Satyanarayana Rao, J.
1. The Income-tax Appellate Tribunal referred the following two questions to this Court for its opinion:
1. Whether in the circumstances of the case thesum of Rs. 21,372/- could in law be treated as aloss in the account period of the assessment year1942-13 and if not;
2. Whether this sum could be deducted as an expenditure under Section 10 (2) (xii), or as abad debt under Section 10 (2) (xi), of the Income-taxAct.
The assessees, who are the applicants, are a registered firm and carry on business as yarn merchants. They were assessed to income-tax for the assessment year 1942-43 (the accounting year ending with 12th April 1942) in which they claimed that they were entitled to deduct out of the income a sum of Rs. 21,372. The baste of the claim for deduction is that the amount represented the loss sustained by them as the result of embezzlement by one Rajarathnam Aiyangar, a former clerk of their firm. In such capacity the clerk was entrusted with manifold duties. He wrote account books, acted as salesman, received and disbursed cash in the absence of the managing partner and collected bills.
2. The amounts received and spent by him in the course of the day used to be noted on slips of paper by him and he would hand over the slips with the cash balance in his hands to the managing partner at the close of the day. He maintained also cash chitta of transactions conducted by him including collections and expenses. In May 1941 it was discovered that he had embezzled a total sum of Rs. 36,398-3-6 during the period between 17th October 1939 and 24th October 1940. The 'modus operandi' adopted by him to embezzle the money was: while he entered the transactions faithfully in the books maintained by him. In totalling the receipts and payments of each day, he short-totalled the receipts and over-totalled the payments and prepared a statement of daily cash balance on the basis of such wrong totals and the cash actually handed over at the end of the day to the managing partner was only the cash as per the cash balance statement prepared by him on that basis. He pocketed therefore 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.
3. The particulars of the amounts so misappropriated during the period are set out in the order of assessment of the Income-tax Officer. Misappropriation, by short-totalling receipts, misappropriation by over-totalling payments, misappropriation by carrying forward wrong totals and various other heads amount to Rs. 36,298-3-6. The suspicion of the managing partner was aroused in October 1940 and Rajanathnam Aiyangar absented himself from his work and ceased to be an employee of the firm in November 1940, 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. As a result of the intervention of certain mediators, the matter was compromised between the assessees and Rajarathnam Aiyangar in August 1941 and he paid in full settlement of the claim of the applicants a sum of Rs. 16,250. The amount now claimed as a deduction from the income is the difference between the total amount embezzled and the amount paid by Rajarathnam Aiyangar under the compromise.
4. The Income-tax Officer refused to recognise the deduction of the amount as a loss on the ground that the assessees failed to establish the embezzlement. On appeal the Appellate Assistant Commissioner practically agreed with that finding of the Income-tax Officer. The Appellate Tribunal, however, differed from this finding and found as a fact that the embezzlement of Rs. 36,398-3-6 was true. But the Tribunal refused the claim to deduct the amount on the ground that the loss did not fall during the accounting year as, according to It the loss had occurred in the year 1939-40, i.e., previous to the accounting year. The assessees rested their claim also on the ground that it was a permissible deduction as a head of an expenditure or bad debt; but this contention was not accepted by the Appellate Tribunal.
5. The two questions referred to us cover the same ground, viz., whether the amounts could be treated as a trade loss in the accounting period of the assessment year or at any rate, whether it can be treated as an expenditure under Section 10 (3) (xii) or as bad debt under Section 10 (2) (xi).
6. The last two contentions may be disposed of first. The reference to Section 10 (2) (xii) in the question as framed is to the present Clause (xv) of Section 10 (2) which was introduced after certain alterations in 1946 by the Indian Income-tax (Amendment) Act, 1946. That clause requires to claim an amount as a permissible deduction under the head of expenditure, that it should be made out as expended solely and exclusively for the purpose of such business, profession or vocation. It is impossible to treat an amount misappropriated by a clerk as an expenditure for the purposes of a business. No serious attempt was made on behalf of the assessees to argue the contrary. Under Clause (xi) of Section 10 (2), in order to constitute a bad debt, it must be a loan advanced in the ordinary course of business. The amount in dispute cannot be treated as a loan made by the assessees to Rajaratnam Aiyangar and therefore it was not a debt.
