Income Tax Act, 1961 - Sections 28, 36, 36(2) and 256(1)
S. Ranganathan, J.
1. This a reference made under section 256(1) of the Income-tax Act, 1961, by the Income-tax Appellate Tribunal on the application of the Commissioner of Income-tax. The question referred to this court is in the following terms :
'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessed was entitled to a deduction of Rs. 1,68,487 in the computation of the profits and gains of the business carried on by it in the accounting year under section 28(i) of the Income-tax Act, 1961 ?'
2. The reference arises out of the income-tax assessment of Pure Ice Cream Co., a registered firm doing business in ice cream. The previous year relevant to the assessment year concerned is the calendar year 1964. As will be seen from the question, the reference relates to the deductibility of a sum of Rs. 1,68,487 in determining the assessed's business profits. The claim for the deduction of the above amount was made by the assessed in the following circumstances.
3. The assessed was constrained, from time to time, to borrow monies on hundis for financing its business in the manufacture and sale of ice cream. For this purpose, it engaged the services of a broker (hereinafter referred to as 'Nand Lal') who was a partner in a firm known as M/s. Nandlal Chuggamal & Co. The services of the broker had been engaged some time in 1954 and the assessed was periodically borrowing monies for the purpose of its through Nand Lal were recorded in a general loan account till July, 1957. From July, 1957, a separate hundi loan account was opened for transactions through Nand Lal. That there were substantial transactions through amounted to Rs. 1,72,000 as on December 31, 1957, Rs. 2,75,000 as on December 31, 1958, and Rs. 90,000 as on March 31, 1959.
4. Some time in 1960 (there is a controversy about the actual date to which we shall make a reference later on) it came to the knowledge of the assessed that Nand Lal had utilised certain monies borrowed by him on behalf of the assessed for his own purposes. What had happened, according to the assessed, was as follows : Nand Lal had purchased a number of hundi papers of the face value of Rs. 5,000 (only one of the papers was of the value of Rs. 2,500) on various dates in 1959-60. The assessed had signed these papers as a token of authorising Nand Lal to borrow on the hundis on behalf of the assessed. According to the assessed, Nand Lal was making use of these hundi papers from time to time to borrow monies as and when needed from such persons as he could also bring monies to the assessed from time to time as against these hundis. But, in September, 1960, Nand Lal came to the assessed with a confession that he had not behalf, but that he had utilised some of these papers for securing monies for his personal use. He is stated to have frankly admitted to the assessed that he had misuse in this way a number of hundi papers. He promised to make a good the loss that might fall on the assessed as a result of this misappropriation of the funds. It is said that on September 2, 1960, he made the disclosure to the assessed and promised to make good the assessed's loss in the following way. A sum of Rs. 1,85,000 had been deposited in the name of Nand Lal in a private limited company, M/s. G.L. Hotels Ltd. Nand Lal agreed by a letter dated September 2, 1960, which he addressed to M/s. G.L. Hotels Ltd., that the above sum of Rs. 1,85,000 with interest could be transferred in the name of the assessed. The assessed was thus able to secure a sum of Rs. 1,85,000. Nand Lal is said to have estimated the amount of other hundi borrowings utilised by him at a rough figure of Rs. 1,75,000 and in respect of this amount he executed on September 20, 1960, a promissory note in favor of the assessed. This was executed by him on behalf of the firm of M/s. Nandlal Chhuganmal & Co.
