ITAT: Unascertained Business Loss Cannot Be Allowed As Deduction

The Assessing Officer (AO) had disallowed loss from embezzlement of cash by Assessee's staff as business loss on the ground that the said fraud and the quantum of loss had not been ascertained and confirmed by the police. The Commissioner of Income Tax (Appeals) (CIT (A)) had confirmed the said order. The Assessee filed an appeal against the order passed by the CIT (A) before the ITAT.

The representative for the Assessee before the ITAT submitted that the Assessee, a dealer in motor vehicles, had suffered loss in the course of business by the embezzlement of cash received which formed a part of the sales revenue of the Assessee. Therefore, the Assessee contended that the loss on account of cash embezzled had to be allowed as a deduction in computing Assessee's taxable income. Also, the Assessee submitted that the AO had not questioned or disputed the allowability of embezzlement loss in computing business income, but only disallowed it on the ground that the fraud and quantum of fraud had not been confirmed by the police. The departmental representative submitted that there was no entry passed in the books of accounts of the Assessee and the loss was not quantified on any scientific basis. He also relied upon the statutory auditor's report that had remarked that the implication of loss was not ascertainable until the final findings of investigation by the management.

The ITAT held that in the present case the Assessee wanted to claim the loss from embezzlement as business deduction without writing off the same in the Profit and Loss Account. It held that in the instant case, the Assessee was still having hope of recovering the said amount. It ruled that since the issue had not reached finality, the Assessee could not claim it as business loss in the relevant assessment year. It observed that the Assessee had not made necessary attempts to recover the loss from the concerned employee and the alleged loss by embezzlement was not proved and therefore could not be allowed as deduction. The tribunal observed that in the present case, as noted by the lower authorities, there was no actual quantification of loss and the Assessee had not taken any steps for recovery.

The ITAT ruled that unless the recovery of the embezzled amount was impossible, it could not be claimed as a business loss. Till the point of time the Assessee entertained the hope of recovering the loss, the said amount could not be allowed as a deduction in the relevant assessment year.

"The assessee continued to show this loss in the balance sheet as "Sundry Debtors – Debit Balance - Suspense Account" without charging it to P&L a/c and debited in Debtors account from whom alleged person collected the cash. Being so, in our opinion, it is not ascertained liability in the assessment year under consideration. Accordingly, we reject the claim of assessee and the grounds raised in this regard are dismissed."

The ITAT ruled that since the Assessee had not ascertained the loss in the books of account and had not charged it to the Profit and Loss Account, it could not be allowed for deduction as business loss. The ITAT, therefore, dismissed the Assessee's appeal.

Case Title: Avijit Dewanjee Versus DCIT, Bengaluru

Representative For The Assessee: Suman Lunkar, CA

Representative For The Department: Priyadarshi Mishra, JT. CIT(DR) (ITAT), Bengaluru

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