S.T. Desai, J.
1. This reference raises some interesting questions and it came up for hearing before Chagla, C.J., and myself on 19th March, 1958. As we shall presently point out, we decided one of the two questions and gave certain directions as to question (2) and required a supplementary statement of the case from the Tribunal The reference has once again come up for hearing before this court.
2. The assessee is a bank which went into liquidation on 21st April, 1947. The assessment year with which we are concerned is 1948-49, and the liquidator made a return of the income of the bank for that year and in his return he claimed bad debts aggregating to Rs. 38,35,689. The liquidator also claimed as business expenditure an amount of Rs. 10,15,000, which represented a defalcation committed by M. C. Javeri, the bank's secretary, in respect of certain banking transactions. He also claimed as business expenditure a sum of Rs. 98,892, which represented another defalcation committed by the bank's secretary in respect of another transaction. The Tribunal held that the liquidator was not entitled to any deductions claimed by him. The questions, as originally referred to this court on this reference, were as under :
'(1) Whether on the facts and in the circumstances of the case the assessee is entitled to claim bad debts amounting to Rs. 48,50,689, or any lesser sum
(2) Whether on the facts and in the circumstances of the case the assessee is entitled to claim two sums of Rs. 10,15,000 and Rs. 98,892, as a business loss under section 10(2)(XV) of the Income-tax Act ?'
3. When the matter was before this court on the previous occasion considerable arguments were advanced on either side on the first question relating to bad debts. Admittedly, the debts were not written off by the liquidator in the books of account. What we had to consider was whether looking at the provisions of section 10(2)(xi) of the Act, it was competent to the assessee to claim a bad debt which had not been actually written off in its books of account. Following the view taken in a series of earlier decisions of this court, we decided the question in favour of the revenue. For myself, I may mention that I had found difficulty in construing the section according to that view but had felt myself bound to follow the earlier decisions of this court. Our attention had been drawn by Mr. Kolah, who then appeared before us, to a decision of the Calcutta High Court where a different view had been taken by this court in earlier decisions and answered the question (1) against the assessee. We may also mention that there was an error about the amount of Rs. 48,50,689, for and we reframed the question by substituting the figure of Rs. 38,35,689, for Rs. 48,50,689, mentioned in question (1).
4. Question (2) referred only to business loss under section 10(2)(XV). We felt that the claim made by the assessee might or might not fall under that provision and very likely it did not fall under that provision in view of the decision of this court in the case of Lord's Dairy Farm . We, therefore, reframed the question so as to read :
'Whether on the facts and circumstances of the case, the assessee is entitled to claim two sums of Rs. 10,15,000 and Rs. 98,892, as a business loss or as a deduction under section 10(2)(XV) of Indian Income-tax Act ?'
5. Although we had expressed our opinion on question (1) learned counsel requested us to give certain directions in respect of that question. We acceded to the suggestion of Mr. kolah and stated in our judgment.
'Assuming we are in the wrong on the interpretation which we have put on section 10(2)(XI) and assuming that it is not necessary to write off the amount claimed by the assessee in the books of account of the assessee, even so there must be a finding that these debts were irrecoverable in the year of account, and this fact has not been found by the judicial member...'
6. We then referred to what had been stated by the accountant member. In our view the finding of the accountant member was not clear. We, therefore, directed the Tribunal to submit a supplementary statement of the case giving an express finding whether the debts claimed by the liquidator or any part thereof had become irrecoverable in the year of account. It is unnecessary for us to say anything more in this judgment about question No. 1 save that our answer to question No. 1 as amended by us is in the negative.
7. Regarding question (2) we felt that the necessary facts were not before us and directed the Tribunal to find the same bearing in mind the position in law pointed out in our judgment. We also mentioned in our judgment that the Tribunal had fallen into another error in respect of this question (2). The Tribunal had held that the losses of Rs. 10,15,000, and Rs. 98,892 claimed by the assessee could not be allowed because there was nothing on the record to show that the losses had come to the knowledge of the liquidator in the year of account. Now that was not in accordance with the view taken by this court in the case of Lord's Dairy Farm Ltd. v. Commissioner of Income-tax . That being the position, we directed the Tribunal also to state in the supplementary statement of the case the necessary facts from the point of view as to whether the loss was caused to the assessee in respect of those embezzlements or defalcations in the year of account.