5. Faced with the above prospects of loss, the assessed reconciled itself to the position that it would have to pay substantial amounts to persons in whose favor Nand Lal had passed on hundis signed by it. The assessed opened an account in the name of Nandlal Chhuganmal & Co. which was described as an 'advance account' on October 1, 1960. In this account, the amount of Rs. 1,85,000 which had been transferred to it by Nand Lal was credited. Thereafter, the assessed proceeded to debit to the account the various amounts which it had to pay in order to honour the other hundis which were presented to it from time to time. It is said that a number of hundis were presented to the assessed between October, 1960, and April, 1961, and the total amount of the hundis so paid by the assessed came to Rs. 3,77,500. On December 31, 1960, the assessed also credited to the account a sum of Rs. 24,013 which was the amount of the interest due from M/s. G.L. Hotels Pvt. Ltd., in respect of the deposit which stood previously in the name of Nand Lal and which had been transferred to the assessed. After setting off the sum of Rs. 1,85,000 and interest of Rs. 24,013 against the payment aggregating to Rs. 3,77,500 the assessed found itself in the red to the extent of Rs. 1,68,487 as on December 31, 1961. This amount was carried forward up to December 31, 1964, and claimed as a deduction in the assessment year 1965-66. It may be clarified at this juncture that, according to the assessed, the debit balance of Rs. 1,68,487 which had appeared in the Nand Lal advance account, as early as December 31, 1961, was carried forward till December 31, 1964, and written off only on that date because the assessed had obtained from Nand Lal Goverdhan Dass a promissory note on July 27, 1961, by which Nandlal Goverdhan Dass promised to pay to the assessed a sum of Rs. 1,75,000 'on behalf of M/s. Nandlal Chhuganmal & Co. and on my own behalf' in respect of the amounts due to the assessed on the hundi dealing through the firm of Nand Lal Chhuganmal & Co.
6. The Income-tax Officer disallowed the assessed's claim for deducting the sum of Rs. 1,68,487. It is sufficient at this stage to extract the conclusion of the Income-tax Officer in respect of the assessed's claim. He observed :
'I have considered all the circumstances of the case. Under o interpretation of section 36 of the Income-tax Act, 1961, it could be established that it is an admissible deduction from the profits of the relevant year in question. It is not a bad debt because there was no debtor of the assessed in the name of M/s. Nandlal Chhuganmal & Co. It was not a debt against which the assessed had received something and which had been included as a receipt or income charged to tax during any of the earlier years. It is a payment under peculiar circumstances, i.e., an account of breach of trust by a broker through whom the assessed was raising the loans. Otherwise also this excess payment is only a payment made by the assessed for non-business consideration. It is to preserve the good will and reputation of the firm, i.e., to maintain its very existence and hence it is a capital loss not admissible as a revenue loss.'
7. The assessed appealed to the Appellate Assistant Commissioner, who disposed of the matter very briefly. He endorsed the Income-tax Officer's finding that the claim was not allowable under section 36 of the Act. He added - (i) that it was not a loss of the year under appeal, and (ii) that the loss was not incidental to the appellant's business at all. He observed that the appellant's business was in the manufacture and sale of ice cream and issuing of bank hundis was not incidental to their business.
8. The assessed preferred a further appeal to the Tribunal and contended that the amount was clearly allowable as a business loss. It was argued that the assessed had necessarily to get its business finance through hundis that it was arranging this finance through Nand Lal, that Nand Lal was a very established broker with a very good reputation, that the assessed had necessarily to give signed hundi khokhas to him for negotiating the loans, that due to luck he fell on evil days, that he abused the true placed on him by the assessed, that he tried to make good as much loss as possible and that only the balance amount which he could not repay and which it was not possible to recover from him was written off by the assessed. It was also pointed out that the income-tax authorities had not doubted the genuineness of the arrangement between the assessed and Nand Lal, and that the fact of the loss also was not questioned. It was contended that the circumstances in which the loss was suffered were no doubt peculiar, but the circumstances arose in the course of the business and, thereforee, the loss was clearly allowable. It was pointed out that if, as observed by the Income-tax Officer, the loss was suffered in order to preserve the reputation and existence of the business, it could not be treated as a capital loss. On the other hand, on behalf of the Department, three conventions were raised - (i) that the circumstances in which the assessed claimed to have suffered the loss were incredible; (ii) that, assuming that the assessed actually suffered the loss, it was of a capital nature; and (iii) that the assessed was not in a position to lead evidence to show that the loss could be related to the accounting year relevant to the assessment year 1965-66.
