1 HIGH COURT OF JAMMU AND KASHMIR AT JAMMU ITA No.17/2007 c/w ITA No.10/2007 ITA No.18/2007 ITA No.6/2008 Date of order: 29.08.2017 J and K Bank Ltd. V Assistant Commissioner of Income Tax J and K Bank Ltd. V Commissioner of Income Tax J and K Bank Ltd. V Assistant Commissioner of Income Tax J and K Bank Ltd. V Additional Commissioner of Income Tax Coram: Hon'ble Mr. Justice Alok Aradhe, Judge Hon'ble Mr. Justice B.S. Walia, Judge Appearing counsel: For Appellant (s) : Mr. Virender Bhat, Advocate. For respondent(s) : Mr. KDS Kotwal, Advocate. i/ Whether to be reported in : Yes/No Press/Media ii/ Whether to be reported in : Yes/No Digest/Journal Per Alok Aradhe,J:- This bunch of appeals preferred under Section 260-A of Income Tax Act, 1961 (hereinafter referred to as Act ) was admitted on following substantial questions of law by order dated 01.02.2016 passed in ITA No.17/2007 which are reproduced below for facility of reference. i) Whether loss on account of embezzlement can be claimed when information of embezzlement is acquired or when embezzlement is discovered? Whether terms detection and discovery has same connotations? ITA No.17/2007 c/w ITA No.10/2007 ITA No.18/2007 ITA No.6/2008 Page 1 of 7 2 ii) Whether loss by embezzlement being incidental to banking business should be allowed as deduction in year of its detection or in year it is discovered? 2. Since appeals were admitted on common substantial questions o f law, they were heard analogously and are being decided by this order. For facility of reference, facts from ITA No.17/2007 are being referred to. 3. assessee filed return of income for Assessment year 1997- 1998 in which it claimed embezzlement loss of Rs.1,65,000/-. Assessing Officer vide order dated 18.03.2003 inter alia held that although embezzlement came to notice of assessee on earlier dates yet assessee has claimed deduction in assessment year 1997-1998. It was further held that assessee had noted details of occurrence of loss and had detected loss in previous accounting year. Therefore, deduction is not admissible. Accordingly, Assessing Officer disallowed loss of Rs.1,15,000/- for Assessment Year 1997-1998 and amount of Rs.50,000/- was disallowed by processing return under Section 143(1)(a) of Act. On similar facts, embezzlement loss to tune of Rs.10,66,000/- was disallowed for assessment year 2000-2001. 4. Being aggrieved, assessee filed appeal before Commissioner of Income Tax (Appeals). Commissioner of Income Tax (Appeals) by order dated 18.03.2004 inter alia held that loss on account of embezzlement has to be allowed in year when same has been crystallized after completing all procedural formalities. Commissioner of Income Tax (Appeals) relied on decision of his predecessor for previous assessment years and allowed appeal. Being aggrieved, Revenue filed appeal before Income Tax Appellate Tribunal (for short Tribunal ). Tribunal by order dated 20.07.2007 ITA No.17/2007 c/w ITA No.10/2007 ITA No.18/2007 ITA No.6/2008 Page 2 of 7 3 on basis of earlier decision rendered by it in ITAT No.252 (ASR) 2003 dated 01.12.2006 inter alia held that loss should be claimed in year as soon as same is detected and case was remitted to Assessing Officer to decide claim in terms of direction that loss can be allowed if same is claimed in year it is detected notwithstanding whether same has got crystallized and accordingly allowed appeal preferred by Revenue. In aforesaid factual background, assessee has filed this bunch of appeals. 5. Learned counsel for assessee submitted that loss on account of embezzlement may come to knowledge of assessee in particular year but exact amount may be ascertained after investigation in subsequent year i.e. date of discovery. Therefore, loss should be allowed as deduction from income in year in which it was discovered. In support of aforesaid submission, learned counsel for assessee has referred to decision of Supreme Court in case of Associated Banking Corporation of India Ltd. V. Commissioner of Income Tax (1965) 56 ITR 0001 as well as Division Bench decision of High Court of Allahabad in case of Shiv Narain Karmendra Narain vs. Commissioner of Income Tax, (2005) 277 ITR 27 (All) as well as Circular issued by Central Board of Direct Taxes dated 24.11.1965. On other hand, learned counsel for Revenue has supported order passed by Tribunal and has submitted that in view of circular issued by Central Board of Direct Taxes, loss must be deemed to have arisen from date when it is discovered and must be claimed in same assessment year. It is further submitted that order passed by Tribunal is order of remand and therefore, no interference is called for. 6. We have considered submissions made by both sides and have perused record. Supreme Court in case of Associated ITA No.17/2007 c/w ITA No.10/2007 ITA No.18/2007 ITA No.6/2008 Page 3 of 7 4 Banking Corporation of India Ltd (supra) has held that problem as to when loss resulting from misapplication of funds by agent occurs must be viewed like many other problems arising under Income-tax Act on conspectus of all facts and circumstances in context of principles of commercial trading. Embezzlement of funds by agent; like speculative adventure, does not necessarily result in loss immediately when embezzlement takes place, or adventure is commenced. Embezzlement may remain unknown to principal, and assets embezzled may be restored by agent or servant. Again it cannot be said that in all cases when principal obtains knowledge of embezzlement loss results. erring servant may be persuaded or compelled by process of law or otherwise to restore wholly or partially his ill-gotten gains. Therefore so long as reasonable chance of obtaining restitution exists, loss may not in commercial sense be said to have resulted. Embezzlements of funds of Bank took place in 1946. They were then unknown to Bank. Even after embezzlements came to knowledge of Liquidator, trading loss cannot be deemed to have resulted. proposition that irrespective of other considerations, as soon as embezzlement takes place of employer's funds, whether employer is aware or not of embezzlement, there results trading loss is not tenable. So long as there was reasonable prospect of recovering amounts embezzled by Bank, trading loss in commercial sense may not be deemed to have resulted. 