7. No doubt, when the misappropriation was discovered in May 1941, this amount was entered, in the accounts as a debit against Rajaratnam Aiyangar at the end of the previous accounting, year and it was eventually argued before the Appellate Tribunal that as it was debited in the previous accounting year, it was converted into a debt due from the clerk to the assessees and as it became a bad debt to the extent of Rs. 21,372 in the accounting year now under consideration, it should be allowed as a deduction. To claim a debt as a bad debt it must be shown that when it was a good debt, it went to swell the assets of the business in calculating the profits and it must be further shown that it was in fact a loan made in the course of the business. If these essentials are not established, it cannot be treated as a debt and cannot be claimed as a deduction if it becomes bad in fact, realising the defect, learned Advocate for the assessees did not press this contention.
8. The only contention that requires serious and careful consideration is that it should be treated as a trade loss incurred during the accounting year and should be excluded from the profits of the year. Mr. Ramarao Saheb, learned Advocate for the Commissioner of Income-tax, took up the position that it was not in the first place a trade loss and that in any event, even if it was a loss, it was a loss sustained in the previous accounting year when the amount was actually intercepted by the clerk without allowing it to go into the till of the business.. Section 10 (1) enacts that the assessee is liable to pay tax in respect of the profits or gains of any business carried on by him. Nowhere in the Act is the method of computation of the profits and gains of the business laid down and all that Section 10 (2), enacts is that the profits or gains should be computed after making the allowances enumerated in that Sub-section. The liability to pay Income-tax under the Act in respect of a business is only on the profits and gains of the business and the meaning of the words 'profits and gains' and the mode of their computation has been the subject-matter of decisions in England and India too numerous to be cited. It is well settled that profits and gains should be ascertained by ordinary, commercial principles of trading. Profits represent the surplus of trade assets over and above the disbursements and liabilities of the trade and this is the meaning which an ordinary commercial man would give to the words 'profits and gains.'
9. The Legislature, after specifying the permissible deductions in Section 10 (2), has left the determination of the profits to be made in accordance with the principles well understood by business people. That is the reason why the trade loss to be set oft against the profits of the year is not specifically mentioned as an allowance. It must be remembered in this connection that every tax year is a self-contained period and the profits earned and the loss incurred during the particular year alone must be considered in order to arrive at the taxable profits. The previous year's and the subseqeunt year's profits or loss is wholly irrelevant for the purpose of computing the assessable income of a particular year. The allowances permitted under Section 10 (2) must generally be those incurred in the year in respect of which the income profits and gains are taken as the basis for assessment.
10. It is not possible to give a precise definition of trade loss which can be set off against the profits of a tax year. In order, however, to constitute a trade loss, it must be either loss of the stock in trade or a loss incurred in the course of the business and as incidental to it. It is not every loss that has some reference to trade that can be considered as a permissible exclusion from the profits.
11. If the business is of sufficient volume, it necessitates the employment of servants to look after its various parts. A trade cannot carry on his business without reposing confidence and trust in his servants and it is always a difficult Question to decide whether embezzlement by people in whom such confidence is reposed can be treated as a Wade loss. Except in the case of money lending business, it cannot be said that the defalcation entails a loss of the stock in trade. Whether it is a loss in the course of business and is incidental to it has of course to be determined on the facts and circumstances of each case as no general rule covering all cases can be laid down. The practice in England is stated by W.E. Spelling in the Dictionary of Income-tax and super-tax Practice, 5th Edn. 1923, page 231:
'Embezzlement': If a loss by embezzlement can be said to be necessarily incurred in carrying on the trade it is allowable as a deduction from profits. In an ordinary case it springs directly from the necessity of deputing certain duties to an employee, and should therefore be allowed.' This practice is referred to also by Murray and Roger N. Carter in Guide to Income-tax Practice and Excess Profits Duty, 8th Edn. page 244: 'Loss by embezzlement': A loss by reason of embezzlement by an employee used to be looked upon as a loss by stratagem, and not one connected with, or arising out of, trade, and it used to be said that the amount could not be deducted. Such a loss, however, is now for income-tax purposes deemed an expense of the year in which it is written off in the books.'
12. in the Income-tax Law and Practice at page 73 Newport observes as follows:
'Losses by Embezzlement': These will usually be incurred in the ordinary course of business,and will be allowed as incidental to the earningof the profits therefrom.'