9. The Tribunal dealt with the contentions of the departmental representative and disposed of them as follows. The Tribunal first pointed out that the amount could not be claimed as a bad debt and that it had to be considered, if at all as a business loss allowable under section 28(i) of the 1961 Act corresponding to section 10(1) of the 1922 Act. With this preliminary observation the Tribunal proceeded to deal with the three contention that the circumstances claimed by the assessed were incredible, the Tribunal observed :
'It must be stated at the outset that the existence of the arrangement between the assessed and Nand Lal has not been doubted at any stage. The ITO, in the course of his finding, has at one stage referred to non-business consideration. But the non-business consideration is not indicated and it is not at all clear whether that finding relates to the subsequent statement about preserving the goodwill and reputation of the firm. Shri Nand Lal or any of the partners had not been examined to find out whether there was any doubt or dubiety about the claim of the assessed. It was, thereforee, not possible to accept the contention put forward by the D.R. that the arrangement giving rise to the assessed's claim was incredible.'
10. Dealing with the objection that the loss was of a capital nature including the broader aspect as to whether it could be said to be incidental to the business, the Tribunal observed :
'Nor is it possible to say that the loss suffered by the assessed was unrelated to its business. The ITO has stated that the amount was paid in peculiar circumstances, and that it was on account of breach of trust of broker through whom the assessed was raising the loan. But the ITO does not say that the peculiar circumstances had no relation to the business requirements of the assessed of that the particular exigency under which the loss was suffered did not spring directly from the process of carrying on of the assessed's business. On the other hand, there is no denying the fact that the assessed was raising the loan through Nand Lal, that for this purpose it had necessarily to give hundi khoka signed by it to Nand Lal some time earlier than the actual receipt of money, that this arrangement worked satisfactorily for about five years, that only in the middle of 1960 due to the turn of the fortune for Nand Lal he took to undesirable ways, that as soon as it was found out, he tried to make good as much of the loss of the assessed as possible, and the assessed had not subsequently received even to date any of the amount which it claimed as a loss. In these circumstances we are inclined to hold that the loss clearly arose in the ordinary course of the carrying on of the assessed's business. The assessed had necessarily to raise finance through hundis, that it had necessarily to act through a broker is one of the unavoidable risks which it had necessarily to act through a broker is one of the unavoidable risks which it had necessarily to take if it had to continue to secure finances. The assessed no doubt was doing the business in ice cream, but in the course of carrying on that business, it had necessarily to secure finance and the risks attendant in securing finance were integral part of the process of carrying on of the business in ice cream.'
11. The Tribunal pointed out that the loss could not be treated as a capital loss and if as observed by the officer it was protect the business and its goodwill it was clearly in the nature of revenue loss. The Tribunal held that from a purely business point of view, the assessed could not possibly repudiate its liability to honour the hundis if it wanted to continue in business.
12. Dealing with the contention that the loss did not pertain to the accounting year 1964, the Tribunal observed :
'Finally, there is nothing in the evidence to show that the amount was claimed prematurely. The assessed no doubt secured a promissory note in 1960 but for three years not a single naya paise was received and as stated earlier there is nothing to show that the debtor was in fact a substantial party and the assessed had made an arrangement with him out of extra commercial considerations. The assessed waited for three years to recover the amount and at the end of the third year held that the loss became present and actual. It was not possible to question this decision either as mala fide or as unbusinesslike or smacking of extraneous considerations.'
13. In the light of the above decisions the Tribunal was of the view that the assessed was entitled to the deduction of the term of Rs. 1,68,487.
14. The Commissioner of Income-tax is aggrieved by the order of the Appellate Tribunal and the question of law pressed by him for reference to this court has been referred by the Tribunal in the terms, which have already been extracted.
15. On behalf of the Department, an attempt was made before was us to challenge the genuineness of the transactions in question and to contend that the whole claim of the assessed was liable to be disbelieved and rejected for a number of reasons.