7. Central Board of Direct Taxes has issued circular dated 24.11.1965 by taking note of decision of Supreme Court in case of Associated Banking Corporation of India ltd (supra) and in Badri Das Daga v. CIT (1958) 34 ITR 10(SC) which reads as under:- reference is invited to instructions on above subject contained in Board s Circular No.25 of 1939 and Circular No.13 of ITA No.17/2007 c/w ITA No.10/2007 ITA No.18/2007 ITA No.6/2008 Page 4 of 7 5 1944. In these circulars it was clarified that losses arising due to embezzlement of employees or due to negligence of employees should be allowed if loss took place in normal course of business and amount involved was necessarily kept for purpose of business in place from which it was lost. Since above circulars were issued, Supreme Court has further considered matter and laid down law in this regard in following two cases:- (1) Badri Das Daga vs. CIT (1958) 34 ITR 10(SC): TC 14R 202 (2) Associated Banking Corporation of India Ltd vs. CIT (1965) 56 ITR 1 (SC): TC 14R.211. In first case, Supreme Court has affirmed view that loss resulting from embezzlement by employee or agent of business is admissible as deduction under s. 10(1) of IT Act, 1922 (corresponding to s.28 of IT Act, 1961) if it arises out of carrying on of business and is incidental to it. In second case decision is that loss must be deemed to have arisen only when employer comes to know it and realizes that amounts embezzled cannot be recovered. 2. In light of above decisions of Supreme Court, legal position now is that loss by embezzlement by employees should be related as incidental to business and this loss should be allowed as deduction in year in which it is discovered. 8. From conjoint reading of decision of Supreme Court in case of Associated Banking Corporation of India Ltd supra as well as circular dated 24.11.1965 issued by Central Board of Direct Taxes, it is evident that loss by embezzlement by employees should be treated as incidental to business and this loss should be allowed as deduction in year in which it was discovered. In Badri Das Daga supra, Supreme Court has held that loss resulting from embezzlement by employee or agent of business as deduction under Section 10(1) of Act if it arises out of carrying on of business and is incidental to it. In ITA No.17/2007 c/w ITA No.10/2007 ITA No.18/2007 ITA No.6/2008 Page 5 of 7 6 case of Associated Banking Corporation of India Ltd supra, it has been held that loss must be deemed to have arisen only when employer comes to know about it and it realizes that amount embezzled cannot be recovered. Thus date of discovery in view of circular issued by CBDT has to be treated as date from which employer comes to know that amount embezzled cannot be recovered. 9. expression detection and discovery have different connotations. When embezzlement comes to notice of employer, it can be said that such embezzlement is detected by employer. However, expression discovers indicates detection as result of uncovering, revealing or laying open to view what was hidden, concealed or unknown. But words do not always retain their abstract or primary definitions and their meanings vary in accordance with contextual use. work discovers has been interpreted by English Courts to means comes to conclusion from examination Inspector makes, and from any information he may choose to receive or has reason to believe or finds or satisfied himself or honestly comes to conclusion from information before him. [ See: Commissioner of Income Tax, Punjab, Himachal Pradesh and Bilaspur, Shimla v. Shree Jagannath Maheshwari Amritsar AIR 1957 PUNJAB 226 (V 44 C 87 Oct.]. 10. In view of aforesaid enunciation of law, we hold that expression detection and discovery have different and distinct connotations in law and 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 amount embezzled cannot be recovered and not merely from date of acquiring knowledge in which that embezzlement has taken place. Accordingly, first substantial question of law is answered in favour of assessee and against Revenue. On ITA No.17/2007 c/w ITA No.10/2007 ITA No.18/2007 ITA No.6/2008 Page 6 of 7 7 same analogy, second substantial question of law framed by this Court is answered by stating that loss by embezzlement being incidental to banking business should be allowed as deduction in year it is discovered and expression discovered has to be read in context of Circular dated 24.11.1965 issued by Central Board of Direct Taxes. Accordingly, second substantial question of law is answered in favour of assessee and against Revenue. 11. In view of preceding analysis, orders passed by Income Tax Appellate Tribunal in ITA No.17/2007, ITA No.10/2007, ITA No.18/2007 and ITA No.6/2008 dated 20.07.2007, 01.12.2006, 20.07.2007 and 25.01.2008 are hereby set aside and quashed. In result, appeals are allowed. (B.S. Walia) (Alok Aradhe) Judge Judge Jammu: 29.08.2017 Raj Kumar ITA No.17/2007 c/w ITA No.10/2007 ITA No.18/2007 ITA No.6/2008 Page 7 of 7 J and K Bank Ltd. v. Assistant Commissioner of Income-tax