8. The contention assessee relating to the amount of Rs. 10,15,000 was that the amount related to defalcations made by the secretary of the bank. The Bank of Maharashtra and the Union Bank of India had remitted Rs. 18,00,000 to the bank towards the purchase of 3% Bhopal Government Loan. The assessee bank entered the receipt of the amount in its books of account. M. C. Javeri, the secretary of the bank, withdrew the amount in December, 1946, without any authority from the two depositing banks and the two banks claimed the amount as preferential creditors in the liquidation proceedings. Their claims were ultimately settled in 1949 by payment of Rs. 10,15,000.
9. As to the amount of Rs. 98,892, the contention of the assessee was that the account from which monies had been withdrawn was a fictitious one and opened by the secretary in order to carry out his own frauds. It was stated that the facts relating to this claim were similar to those relating to the other defalcation, which we have already mentioned.
10. The bank went into liquidation on 21st April, 1947, and the liquidator took charge of its assets on that date. The secretary could not be and was not in management of the affairs of the bank at any date thereafter and, therefore, the defalcations took place before that date. There is no dispute and it is not disputable that the defalcations by the secretary took place before 21st April, 1947. The assessment year, as we have already mentioned, is 1948-49 and the account year, which was 1946-47, ended on 30th June, 1947. The liquidator filed his return on 23rd August, 1949.
11. A contention of some importance and interest has been advanced before us by learned counsel. It has been urged on behalf of the assessee in the context of this question (2) that the loss caused to the bank must be regarded as a trading loss. What little scope there might have been for argument by the Revenue to the contrary on this point in this reference has been negatived by a decision of their Lordships of the Supreme Court in Badridas Daga v. Commissioner of Income-tax : 34ITR10(SC) .) and no attempt has been made before us by learned counsel for the Revenue to suggest that the loss under consideration was not a trading loss. Now Mr. Kolah, learned counsel for the assessee, has not presented any argument before us on the footing that the case falls under section 10(2)(XV). What he has augured is that this is a case of trading loss and must be considered as falling within the purview of section 10(1). The argument has proceeded that we must have regard to the true profits of the bank for the year of account and the true profits can be determined only by taking into account any such loss resulting from embezzlement in any year in which he can show that the loss has occurred, and it is urged that in the case before us the loss occurred when the embezzlement of the amount of Rs. 10,15,000 took place. The defalcation or embezzlement, whatever one may call it, took place before the bank went into liquidation and if the crucial period of time relating to any such trading loss is the date when the embezzlement took place, then indubitably the assessee is in a strong position. On the other hand, if the assessee is unable to establish that the trading loss occurred in the year of account, the decision must go against him.
12. Not because he wanted to rely on that decision, but in apprehension of the argument of learned counsel for the Revenue, Mr. Kolah argued that the decision of this court in the case of Lord's Dairy Farm Ltd. was distinguishable and required to be distinguished. We shall presently refer to that case.
13. The whole argument on behalf of the Revenue has rested upon an insistence that the point of law about the time of the occurrence of any such loss resulting from embezzlement or defalcation has been decided by this court in that case and the matter is not res integra. We agree and it is hardly necessary to mention that this court is bound by a decision on any question of law given in an earlier case. But we have to see whether the question in its present form arose for the determination of this court in the case of Lord's Dairy Farm Ltd. and have to ascertain for ourselves the ratio decidendi of that case. Mr. Joshi has strongly relied on the following observations of Chagla, C.J., in that case :
'If we are right in the view that we have taken that what is claimed as a trading loss is not a permissible deduction under section 10(2)(XV), then the material date obviously is not the date when the embezzlement took place but the material date is when the loss is caused. So long as there is any possibility of the money being recovered from the employee who has embezzled the money, there is no loss to the assessee.'