16. Taking the cue from the arguments of the Departmental representative before the Tribunal, the learned counsel for the department contended that the whole version of the assessed was incredible. He pointed out that even, according to the assessed, Nand Lal was not a total stranger but was undoubtedly connected with the assessed and its various business transactions. Before the Income-tax Officer, the assessed's case had been, that the partners of the firm had developed an 'intimate relation with the broker'. Again it was found by the Income-tax Officer that apart from the sum of Rs. 1,85,000 deposited by Nand Lal with G.L. Hotels Ltd., the assessed had agreed to admit Nand Lal to a one-third share in a hotel which was to be but up by G.L. Hotels (Pvt.) Ltd. Further, the land and building for the hotel had been purchased in the joint names of the two partners of the assessed-firm and the wife of Nand Lal. It was, thereforee suggested that there was a closer personal relationship between Nand Lal and the assessed firm and this was why the assessed-company did not institute any civil or criminal proceedings against Nand Lal and had refrained from even sending him a simple legal notice calling upon him to make good the losses incurred by the assessed on account of his alleged misappropriation. It was further pointed out that, according to the Tribunal, the position of Nand Lal became straitened some time in the middle of 1960 and that no more loans had been arranged through him after July 30, 1960. This is not correct because a perusal of the relevant details which form part of the statement of case would clearly show that Nand Lal had purchased hundi papers and raised loans even after July, 1960. Substantial amounts of hundis had been issued by him subsequent to July 31, 1960. This, according to the learned counsel, belies assessed's version that Nand Lal had become unreliable some time in the middle of 1960. Learned counsel submitted that in the normal course one would have expected the assessed, some time in July, 1960, when it discovered that Nand Lal had misused the hundi papers entrusted to him at least to publish an advertisement in the newspapers to say that his transactions after that date will not be binding on the assessed. Counsel further contended that the assessed did not also appear to have made any attempt to recover the amounts of the so-called losses and that no proceedings had been taken against the share which Nand Lal and his wife had in the property of G. L. HotelsPvt.Ltd. He pointed out that amounts which had been paid by the assessed were all debited to Nand Lal's advance account. This meant that the total amount for which Nand Lal had issued hundis on behalf of the assessed was treated as a loan to him and if this debt was not recovered it would only be bad debt but a bad debt which could not be allowed as such as it did not admittedly fulfill the requirements of section 36 in that regard. If it was intended to claim the amount paid to various persons on the hundis as losses, according to the learned counsel, the assessed should have claimed these amounts as losses as and when the payments were made on the various hundis presented to the assessed and was not entitled to wait till 1964 to write off the same. Learned counsel contended that the promissory note dated July 21, 1961, was a verbatim reproduction of the promissory note taken already on September 28, 1960, and he suggested that the obvious purpose of taking this second promissory note was to bring the date of write off within a period of three years from its date.On these various grounds learned counsel submitted that the assessed had put up a false claim and suggested that what had really transpired was that the assessed had borrowed monies which had not been accounted for in its books and that the repayment of these monies was also being sought to be deducted by claiming it as a business loss thus attempting to get a double benefit from the Department. He pointed out that in the assessment year 1965-66, the assessed had made profits of Rs. 3,47,200, according to its own return and this, he said, indicated that the whole purpose of making this claim was to reduce the tax effect substantially by writing off a large amount on the last day of the previous year. Shri Wadhera also made a suggestion that, if we were not satisfied with the facts on record, we should remit the matter to the Tribunal for submitting a further and better statement of the case.
