be treated as incidental to a business and this loss should be allowed as deduction in the year which it is discovered.
Cash loss is allowable in banking business - Cash is a stock-in-trade of a banking business and its loss in the course of its business under varying circumstances is deductible as a trading loss in computing the total income of the business - CIT v. Nainital Bank Ltd. [1965] 55 ITR 707 (SC).
Theft cannot be differentiated from embezzlement - It is settled that for determining whether any loss from theft, dacoity, embezzlement, etc., is deductible or not, what is material is whether the loss incurred by theft, dacoity, etc., is incidental to the carrying on of the business. It does not make such difference whether such act is committed by the employees of the assessee or by strangers. It is difficult to draw a distinction between embezzlement of the amount from the bank and theft of the amount from the cash box of the businessman from his sales counter or business premises. What is material is whether the loss was caused to the assessee in the course of his business activity - G.G. Dandekar Machine Works Ltd. v. CIT [1993] 202 ITR 161 (Bom.).
Theft of borrowed amount meant for purchase of securities is deductible - Where the assessee had borrowed a sum of Rs. 50,000 from some creditor for the purpose of purchasing Government securities, out of which, a sum of Rs. 30,000 was lost in transit by theft, the loss was directly connected with the business operation and was incidental to the carrying on of the business of purchase of Government securities to earn profit and, hence, it was deductible - Ramchandar Shivnarayan v. CIT [1978] 111 ITR 263 (SC).
Theft of sale proceeds kept in business premises is deductible - Sale proceeds of the business which might or might not be required for carrying out the operation of the business may be kept at the business premises and while so kept may be lost by theft. Maybe that the said cash was required for carrying out the operation of the business or maybe that it was not. Unless therefore, it is found that the cash stolen was required for carrying out business operations deduction is not admissible - Kewal Ram Agarwal v. CIT [1973] 88 ITR 243 (Pat.).
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