1. This is a reference by the Income-tax Appellate Tribunal, Bombay Bench 'A', under Section 256(1) of the Income-tax Act, 1961, referring the following question of law for the opinion of this Court:--
'Whether on the facts and in the circumstances of the case, the sum of Rs. 23,000/- is deductible in computing the income of the assessee?'
2. According to the Income-tax Appellate Tribunal the said question of law arises on the following facts and circumstances : The respondent was being assessed to income-tax for the assessment year 1962-63, i.e., the accounting year ending Diwali of the year 1961. The respondent is a registered firm carrying on the business of running a Rice Mill. On 9-3-1961 Shri Chandrashekhar, a partner of the firm, had gone from Kargi-road to Bilaspur for depositing a cheque issued to the Mill by the Government. The cheque was duly deposited and an amount of Rs. 23,000/- was withdrawn in cash for disbursement at Kargi-road, which disbursement was said to be necessary for the business of the respondent. At the bus-stand on his way back, Shri Chandrashekhar lost the amount as some unknown persons were said to have stolen the amount from him. Therefore, the respondent in the assessment proceedings claimed that amount as a loss in business.
3. The Income-tax Officer and the Appellate Assistant Commissioner of Income-tax refused to allow that item as a loss in business. However, the Income-tax Appellate Tribunal by order, dated 18-1-1968 allowed the appeal by relying on the pronouncement of theirLordships of the Supreme Court in Badridas Daga v. Commissioner of Income-tax : 34ITR10(SC) and Commr. of Income-tax v. Nainital Bank Ltd. : 55ITR707(SC) .
4. The test laid down by the King's Bench Division in the English case of Curtis (H. M. Inspector of Taxes) v. J. and G. Oldfield Ltd. (1925) 9 Tax Cas 319, was to ascertain whether the loss was a trading loss and was incidental to the business. In that case the Managing Director of a Company in his capacity as a Managing Director had withdrawn large amounts from the accounts of the Company much in excess of what he was entitled to do. He died and the excess amount withdrawn was a bad debt owed by his estate. The same was written off as it was irrecoverable. Therefore, the Company claimed that to be a loss in business, which according to it, would not be taxable. The assessing authority refused to allow it as a loss, but the General Commissioners on appeal allowed the Company's claim and, therefore, a reference was made to the High Court under Section 149 of the English Income-tax Act, 1918. Rowlatt, J. upheld the view of the General Commissioners. This view as expressed by Rowlatt, J. stands approved in some Privy Council cases, such as in Commr. of Income-tax, C. P. and Berar v. S. M. Chitnavis , wherein their Lordships were required to consider whether a bad debt was deductible as a loss in business.
A Full Bench of the Nagpur Judicial Commissioner's Court in Commr. of Income-tax, Nagpur v. S. M. Chitnavis had taken the view that it could not be allowed to be deducted as a loss in business. Their Lordships of the Privy Council reversed that Full Bench decision and held that the question as to when a debt becomes a bad debt, would be a question of fact to be decided by the Court. The assessee's will would not be the determining factor. But if once it is established that it is a bad debt, it could be allowed to be deducted as a loss in business.
5. A Division Bench of the Patna High Court, in Motipur Sugar Factory, Ltd. v. Commr. of Income-tax : 28ITR128(Patna) , presided over by Ramaswami, J. (as he then was) and Sahai, J. observed that two things would be necessary that the loss of money should be a loss connected with or arising out of the business of the assessee and should, therefore, be taken into account in calculating the profits and gains under Section 10 (1) of the Income-tax Act, 1922, for the purpose of computing the taxable income. Their Lordships also observed that if the loss be incidental to the business affairs of the Company, it could be deducted as a loss in business. Of course,it would not be covered by any of tht deductions permissible in other provisions of the Income-tax Act. This view as expressed by a Division Bench of the Patna High Court, has been affirmed by their Lordships of the Supreme Court in : 34ITR10(SC) and in : 55ITR707(SC) .
6. In : 34ITR10(SC) , the munim of the firm, who had authority to withdraw amounts and to disburse them, had embezzled some amounts of the firm and subsequently they were written off as bad debt because in spite of a decree of a Civil Court, only a small portion of the amount could be recovered from the employee. Therefore, the firm claimed the written off bad debt as a loss in business. The High Court in Badridas Daga v. Commissioner of Income-tax, AIR 1956 Nag 43 refused to allow it as an item of loss in business and, therefore, it was held that the said item was taxable. Their Lordships of the Supreme Court reversed that decision and held that it could be allowed to be excluded as a loss in business. With reference to the decided case their Lordships in paragraph 13 of the judgment made the following observations:--
'Subsequent to the decision now under appeal, the Bombay High Court had occasion to consider this question in Lord's Dairy Farm Ltd. v. Commr. of Income-tax : 27ITR700(Bom) . On a review of the authorities including the decision in (1925) 9 Tax Cas 319, Chagla, C. J. and Tendolkar, J. held that loss caused to a business by defalcation of an employee was a trading loss, and that it could be deducted under Section 10(1). In : 28ITR128(Patna) , an employee who had been entrusted with the funds of a company for purposes of distribution among sugar-cane growers in accordance with statutory rules, was robbed of them on the way. It was held by Ramaswami and Sahai, JJ. that the loss was incidental to the conduct of the trade, and must be allowed. We agree with the decisions in Venkatachalapathy lyer v. Commr. of Income-tax : 20ITR363(Mad) and : 28ITR128(Patna) .'