17. Before proceeding to deal with the two points which, according to us, arise in this case, it is necessary to observe that the arguments of the departmental counsel travel for beyond the scope of the reference and raise issue which do not properly arise in the context of the orders of the authorities below, The whole suggestion of the learned counsel has been that the claim put forward by the assessed is a bogus claim and that the assessed, has not in fact incurred any loss whatsoever and that an incredible claim has been accepted by the Tribunal. Unforunately, the case has not proceeded on this footing at any earlier stage, as rightly pointed out by Shri Harish, who appears for the assessed, Even the Income-tax Officer does not appear to have doubted the genuineness of the assessed's claim. At the very outset, while referring to the facts of the case, the Income-tax Officer points out that the facts, as narrated by the assessed, had been clarified from the records. The discussion in the assessment order also does not indicate that the Income-tax Officer considered the claim put forward by the assessed to be an incredible or fictitious one. If the Income-tax Officer had really doubted the assessed's claim, he would have taken steps to examine Nand Lal and all or some of the seventy odd persons in whose favor hundis by Nand Lal are stated to have been honoured between October, 1960, and April, 1961. The Income-tax Officer also appears to have accepted the plea of the assessed that there was absolutely no use filing any legal claim against Nand Lal because he was in financial straits and several cases for recovery were outstanding against him and pending in various courts. The Income-tax Officer has indeed accepted the assessed's case and given a finding that it has incurred a loss on account of the breach of trust by a broker through whom it was raising loans. Even before the Appellate Assistant Commissioner there was no suggestion made by the Income-tax Officer that the genuineness of the transactions alleged by the assessed was in doubt. We are left in no doubt at all about this aspect by the clear observations and findings given by the Tribunal. We have earlier pointed out that one of contentions of the departmental representative before the Tribunal was that the circumstances in which the assessed claimed to have written off the amounts were incredible. The Tribunal has dealt with this contention. It points out that the existence of the arrangements between the assessed and Nand Lal had not been doubted at any stage. It has expressed the view that there was nothing incredible about this claim. The facts before the Tribunal clearly indicated that the assessed had been raising finances through Nand Lal and that it had been able to secure substantial loans through him between 1954 and 1960. Only some time in 1960, Nand Lal, on account of his misfortunes, abused the trust and confidence placed by the assessed in him and utilised the assessed's hundis for his own purposes. As rightly pointed out by Shri Harish, once the assessed came to know of it, it tried to recover as much as it could from Nand Lal. Steps by way of legal proceedings against Nand Lal or an advertisement in the newspaper would not have been of any use. If the assessed had advertised the breach of trust in the newspaper or denied responsibility for the hundis, it may have precipitated insolvency proceedings against Nand Lal and there was a danger of the assessed losing even the benefit of the sum of Rs. 1,85,000 which Nand Lal was prepared to give it by assigning the debt due from G.L. Hotels Pvt. Ltd., which was his only asset. There was, thereforee, nothing extraordinary about the way the assessed chose to deal with the matter or about its omission to initiate any prosecution or other legal proceedings against Nand Lal, the departmental counsel suggested that Nand Lal was really in an affluent position. This contention is untenable. We have already referred to the findings of the Income-tax Officer accepting the position that Nand Lal was not financially solvent and that no useful purpose would be served by proceeding against him. Learned counsel for the Department suggested that there were other assets of Nand Lal and his wife, which had not been proceeded against. This is also incorrect. The assessment order makes it clear that Nand Lal had deposited a sum of Rs. 1,85,000 in order to obtain shares of G.L. Hotelspvt. Ltd., to the extent of 1/3rd. The amount remained as a deposit and no shares in the company had been issued to Nand Lal. Though the Income-tax Officer has referred to the land and building of G.L. Hotels Pvt. Ltd., having been purchased jointly in the name of Nand Lal's wife also, Shri Harish stressed that no land or building had at all been purchased for the hotel and only an agreement of purchase had been executed. The relevant sentence in the assessment order is somewhat ambiguous but it is quite clear that if, as suggested by Shri Wadhera, Nand Lal's wife had substantial interest in the land and building of G.L. Hotels Pvt. Ltd., the Income-tax Officer would have disallowed the assessed's claim on the very simple ground that the loss had not been established and that it was open to the assessed to proceed against those properties for recovering the amounts due to it. In the circumstances, the suggestion of Mr. Harish that there was actually no other property in the name of Nand Lal appears to be correct. Anyway these are all matters of fact which we have no jurisdiction to go into as there is no question referred to us challenging the findings of the Tribunal on all these matters. We have dealt with this aspect only because the learned counsel for the Department devoted a considerable portion of his arguments in trying to substantiate the contention that the claim of the assessed should have been rejected our of hand as totally incredible.
