KOTHARI AND SONS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE question that stands referred to us is :

(2.) IN the year ended December 31, 1953, relevant to the assessment year 1954-55, the assessee wrote off in its profit and loss account a sum of Rs. 42,716-12-0 as loss arising from embezzlement of cash. IN explanation of this claim, the assessee stated that the embezzlement resulted from the manipulation in the cash and the share transfer stamp account, by the employees. It was also stated by the assessee that this embezzlement had been going on for several years but had been discovered only in that accounting year and that any action in law to recover the amounts would be futile. The INcome-tax Officer held that since the embezzlement was discovered only 1954, it could not be allowed in the assessment for the year 1954-55, and there the matter ended. IN the assessment for the assessment year 1955-56, the assessee again put forward this claim. It was stated that the cashier and the accountant employed by the assessee had embezzled these amounts. Two letters signed by these persons were produced before the income-tax authorities in which each acknowledged his extent of his guilt in the matter. The assessee-firm also appointed an auditor to investigate into the matter and to ascertain how and in what manner the embezzlement had been effected. According to the auditors, up to April 11, 1954, a total sum of Rs. 40,744 had been so emmbezzled. The INcome-tax Officer rejected the claim, taking the view that the loss did not occur in the course of the business, and that, further, as the assessee had taken promissory notes from the employees responsible for the embezzlement, but had taken no action to recover the moneys on the promissory notes, no allowance could be granted. Successive appeals to the Appellate Assistant Commissioner and the Tribunal failed.

(3.) IN Badridas Daga v. Commissioner of INcome-tax their Lordships laid down that the allowances contemplated under section 10(2) of the Act are not exhaustive and that when a claim is made for deduction for which there is no specific provision under section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial and trading principles, it can be said to arise out of the carrying on of the business and be incidental to it. The loss must spring directly from the carrying on of the business, and should be incidental to it. It should not be one which has only some connection with the business. It was pointed out that while loss sustained by a business by reason of embezzlement is not an admissible deduction under section 10(2)(i) or section 10(2)(xv), it would nevertheless be admissible as a deduction under section 10(1) of the Act if it arose out of the carrying on of the business and was incidental to it. Whether the employee occupied a subordinate position or one which was possessed of large powers of management makes little difference to this question of principle. IN this case which their Lordships had to deal with, a dealer in shares and bullion carried on a business through an agent, who held a power-of-attorney. This agent withdraw large amounts and applied them in satisfaction of his personal debts. The employer was able to recover a small sum from the agent by way of suit and had to write off the balance as irrecoverable. Their Lordships pointed out that the principle that, when once the moneys had reached the till, their subsequent withdrawl was de hors the business was inapplicable to a business such as banking or money lending. That being so, the continuous operation on the bank account by the agent was incidental to the course of the business. IN those circumstances, his withdrawl of the moneys was referable to his character as agent and the loss resulting from the misappropriation was necessarily incidental to the carrying on of the business. IN the present case also, it is not in dispute that though the business is not one of money-lending or banking, it had necessarily to entrust cash and amounts (sic) to the employees for the purpose of day-to-day transactions, and for the purpose of carrying on another part of its business as share dealer and stock-brokers, it had to entrust the necessary share transfer stamps to the employees. If the employees embezzled amounts from either of these heads of account, it would certainly seem to follow that the loss was occassioned in the course of the business and was undoubtedly incidental to the business.