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ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 20(1), ROOM NO. F-308, VIKAS BHAVAN, NEW DELHI VS. SH. SCHIN KATARIA, 1279, DR. MUKHERJEE NAGAR, DELHI 110 009
November, 14th 2014
                                                           ITA NO. 5487/Del/2011


                  IN THE INCOME TAX APPELLATE TRIBUNAL
                      DELHI BENCH "G", NEW DELHI
              BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER
                                  AND
                  SHRI T.S. KAPOOR, ACCOUNTANT MEMBER


                         I.T.A. No. 5487/DEL/2011
                                A.Y. : 2008-09
ASSTT.                           VS.                  SH. SCHIN KATARIA,
COMMISSIONER     OF                                   1279, DR. MUKHERJEE
INCOME TAX,                                           NAGAR,
CIRCLE 20(1), ROOM                                    DELHI ­ 110 009
NO.   F-308,  VIKAS                                   (PAN: AAJPK2212K)
BHAVAN, NEW DELHI
(APPELLANT)                                           (RESPONDENT)



        Department by                  :    Sh. Vikram Sahay, Sr. DR
         Assessee by                   :    Sh. Raj Kumar Gupta, CA


                      Date of Hearing : 05-11-2014
                      Date of Order        : 10-11-2014


                             ORDER
PER H.S. SIDHU : JM


     This appeal by the Revenue is directed against the Order of the
Ld. Commissioner of Income Tax (Appeals)-XXII, New Delhi                dated
16.9.2011 pertaining to assessment year 2008-09 on the following
grounds:-

            "1.         Whether on the facts and circumstances of the
                        case the Ld. CIT(A) has erred in deleting the
                        addition of Rs. 60,62,443/- made by the AO in



                                      1
                                                    ITA NO. 5487/Del/2011


                     regard to the disallowance u/s. 54F of the I.T.
                     Act, by admitting the additional evidences.

          2.         Whether on the facts and      circumstances of
                     the case the Ld. CIT(A) has erred in deleting
                     the addition of Rs. 10,15,252/- on account o
                     the business loss pertaining to the amount
                     recovered by the police from the alleged
                     culprits.

          3.         The appellant craves leaves to amend or alter
                     or ay of the aforesaid ground of appeal and
                     amend, after or add any other ground of
                     appeal.

2.   The brief facts of the case are that the asseessee is engaged
in the business of decorative handicrafts items. The assessee filed
its return of income showing a loss of Rs. 22,59,021/- on 30.9.2008.
In the assessment order, the assessing officer has disallowed claim
of exemption u/s. 54F of the Act.     The Assessing Officer has also
disallowed claim of business loss of Rs. 20,15,252/- claimed on
account of fraud. The Assessing Officer also disallowed Rs. 58,565/-
out of vehicle maintenance expenses and Rs. 35,310/- out of
telephone expenses and Rs. 20,000/- out of staff welfare, festival
and general expenses.

3.   Against the Assessing Officer's order dated 1.12.2010 passed
u/s. 143(3) of the I.T. Act, 1961 assessee appealed before the Ld.
CIT(A), who vide impugned order dated 16.9.2011 partly allowed the
appeal of the assessee.




4.   Against the above order of the Ld. CIT(A) dated 16.9.2011,
Revenue is in appeal before us.


                                  2
                                                        ITA NO. 5487/Del/2011


5.   At the time of hearing Ld. Departmental Representative relied
upon the order    of the Assessing Officer.   He also     reiterated the
contentions raised in the grounds of appeal that Ld. CIT(A) erred in
deleting the addition of Rs. 60,62,443/- made by the AO in regard to
disallowance u/s. 54F of the I.T., by admitting the additional
evidences and stated that the CIT(A) has not provided sufficient
opportunity to the Assessing Officer while admitting the additional
evidences. On the other hand, Ld. Counsel of the assesee has relied
upon the order of the Ld. CIT(A) and stated that the same should be
upheld.

6.   We have heard both the counsel and perused the records. We
find that Ld. D.R. in ground no. 1 has force in his contention that Ld.
CIT(A) has not provided sufficient opportunity to             thoroughly
examine the additional evidences, which is arbitrary in the eyes of
law. In our considered opinion, in the interest of natural justice, this
issue requires thorough investigation at the level of the Assessing
Officer. Hence, we remit the ground no. 1 relating to addition Rs.
60,62,443/- made by the AO in regard to the disallowance u/s. 54F of
the I.T. Act with the directions to consider the same, after giving
adequate opportunity of being heard.

7.   We have heard both the counsel and          perused the records.
With regard to ground no. 2 relating to addition on account of
business loss pertaining to the amount recovered by the police from
the alleged culprits, we find that Ld. CIT(A) has elaborately
discussed the issue in question and adjudicated the same as under:-

                 "I have considered the observation of the assessing
                 officer in the assessment order, submissions of the
                 appellant, copy of the bank account of the culprit
                 and copy of the bank account of M/s Ornet Homes

