Question

Lasting Sdn Bhd owns several units of mobile crane, which ware hired to contractors. In March 2018, one of the cranes was involved in an accident with a bus. The owner of the bus admitted negligence and paid the following sums to Lasting Sdn Bhd:

1. RM 30,000 being the actual cost of repairs to the crane

2. RM 20,000 for not being able to use the crane for two weeks while undergoing repair.

Required:

Explain whether each of the sums received by Lasting Sdn Bhd is chargeable to tax.

SUBJECT: BUSINESS TAXATION

Answer 1

Loss of cash deductible

Loss of cash caused by theft, defalcation or embezzlement in the course of

business may be allowed as a deduction in computing the adjusted income

under the following circumstances:

7.1.1 Theft or embezzlement by third party if-

(i) banking of cash takings is a necessary part of the operations

of the business, any loss of cash caused by theft or robbery

while in transit to the bank is allowable.

Example 1

A Sdn Bhd deposits its cash collections daily. The company’s

van carrying cash of RM50,000 was robbed while on the way

to the bank.

The loss of cash of RM50,000 is allowable as a deduction.

(ii) an agent who is assigned to collect the cash embezzles the

cash, the loss is allowable as a deduction.

Example 2

B Sdn Bhd, a furniture company, appoints an agent to collect

instalment payments from clients. The agent had collected

RM50,000 and misused the cash by investing in the share

market. He suffered losses and absconded. The company was

unable to trace the agent.

The loss of RM50,000 is allowable as a deduction.

2 Theft or embezzlement by employee

Loss of cash caused by theft, defalcation or embezzlement by an

employee is allowable as it arises directly from the necessity of

delegating certain duties of the business to employee.

Example 3

A clerk working in Bank C had been stealing money from customers’

accounts. When detected it was found that RM10,000 had been

embezzled. The bank terminated the services of the clerk.

The loss of RM10,000 is allowable as a deduction as the bank clerk

embezzled the monies in the course of his duties as an employee

and the loss was caused in the course of the business.

Example 4

Miss D was employed as an accounts clerk at Beautiful Wear

Apparels. The store owner noticed that 9 cheques were missing

during the year 2011. It was discovered that Miss D had cashed the

9 cheques for RM8,000 with forged signatures. Her services were

terminated by the store.

The loss of RM8,000 is an allowable deduction as the theft arises out

of the necessity of allowing the accounts clerk to handle the cheques.

7.2 Loss of cash not deductible

Loss of cash caused by theft, defalcation or embezzlement cannot be allowed

as a deduction in computing the adjusted income under the following

circumstances:

7.2.1 The employee who is involved in the theft or embezzlement is a

relative of the proprietor, and there is clear evidence that the

proprietor proposes to overlook the theft and even continues to

employ the offender. Such a loss would not be regarded as a trade

loss.

Example 5

Mr E, the owner of a sundry shop, suffered a loss of RM5,000

embezzled by his brother who is his employee. Mr E claimed the

loss. However, no action was taken against the brother for the

recovery of the loss and it is not deductible.

The loss of RM5,000 is not an allowable deduction since no action

has been taken against the employee to recover the loss.

7.2.2 Loss of cash or embezzlement by a sole proprietor, a partner, a

director of a company or an administrator of a deceased person’s

estate or any person who is in control of the business operations.

Example 6

A service director of a company Mr F had embezzled cash collections

of RM10,000. A new director had discovered the loss and the sum

was claimed as loss by embezzlement in the profit and loss account.

The loss of RM10,000 is not allowable as a deduction.

7.2.3 Loss of cash caused by theft, burglary or robbery which is not

incidental to the business is not allowable as a deduction.

Example 7

Mr G, a money-changer, brought home cash amounting to RM15,000

from his office and kept the cash in the strong room in his house.

Thieves broke into his house and stole the cash.

The loss of cash of RM15,000 is not allowable as the loss of cash is

not an incident in carrying on Mr G’s business. The loss had fallen on

Mr G as the owner of the cash which was temporarily not being used

for his business.

8. Supporting Evidence

Any claim for a deduction for loss of cash caused by theft, defalcation or

embezzlement should be substantiated by more than one of the following

documents:

(i) police report;

(ii) bank statement;

(iii) responsibility of the staff involved;

(iv) letter of termination of employment;

(v) the minutes of board of directors meeting;

(vi) proof of recovery action; or

(vii) other relevant documents.

Example 8

Mr H, an employee of Syarikat Utama Sdn Bhd, is a door-to-door salesman selling

electrical products. Puan Aminah had bought electrical goods amounting to

RM5,000 and the payment was made by cheque. The cheque was embezzled by

Mr H and this was discovered by his supervisor. Proof of payment by Puan Aminah

was obtained and a police report was made.

The proof of payment and the police report should be kept as evidence of

embezzlement by Mr H to substantiate a claim for tax deduction.

9. Tax Treatment Of Recoveries

9.1 Loss of cash that has been allowed in computing the adjusted income has to

be taken as gross income of a business when such recoveries are obtained

through-

(i) insurance;

(ii) agreement of payment from the employee concerned;

(iii) legal action; or

(iv) other recovery actions.

9.2 Recovery of cash is gross income from a business for the basis period for a

year of assessment in which it is receivable or deemed to have been

received. The date the cash is actually received is irrelevant.

In the case of recovery where payments made are based on an agreement

between both parties, the whole amount is taken as business income at the

date the amount is agreed or determined.

In short, the full amount of any recovery shall be treated as a gross income

for the basis period for the year of assessment in which it is first receivable.

Example 9

Restoran J which closes its accounts on 31 December each year frequently

encountered loss of cash through embezzlement by its cashiers. In the year

2010, RM50,000 was embezzled by several cashiers. The company made an

insurance claim for the loss of cash on 29.12.2010. On 30.1.2012 the

company recovered RM40,000 from the insurance company.

• The loss of cash of RM50,000 has been allowed as a deduction in

calculating the adjusted income from the business for the year of

assessment 2010.

• The sum of RM40,000 received from the insurance company should be

taxed as income of the business for the year of assessment 2012.

Example 10

Same facts as in Example 9, except that after the insurance claim was made,

several consultations were held with the insurance company and the

insurance company agreed on 15.12.2011 to pay RM40,000. Cheque for the

payment was received on 30.1.2012.

The amount of RM40,000 is deemed to have been received on 15.12.2011

and should be taxed as business income for the year of assessment 2011 as Rm

RM40000 was receivable in the basis period for the year of assessment  

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