14. Now these observations must of necessity be read in the context of the facts of that case, and cannot be read in any isolated manner and certainly not in a manner divorced from the facts of that case. We find ourselves fully in agreement with what has been stated by the learned Chief Justice and Mr. Justice Tendolkar, but we are not prepared to read those observations as laying down any absolute and unqualified proposition of law applicable to every such case of embezzlement. Mr. Joshi has told us that an absolute test has been laid down by this court in that decision and we are not at liberty to depart from the view there expressed. We have carefully read that decision but are unable to find in it any attempt to lay down any absolute principle of law. We read those observations, so strongly relied on by Mr. Joshi, as a corollary of the general rule and not any absolute statement of the basic principle. No doubt, the observations there made afford guidance and in a similar case would afford considerable guidance and be instructive but that does not mean that in the case before us we should accept the to observations quoted above as laying down the ultima ratio to be applied to all cases falling under the head of embezzlement.
15. The true principle of the matter has been expressed in a decision of the Supreme Court of the United States and we find ourselves in respectful agreement with what is there stated. We would have given a brief analysis of the facts of that case, but refrain from doing so as the rule there stated enunciates a broad general principal and it is possible to appreciate the principle without going into any factual examination of that case. In that case, Burnet v. Huff Court Reports, Law, Edn. 670 at 673.), it is observed :
'But the mere existence of liability is not enough to establish a deductible loss.... And whether a taxpayer will actually sustain a loss through embezzlement of trust funds of which he is trustee will depend upon a variety of circumstances. If there is liability on his part for the misappropriation, it does not create a certainty of loss, as the defalcation may be made good by the one who caused it.... The requirement that losses be deducted in the year in which they are sustained calls for a practical test. The loss must be actual and present'.'
16. The concept that the loss in any such case 'must be actual and present' was not a new one but was established in a series of earlier decisions of the Supreme Court.
17. Our attention has been drawn to a decision of the Madras High Court, Venkatachalapathy Iyer v. Commissioner of Income-tax Reference was made to the statement of the law in the decision of the Supreme Court of the United States by the learned judges in their judgment in this case and it was pointed out by Satyanarayana Rao, J., that it was only when the loss became actual and certain that there could be an accrual of a loss and till then it would be merely a civil liability (liability in tort) to pay back that amount. In this case there was a settlement of the matter by way of a compromise and it was held that till the date of the compromise there was no loss at all. it was only then that the loss came into existence and accrued. There is nothing in the observations made by the learned judges in this case, which can be read as an opinion to the effect that the loss in like cases can occur only when the matter is compromised. The principle adopted as applicable to the case was the one enunciated by the Supreme Court of the United States, namely, that the loss must be actual and present. We see nothing in the decision of the Madras High Court, which lends support to the argument of Mr. Joshi that a loss can never be said to occur when the embezzlement takes place and can only be said to occur when the amount becomes irrecoverable. Indeed Satyanarayana Rao, J., was at pains to observe as under :
'Of course, when exactly the loss is incurred and at what moment it became a loss is a matter which has to be determined upon a consideration of all relevant and admissible evidence.'
18. It was immediately after making this observation that the learned judge pointed out that the fact of the case was that the amount became a loss only after the compromise and the moment the dispute was settled between the parties. Therefore, it is abundantly clear that the matter was not regarded by the learned judge as one which turned solely on a point of law but was one in which the facts and circumstances of the case had to be regarded.
19. On a question as to the time when loss can be said to occur, it is difficult to see how there can be any absolute rule of universal applicability. neither in the decision of this court in the case of Lord's Dairy Farm Ltd. nor in the Madras decision, of which we have made mention, has any attempt been made to lay down any comprehensive standard or rule. It seems to us impossible to expect any rule exclusive or inclusive, which will cover every situation and every set of facts and circumstances and not fail in some cases. it seems permissible, therefore, to enter a caveat against any attempt in that direction. The question in any such case would be a mixed question of fact and circumstances and would of course have to be in consonance with the basic principle that the loss must be actual and present.
