COMMONWEALTH TRUST Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) Pursuant to the direction of this Court in O. P. No. 7485 of 1993, the Income Tax Appellate Tribunal, Cochin Bench (in short 'Tribunal') referred the following questions of law for opinion under S.256(2) of the Income Tax Act (in short 'the Act'):

(2.) The short facts which are necessary for the disposal of this reference are as follows. The assessment year in question is 1981-82. Assessee - company is an industrial company engaged in the manufacture and sale of tiles and hand woven goods. For the assessment year under consideration the Income Tax Officer added a sum of Rs. 68,434/- being net provision for defalcated amount of wages, to the total income of the assessee. Aggrieved by the said addition, assessee took up the matter before the Commissioner of Income Tax (Appeals), who deleted the addition holding that the employee of the assessee company was entrusted with the cash for payment of wages in the course of the assessee's business, and therefore, the defalcation made was a trading loss and hence allowable. The matter was then taken up in appeal by the revenue before the Tribunal. Tribunal set aside the order of the Commissioner of Income Tax (Appeals) relying on the admission made by the assessee's representative that the employee of the assessee, who defalcated the amount, was not authorised to disburse the amount. Tribunal therefore confirmed the addition made by the Income Tax Officer.

(3.) Counsel appearing for the assessee, Sri. P. Balachandran, submitted that defalcation made by the employee is to be treated as a trading loss, which, according to the assessee, arose in the course of carrying on the business. According to him, it is the employee of the assessee company who made defalcation after being entrusted with cash for payment of wages to the employees in the course of assessee's business. In support of his contention, he relied on the decision of the Supreme Court in Badridas Daga v. C.I.T., ( 1958 (34) ITR 10 and also Ramachandar Shivnarayan v. C.I.T., ( 1978 (111) ITR 263 . Reliance was also placed on the decision of this Court in Churakulam Tea Estates Pvt. Ltd. v. C.I.T. ( 1995 (214) ITR 457 ).