39. Principal CIT vs. Saravana
Selvarathnam Trading and Manufacturing Pvt. Ltd.; [2019] 415 ITR 146 (Mad.)
Date of order: 14th March, 2019; A.Y.: 2012-13
Section 37 of ITA 1961 – Business loss –Embezzlement of cash by director
of assessee – Recovery of amount or outcome of pending criminal prosecution
against director before Magistrate Court – Not relevant – Deduction allowable
For the accounting year 2012-13, the assessee claimed as bad debt u/s 36
of the Income-tax Act, 1961 the amount embezzled by a director who dealt with
the day-to-day business activities. Upon the embezzlement being found out
during the internal audit, the director was removed from the board of
directors. A criminal prosecution against him was still pending before the
Metropolitan Magistrate. The Assessing Officer disallowed the claim for
deduction.
The Tribunal held that the conditions prescribed u/s 36(2) were not
complied with and therefore deduction of the embezzled amount could not be
allowed as bad debt but the embezzled amount claimed was allowable as a
business loss suffered by the assessee in the course of its business activity.
On appeal by the Revenue, the Madras High Court upheld the decision of
the Tribunal and held as under:
‘i) The embezzlement by one
of the directors or an employee of the business of the assessee during the
ordinary course of business would be a business loss irrespective of the
criminal prosecution of the director or employee. The final outcome of the
criminal proceedings or recovery of the amount in question would not determine
the claim of the assessee in the A.Y. 2012-13 when it was written off as a
business loss.
ii) The Tribunal had
rightly held it to be a business loss as it was treated to be only pilferage of
the assessee company’s funds by a director on the board of the company. No
question of law arose.’