18. We shall now come to the two aspects of the question which have been referred to us by the Tribunal. The first is whether the claim of the assessed can be allowed as a business loss under section 28(i) of the Income-tax Act and the second is whether the loss can be treated as having been incurred in the accounting year 1964. So far as the first aspect is concerned, it is suggested by Mr. Wadhera that the loss was on capital account. He tried to approximate the present case to the case of CIT V. S. R. Subrananya Pillai : 18ITR85(Mad) , Madan Gopal Bagla v. CIT : 30ITR174(SC) , CIT V Birla Bros. P. Ltd : 77ITR751(SC) and Abdullabhai Abdulkadar : 41ITR545(SC) . These were all cases where the very assessed had tried to claim an expenditure or loss in respect of transactions pertaining to another businessman which he was obliged discharge or meet either under statute or because he was a joint signatory to the documents under which the borrowals were made or the transactions entered into. We do not, however, think that there decisions are in point in considering the issue before us in the present case. On the facts which have been found by the Tribunal it is clear that the monies were borrowed by Nand Lal on behalf of the assessed and on the strength of hundi papers signed by it. The loss which has occurred to the assessed is a loss which falls on it is its character as a trader and because of the breach of trust of an agent in whom it had placed implicit faith. The Supreme Court, in the case of India Cements Ltd v. CIT : 60ITR52(SC) , has pointed out that not only short-term but even long-term loans which may have to be borrowed by an assessed for the purpose of carrying on its business cannot be treated as creating any asset or enduring benefit to the assessed but should be treated a transaction incidental to the carrying on of the business. In the above case, the question for consideration was whether the expenditure incurred by the assessed towards stamp fees, registration charges, etc., by way of expenses in connection with raising of a long of Rs. 40 lakhs from the Industrial Finance Corporation of India could be treated as a capital expenditure. It was held that since the loan obtained could not be treated as an asset or an advantage of enduring nature, the expenditure which was incurred for securing the use of the money was allowable as being of revenue nature whatever may be the purpose for which the loan was obtained. It is clear from the observations of the Supreme Court that the borrowing of money for the purpose of a business is a transaction incidental to the business and cannot be treated as being on capital account. The position would, of course, be different where the monies are borrowed not for the purpose of the assessed's business but in order to help somebody or to finance the business of some other person as happened in the cases referred to by the learned departmental counsel. We are, thereforee, of the opinion that the various decisions on which reliance has been placed by Shri Wadhera are not in point and that in the present case the loss incurred by the assessed as a result of the breach of trust committed by the broker was business loss which arose directly from the business and which was incidental to the carrying on of its business. The breach of trust committed by the broker was business loss which arose directly from the business and which was incidental to the carrying on of its business. The Tribunal has found this as a fact and it has given good reasons for coming to this conclusion.
19. We may also refer in this context to the decision of the Supreme court in the leading case of Badridas Daga v. CIT  34 ITR 10. The Supreme Court pointed out that loss resulting from embezzlment by an employee in a business is admissible as a deduction under section. 10(1) of the 1922 Act when it arises out of the carrying on of the business and is incidental to it. It was pointed out that a business, especially such as is calculated to yield taxable profits, has to be carried on through agents, cashiers, clerks and peons. Salary and remuneration paid to them are admissible under section 10(2)(xv) as expenses incurred for the purpose of the business. If employment of agents is incidental to the carrying on of business, it must logically follow that losses which are incidental to the carrying on of business in that manner are allowable. For, human nature being what it is, it is impossible to rule out the possibility of an employee misappropriating the funds of his employer or otherwise causing loss to him by his conduct and the loss arising such misappropriation must be held to arise out of the carrying on of the business and to be incidental to it. It has also been specifically made clear by the Supreme Court that employee occupies a subordinate position in the establishment, or is an agent with large powers of management. The findings of fact arrived at by the Tribunal can be summed up thus : The assessed, for the purpose of its business, needed to raise loans from time to time. That these were all short-term loans intended for the carrying on of the business is clear from the details given in the annesures. That has been found as a fact that the arrangement was entered into for business purposes and worked satisfactorily for a period of about five years. The loss arose subsequently on account of the misappropriation of the agent and the breach of faith committed by him. The assessed was able to recoup a part of the amount of such loss from him but could only get a promissory note in respect of the balance. Finding no possibilities of recovering the amount of this promote, the balance remaining outstanding was claimed as a loss in the year when the promote got time-barred. On these findings, clearly, the conclusion of the Tribunal that the assessed is entitled to claim the loss as a business loss in the calendar year 1964 is fully borne out by the above decision of the Supreme Court.
