1. These two appeals are directed against the order dated 16-3-1984 passed by the Commissioner (Appeals). Various grounds are taken by the assessee and against the same order, the revenue has also objected to the allowance in respect of expenses pertaining to the earlier years.
Both the appeals are disposed of together for the sake of convenience.
2 and 3. [These paras are not reproduced here as they involve minor issues.] 4. The third ground also pertains to quantification of relief under Section 80J of the Income-tax Act, 1961 ('the Act'). The assessee is a company wherein the investment is made by the State Government as also by the Central Government. The company is engaged in various activities comprising trading and manufacturing activities and is also having various subsidiaries. The company claimed relief under Section 80J in respect of the pesticides unit for which separate books of account in respect of this unit are maintained. Separate balance sheet was extracted for. the purpose of considering the claim for computing relief. The ITO observed in paragraph No. 3 of his order as follows : On going through the details furnished it is noticed that the head office does have borrowed funds and own funds. All that the assessee has done is that a balance sheet is drawn (extracted) showing the value of fixed and other assets on the asset side and the figure shown on the asset side is counter-balanced by showing an equivalent amount as funds provided by head office. In the absence of the detailed copy of the new unit's account in the books of head office and that of the head office account in the books of the new unit it is not possible to verify how much of the borrowed and of self-generated funds have gone into building up the capital in the new unit. The assessee's plea that self-generated funds alone have gone into building up the capital of the new unit cannot, therefore, be accepted. However, considering the fact that the assessee did have both borrowed as well as own funds as could be seen from the balance sheet, the capital employed in the pesticides unit is taken at the proportion of the own capital to the total assets of all the units taken together.
On this basis, he calculated the percentage of own capital at 58 per cent and, accordingly, granted relief. The credit balance in the head office account being Rs. 76,46,882 on which applying the percentage of 58, he worked out relief at 7.5 per cent on Rs. 44,35,189.
5. On appeal, the assessee put up various pleas such as (i) on the basis of cash flow statement of the head office, it could be observed that capital employed in the unit came out of own capital, (ii) if the proportion is to be made in this, then current liabilities and provisions of the head office were required to be reduced from gross assets of the head office and this would work out to 84 per cent of own funds employed. The Commissioner (Appeals) did not agree with the submissions made by the assessee, mainly on the ground that the assets were not proved to have exclusively been financed by the head office from the own funds and, therefore, the ITO was justified in applying the proportion for the purpose of arriving at the amount of capital employed on the basis that credit balance in the head office accounts in the books of industrial undertaking, namely, pesticides unit, did represent not only own funds, but also part of borrowings because such borrowings did appear in the books of the head office. He, accordingly, after making minor variation to remove the defects in the order of the ITO applied the ratio of 5.41 : 7.92 to the net capital of the pesticides unit represented by funds of the head office utilised in that unit and worked out the eligible capital at Rs. 52,23,438.
6. At the time of hearing, the learned counsel appearing on behalf of the assessee gave various statements in respect of the claim and the alternative claim on the basis of various computations. It was submitted that the Commissioner (Appeals) committed an error in taking into account an amount of Rs. 1,05,86,335 in respect of unsecured loan appearing in the balance sheet because this amount was received from the Gujarat Government for the purpose of handing over the same to Gujarat Agro Service Products Ltd. for certain specific purpose and it was done so. For this purpose necessary note in the audited statements of accounts was brought to our notice. Reliance was placed on the decision of the Madras High Court in the case of CIT v. South India Viscose Ltd.  14 Taxman 259 and also the Karnataka High Court in the case of CIT v. Karnataka Cement Pipe Factory  151 ITR 247.
7. The learned departmental representative, supporting the order of the Commissioner (Appeals), stated that since in the accounts loans were raised by the head office, the same were required to be considered. The decision in the case of South India Viscose Ltd. (supra) was distinguishable because element of borrowings by the head office is required to be considered.
