This case has been referred to us under section 66(I) of the Indian Income-tax Act by the Income-tax Appellate Tribunal, Bombay Branch, by its application dated November 19, 1953. The point which is stated by it is as follows : "Whether the said sum of Rs. 2,02,442-13-9 being part of the amount embezzled by the assessees munim allowable as a deduction under the Indian Income-tax Act either under section 10(I) or under the general principle of determining the profit and loss of the assessee or section 10(2)(XV) ?" 2. The facts, as would appear in the application, are as follows : The assessee is carring on business, among other places, at Bombay. One of the business at Bombay was that of banker. The sources of income at Bombay are interest adat, business in gold and silver, house property and divided. The assessment year is 1946-47, the relevant accounting year being Sambat year 200I(October 18, 1944, to November 4, 1945). The assessee had a munim by name Chandrattan Laxminarayan Daga, who held a general power of attorney executed in his favour by the assessee on May 13, 1944, for the general conduct and management of the assessees business at Bombay and other places. Between November 15, 1944, and November 23, 1944, this munim withdrew from the blank five sums of money amounting in all to Rs. 2,30,636-4-0 for meeting his personal liabilities arising as a result of heavy loses in speculative transactions of silver, bullion, etc., entered into by him in his individual capacity. Entries in the cash book were posted to the debit of "Suspense Account" (udrat Khata). The assessee was informed of these heavy withdrawals by the munim by a telegram sent to him at Bikaner by his cashier on November 25, 1944. The assessee soon after returned to Bombay, revoked the power of attorney granted to the munim and brought a suit in the Bombay High Court for the recovery of the amounts withdrawn by the munim, viz., Rs. 2,30,636-4-0. The munim admitted in writing his liability to the assessee. An ex parte decree was obtained against the munim on February 20, 1945. The munim paid Rs. 28,000 on account of his liability created by the decree. In the account of the munim, there was a debit of Rs. 106-11-9. The sum of Rs. 2,30,636-4-0 was transferred to the munim account from udrat khata on account of the unauthorised withdrals by him. A credit was given to the account of the munim for Rs. 300-2-0 for his salary and bonus. After the credit of Rs. 28,000 was given to the account, viz., Rs. 2,02,442-13-9, was written off and claimed as an allowance under section 10(2)(XV) of the Indian Income-tax act.
2. The Tribunal accepted the assessees contention that the amount of Rs. 2,30,636-4-0 which was withdrawn by its munim Chandrattan Laxminarayan Daga was misappropriated by him. It was, however, of the opinion that no deduction could be allowed in respect of it either under section 10(I) or under section 10(2) (XV) of the Act. In support of its view it referred to the decisions in Curtis v. Oldfield, and Venkatachalapathy Iyer v. Commissioner of Income-tax, Madras. Those are the decision which have been relied upon not by the assessee but also by the Department.
4. The facts of the first mentioned case are these : J. E. Oldfield, the manging director of a company of wine and spirit merchants was, for many years up to his on February 4, 1919, in sole control of the companys business. It transpired at the investigation made after his death that several payments and some receipts not relating to the companys business but to the private affairs of Oldfield had been passed through the companys books and that a sum of $14,000 was due on the date of the investigation from the estate of deceased to the company. This debt was valueless and was written off as bad in the companys book of account for the sixteen months ending June 30, 1920.
The General Commissioners allowed the Companys claim to deduct the amount in question in computing its profits for assessment to income-tax, holding that the loss "was a bad debt arising in the course of the companys trading." It was held by Rowlatt, J., in appeal that there was no evidence to support the Commissioners finding that the loss was a trading loss and that it was an admissible deduction from the companys profits for income-tax purposes. In delivering his judgment the learned Judge observed : "What the Commissioners have been misled by, in my judgment quite clearly is this. They have allowed themselves to act under the impression that they were taxing the company on what the company in a loose way had made and secured. In point of law they were engaged in assesseing the profits of the companys trade not of the company in a loose way had profits of the company itself but of the companys trade, and I have to consider whether there is the least ground for supposing that losses of these sums resulting in this bad debt were losses in the trade. I quite think, with Mr. Latter, that if you have a business.....
in the course of which you have to employ subordinates, and owing to the negligence of the dishonesty of the subordinates some of the receipts of the business do not find their way into the till, or some of the bills are not collected at all, or something of that sort, that may be an expense connected with and arising out of the trade in the most complete sense of the word. But here that is not this case at all.
