B.S. Dhillon, J.
1. The assessee is a private limited company and deals in iron and steel. It has its head office at Jullundur and stockyards at Chandigarh and Karnal. For the assessment year 1965-66, the assessee declared the income at Rs. 13,19,200. Along with the return, the assessee filed the report dated 30th November, 1964, of the directors and the statement of accounts including profit and loss account and the balance-sheet. By letter dated 10th September, 1969, the assessee claimed a loss of Rs, 60,000 on the ground that the books were maintained by the previous secretary against whom a case is pending in the court of law ; on checking, it was found that there was no deposit with M/s. Tata Iron and Steel Company and Hindustan Steel Ltd., whereas there was a deposit (security) of Rs. 10,000 with M/s. Indian Iron and Steel Company as against Rs. 20,000 shown in the balance-sheet. It may be pointed out that in the balance-sheet a sum of Rs. 30,000 was shown as deposit with Tata Iron and Steel Company and a sum of Rs. 20,000 was shown as deposit with Indian Iron and Steel Company. The assessee also produced copies of the printed balance-sheet as on 30th June, 1964, and 30th June, 1967, along with the auditor's report dated 8th May, 1969. According to this report, the depositsworth Rs. 60,000, referred to in the earlier part of the judgment, were nonexistent. It was also pointed out that a case under Sections 406, 408, 409, 477A and 465, etc., of the Indian Penal Code was registered against Shri D.D. Mehta, previous secretary of the assessee-company, who was also placed under suspension on 25th February, 1968.
2. The ITO rejected the claim of the assessee for allowing the loss of Rs. 60,000.
3. The appeal before the AAC was dismissed. For the assessment year 1969-70, the assessee-company declared its sales at Rs. 18/18, 696 and gross profit at 1%. The ITO came to the conclusion that the books of account pertaining to the assessment year 1969-70 were not correctly maintained and that a gross profit shown by the assessee was not acceptable. He, therefore, estimated the sales at Rs. 19,00,000 and gross profit at 5%. He computed the business income of the assessee at Rs. 78,341.
4. On appeal, the AAC reduced the estimated income of the assessee for the assessment year 1969-70 from Rs. 95,000 to Rs. 21,082.
5. During the course of appellate proceedings before the AAC, the assessee claimed deductions on various grounds. Deduction was also claimed as loss on account of embezzlement. The assessment order was passed on 6th August, 1971. The assessee filed an application on 9th August, 1971, before the ITO giving the details of the amount so embezzled and thus claimed that the said amounts be allowed as expenditure. The AAC rejected the claim of the assessee.
6. The assessee filed I.T.A. No. 535/1970-71, pertaining to the assessment year 1965-66, and I.T.A. No. 3121/1971-72, pertaining to the assessment year 1969-70. Both the appeals were dismissed by the Tribunal by its consolidated order of the 26th November, 1979.
7. On a reference application having been made by the assessee, the Tribunal has referred the following two questions of law to this court for its opinion:
' 1. Whether the Tribunal has rightly held that, on the material on record, the assessee has failed to prove the embezzlement of Rs. 60,000 and Rs. 2,61,000 in the assessment years 1965-66 and 1969-70, respectively?
2. Whether, on the facts and in the circumstances of the case, the Tribunal has rightly upheld the disallowance of Rs. 60,000 and Rs. 2,61,000 in question '
8. The Tribunal in paragraph 13 of its judgment held as under:
'13. We are in agreement with the view taken by the authorities below that the losses claimed by the assessee are not allowable. The reason is not far to seek. There is no satisfactory evidence on record to establish that there has, in fact, been any embezzlement and that the assessee has suffered losses on that account. No doubt Shri D. D. Mehta, being the secretary ofthe assessee-company, was in charge of its afiairs, but this fact merely arouses a suspicion against him for the discrepancies found in its account books and suspicion, however deep it may be, cannot take the place of positive evidence. Thus, at this stage, the charge of embezzlement against Shri Mehta is nothing more than a mere allegation. The mere fact that a complaint has been lodged by the assessee against him is not a conclusive proof of embezzlement by him. Till the criminal case pending against Shri Mehta is decided against him, it cannot be said with any degree of certainty that any embezzlement had, in fact, taken place or that Shri D. D. Mehta is guilty of that offence. No director or any other witness has appeared before the Income-tax Officer to state that it was Shri Mehta who had embezzled the funds of the assessee. Nor has Shri D.D. Mehta been examined by the assessee to prove so. Again, the report of the auditors merely points out the discrepancies in the accounts of the assessee.
