Decided on December 22,1954



- (1.)THIS case has been referred to us under s. 66(1) of the Indian IT Act by the Tribunal, Bombay Branch, by its application dated 19th Nov., 1953. The point which is stated by it is as follows: "Whether the said sum of Rs. 2,02,442 -13 -9 being part of the amount embezzled by the assessee's munim is allowable as a deduction under the Indian IT Act either under s. 10(1) or under the general principles of determining the profit and loss of the assessee or s. 10(2)(xv) -
(2.)THE facts, as would appear in the application, are as follows : The assessee is carrying on business, among other places, at Bombay. One of the businesses at Bombay was that of banker. The sources of income at Bombay are interest, adat, business in gold and silver, house property and dividend. The assessment year is 1946 -47, the relevant accounting year being Sambat year 2001 (18th Oct., 1944, to 4th Nov., 1945). The assessee had a munim by name Chandrattan Laxminarayan Daga, who held a general power of attorney executed in his favour by the assessee on 13th May, 1944, for the general conduct and management of the assessee's business at Bombay and other places. Between 15th Nov., 1944, and 23rd Nov., 1944, this munim withdrew from the bank five sums of money amounting in all to Rs. 2,30,636 -4 -0 for meeting his personal liabilities arising as a result of heavy losses in speculative transactions of silver, bullion, etc., entered into by him in his individual capacity. Entries in the cash book were posted to the debit of "Suspense Account" (udrat khata). The assessee was informed of these heavy withdrawals by the munim by a telegram sent to him at Bikaner by his cashier on 25th Nov., 1944. The assessee soon after returned to Bombay, revoked the power of attorney granted to the munim and brought a suit in the Bombay High Court for the recovery of the amounts withdrawn by the munim, viz., Rs. 2,30,636 -4 -0. The munim admitted in writing his liability to the assessee. An ex parte decree was obtained against the munim on 20th Feb., 1945. The munim paid Rs. 28,000 on account of his liability created by the decree. In the account of the munim, there was a debit of Rs. 106 -11 -9. The sum of Rs. 2,30,636 -4 -0 was transferred to the munim's account from udrat khata on account of the unauthorised withdrawals by him. A credit was given to the account of the munim for Rs. 300 -2 -0 for his salary and bonus. After the credit of Rs. 28,000 was given, balance of the account, viz., Rs. 2,02,442 -13 -9, was written off and claimed as an allowance under s. 10(2)(xv) of the Indian IT Act.
(3.)THE Tribunal accepted the assessee's contention that the amount of Rs. 2,30,636 -4 -0 which was withdrawn by its munim Chandrattan Laxminarayan Daga was misappropriated by him. It was, however, of the opinion that no deduction could be allowed in respect of it either under s. 10(1) or under s. 10(2)(xv) of the Act. In support of its view it referred to the decisions in Curtis vs. Oldfield (1925) 9 Tax Case 319, and Venkatachalapathy Iyer vs. CIT (1951) 20 ITR (363). Those are the decisions which have been relied upon not only by the assessee but also by the Department.
The facts of the first mentioned case are these : J. E. Oldfield, the managing director of a company of wine and spirit merchants was, for many years up to his death on the 4th Feb., 1919, in sole control of the company's business. It transpired at the investigation made after his death that several payments and some receipts not relating to the company's business but to the private affairs of Oldfield had been passed through the company's books and that a sum of 14,000 was due on the date of the investigation from the estate of the deceased to the company. This debt was valueless and was written off as bad in the company's books of account for the sixteen months ending 30th June, 1920. The General Commissioners allowed the company's claim to deduct the amount in question in computing its profits for assessment to Income -tax, holding that the loss "was a bad debt arising in the course of the company's trading." It was held by Rowlatt, J., in appeal that there was no evidence to support the CITs' findings that the loss was a trading loss and that it was an admissible deduction from the company's profits for income -tax purposes. In delivering his judgment the learned Judge observed :

"What the CITs have been misled by, in my judgment, quite clearly is this. They have allowed themselves to act under the impression that they were taxing the company on what the company in a loose way had made and secured. In point of law they were engaged in assessing the profits of the company's trade, not of the company itself but of the company's trade, and I have to consider whether there is the least ground for supposing that losses of these sums resulting in this bad debt were losses in the trade. I quite think, with Mr. Latter, that if you have a business . . . . in the course of which you have to employ subordinates, and owing to the negligence or the dishonesty of the subordinates some of the receipts of the business do not find their way into the till, or some of the bills are not collected at all, or something of that sort, that may be an expense connected with and arising out of the trade in the most complete sense of the word. But here that is not this case at all. This gentleman was the managing director of the company, and he was in charge of the whole thing, and all we know is that in the books of the company which do exist it is found that moneys went through the books into his pocket. I do not see that there is any evidence at all that there was a loss in the trade in that respect. It simply means that the assets of the company, moneys which the company had got and which had got home to the company, got into the control of the managing director of the company, and he took them out. It seems to me that what has happened is that he has made away with receipts of the company dehors the trade altogether in virtue of his position as managing director in the office and being in a position to do exactly what he likes."

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