This gentleman was the managing director of the company, and he was in charge of the whole thing, and all we know is that in the books of the company which do exist it is found that moneys went through the books into his pocket. I do not see that there is any evidence at all that there was a loss in the trade in that respect. It simply means that the assets of the company, moneys which the company had got and which had got and which had got home to the company, got into the control of the managing director of the company, and he took them out. It seems to me that what has happened is that he has made away receipts of the company dehors the trade altogether in virtue of his position as managing director in the office and being in a position to do exactly what he likes." 5. Shri kolah who appeared for the assessee relied on the observation that where an assessee employs subordinate and the money is lost on account of their negligence or ordinary that loss should be regarded as expense connected with and arising out of the most complete sense of the word. On behalf of the Department reliance is placed on the observations that where the money had got home to the company, got into the control of the managing director of the company and was then yaken out by him by virtue of his position as managing director and misappropriate that loss resulting therefrom cannot be regarded as a loss arising out of the trade.
6. We have before us the power attorney which is executed by the assessee in favour of its munim. The power of attorney, as is admitted by Shri Kolah, confers widest possible powers on the munim. He can do what he likes, of course, for the better and more effectual conduct of the assessees business. Clearly, however, his powers were in no sense different from those of Oldfield as manging director of the company.
His position cannot be regarded as that of a subordinate at all though of course he has was accountable to his master the assessee as unquestionably Oldfield was to the company. The fact that in one case the person was a munim and in the other a manging director makes no difference. The power of attorney would clearly show that for the purpose of the business the minim was in the same position as the assessee himself.
7. It was however argued that whereas in Curtiss in case the money which was misappropriate had got home to the company that was not as here, because the assessee lives at Bikaner and has his head office at Kamptee in Madhya Pradesh, whereas Chandrattan was carrying on his business at Bombay and in the course of this business was permitted to operate on the bank account there. It was said that though the money which was misappropriated stood to the assessees credit in the bank it cannot be deemed to have reached the "till" untill it got to Bikaner.
We cannot accept this contention. The assessee is carrying on business at a number of places and has bank account in several banks. Whenever money is credited in any of thses banks it must be deemed to have reached him. Where money has reached him and was lost thereafter it cannot be regard as a loss in business. It was lost in the same way as if it would have been stolen. Such a loss cannot be allowed to be deducted under section 10(2) (XV) of the Income-tax Act.
8. We would also point out that even assuming that the fact that Chandrattan was endowed with very wide powers is immarterial and that he should be regarded in the position of a subrdinate, we think that misappropriation of all monies by him from the bank from time to time for a purpose unconnected with the business of the concern cannot be regarded as a loss in trade. The loss of money through the negligence and dishonesty of the subordinate which can be regarded as a loss in trade must, according to Rowlatt, J., be due to the fact that money did not find its way into the till or some of the bills relating to the concern were not collected or "something of that sort." No connection has been established between the act of the withdrawal of the money by the agent and the business of the concern. The mere fact that Chandrattan was able to withdraw the money only by virtue of the power of attorney conferred upon him, i.e., only by virtue of the power of attorney conferred upon him is not sufficient to put the misappropriation made by him of the money on the same footing as a loss in trade.