It seems to be a well established practice in England that loss of embezzlement is a permissible deduction. Of course, as pointed out by Spelling, the loss is allowed as a deduction only If the embezzlement can be said to be necessarily incurred in carrying on the trade and springs directly from the necessity of deputing duties to the various employees. The question whether the amount so appropriated was a trading loss and a permissible deduction from the profits for income-tax purposes was considered by Rowlatt. J.. in 'Curtis v. Oldfield Ltd.', (1925) 9 Tax Cas 319, where a managing director of a company who was in sole charge of the business of the company diverted the funds of the company for his personal use.
13. The judgment of the learned Judge in my opinion deals with the question when a defalcation or embezzlement could be treated as a trade 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. He observes at page 330:
'I quite think, with Mr. Latter, that if you have a business (which for the purposes of today at any rate I will assume) in the course of which you will have to employ subordinates, and owing to the negligence or 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. 1 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 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 with receipts of the company 'de hors' 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.' (14) What is it then, that makes the misappropriation or the interception of the funds of the company unauthorisedly by a subordinate a trade loss incurred in the course of the business? 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 loss arising 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 trade 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 funds to reach the till, it follows that the loss incurred by such embezzlement is a loss in the course of the 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 by theft or by embezzlement, such loss is altogether outside the trade and the course of the business.'
15. in the present case, the money was intercepted & diverted by Rajarathnam Aiyangar before it reached the hands of the managing partner. He was entrusted with the duty of collecting funds and making disbursements and of maintaining the cash chitta with an obligation to account for the funds reaching his hands truly and faithfully to the managing partner at the end of the day and to hand over the balance. In violation of his duties and in breach of the confidence reposed in him, while he took care to see from the point of view of the customers that the entries are correctly made in the accounts, made wrong totals so as to cheat his master by representing that the balance in his hands was much less than what is really was. The managing partner was induced into the belief that the totals in the account reflected the true financial position at the end of the day and took the balance handed over by Rajaratnam Aiyanagar, trusting in his integrity. It was only when suspicion was aroused and an inquiry was made that it was discovered that he had embezzled this large amount.
16. The till in this case is with the managing partner, and it cannot be said that the temporary custody of the money with Rajarathnam Aiyangar constituted a till and the diversion of the funds by him was de hors the trade on the analogy of the facts in 'Curtis v. Oldfield Ltd.', (1925) 9 Tax Cas 319. 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 embezzement was made. The decision of the learned Judge, if I may say so with respect, states in a short compass the law on the subject and defines with precision the limits when an amount embezzled becomes a trade loss and when it should be treated as outside the trade altogether. In view of this decision. I have no doubt that in the present case, the embezzlement was in the course of trade and that it is incidental to the business and it can therefore be legitimately treated as ft trade loss deductible from the profits.
17. Of the decisions in India, 'Jagarnath v. Commissioner of Income-tax', 4 Pat 385, follows the English practice and holds that an amount embezzled by a gumastha of the assessee was a loss incidental to the conduct of the business and was a permissible allowance.
18. If money is lost by theft it was held in this Court (by a majority of Judges, Ananthakrishna Aiyar J. however taking a different view) that it is not a permissible allowance, particularly when the theft was committed by persons who were not at the time of the offence in the employment of the assessee as his clerks or servants in the business -- See 'Ramaswami v. Commissioner of Income-tax', 53 Mad 904. It is a case of money lending business and Curgenven J. held that in such a case, to establish loss, it must satisfy two conditions. It must be a loss of the part of the stock in trade of the business and it must be a loss of such a kind as is incidental to the business. The learned Judge had no difficulty in holding that there was a loss of stock in trade as it was money lending business taut as regards the second requirement, he held that the money was not lost in the course of the business and as incidental to it. The learned Judge expressly confines his observations in the judgment to a case of theft by some external operator with or without the complicity of the domestic servants. On the facts of the case, the majority view is undoubtedly correct, in view of the practice in England which was accepted by Rowlatt J. that in cases where the business was not money lending business, the condition that there should be a loss of the part of the stock in trade of the business is not neeessary. Even if the loss in the case of business other than money lending business is only of money lost in the course of and as incidental to the business, in circumstances which are within the line of demarcation drawn by Rowlatt J. in 'Curtis v. Oldfield Ltd.', (1925) 9 Tax Cas 319, it may be treated as a trade loss.
