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Judgment
PER SHRI ANUBHAV SHARMA, JUDICIAL MEMBER:
This appeal is preferred by the assessee against the order dated 17.02.2026 of the Ld. National Faceless Appeal Centre, Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in DIN & Order No: ITBA/NFAC/S/250/2025-26/1086126751(1) arising out of the assessment order dated 08.04.2021 u/s 143(3) r.w.s 143(3A) & 143(3B) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by National e-Assessment Centre, Delhi for AY: 2018-19.
On hearing both sides we find that assesse is a charitable institution operating blood bank and is engaged in providing blood and other related services to the needy and critically ill patent by collecting blood from voluntary donors and organizing blood donation camp and the said blood is then provided to charging very minimal charges for screening and testing of blood. It is a society registered under the Uttar Pradesh Society Registration Act, 1860 with Registrar of Society, Uttar Pradesh and holds a registration u/s 12AA from ld. Prescribed authority dated 05.09.2007 and have also obtained provisional registration in form 10AC under the new regime of the Act.
As the management of assesse had found certain discrepancy in the accounts for Financial Year 2017-18 a special audit was got conducted and which indicated fictitious/non-existent assets have been recorded in the books to camouflage the shortfall arising out of embezzlement of the fund by one Mr. Satish Singhal & Mr. Rahul Goel who were managing the affairs of the society. The amounts so embezzled was quantified as Rs.1,77,70,265/- and upon restatement of accounts, consequent to special audit the fictitious assets were written off and a corresponding amount was charged to the profit and loss account as an extraordinary item being loss on account of embezzlement. However, while completing the assessment u/s 143(3) of the Act, ld. AO disallowed this amount while computing the taxable income of the assesse alleging that assesse has failed to establish the fact of embezzlement and that amount has become irrecoverable.
Though ld. DR has heavily relied the impugned orders submitting that assesse has failed to establish that there were actual embezzlement we find that in paper book assesse has provided a copy of FIR registered u/s 420/466, 468, 406 of the Indian Penal Code, registered on 03.05.2018 and the name of accused has been mentioned as Satish Chand Singhal. All the facts which are asserted before us with regard to the embezzlement of fund, are narrated extensively wherein it is alleged that during the examination of the records obtained from UCO Bank regarding FDR it transpires that the loans were obtained by fabricating the resolution of trust and forging signatures of trustee. The allegation were that Mr. Satish Chand Singhal had utilized FDRs of trust for his personal use while the resolution were signed by the six trustees. Mr. Satish Chand Singhal had taken cash credits against these FDRs. He has withdrawn the cash amounts and taken cash credit loans. It also transpires that he has opened blood bank in the name of Mayanajali Charitable Blood Bank, Kanpur and illegally transferred about 7000 units of blood from the stock of assesse and the value of these 7000 units of blood @ Rs.1700 per units cost to Rs.1,19,00,000/-. It also transpire that Mr. Satish Chand Singhal illegally transferred another 1087 units of blood to Sree Lakhan Sewa Kalashi Charitable Blood Bank Gorakhpur costing Rs.18,47,900/-.
We find that these content of FIR are very descriptive and the ld. AO takes note of the registration of the FIR to brush it aside by observing that only alleging the FIR is not ample evidence to prove the alleged blood unless the same is prove in the Court. We are of the considered view that the assessee’s conduct is relevant and not the ultimate outcome of the criminal case registered. The content of the FIR give complete description of the alleged crime and Police has registered FIR under various provision of cheating and fabrication of forged documents, as well as criminal breach of trust against Shri Sanjay Chand Mittal who was the then president of the Rotary Club of Noida and first managing trustee of the trust. Thus, in in the present facts and circumstances it is erroneous to hold that this embezzlement was in any form of benefit extended to specified persons u/s 13(3) of the Act leading to a disallowance. The revenue cannot question the principle that embezzlement by an employee and that too the executive in charge of the society cannot be treated as a business loss. There is embezzlement, cheating or misappropriation of funds, thus the loss is absolute or irrecoverable. Reliance in this regard is placed on the decision to Hon’ble Supreme Court in CIT Vs. Nainital Bank Ltd. (1965) 55 ITR 707 (SC). At the same time, in similar facts and circumstances Chandigarh Bench in the case of Gurudwara Godri Sahib Baba Farid Society Vs. DCIT(Exemption) (2023) 154 Taxmann.com 503 (Chandigarh–Trib) has held that such alleged act of embezzlement cannot become basis for making a disallowances.
In the light of aforesaid discussion, we are inclined to sustain the grounds and the appeal of the assesse is allowed and the impugned disallowance stands deleted.