8. We have gone through the orders of the authorities below and also materials to which our attention was drawn. There is no dispute regarding the credit balance of Rs. 76 lakhs approximately lying in the head office account in the books of pesticides unit. The only dispute is with regard to the stand of the revenue that this amount of Rs. 76 lakhs does include part of the borrowings raised by the head office. In our opinion, the exercise undertaken by the authorities below is not required to be gone into considering the facts of this particular year as reflected by the audited statements and reports. If one looks at the sources and application of the funds as per the balance sheet for the year ended 31-3-1979, which is relevant as per the provisions of Section 80J, then one finds that there is internal accrual of cash resources to the extent of Rs. 53 lakhs. Besides, Rs. 98 lakhs is received by the company from the Government in respect of additional shares to be issued. Therefore, one can straight- away correlate this amount of Rs. 98 lakhs to the amount lying in the head office account in books of industrial undertaking for the purpose of capital employed in this only unit of pesticides eligible for relief under Section 80J.This is apart from the amount of cash profits generated during the year ended 31-3-1979.
9. To the extent of Rs. 160 lakhs, there is also an increase in the liabilities but this amount gets reflected in increase in the current assets and, therefore, the additional source of funds from outside gets related to investment in current assets, etc., and for this purpose the liabilities are already deducted in statement considered as per the computation made in respect of claim under Section 80J.10. Considering the provisions of Section 80J, now retrospectively amended by the Finance (No. 2) Act, 1980, it is pertinent to note that though the assets to be considered for the purpose of computation under Section 80J are the assets of an industrial undertaking, the section provides for deduction of borrowings and debts owed by the assessee vide Clause (iii) of Sub-section (1A) of Section 80J. We find from the decision in Karnataka Cement Pipe Factory's case (supra) that the Board has accepted the view that the word 'assessee' is to be equated with industrial undertaking vide Circular No. 380 dated 10-4-1984 [see Taxman's Direct Taxes Circulars, Vol. 1, 1985 edn., p. 535]. Therefore, the liability in respect of industrial undertaking only is required to be considered. In the statement of computation for relief submitted and considered by the authorities below, the assessee has deducted the liabilities of Rs. 99 lakhs approximately pertaining to the pesticides division. Therefore, there is no reason to deduct any further amount only on the basis that the balance in the head office account might represent part of the borrowings by the head office. No nexus is proved or even attempted for giving necessary finding by the authorities below. On this point, the Commissioner (Appeals) has cast the burden on the assessee by stating in paragraph No. 7 that the net assets in respect of the new unit are not proved to have been exclusively financed by the head office from its own funds. We would only state that in the absence of clear case of diversion of borrowings to the new unit it would not be proper to deny the claim of the assessee especially when the funds of the head office are sufficient enough to make investments in the new unit.
11. We, therefore, set aside the decision taken by the Commissioner (Appeals) and direct the ITO to grant relief to the assessee which is worked out at Rs. 5,73,516 being 7.5 per cent on Rs. 76,46,882.
12. The next ground is in respect of confirming the disallowance made by the ITO in connection with provision in respect of misappropriation amounting to Rs. 71,124 by an employee of the company. The relevant facts in brief appearing on page 6 of the paper book are as under : Shri B.R. Raj was in charge of Agro Service Centre of the Corporation at Bharuch. During his service, he had done some misappropriation in connection with the stocks of the fertilizers which were in his charge. The value of such fertilizers was worked out to Rs. 76,936.67.
Investigation was carried out against him and the amount in question was debited to his personal account. He was asked to pay back the entire amount without prejudice to the action that may be taken against him under the criminal law. A police complaint was lodged against him on 23rd August, 1978, at Bharuch. His services were terminated vide office order No. Est P/9364 dated 17th October, 1979, with effect from 18th October, 1979. An amount of Rs. 5,853 only could be recovered from him and thereafter no recovery is received from him. The balance amount has been written off to the profit and loss account during the year under assessment, i.e., assessment year 1980-81.