19. in 'Bansidhar Onkarmal v. Commissioner of Income-tax, Bihar and Orissa : 17ITR247(Orissa) , the Orissa High Court dealt with a case of loss by theft of money of the business of selling yarn, speculation in cotton and money lending. The theft was by the accountant of the firm but was and the office hours. It was field that it was not a trade loss, Narasmnam J. who delivered the leading judgment recognised however an exception when, he observed at page 264 that the
'position might have been quite different if the theft had occurred during office hours prior to the crediting of the sum to the account of the employer.'
The implication of this, as I understand it, is that even 11 it is a case of theft, if it was committed by a servant or an employee during office hours, it would bring it within the course of the business and as incidental 10 it and therefore would have been a permission allowance. The majority view in 'Ramaswami v. Commissioner of Income-tax, Madras', 53 Mad 904, was followed.
20. Tile correctness of the decision in 'Jagarath v. Commissioner of Income-tax', 4 Pat 385 was doubted in 'Mulchand Hiralal v. Commissioner of Income-tax, B & O', AIR 1938 Pat 159; but as pointed out by Narasimham J. in 'Bansidhar Onkarmal v. Commissioner of Income-tax, B & O : 17ITR247(Orissa) the Observations in the later Patna decision were 'obiter' and the later case was one of loss of money by theft. While criticising the judgment in 'Jagarnath v. Commissioner of Income-tax', 4 Pat 385, Courtney-Terrel C. J. in 'Mulchand Hiralal v. Commissioner of Income-tax', AIR 1938 Pat 159 distinguished that case on the ground that it was a case of loss by embezzlement while the case before him was loss by theft. For the foregoing reasons, I have no hesitation in holding that the loss in question is a trade loss which is a permissible allowance in the computation of profits.
21. But the question is when did the loss occur? Did it occur at the moment when the monies were misappropriated and taken away by the clerk, i.e., during me previous accounting year or did it arise only when after discovery of the loss in May 1941, the assessee took steps to recover the amount from the clerk and obtained a large amount in settlement of the claim and the balance was then found to be irrecoverable? Mr. Ramarao saheb maintains that the former is the correct date of the accrual of the loss while Mr. Subbaraya Aiyar for the assessee maintains the latter. When the embezzlement was discovered, the assessees did not treat the amount as a loss but entered it in the account as a debit to the clerk. In that year of assessment, they did not claim the amount as a loss. But the income was computed and the assessment was made on the basis that that amount was a valuable asset. Notwithstanding this fact, the contention on behalf of the Income-tax Commissioner by Mr. Ramarao Saheb his learned advocate is that every item which goes out of the business by way of misappropriation by the clerk is an immediate loss without the necessity to wait and to take steps to recover the amount, if possible, from the clerk. Accepting the ordinary and popular connotation of the word 'loss' it is rather difficult to say that the amount was lost the moment it was taken or misappropriated by the clerk. It is one thing to say that the amount was unauthorisedly appropriated by the clerk and it is a totally different thing to describe the amount so taken as a loss of the business.
22. Loss implies that it is an amount which is gone for ever and it is impossible to recover it. The analogy of bad debts may be taken'. It cannot be said that a debt becomes bad immediately it was advanced or immediately it was suspected that the debtor was not financially sound. The creditor has to establish that he had taken all available steps to realise the debt and that it was impossible to recover It, The decision of this Court in 'Alagananda Mudaliar v. Commissioner of Income-tax, Madras', 1940 48 ITR 69 relating to the insolvency of C. K. and Sons is an instance where it was held that the creditor is entitled to wait till the decision of the Privy Council which became necessary for settling the dispute with regard to certain matters before a debt is considered as bad. debt and written off as such. It is not to be assumed by this that I am treating this loss as a debt and I have already given reasons for holding that it is not a debt. Before Clause (xi) of Section 10(2) was introduced in the Income-tax Act making express provisions for bad debts, bad debts were excluded from the profits only as losses in trade as established by the decision of the Judicial Committee in 'Commissioner of Income-tax, C. P. & Berar v. S.M. Chitnavis', 59 I. A. 290 (PC). 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.
