VENKATACHALAPATHY IYER M P Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE Income-tax Appellate Tribunal referred the following two questions to this Court for its opinion:

(2.) THE amounts received and spent by him in the course of the day used to be noted on slips of paper by him and he would hand over the slips with the cash balance in his hands to the managing partner at the close of the day. He maintained also cash chitta of transactions conducted by him including collections and expenses. In May 1941 it was discovered that he had embezzled a total sum of Rs. 36,398-3-6 during the period between 17th October 1939 and 24th October 1940. THE 'modus operandi' adopted by him to embezzle the money was: while he entered the transactions faithfully in the books maintained by him. In totalling the receipts and payments of each day, he short-totalled the receipts and over-totalled the payments and prepared a statement of daily cash balance on the basis of such wrong totals and the cash actually handed over at the end of the day to the managing partner was only the cash as per the cash balance statement prepared by him on that basis. He pocketed therefore each day the difference between the actual balance on the basis of the correct totals and the balance as per the statement of cash prepared on the basis of wrong totals.

(3.) NO doubt, when the misappropriation was discovered in May 1941, this amount was entered, in the accounts as a debit against Rajaratnam Aiyangar at the end of the previous accounting, year and it was eventually argued before the Appellate Tribunal that as it was debited in the previous accounting year, it was converted into a debt due from the clerk to the assessees and as it became a bad debt to the extent of Rs. 21,372 in the accounting year now under consideration, it should be allowed as a deduction. To claim a debt as a bad debt it must be shown that when it was a good debt, it went to swell the assets of the business in calculating the profits and it must be further shown that it was in fact a loan made in the course of the business. If these essentials are not established, it cannot be treated as a debt and cannot be claimed as a deduction if it becomes bad in fact, realising the defect, learned Advocate for the assessees did not press this contention.