7. It will be seen that their Lordships have specifically approved of the said three cases of the Madras. Bombay and Patna High Courts, which lay down the test whether the loss is connected with the business or whether it arises out of the affairs of the business or whether it is incidental to the affairs of the business. If these tests are fulfilled, the amount of such bad debt can be deducted as a loss in business under Section 10(1) of the Income-tax Act, 1922. It is pertinent to note that the present case would be governed by the provisions of the Income-tax Act, 1922, and not by the Income-tax Act, 1961, which came into force with effect from 1-4-1962.
8. Reference may further be made to the pronouncement of their Lordships of the Supreme Court in : 55ITR707(SC) , which was a case of a Bank robbery. In this cast their Lordships rejected the majority view in the Full Bench case of Ramaswami Chettiar v. Commissioner of Income-tax, ILR 53 Mad 904 : AIR 1930 Mad 808 and approved of the minority view of Anantakrishna Ayyar, J. which was in accord with the view expressed later in the Bombay, Patna and Madras cases, which met the approval of their Lordships of the Supreme Court in : 34ITR10(SC) .
9. The learned authors, Kanga and Palkhivala in their Commentary on the 'Law And Practice of Income-tax' (6th Edition 1969) Volume I, at page 330, under the heading 'Losses incidental to trade: Embezzlement, theft, destruction of assets, overdrawing by employees, ete.', have discussed the topic with reference to the earlier English cases as also the pronouncements of their Lordships of the Supreme Court in : 34ITR10(SC) and : 55ITR707(SC) .
10. Applying the said tests we find that the Income-tax Officer, the Appellate Assistant Commissioner of Income-tax and the Income-tax Appellate Tribunal had proceeded to decide the question on the facts stated in the orde of reference, to the effect that Shri Chandrashekhar, a partner of the firm, had gone from Kargi-road to Bilaspur for depositing a cheque in the Bank and for withdrawing some cash amount for disbursement in connection with the business affairs of the respondent at Kargiroad. He deposited the cheque and withdrew Rs. 23,000/- in cash. On his return journey from Bilaspur to Kargi-road he happened to lose the amount as a result of the theft. Therefore, the respondent claimed it as a loss in the business under Section 10(1) of the Income-tax Act, 1922. These facts by themselves would squarely fit in with the principle indicated by their Lordships of the Supreme Court in : 34ITR10(SC) and : 55ITR707(SC) . The loss can be said to be incidental to business as the partner had gone to the Bank to bring cash for disbursement at Kargi-road.
11. The learned counsel for the department, however, urged that there is no material on record of this case to come to the conclusion that the facts were as stated by the Tribunal in its order of reference. Therefore, the suggestion was that the Tribunal has made a reference on a hypothesis which is not supported by the material on record. We may observe that it is now too late for the learned counsel for the department to challenge the statement of facts on the basis of which the Appellate Tribunal has sought an opinion. We may observe that the Income-tax Officer also had found the following facts established in the order of assessment: 'Rs. 23,000/- have been claimed as loss due to theft. On 9-3-1961, partner Shri Chandrashekhar withdrew Rs. 23,000/- from the State Bank, Bilaspur, and went to the bus-stand for catching the bus to Kargi-road. At the bus-stand some unknown person snatched away Rs. 23,000/- from Shri Chandrashekhar Trivedi and the culprit could not be traced out. The assessee claims that on 9-3-61 the sale proceeds of rice were received from the Government in the form of cheque. The cheque was deposited in the Bank account of the assessee firm and a part of the amount of that cheque was withdrawn as cash, for being taken to Kargi Road for making cash disbursements necessary for the business of the assessee.'
12. We may note that the Appellate Assistant Commissioner as also the Income-tax Appellate Tribunal proceeded to decide the matter on the same statement of facts. In our opinion, the statement of facts made by the Tribunal in its order of reference cannot be allowed to be challenged in this Court. If the petitioner had any objection to the statement of facts, the same should have been raised before the Tribunal when the question for reference was drafted. Therefore, we disallow the petitioner from challenging the statement of facts.
13. Thus, on the facts stated and in the circumstances of the case, we are of opinion that the item of Rs. 23,000/- is deductible as loss in business vide Section 10(4) of the Income-tax Act, 1922.
14. We answer the said reference as indicated and further direct that the respondent will be entitled to the costs of this Court from the petitioner. Counsel's fee in this Court shall be Rs. 200/-, if certified.
15. The reference be returned to the Appellate Tribunal with the answer as indicated above.