' SIKANDAR HAYAT KHAN (MEMBER). --By virtue of this departmental appeal objection has been taken to the deletion of Rs,2,38,612 vide appeal No,1246, dated 20-5-1981.
2. Briefly speaking the facts of this case are that the respondent, a Public limited company, derives income from the sale of items produced by Pakistan Ordinance Factory, W... Cantonment. While making the assessm ent for the charge year 1978-79 I.T.O. Disallowed a sum of Rs,2,38,612 on account of Bank Suspense Account in the following words:- "It is clear from the minutes of the meeting of the Board of Directors (an extract of which has been given above) and assessee's reply to notice under section 23(3) that the assessee had not taken any action at the time when this embezzlement is stated to have taken place which could result in the recovery of the embezzled amount. It is, therefore, obvious that such loss actually relates to the year when the embezzlement occurred and should have been claimed as such in that year.
Nothing has happened from the time of embezzlement till the year under assessment which could have justified the assessee's claim on account of loss due to embezzlement in the year 1978-79. So apart from the admissibility of the assessee's claim which can be considered as dobtful in view of many decisions of appellate authorites (in this connection please see p. 282 of Income-tax Digest 1st Volume by S.M. Raza Naqvi) the loss cannot be allowed because it relates to the assessment year 1964-65. In support of this view the book Indian Income-tax Act "(Vol. II) by AC. Sampath Iyngar" may be referred to in which the author says:-- 'the loss to the owner of the fund unmistakably arises when the money is abtracted from him or his business. It is a physical loss arising at that moment. The circumstances that the misappropriation or the embezzlement is not discovered at the time does not nagative the physical disappearance of fund from the dominion of the owner. The possibility that assessee, the owner of the fund may, in certain contingent events, recover either the whole or part of the sum embezzled in a later year cannot alter the fact of the real loss he has incurred at the time of the embezzlement. It may be of the embezzler or defalcater to restore the fund to the rightful owner, but the criterion is not liability of a third party or any circumstances, touching that third party. The loss and the year of loss have to be determined by facts touching the assessee himself and they alone have any bearing upon the question. Consequently, the assessee will have to claim the loss for the year in which the embezzlement has taken place.'
' Normally the embezzlement or theft will be detected when the accounts are closed at the end of the accounting year, and in the return of the assessment year the loss can be claimed. But in the event of the loss not being detected in the assessment year and therefore, resulting in an overpayment of tax, the remedy of the assessee would be to apply for relief by way of reduction of tax under section 33A".
3. The respondent having felt aggrieved against the impugned addition made by the I.T.O. Filed an appeal before the learned CIT(A) who by virtue of order No,1246, dated 20-5-1981 deleted it by making the following observation:- "My attention was drawn to a reported case Lords Dairy Farms Ltd. v. CIT (1955) 27 ITR 700 wherein it was held that the material date of loss is not when the loss is caused. So long as there is any possibility of the money being recovered from the employees which is embezzled money there is no loss to the assessee. It is only when it is clear that the money cannot be recovered, that the loss is caused: The appellant-company had written off this loss due to embezzlement during this year on legal advice and it can be said that it was caused this year. As such the amount was rightly claimed during the year and the addition made on this account stands deleted."
4. The DR in support of the fact that there was no justification with the learned C.I.T. (A) to have deleted the impugned addition repeated the same arguments that are there in the assessment order relating to the charge year 1978-79. On the other hand, the learned counsel of the respondent has invited our attention on to page 457 of the Income-tax Digest (Seventh Edition)by A. N. Aiyar., AccorditIg to which loss becomes admissible only when it becomes actual and certain.
' In this connection relevant part of the page is reproduced below for facility of reference:- "It was only when the loss became actual and certain that there could be an accrual of a loss and till then, it was merely a civil liability of the clerk to pay back that amount based on tort.Until the settlement of the case by way of compromise there was no loss at all."
5. We were also made aware of the fact that if a loss by embezzlement can be said to be necessarily incurred in carrying on the trade it is allowable as deduction from profits.Lt was stated by the learned counsel that when loss by embezzlement by on employee is claimed as a deduction, the material date is not the date when the embezzlement took place but the date when the loss is caused. So long as there is any possibility of the money being recovered from the employee who has embezzled the money, there is no loss to the assessee. It is only when it is clear that the money cannot be recovered that the loss is caused. The learned counsel of the respondent argued that in this case immediately after the embezzlement F. I. R. Was lodged with the S.H.O., W....C.... On 2-12-1965. However, the amount embezzled by the Accountant was only written off when it became evident that it was not possible to recover it from the Cashier. It was thus stated that the amount was correctly deleted by the learned C.I.T. (Appeals).
