Alok Aradhe, J.-This bunch of appeals preferred under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) was admitted on following substantial questions of law by an order dated 01.02.2016 passed in ITA No.17/2007 which are reproduced below for the facility of reference.
“i) Whether the loss on account of embezzlement can be claimed when information of the embezzlement is acquired or when the embezzlement is discovered? Whether the terms detection and discovery has the same connotations?
ii) Whether the loss by embezzlement being incidental to the banking business should be allowed as deduction in the year of its detection or in the year it is discovered”
2. Since the appeals were admitted on common substantial questions o f law, they were heard analogously and are being decided by this order. For the facility of reference, facts from ITA No.17/2007 are being referred to.
3. The assessee filed the return of income for the Assessment year 1997-1998 in which it claimed embezzlement loss of Rs. 1,65,000/-. The Assessing Officer vide order dated 18.03.2003 inter alia held that although the embezzlement came to the notice of the assessee on earlier dates yet the assessee has claimed the deduction in the assessment year 1997-1998. It was further held that the assessee had noted the details of occurrence of loss and had detected the loss in the previous accounting year. Therefore, the deduction is not admissible. Accordingly, the Assessing Officer disallowed the loss of Rs. 1,15,000/- for the Assessment Year 1997-1998 and amount of Rs. 50,000/- was disallowed by processing the return under Section 143(1)(a) of the Act. On similar facts, embezzlement loss to the tune of Rs. 10,66,000/- was disallowed for assessment year 2000-2001.
4. Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) by an order dated 18.03.2004 inter alia held that the loss on account of embezzlement has to be allowed in the year when the same has been crystallized after completing all procedural formalities. The Commissioner of Income Tax (Appeals) relied on the decision of his predecessor for previous assessment years and allowed the appeal. Being aggrieved, the Revenue filed an appeal before the Income Tax Appellate Tribunal (for short “Tribunal”). The Tribunal by order dated 20.07.2007 on the 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 the year as soon as the same is detected and the case was remitted to the Assessing Officer to decide the claim in terms of the direction that the loss can be allowed if the same is claimed in the year it is detected notwithstanding whether the same has got crystallized and accordingly allowed the appeal preferred by the Revenue. In the aforesaid factual background, the assessee has filed this bunch of appeals.
5. Learned counsel for the assessee submitted that the loss on account of embezzlement may come to the knowledge of the assessee in a particular year but the exact amount may be ascertained after investigation in a subsequent year i.e. the date of discovery. Therefore, the loss should be allowed as deduction from income in the year in which it was discovered. In support of the aforesaid submission, learned counsel for the assessee has referred to the decision of the Supreme Court in the case of Associated Banking Corporation of India Ltd. V. Commissioner of Income Tax (1965) 56 ITR 0001 as well as a Division Bench decision of High Court of Allahabad in the case of Shiv Narain Karmendra Narain vs. Commissioner of Income Tax, (2005) 277 ITR 27 (All) as well as Circular issued by the Central Board of Direct Taxes dated 24.11.1965. On the other hand, learned counsel for the Revenue has supported the order passed by the Tribunal and has submitted that in view of the circular issued by the Central Board of Direct Taxes, the loss must be deemed to have arisen from the date when it is discovered and must be claimed in the same assessment year. It is further submitted that order passed by the Tribunal is an order of remand and therefore, no interference is called for.
6. We have considered the submissions made by both the sides and have perused the record. The Supreme Court in the case of Associated Banking Corporation of India Ltd (supra) has held that The problem as to when loss resulting from misapplication of funds by an agent occurs must be viewed like many other problems arising under the Income-tax Act on a conspectus of all the facts and circumstances in the context of principles of commercial trading. Embezzlement of funds by an agent; like a speculative adventure, does not necessarily result in loss immediately when the embezzlement takes place, or the adventure is commenced. Embezzlement may remain unknown to the principal, and the assets embezzled may be restored by the agent or servant. Again it cannot be said that in all cases when the principal obtains knowledge of the embezzlement the loss results. The 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 a reasonable chance of obtaining restitution exists, loss may not in a commercial sense be said to have resulted. Embezzlements of funds of the Bank took place in 1946. They were then unknown to the Bank. Even after the embezzlements came to the knowledge of the Liquidator, trading loss cannot be deemed to have resulted. The proposition that irrespective of other considerations, as soon as the embezzlement takes place of the employer's funds, whether the employer is aware or not of the embezzlement, there results a trading loss is not tenable. So long as there was a reasonable prospect of recovering the amounts embezzled by the Bank, trading loss in a commercial sense may not be deemed to have resulted.
7. The Central Board of Direct Taxes has issued a circular dated 24.11.1965 by taking note of the decision of the Supreme Court in the 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:-
“ A reference is invited to the instructions on the above subject contained in Board”s Circular No.25 of 1939 and Circular No.13 of 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 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 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 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 s. 10(1) of the IT Act, 1922 (corresponding to s.28 of the IT Act, 1961) 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 it and realizes 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 related as incidental to a business and this loss should be allowed as deduction in the year in which it is discovered.”
8. From a conjoint reading of the decision of the Supreme Court in the case of Associated Banking Corporation of India Ltd supra as well as circular dated 24.11.1965 issued by the Central Board of Direct Taxes, it is evident 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 in which it was discovered. In Badri Das Daga supra, the Supreme Court has held that loss resulting from embezzlement by employee or agent of a business as deduction under Section 10(1) of the Act if it arises out of carrying on of business and is incidental to it. In the case of Associated Banking Corporation of India Ltdsupra, it has been held that loss must be deemed to have arisen only when employer comes to know about it and it realizes that the amount embezzled cannot be recovered. Thus the date of discovery in view of circular issued by CBDT has to be treated as the date from which the employer comes to know that the amount embezzled cannot be recovered.
9. The expression detection and discovery have different connotations. When embezzlement comes to the notice of an employer, it can be said that such embezzlement is detected by the employer. However, the expression “discovers” indicates detection as the 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. The work “discovers” has been interpreted by English Courts to means “comes to the conclusion from the examination the 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 the 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 the expression detection and discovery have different and distinct connotations in law and the 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 the amount embezzled cannot be recovered and not merely from the date of acquiring knowledge in which that embezzlement has taken place. Accordingly, the first substantial question of law is answered in favour of the assessee and against the Revenue. On the same analogy, the second substantial question of law framed by this Court is answered by stating that loss by embezzlement being incidental to the banking business should be allowed as deduction in the year it is discovered and the expression “discovered” has to be read in the context of Circular dated 24.11.1965 issued by Central Board of Direct Taxes. Accordingly, the second substantial question of law is answered in favour of the assessee and against the Revenue.
11. In view of the preceding analysis, the orders passed by the 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 the result, the appeals are allowed.