13. The action of the ITO disallowing the claim was confirmed by the Commissioner (Appeals) on the ground that the loss came to the notice of the assessee in August 1978 and, therefore, it pertained to earlier assessment year. Relying upon the decision of the Supreme Court in the case of Associated Banking Corpn. of India Ltd. v. CIT  56 ITR 1, he rejected the claim holding that the loss by a misappropriation must be deemed to have occurred when the assessee came to know about the same.
He further observed that the civil suit was filed only in 1981 and there was no evidence to show that there was no prospect of recovery from this employee after the police complaint was lodged. Again the enquiry which was in progress was only in respect of punishing the employee dcpartmentally and this had nothing to do with recovery. The civil suit is still pending.
14. Bringing to our notice the factual position, it was submitted by the learned counsel that amount was debited to the personal account of the employee and inquiry regarding final conclusion prolonged up to 27-7-1979 and, therefore, deduction or conclusion regarding committing of a fraud by the employee could be arrived at only at this time and, therefore, the amount was allowable as business loss in accounting year 1979-80. Reliance was placed in the decision of the Punjab and Haryana High Court 125 ITR 529 (sic) as also Sarangpur Cotton Mfg. Co. Ltd. v.CIT  143 ITR 166 (Guj.). It was clarified that gratuity was not payable to the employee. Again the Controller and Auditor General, who audited accounts of this Government company, had also certified the writing off the loss in the current year.
15. The learned departmental representative supporting the decision of the Commissioner (Appeals) stated that the amount writtens off was not finally determined because there could be balance payable under the Provident Funds Act, J925, Gratuity Act, etc., to which recourse be made. Again company could proceed against private assets when decree is obtained in respect of suit filed in the Court. In any case, fairly agreeing that the assessee was entitled to loss, the question was of fixing the year in which the loss is required to be allowed.
16. We have gone through the relevant material placed before us, especially the-inquiry report submitted by Mr. P.D. Desai, manager, vide report dated 22-8-1978 and the charge sheet dated 12-1-1979. In the charge sheet it is specifically mentioned that the employee had admitted the shortage in the stock vide letter dated 25-2-1978, the stock under his control. Again the management division had investigated the ledger kept at Agro Service Centre, Bharuch, and on verifying the same, charges were made in respect of keeping of a large sum with the employee without authority. Thereafter, in February 1979 office order was issued regarding holding the inquiry as per the service rules and the report was received. Thereafter, Special Civil Suit No. 17 of 1981 was filed in the Court of Civil Judge at Bharuch against various persons including employees. I Tom the above facts before us, it is quite clear that though the stock and the other assets were misappropriated by the employee because of the chances of recovery from the employee, the amounts were debited to the personal account on basis that it was not a conclusive loss. There is nothing to show on record that even if the employees admitted the misappropriations, the amounts could not be recovered from them and, hence, the loss of earlier, the accounting year relevant to the assessment year under consideration, therefore, the assessee wrote off the amount like the amounts irrecoverable from the debtor on basis of sales (sic). Therefore, the claim of the assessee has to be allowed in the year when it is shown that there are no chances of recovery in respect of the amounts debited. Therefore, the decision of the Commissioner (Appeals) holding that the loss occurred in the year 1978 being the earlier year and cannot be allowed is not justified. Again it is an admitted fact that amount has not been received in the subsequent years to the date of the hearing of the appeal and in this connection, the assessee's counsel had also made statement at the bar. Whatever amount was recovered is already credited to the accounts of the employee. Considering these aspects, in the light of the principles laid down by both the Courts in cases relied upon by the learned counsel and considering the fact that accounts of the company are audited by the Controller and Auditor General of India, we uphold the claim made by the assessee holding that the deduction is allowable by way of loss in the course of business under Section 28 of the Act itself. This ground is, therefore, allowed.
17 to 23. [These paras are reproduced here as they involve minor issues.] 24. In the result, the appeal filed by the assessee is allowed in part and that filed by the revenue is dismissed.