20. The test of knowledge on the part of the liquidator and the time when such knowledge was acquired has, as we have already mentioned, been rejected by this court. The test about the occurrence of the loss only when the amount is shown by the assessee to be irrecoverable though often useful in practice cannot be regarded as determinative of every case. Consideration must, of course, be given to what happened after the embezzlement and what the assessee did in the matter of recovering the amount of embezzlement after he had knowledge of the true facts, but that is not the same thing as saying that there is an infallible test. In a conceivable case loss can be said to occur the moment moneys are embezzled or misappropriation of funds takes place, but that again would be having regard to the facts and circumstances of the case and not because there is any absolute rule that as a matter of law loss occurs as soon as misappropriation takes place. In tax parlance loss ordinarily occurs when the funds or moneys are lost to the assessee and there is no real chance of getting back the same. The mere fact that in any such case the assessee had made attempts to recover the amount cannot be conclusive of the matter. It is conceivable for instance that an assessee in any such case may very well know that there is no reasonable chance of recovering the amount from the employee guilty of embezzlement. Even so he may deem it prudent or feel compelled to take some action in that direction. It need not, therefore, necessarily follow that the loss would occur only if and when the assessee is able to establish that the amount had become irrecoverable. We make these observations only for the purpose of showing that the case before us is not to be decided and cannot be decided by applying any yardstick, for there can be no yardstick applicable to all cases of the nature under consideration that may come up for determination by the court.
21. Considered in the light of the observations we have made the factual position presents little difficulty. We have already mentioned the relevant dates and some other facts which have bearing on this question. A good deal of stress was laid by Mr. Kolah on the circumstance that it was the liquidator who was concerned in this matter and he could get knowledge of the true position only after the expiry of the accounting year. We agree that we should not overlook the fact that the assessee is a bank in liquidation represented by the official liquidator. But that cannot, in our opinion, make any real difference to the point which arises for our determination. Now there is one important factual aspect of the matter of which we have so far made no mention. In the supplementary statement of the case it has been stated that the secretary had misused his powers and passed fictitious entries in the books of account. Then it is stated :
'Accordingly, the misfeasance summons were taken out on April 17, 1950. After this Mr. M. C. Javeri accepted liability for an amount of Rs. 10,00,000 in lieu of his liability under the misfeasance summons. This offer was accepted by the official liquidator, and consequently, the High Court passed a decree on February 27, 1951, for Rs. 10,00,000 against M. C. Javeri.'
22. It does emerge from these facts that the liquidator even after he came to know of the true position about the embezzlement of M. C. Javeri, took action against him and obtained a decree against him for Rs. 10,00,000, These facts are, in our opinion, eloquent and it seems difficult to us how in view of these facts we would be justified in acceding to the contention of Mr. Kolah that the loss had occurred as early as the end of 1946, that is, when fictitious entries had been passed in the books of account of the bank at the instance of Javeri. No further facts are brought in the original statement of the case or in the supplementary statement of the case and our attention has also not been drawn to any facts from which we can say that the loss did occur when those fictitious entries were made. We have said it before and it bears repetition to say that mere entries in the books of account are not of great consequence in these matters, and we must look also at the nature and substance of the matter. For all these reasons we are of the opinion that the assessee is not entitled to claim the sum of Rs. 10,15,000 in the year of account as a business loss.
23. We have not so far considered the other item, which is also the subject-matter of the question. As to that item of Rs. 98,892, Mr. Kolah with his usual fairness has stated before us that when he opened the case, he was not aware that the embezzlement had taken place about two years before the year of account. Mr. Joshi has rightly pointed out to us that such was the correct position. In view of that learned counsel for the assessee had perforce to rest his case about this item on the solitary fact that in the books of account no interest was charged on this amount of Rs 98,892 after 31st December, 1946. In our opinion, it is a slender circumstance and the assessee cannot found his case in respect of this item only upon that circumstance. We are, therefore, of the view that the assessee is not entitled to claim this amount of Rs. 98,892 in the year of account as a business loss.
24. In the result our answer to question (2) will be in the negative. The assessee to pay the costs.
25. We would not like to part with this reference without making some observations which have nothing to do with the strictly legal position. Of course, the Revenue is entitled to take its stand on the sheer legal position and if the law is in favour of the Revenue, we on our part are bound to give effect to the same. The peculiar and extraordinary factual position here is that the bank has, in fact, made no profits but incurred heavy losses. In effect the assessee will have to pay tax on a part of the amount of the large embezzlements, which we are informed exceed Rs. 25 lakhs. If the assessee had been entitled to claim a deduction in respect of even a part of the amount that was embezzled, it would have been able to bring down the profits otherwise made in the year of account. We feel that we should be failing in our duty if we did not recommend to the Revenue that this is a case in which, having regard to the large number of persons, including small depositors and persons with savings accounts, who must have suffered in the wake of the failure of this bank, substantial relief should be given to the assessee.
26. Reference answered accordingly.