LORDS DAIRY FARM LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE question that arises in this reference is whether the assessee who lost a certain amount as a result of the defalcation of its employee is entitled to claim that amount as a permissible deduction.

(2.) NOW , the facts are that one Chhaganbhai was a cashier of the assessee company and one of the duties entrusted to him was to go to the bank in which the moneys of the assessee company were kept and withdraw the moneys and bring the moneys to the office of the company for making payments from time to time in cash. In the course of discharging his duties Chhaganbhai defalcated various amounts aggregating to Rs. 53,000. These defalcations took place between May 1946 and April 1947 and when these defalcations were discovered, the company took from Chhaganbhai a promissory note for Rs. 21,000. This promissory note was taken on 28 -4 -1947. A criminal prosecution was launched against Chhaganbhai and certain amount was spent in connection with this litigation, and in the assessment year 1948 -49 the company claimed a sum of Rs. 34,053 as a permissible deduction. This Rs. 34,053 was made up of the balance of Rs. 32,000 left over after the promissory note was given by Chhaganbhai and a sum of Rs. 2,053 as legal expenses. In this assessment we are concerned with the sum of Rs. 32,000.

(3.) NOW , Mr. Pradhan has first contended that this case would fall under Section 10(2)(xi) and that he would be entitled to claim the amount when the bad debt was written off, and, according to him, as he wrote off this debt as a bad debt in the accounting year, he must be entitled to claim the whole of the amount of Rs. 32,000 as a deduction. In our opinion it is impossible to take the view that a loss caused by defalcations of a servant is a bad debt. Before a debt can be claimed as a bad debt, it must be a debt in law. At some time it must be an amount due to the assessee and at some time the debt must form part of the assets of the assessee. It is only when that amount becomes irrecoverable that it becomes a bad debt and can be claimed as a deduction. It is difficult to understand how any amount was due by the employee to the assessee company which amount became irrecoverable, and therefore the subject -matter of a deduction under Section 10(2)(xi).