20. The next question that falls for consideration is regard in the year in which the loss should be claimed. The contentions of the departmental counsel in this regard proceed on a misconception. The loss was incurred by the assessed not at the point of time when it was constrained to honour the hundis executed by it and negotiated on its behalf by Nand Lal but when it found that Nand Lal who had committed breach of trust in respect thereof was unable to reimburse the assessed in respect of the amounts paid out by it on these hundis. thereforee, the loses occurred, not when these amounts were paid from time to time, but only when it became certain to the assessed that no amounts could be recovered from Nand Lal in this regard. The decision of the Supreme Court in the case of Associated Banking Corporation of India Ltd. v. CIT : 56ITR1(SC) , makes it clear that, in the case of an embezzement, the loss does not occur merely because certain funds are embezzled nor at the point of time always the possibility that the servant or agent may be persuaded or compelled by process of law or otherwise to restore wholly or partially his ill-gotten gains. It is, thereforee, only when the assessed fails in its attempts to have the embezzlement of misappropriation reimbursed by the agent or employee that the loss can be said to result. In the present case, when the assessed discovered that Nand Lal had encased a large number of hundis executed by it, it had to decide what was to be done with him. The matter came to light on 2-9-1960. This is clear from the date of the letter and the findings in the assessment order. The date July 31, 1960 referred to by the Tribunal is without basis. On being confronted by the assessed, Nand Lal assigned to the assessed a sum of Rs. 1,85,000 which was due to him and also gave a promissory note in respect of the balance. Though it is true that on 2-9-1960 Nand Lal had come out with the disclosure of his conduct, there is nothing to indicate that on that very date the assessed had also certain knowledge that Nand Lal on that very date the assessed had also certain knowledge that Nand Lal would not be in position to pay these amounts. There is no suggestion that the even the promissory note dated 28-9-1960 was only taken as a pretence or make believe and there is no ostensible reason shown why, if the assessed had really known that Nand Lal had no resources, it would not have claimed that balance as a loss in that very year. On the other hand, the fact that the assessed got Rs. 1.85 lakhs from Nand Lal and a promissory note for any further amounts he may have to pay and started an account to reckon against the credit entry of Rs. 1.85 lakhs the subsequent payments as and when made indicate that the assessed was then not quite certain of what the final resultant position would be. Mr. Wadhera also threw suspicions on the second promote and asked what the purpose was of obtaining another promissory note on the same terms as the earlier one on July 21, 1961, and suggested that the only idea was to prolong the period of limitation. This argument also proceeds on a number of basic assumptions which are not correct. In the first place, there is a substantial difference between the two promissory notes. The promissory note dated September 28, 1960, was issued by Nand Lal as a partner of Nand Lal Chhuganmal & Co. but by the second promissory note he also undertook to be personally liable to repay to the assessed a sum of Rs. 1,75,000. The first promissory note had been executed on behalf of the firm but there was nothing inappropriate or suspicious in the assessed getting another promissory note from Nand Lal binding himself in his individual capacity to safeguard itself against the possibility of somebody raising a plea that the transactions had not been validly put through on behalf of the firm. Secondly, in 1963 when the first promote was about to more profitable for it to claim a deduction for the amount of loss in relation to the year 1964 rather than in the relevant year 1963 and would not have forgone the chances of a successful claim in 1960 or 1963 and postponed its claim to the uncertain future off 1964 by getting a promissory note in July, 1961. Thirdly, if the suggestion made is that the promissory note dated July 27, 1961, was connected and got up some time later in that could not also be correct. Learned counsel for the assessed pointed out that in the assessment year 1964-65 the assessed had a substantial income of about Rs. 2.23 lakhs. Though in 1965-66 the income was some what higher, it made no difference in which of the two years the claim was made and allowed as the tax rates at the level of income were the same in both the years. The assessed, thereforee, had every reason to put forward its claim for deduction and was sure to have done so when by December, 1963, the promote had got time barred and no recoveries had been made had it not really transpired that the assessed had obtained the further promote of 1961 and believed that the claim could not be made until this promote also became unenforceable. It