R.R. Rastogi, J.
1. The Income-tax Appellate Tribunal, Allahabad Bench, has referred the following question under Section 256(1) of the I.T. Act, 1961, hereafter 'the Act', at the instance of the Commissioner of Income-tax, for the opinion of this court :
' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the assessee's claim of Rs. 71,648 as a loss incidental to the trade in the assessment year 1969-70 '
2. The facts giving rise to this question, briefly stated, are : The assessee which is a public limited company carries on the business in the manufacture and sale of rosin and turpentine. It follows the financial year as its year of account. In the previous year relevant to the assessment year 1966-67, the assessee had despatched goods worth Rs. 73,081 to M/s. Mandya Paper Mills, Madras, and credited the sales by debiting the purchaser's account accordingly. The purchaser did not retire the documents relating to those goods and the assessee then instructed its agent at Madras to take delivery of the goods and sell them on its account. The agents thereat sold those goods and sent the proceeds so realised to the assessee. This happened in the previous year relevant to the assessment year 1967-68 and the sale proceeds were credited to the sales account and a corresponding debit entry was made in the purchase account. In the previous year relevant to the assessment year 1969-70, the assessee realised the mistake that since M/s. Mandya Paper Mills, Madras, had not taken delivery of the goods, they were not its debtors and the debit entry appearing in their account was not correct. Hence, it debited the sales account and made a corresponding entry in the account of M/s. Mandya Paper Mills and claimed deduction of Rs. 73,081.22 as bad debt.
3. In reply to a query made by the ITO the assessee explained that this amount had been shown as sundry debt in the balance-sheet as on 31st March, 1968, and was assessed in the assessment year 1966-67. Since the debt had become bad and was not recoverable, deduction of the same was claimed in the assessment year 1968-69. It was further stated that in case the ITO was of the opinion that this deduction could be allowed only in the assessment of that year he might allow the claim. The ITO referred to this explanation and held that this item could not be regarded as bad debt and further that in the previous year relevant to the year 1969-70, the assessee had no justification to pass the entries that it did. He, therefore, added back this amount to the income of this year.
4. In its appeal before the AAC, the assessee disputed the disallowance of its claim. It was, however, conceded by the counsel appearing on behalf of the assessee that this item was not in the nature of bad debt and hence it was not allowable under Section 36(2) of the Act. It was, however, submitted that since this amount had suffered tax in the assessment year 1966-67, in equity it should not be subjected to tax again in the year under consideration. On a verification from the books the AAC found that the amount debited to the sales account was Rs. 71,648 and not Rs. 73,081. However, in his opinion, the claim was neither in the nature of a bad debt nor a business loss of this year and on that view he upheld the addition but to the extent of Rs. 71,648.
5. The Appellate Tribunal has in further appeal accepted the assessee's claim and the findings recorded are that the assessee had placed the facts correctly and faithfully before the ITO and it was for him to apply the correct law. Certainly the claim could not be considered under Section 36(2) or 36(1)(iii) because there was no debt outstanding from the Madras party. In the opinion of the Appellate Tribunal, the claim was allowable under Section 28. Factually, the assessee had not suffered any loss, but it was only a mistake which had happened inasmuch as in the previous year relevant to the assessment year 1967-68 when the goods were actually sold and the prices were received by the assessee, a credit entry was made in the sales account without any corresponding debit entry in the stock account. On account of that mistake, the profit for 1968-69 was inflated and when this mistake was detected in the previous year relevant to the assessment year 1969-70, the correct entries were made as a result of which the profit stood reduced. The Tribunal hence held that the loss was incidental to the trade itself and was suffered by the assessee in the capacity of a trader and was allowable as such.
