PCIT vs. Saravana Selvarathnam Trading and Manufacturing Pvt. Ltd.; [2019] 415 ITR 146 (Madras HC)

The High Court held that embezzlement of cash by director of assessee is allowable as Business loss and recovery of amount or outcome of pending criminal prosecution against director before Magistrate Court is not relevant.


The assessee claimed as bad debt u/s 36 of the Income-tax Act, 1961 the amount embezzled by a director, who dealt with the day-to-day business activities. Upon the embezzlement being found out during the internal audit, the director was removed from the board of directors and a criminal prosecution against him was initiated, which was still pending before the Metropolitan Magistrate. The AO disallowed the claim for deduction.

The Tribunal held that the conditions prescribed u/s 36(2) were not complied with and therefore deduction of the embezzled amount could not be allowed as bad debt. The ITAT however allowable deduction as a business loss suffered by the assessee in the course of its business activity.

Revenue filed appeal to HC.


The Madras High Court upheld the decision of the Tribunal and held that the embezzlement by one of the directors or an employee of the business of the assessee during the ordinary course of business would be a business loss. The final outcome of the criminal proceedings or recovery of the amount in question would not determine the claim of the assessee in the A.Y. 2012-13, when it was written off as a business loss.

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