6. Proceeding further the learned counsel of the respondent has relied on a case cited as 1960 P.T.D.
(Trib.) 567 in support of the fact that the amount ambezzled by the Cashier was a trading loss and consequently allowable as business expenditure. In this connection reliance was also placed on Murray and Roger N. Carter's book namely guide to Income-tax Practice where it is stated that a loss by reason of embezzlement by an employee is for income-tax purposes deemed to be an expense for the year in which it is written of in the books.
7. As we find the case of the department is primarily built on a case referred to on page 282 (Income-tax Digest 1st Volume by Raza Naqvi) and the view of Mr. A. C. S....I....Given in the Income- tax Act (Volume-II In so far as the case reported on page-282 of the Income-tax Digest by Raza Naqvi is concerned it is not relevant to the issue before us. In 1960 P.T.D. (Trib.) 582 the Accountant was deprived of Rs,15,221 at the point of knife by a robber as he was taking the money to the Customs Office. The loss of money, therefore, took place not in connection with the duty of Accountant in handling the amount but as a result of taking the money for depositing it in the Custom Office. Consequently loss by robbery is distinguishable from loss which directly arises from the dealing of money by a Cashier in connection with his duties. The case relied upon by the department being distinguishable from the facts before us is, therefore, ignored.
8. In so far as the views of Mr. A.C.S. Are concerned these have not been supported by any cited case by the learned D. R. Even here the learned author observed that the loss and the year of loss have to be determined by facts touching the assessee himself and they alone have any bearing the question. This observation by the learned author has left us in no manner of doubt that in the present case loss through embezzlement will be determined by the facts relevant to it and how the assessee itself wrote off in its books of accounts. As A the discussion would soon establish the relevant date the date when the assessee itself considers that the expenditure having become irrecoverable should be written off. This being the undoubted position it is not possible for us to.....Give any consideration to the views expressed by the learned author.
9. The learned counsel of the respondent drew our attention to a case cited as Lord's Dairy Farms Ltd. v. C.I.T. Bombay North (1955)27 I T R 700. In this case loss by embezzlement was allowed as a trade deduction from profits. In this connetion relevant part of the holding is set out below.
"Held that as it was necessary for the assessee to employ a cashier and to depute to him the duty of drawing money from the necessity or deputing this duty to the cashier and, therefore, B the loss caused by the embezzlement was a trade loss and the assessee was entitled to claim deduction"
10. In the present case Cashier of the respondent during the course of his duties embezzled a sum of Rs,2,38,612. The respondent promptly reported this matter to the S.H.O. W....C.... On 2-12-1965. The amount was, however, written off only when the respondent thought that it was not possible to recover it through any other means. In this connection it is desirable to put .On record that where the criminal proceedings did not deliver any goods. It is impossible to believe that something could have been realized through civil action. Thus, in our view the amount was rightly written off when it was so considered appropriate by the respondent. It was also an admissible deduction in view of L....D...R...Ltd. v. C.I.T., Bombay.
11. The question whether an amount embezzled by a cashier is a trading loss or not was also considered in I. T. A. Nos.316 and 317 of 1955-56, dated 31-1-1958 vide 1960 P.T.D.(Trib.) 567. In this case the President of the Tribunal who delivered the judgment held that an amount embezzled by Cashier-cum-Accountant was a trade loss and, therefore, allowable as business expenditure.
12. Murray and Roger N. Carter in a book Guide to Income-tax Practice (eighth edition page 244 ) have held that a loss on account of embezzlement for income-tax purposes is deemed to be an expenditure of the year in which it is written off in the books. This view is also shared by A. N. Aiyar. In this connection even at the cost of repetition relevant part of the holding is incorporated below:- "It was only when the loss became actual and certain that there could be an accrual of loss and till then, it was merely a civil liability of the clerk that amount based on tort".
13. In the present case the loss did not become certain with the filing of F.I.R. With the police authorities until it was written off in the respondent books. Thus, in our opinion the loss on account of embezzlement became certain only when after having exhausted all means for its recovery it was decided by the Board of Directors that the amount being irrecoverable should be written off.
Undoubtedly the board was competent to decide the date based on the merits of this case. It is not possible for us to question the validity of this action. On account of these reasons we confirm the orders of the learned C.I.T (Appeals). Consequently the departmental appeal being devoid of any merit fails.