It does not fix the responsibility for embezzlement, if any, on Shri D. D. Mehta, or any other employee. Thus, on the material on record, it is difficult to hold that any losses had, in fact, arisen to the assessee on account of embezzlement by any of its employees. Again, there is no material on record to hold that the alleged embezzlement of the relevant amounts occurred in the respective assessment years or that the amounts became irrecoverable in these years. The losses claimed by the assessee cannot, therefore, be allowed in the assessment year in question. The authority cited by the assessee, i.e., : 61ITR23(Mad) (Kothari and Sons v. CIT) is distinguishable and does not advance its case in any way. In that case, it was clearly admitted by the employees concerned that they had embezzled the money belonging to the assessee and so it was held that the loss was actual and present, allowable in the year in which the loss was discovered by the assessee.
In the present case, there is no such admission on the part of Shri D. D. Mehta, nor is there any clear evidence as to when the assessee, in fact, discovered the loss. That being so, the aforesaid authority has no bearing on the present case. '
9. After hearing the learned counsel for the parties and going through the records of the case, we have come to the conclusion that it is not possible for us to answer the questions referred to us and we are of the opinion that it is a fit case which should be sent back to the Tribunal for re-deciding the appeals of the assessee. The Tribunal viewed the contentions of the assessee from a completely different angle from the one from which the same should have been viewed. It cannot be disputed that if the embezzlement is proved by the assessee, the same can be claimed as business loss. It is no doubt true that embezzlement is a criminal offence andif, in a given case, criminal proceedings have been launched, this may be one of the relevant pieces of evidence for proving the loss but the culmination of such proceedings in the conviction of the accused is not necessary to prove the loss. If the assessee is able to place relevant material before the authorities for proving the loss irrespective of the fact whether the accused charged of embezzlement has been convicted or not the authorities cannot refuse to consider the material by observing that the conviction of the person accused of embezzlement, has not been recorded. In the present case, the assessee produced its balance-sheets, audit report, copy of the first information report, copy of the letter dated 10th September, 1969, of the assessee along with its enclosure. The Tribunal observed that there was only suspicion against Shri D.D. Mehta and that there was only a charge of embezzlement against him. It was further observed that till the criminal case pending against Shri Mehta is decided against him, it could not be said with any degree of certainty that any embezzlement had taken place or that Shri D.D. Mehta is guilty of any offence. This observation of the Tribunal, in our view, is uncalled for. In a given case, even if the person, who is accused of embezzlement, is acquitted, still if proper evidence is led before the authorities, the authorities are bound to consider the material with a view to find out if the loss is proved or not. The observation of the Tribunal that no director or any other witness has appeared before the ITO, is not relevant as the resolution of the board of directors was placed on the record. The further observation that Shri D.D. Mehta has not been examined by the assessee, is again irrelevant as it cannot be expected that the person who is charged of embezzlement is likely to confess in every case before the authorities that he is guilty of having embezzled the amount especially when he is being tried in a criminal trial. Moreover, it is not necessary for the assessee to prove that the embezzlement was done by a particular employee. If the loss by way of embezzlement is proved, the assessee is entitled to claim set-off. The observation of the Tribunal that there is no material on the record to hold that the alleged embezzlement of the relevant amounts occurred in the respective assessment years, is again irrelevant. It is well settled that if the loss is not known, and it comes to be known during a particular assessment year, the adjustment can be claimed in the assessment year when it came to be known. The material produced by the assessee before the Tribunal was not at all considered by the Tribunal from a true perspective. It is, therefore, obvious that irrelevant considerations got in and the Tribunal without considering the material rejected the claim of the assessee. In the circumstances of the case, we feel that it is not possible for us to answer question No. 1. Since the decision of question No. 2 is directly linked with question No. 1, therefore, it is also not possible for us to answer the same.
10. For the reasons recorded above, we direct that the case be sent back to the Tribunal which shall decide the appeals of the assessee afresh keeping in view the propositions which find enunciated by us. We order accordingly. However, there will be no order is to costs.