B. P. Jeevan Reddy C. J. - (1.) UNDER Section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following question : "Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that it was premature for the assessee to put forward its claim of business loss in the accounting period relevant to the assessment year 1975-76 ?"
(2.) THE assessee is a partnership firm. THE assessment year concerned is 1975-76. THE previous year relevant to the assessment year commenced on (sic) 27, 1973, and ended on April 30, 1974. The assessee was carrying on a business in cloth on commission basis. There were twelve partners including one Badri Nath who was the working partner. The assessee's case was : Sri Sidh Nath Singh was an employee of the firm. His duties included delivery of cheques to banks and other persons in the course of the assessee's business. Certain blank cheques, endorsed "account payee" were kept with the cashier ; Sidh Nath Singh used to take them whenever necessary, make appropriate entries and deliver them to the appropriate persons. One such cheque taken by him was misutilised by him. On the counterfoil of the cheque he made entries as if it was issued to the State Bank of India in a sum of Rs. 5,688.80 on account of Sri Niwas Cotton Mills, but the cheque was actually made out in a sum of Rs. 41,000 in favour of one Sri Rama Shanker Shukla. Sri Shukla got the cheque encashed. Some time later, Badri Nath received a legal notice from Rama Shanker Shukla alleging that Badri Nath had taken a loan of Rs. 35,000 from the said Sri Rama Shanker Shukla stipulating a particular interest, that a sum of Rs. 41,000 was paid towards that debt under the said cheque and that a sum of Rs. 4,500 was still due. Badri Nath was called upon to pay the same forthwith. This letter was received by Badri Nath on July 4, 1973. It is from this letter that he came to know of the fraud played by the employee and immediately lodged a complaint with the police. According to the assessee, the said employee and Rama Shanker Shukla were arrested but immediately bailed out. The assessee lodged a private complaint in the court against the said persons.
(3.) ON the above facts, the assessee claimed a loss of Rs. 41,000 during the assessment year 1975-76. The Income-tax Officer disallowed the same holding that since the fate of the criminal proceedings is not known, it cannot be said that any loss has occurred. An appeal to the Appellate Assistant Commissioner proved of no avail. A second appeal to the Tribunal too met with the same fate. The Tribunal held that the claim of the assessee is premature. It observed that there are two versions with respect to the payment of the said amount--one put forward by the assessee and the other put forward by Rama Shanker Shukla. The criminal court has not yet adjudicated upon the question. No proceedings had been taken in the civil court. It, therefore, cannot be said whether the petitioner's case is true. There are two different and conflicting versions. The claim cannot, therefore, be allowed in this assessment year, whereupon, the assessee obtained this reference. Learned counsel for the assessee contended that the finding of the Tribunal is wholly unsustainable. It should not have left the question undecided, calling it premature. The Tribunal ought to have recorded a finding on the plea put forward by the assessee. Its failure to do so on the ground that the petitioner's claim is premature amounts to failure to exercise jurisdiction vested in it by law. We are inclined to agree with this submission. The petitioner had come forward with a particular case. Whether the case is true or not, it is for the authority to decide. Simply because the criminal case is pending or a civil suit has not been filed, the claim of the assessee cannot be left undetermined. Learned counsel for the petitioner also relied upon a circular of the Central Board of Direct Taxes, being Circular No. 35-D (XLVII-20) of 1965 (F. No. 10/48/65-IT(Al)) dated November 24, 1965, which says, inter alia, 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 is discovered." The petitioner's case is that since it discovered the said embezzlement on July 4, 1973, the loss must be allowed in that assessment year. This is a matter for the Tribunal to consider.;