6. After hearing counsel for parties, in our opinion, on the facts found in the case, the view taken by the Appellate Tribunal was not very correct. There is now no dispute that this claim could not be treated as a bad debt. As for the contention whether it could be treated as trade loss under Section 28 of the Act, apart from the loss being incidental to the trade and that the loss should fall to the assessee in the capacity of a trader, what is still more relevant to see is as to whether the loss had occurred in the relevant previous year. It is settled that the deductions can be permitted in respect of only those expenses and losses which are incurred in the relevant accounting year. For the purpose of computing yearly profits and gains, each year is a separate self-contained period of time in regard to which profits earned or losses sustained before its commencement are irrelevant. In cases of embezzlement of funds, like a speculative adventure, however, the view has been taken that it does not necessarily result in loss immediately when the embezzlement takes place or the adventure is commenced. Embezzlement may remain unknown to the principal, and the assets embezzled may be restored by the, agent or servant. In such a case, in the commercial sense no real loss has occurred as held by the Supreme Court in Associated Banking Corporation of India Ltd. v. CIT : 56ITR1(SC) . It was further held in that case that again it cannot be said that in all cases when the principal obtains knowledge of the embezzlement, loss results. The erring servant may be persuaded or compelled by process of law or otherwise to restore wholly or partially his illgotten gains. Therefore, so long as a reasonable chance of obtaining restitution exists, loss may not in a commercial sense be said to have resulted.
7. The decision in U. P. Vanaspati Agency v. CIT : 68ITR120(All) , on which the Tribunal placed reliance proceeds on almost similar facts. In that case, the assessee handed over Rs. 13,100 to an employee of a sister concern on January 4, 1960, for being deposited in a bank. The employee handed over to the bank a cloth bag containing Rs. 13,100 and later reported that the amount was stolen. Rs. 1,100 was recovered from the employee on the same day by the police, but his prosecution failed for want of evidence. In the assessment proceedings for the year 1961-62, for which the accounting year ended on March 31, 1961, the assessee claimed deduction of Rs. 12,000. That claim was disallowed by the ITO as also by the appellate authorities, one of the grounds being that the loss occurred in the assessment year 1960-61. On reference, this court held that the claim was an admissible deduction for the assessment year 1961-62, because a dispossession would become a loss only after the recovery becomes impossible or the chances of recovery become very remote. In our opinion, the principle which is applied in cases of embezzlement of funds by an agent or an employee would not be applicable in the case of a trade loss because in the case of a trade loss there is no question of any reasonable chance of obtaining restitution or persuading or compelling anyone by process of law or otherwise to make good the loss. Apart from this, in the ultimate analysis, these questions are to be decided on the facts and circumstances obtaining in a particular case. In our opinion, therefore, in order to succeed in respect of a claim of a trading loss, apart from proving that the loss is incidental to trade and the loss falls on the assessee in the capacity of a trader, it has to be proved that it occurred in the relevant accounting year.
8. The Tribunal in this behalf has referred to a decision of the Madras High Court in the case of Devi Films P. Ltd. v. CIT : 75ITR301(Mad) , as lending indirect support to the view they had taken. We do not think that that decision lends any support to the claim of the assessee. The ratio laid down in that case was that if a trading loss had been incurred in an earlier year, but by some reason it was not allowed, it was clearly not eligible for deduction in any subsequent year in the computation of net profits of that year. In the instant case, rightly speaking, it was not a case of any trading loss. It was the case of a mistake in passing entries in the books. As noted above in the previous year relevant to the assessment year 1966-67, the assessee despatched certain goods of the value of Rs. 71,648 to M/s. Mandya Paper Mills, Madras. Necessary entries were passed in the books by debiting the purchaser's account and crediting the sales account, The purchaser did not take delivery of those goods and on assessee's instructions those goods were sold by its own agent on its account in the previous year relevant to the assessment year 1967-68. The assessee received the sale proceeds and instead of reversing the entries made in the accounting year relevant to the year 1966-67, it credited the sales account and debited the stores account. Thus, the mistake occurred in that year. The assessee knew that the goods despatched in the preceding year had not been taken delivery of by the purchaser and had been sold on its account by its agent. Therefore, it should have made the necessary entries in that year itself and there would not have arisen any question of the profit of 1967-68 being inflated as observed by the Tribunal. This mistake certainly could not have been corrected by the assessee itself by reversing the entries in the previous year relevant to the year under consideration and then claiming deduction of the amount as a bad debt or as a trade loss. It could not have been a bad debt and that contention was rightly given up. It could not have been a trade loss either because no such loss occurred to the assessee in the relevant previous year.
9. We, thus, do not agree with the view taken by the Tribunal and answer the question referred, in the negative, in favour of the department and against the assessee. The Commissioner is entitled to costs which we assess at Rs. 200 and counsel fee in like figure.