is rightly pointed out on behalf of the assessed that there was no conceivable reason at all why the assessed should put forward a false case that it had obtained the second promissory note in 1961 when, even on the basis of the promote of 1960, it could have got practically the same relief in an earlier assessment year. It is with no basis in fact but merely on the basis of general guess-work that the learned counsel for the Department is pleading that the claim made by the assessed on the basis of the second promissory note is an afterthought. Lastly, the Department has placed on record no material to rebut the normal promissory note is an afterthought. Lastly, the Department has placed on record no material to rebut the normal presumption arising out of the entries in the assessed's books of account 27 ITR 700 (Bom), and to establish that the loss does not pertain to the year in which it is written of. Indeed, the Department's stand inn regard to the year of allowbility of the loss is not quite clear or consistent. Before the Tribunal the suggestion on behalf of the Department appears to have been that the loss was claimed prematurely but the Tribunal rejected this contention. Before the Tribunal the suggestion on behalf of the Department appears to have been that the loss was claimed prematurely but the Tribunal rejected this contention. Before us, while reiterating the plea that the assessed had not exhausted its remedies against Nand Lal, Sri Wadhera also raise the plea that the amount should have been claimed, if at all as a loss in 1960 and that the claim should not have been postponed till 1964. For the reasons which we have already discussed, we are of the opinion that the assessed's conduct was quite natural in the circumstances. Having obtained the promissory notes from Nand Lal in 1960 and 1961 and having been unable to effect any recoveries-on this part of the case there was no dispute-it put up the claim in the year 1964 on the expiry of the period of limitation. The loss thus was rightly claimed and, in our opinion, rightly allowed in the assessment year 1965-66.
21. Shri Wadhera placed some emphasis on the fact that the amount had been claimed by a write off in an account started by the assessed called Nand Lal's advance account. He submitted that this meant that the assessed considered it as a case of advances made to Nand Lal. The further argument was that this debt, even if irrecoverable, was not allowable under section 36(2) of the Act as per the concurrent finding of all the authorities which has become final and that, thereforee, the Tribunal erred in accepting the assessed's claim. The contention also proceeds on a misconception. The amounts misappropriated by Nand Lal did not constitute a debut due from him the assessed, as explained in Badridas Daga's cases. However, in the circumstances, for purposes of accounting, the assessed had no option except to open an account in the name of Nand Lal, crediting him with the amount which he had agreed to pay to the assessed on account of his conduct and, ultimately, find out the resultant position and thus fix the amount of his loss. It was pointed out by the Supreme Court in Badridas Daga v. CIT : 34ITR10(SC) , that it is immaterial that the assessed may show the amounts embezzled (which constitute a business loss) as debits in the account of the employee and the amounts realised towards them, if any, as credits and write off the unrecovered deficit ultimately. It was observed that these are merely journal entries which do not import is entitled to claim a business loss as deductible under s. 28 itself. Though, in the present case, the assessed, at the stage of assessment before the ITO made its claim under s. 36 of the Act, subsequently at both the appellate stages the amount was claimed as business loss and it was also considered on that footing. It is, thereforee, not possible to accept the contention that this should be treated as a write off of a bad debt in the account of Nand Lal. Even assuming that the assessed did not properly set out the provision on the basis of which the deduction was claimed, it is now well established that the question whether the assessed is entitled to a particular deduction or not will have to be decided on the basis of the provisions of law that apply to the case and not merely that mentioned by the assessed (vide v. C. Parakh & Co. (India) Ltd. : 29ITR661(SC) at page 665), The mere fact, thereforee, that the assessed might have thought that this should be entered in the books in the form of a debt from Nand Lal will not affect or take away the real character of transaction of deprive the assessed of the benefit of the deduction.
22. For the reasons discussed above, we are of the opinion that the loss in question was incidental to the business and that it was properly claimed and allowed in the assessment year 1965-66. The question referred to us is, thereforee, answered in the affirmative and in favor of the assessed. As the assessed has succeeded, the Commissioner will pay the cost of this reference. Counsel's fees Rs. 350.