                                   3
                                            ITA NO. 5487/Del/2011


from   where         amount      has    been      transferred
fraudulently.   It       is   seen   that   an   amount       of
Rs.48,82,0001- was transferred fraudulently from
the appellant's bank account running with HSBC
Bank. In connection with this fraud, police arrested
one Mr. Ramesh of Village Barola, District Noida and
from his possession an amount of Rs.70,000/- in
cash and Rs.9,45,252/- were traced in his bank
account running with State Bank of India, Ghazipur,
Delhi. In the assessment order, it is mentioned by
the assessing officer that police seized Rs.70,000/-
in cash and Rs.l9,45,252/- have been traced in his
bank   account. The AR of the                appellant has
submitted that due to typing mistake, a sum
ofRs.9,45,252/- as reported by the police was stated
as Rs.19,45,252/- which is in facts Rs.9,45,252/-. In
support of this, the appellant has filed copy of the
accused's bank account from the State Bank of
India and copy of the petition filed by the appellant
before the Supreme Court. The balance amount
which is not yet traced is Rs.38,66,748/-. The
appellant has submitted that till date he has not
received any amount from the police and the
matter is still pending in the Supreme Court as the
appellant has made bankers as party without whose
connivance, the accused could not have succeeded
in transferring the amount from appellant's bank
account. It is also claimed by the AR of the
appellant that more than four years have elapsed to
the incident but till date not a single paisa has been
received by the appellant. Therefore, the total loss
                     4
                                         ITA NO. 5487/Del/2011


on account of fraud of Rs.48,82,000/- has to be
allowed as capital loss.

I have considered the facts of the case, it is seen
that entire amount ofRs.48,82,000/- have been
fraudulently    transferred     from    the    appellant's
proprietary concern M/s Omet Homes in November,
2007. Though the police have caught the culprit
who has committed fraud but till date, the appellant
has not received a single paisa. M/s Omet Homes is
engaged in the business of exporting decorative
handicrafts items. Therefore, this loss occurred to
the proprietary firm is incidental to carrying on
business and there is a direct an proximate
connection and nexus between the money lo-st by
fraud and the business. Hence, the entire money
lost by the appellant in fraud has to be allowed as
business loss. The amount recovered by the police
of Rs.70,000/- in cash and Rs.9,45,252/- traced in
the bank account of the accused has not been
received by the appellant till date. As and when it
will be received by the appellant, the same will be
offered as income in the year of receipt, therefore,
the assessing officer's action of restricting the
claimed of business loss to Rs.28,66,748/- was not
correct. The appellant is entitled to set off full loss
occurred in the fraud. In support of the above view,
reliance   IS   paced      on   the    following    judicial
pronouncements:-

CIT v. Smt. Pukhraj Wati Rubber [2007J 199 Taxation
107 (Punj. & Har.)
                     5
                                           ITA NO. 5487/Del/2011





       The assessee's representative for recovery of
sale    proceeds    embezzled      Rs.     2,64,795.       The
Assessing Officer disallowed the loss however AAC
allowed assessee's appeal. The Tribunal confirmed
the AAC's order. On reference, the High Court
answered the question against the revenue and in
favour of the assessee as the loss on account of
embezzlement was incidental to carrying on the
business and there was direct and proximate
connection and nexus between the loss and the
business.

       The High Court said that the liability to tax is
on     profit or   gains   of   business     computed        in
accordance with sections 30 to 43D of the Act.
Though there is no provision for allowing deduction
of a trading loss on account of embezzlement, yet
section 37 of the Act provides for any expenditure
for the purpose of business and there has to be
nexus between the business operation and the loss.
If loss was directly connected with the business
operation and incidental to carrying on' of business,
the same has to be allowed as a deduction.

Badridas Daga v. CIT [1958J34 ITR 10(SC), an agent
of the assessee withdrew amount from bank and
misappropriated the same. It was held that having
regard to accepted commercial practice and trading
principles, it could be held that loss arose out of
carrying on of business and was incidental to it.
Same principle was followed in CIT v. Nainital Bank
Ltd. [1965J 55 ITR 707(SC). In the said case, cash
                    6
                                                      ITA NO. 5487/Del/2011


               amount was stolen in a dacoity. In Ramchandar
               Shivnarayan v. CIT, AP [1978J 111 ITR 263 (SC),
               after review of case law on the point, it was held
               that loss on account of theft had to be treated as
               trading loss as it was directly connected with the
               business operation and was incidental to carrying
               on of business.

                       Following the law laid down by the Supreme
               Court, the High Court held that the Tribunal was
               justified in allowing deduction on account of loss by
               embezzlement, which was held to be incidental to
               the carrying on of the business and there was a
               direct    and   proximate    connection    and      nexus
               between the loss and the business operation of the
               assessee.

                       In view of the above judicial pronouncement, it
               is established that the loss occurred in fraud was
               directly connected with the business operation and
               incidential to carrying on of business. Hence entire
               amount of business loss of Rs.48,82,OOOI- has to be
               allowed as a deduction. As a result the assessing
               officer in directed to delete the addition of Rs.20,
               15,252/-."

7.1   In view of the     above, we find considerable force in the
conclusion drawn by the Ld. CIT(A)       that in view of the judicial
pronouncement discussed as aforesaid, it is established        that the
loss occurred in fraud was directly connected with business
operation and incidental to carrying on of business. Hence, entire
amount of business loss of Rs. 48,82,000/- has to be allowed as a


                                   7
                                                    ITA NO. 5487/Del/2011


deduction. Therefore, we find Ld. CIT(A) has rightly deleted the
addition of Rs. 20,15,252/-, which does not need any interference on
our part, hence, we uphold the same.

8.    In the result, the Appeal filed by the Revenue stands partly
allowed for statistical purposes.

      Order pronounced in the Open Court on 10/11/2014.




      Sd/-                                            Sd/-

[T.S. KAPOOR]                                   [H.S. SIDHU]
ACCOUNTANT MEMBER                            JUDICIAL MEMBER

Date 10/11/2014
"SRBHATNAGAR"
Copy forwarded to: -
1.    Appellant -

2.    Respondent -
3.    CIT
4.    CIT (A)
5.    DR, ITAT


                            TRUE COPY
                                                By Order,




                                                Assistant Registrar,
                                                ITAT, Delhi Benches




                                    8
    ITA NO. 5487/Del/2011




9

 
 
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