9. We shall now deal with the other case relied on. The facts of that case adequately summarized in the head-note which runs thus : "The assessees, a firm carrying on business as yarn merchants, employed a clerk who in such capacity wrote account books, act as salesman, received and disbursed cash in the absence of the managing partner and collection bills. He noted the amounts received and spent by him in the course of the day on slips of paper and handled over the slips with the cash balance in his hands to the managing partner at the close of the day. He also maintained cash chitta of transactions conducted by him including collection and expenses. In may, 1941, it was discovered that the clerk had embezzled a total : sum of Rs. 36,298-3-6 during the period between Octeber 17, 1939, and October 24, 1940. The manner in which the embezzlement took place was as follows : The clerk entered the transaction faithfully in the books maintained by him, but he short-totalled the receipts and over-totalled the payments and prepared a statments of daily cash balance on the pf such wrong totals and handed over to the managing partner at the end of the day only the cash as per that statement. He thus pocketed 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. In June, 1941, a criminal prosecution was launched against him and about the same time a civil suit for the recovery of the amount was also instituted. The matter was comprised in August, 1941, and the clerk pad the as sessees a sum of Rs. 16,25 in full settlement of the claim. The assessees claimed in the assessment year 1942-43 (accounting year ending with April 12, 1942) that they were entitled to a deduction of a sum of Rs. 21,372 being the sum embezzled by the clerk of the firm." It was held that the sum of Rs. 21,372 could not be treated as a loss in the accounting period of the assessment year 1942-43 and was therefore deductible from the profits of that period. Satyanarayana Rao, J., who was one of the parties to the decision observed : "It seems to be a well-established practice in England that loss by embezzlement is a permissible deduction. Of course, as pointed out by snelling, the loss is allowed as a deduction only if the embezzlement can be said to be necessarily incurred in carring on the trade and springs directly from the necessity of deputing duties to the various employees. The question whether the amount so misappropriated was a trading loss and a permissible deduction from the profits for income-tax purposes was considered by Rowlatt, J., in Curtis v.Oldifield Ltd., where a manging director of a company who was in solec harge of the business of the company diverted the funds of the company for the personal use. The judgement of the learned judge in my opinion deals with the question when a defalcation or embezzlement could be treated loss and when such diversion of monies unauthorisedly by an employee goes out of the ambit of trade loss. He draws the line of demarcation between the two situations and it seems to me that the statement of the law by the learned Judge is in consonance with the practice obtaining in England." And after quoting from the judgement of Rowlatt, J., he posed the question "What is it then, that makes the misappropiation or the interception of the funds of the company unauthorisedly by a subordinate a trade loss incurred in the course of the business ?" and answered it thus : "It is the employment of subordinates and the necessity to employ them and to entrust them with various duties including collection of monies that makes the loss a rising in the course of the business. The trade cannot be carried on without the employment of the servants and it is impossible to carry on the without reposing confidence in them. If, taking advantage of the situation in which they are placed and of the confidence reposed in them, they pocket a portion of the funds and intercept them without allowing such embezzlement is a loss in the course in the course of trade." "If, however, - and this is the line of demarcation - the funds reach the till as in the case before the learned Judge (Rowlatt, J.) and the monies, to use the language of the learned Judge had got home to the person entitled to their custody and control, and if thereafter the funds are lost either or by embezzlement, such is altogether outside the trade and the course of the business. In the present case, the money was intercepted and diverted by Rajarathnam Ayyangar before it reached the hands of manging partner." "The till in this case with the managing partner and it cannot be said that the temporary custody of the money with Rajarathnam Ayyanagar costituted a till and the diversion of the funds by him was dehors the trade on the analogy of the facts in Curtis v. Oldfield Ltd. The funds were not got home to the managing partner and did not come under his control as in the case of the managing director in the above case before the embezzlement was made." Thus the learned Judge has based himself solely on the ground that the money which was misappropriated by Ayyanagar had not reached the till, i.e., it had not reached owner, and therefore the loss resulting therefore to the owner could be deducted.
Raghava Rao, J., has also taken the same view but has added that it did not make any difference whether the money was missappropriated by a subordinate or by managing director in order to ascertain whether the loss resulting therefrom could be regarded as a loss in the trade.
However, these observations are obiter.
10. In our judgment, the Madras case is very clearly distinguishable because of the finding that the money had not reached the till before it was missappropriated. In the present case it was actually taken out of the till by the munim.
11. Upon the consideration of the entire material our answer to the question posed by the Tribunal is that the amount of Rs. 2,02,442-13-9 cannot be allowed to be deducted under section 10(2)(XV) or under the general principles of dertermining the profit and loss of the assessee.
We would, however, like to make it clear that no argument was advanced before us on the question whether could be deducted under section 10(I) of the Act.
12. Costs of the application to be borne by the applicant. Counsels fee Rs. 250.