23. As in the case of a bad debt it cannot be said that until it is found that the clerk was unable to pay and it was impossible to recover the balance from him that the loss had been incurred by the business in this case. The mere entry in the accounts is of no consequence as what matters is the cash and not the entries in the accounts. The fact is that the amount became a loss only after the compromise and the moment the dispute was settled between the parties and Rs. 16250 was accepted in full settlement of the claim of the assessees against the clerk. Mr. Ramarao Saheb, learned advocate for the commissioner wishes to describe the situation as a loss and reimbursement or replacement of the loss for his contention is that the assessee should have claimed it as a loss in the previous accounting year and when the sum of Rs. 16250 was recovered from the clerk it could have been assessed as a trade receipt as in the case of money which the auditors paid to make up the loss by misappropriation incurred by Lord Penryhm in the case of 'Gray v. Lord Penryhm', (1937) 21 Tax Cas 252. The liability for the misappropriation by the clerk is a liability based on tort only. Such liability 'does not create a certainty of loss', as, to quote the language in 'Burnett v. Huff, 288 U S Rep 156: 77 Law Ed 670 ,
'the defalcation may be made good by the one who caused it or the liability of the tax payer may be enforced only to a limited extent or not at all. The requirement that losses be deducted in the year which they are sustained calls for a practical test. The loss must be actual and present.'
24. The facts in that case no doubt bear no analogy to the present case but the statement that the loss must be actual and present and must be certain cannot be taken exception to. In my opinion, it is only when the loss becomes actual and certain that there can be an accrual of a loss and till then, it was merely a civil liability, of the clerk to pay back that amount based on tort. Until it is found that the liability though enforceable, it could not be materialised, it cannot be said that loss had occurred. I wish to make it clear that I do not by any means suggest that there was an unascertained loss at its inception which became certain and definite when the litigation was settled. But the point I wish to lay stress on is that until the settlement of the case by way or compromise, there was no loss at all. It was only then that the loss came into existence and accrued. It was then with definiteness and certainty the amount was known. I do not wish to refer to the other decisions which have been cited at the bar as in my opinion they are not of assistance in the solution of the questions which have been raised in the cease. I am therefore of opinion differing from the Appellate Tribunal that there was a trade loss and that the loss had accrued only during the relevant accounting period. It follows that the first question referred to us must be answered in the negative and in favour of the assessees and the second question in the negative and against the assessees. AS the assessees have succeeded in the main question, they are entitled to their costs which we fix at Rs. 250.
25. RAGHAVA RAO J.: The only way, worth serious consideration, in which Mr. Subbaraya Aiyar represented his case was that the charging part of Section 10 of the Indian Income-tax Act which is Sub-section (1) operates only on profits and gains, in assessing which, as observed by Lord Russel of Killowen to the Privy Council in the case Sir S.M. Chitnavis 59 I. A. 290 (PC) 'account must be taken of all losses incurred as otherwise you would not arrive at the true profits and gains'. That case related to a claim of deduction by the assessee of bad debts for which there was no provision in the statute as it stood at the time and would, in the submission of learned counsel, govern the present case with reference to the assessee's claim of deduction of the loss in question here as a trade loss even on the footing of the inapplicability of Section 10(2)(xi) and (xv) of the Act. Whatever the difficulty in the way of such interpretation of Section 10, Sub-section (1), in the absence at the opening of Sub-section (2) of words like 'without prejudice to the generality of the provision of the foregoing sub-section' which might, if the matter were 'res integra', suggest that the allowances specified in the section cannot be added to, authority of the highest tribunal leaves us in the position that though there are several provisions in the Act relating to allowances and deductions, profits have still to be computed to some extent on general principles followed in commercial practice, subject to such modifications as are laid down in the cases decided in the realm of income-tax law.
26. It seemed to me even in the initial stages of the argument on the bare statement of relevant facts by counsel that the position that the loss in question here was not a trade loss was so thoroughly unarguable that it would not be taken up by Mr. Ramarao Saheb. The position however was not only taken up but persisted in by him with his usual force by emphasis on the consideration that there had been no abstraction of funds here by means of wrong entries in the account books in the course of the business before the funds actually reached the till. Learned counsel urged that the till remained intact according to the account books which correctly reflected the receipts and disbursements notwithstanding the defalcation and that what loss the company sustained was incidental to the misconduct of the employee 'de hors' the trade. The argument is. In my opinion, clearly fallacious and, far from deriving any warrant from 'Curtis v. Oldfield Ltd.', (1925) 9 Tax Cas 319 relied on by learned counsel, rests on a total misapprehension of the decision as I shall presently show.
27. The argument lays too much of emphasis on the appearances of correctness and too little of emphasis on the realities of incorrectness about the truth and fact of the financial condition of the company so far as it stands prejudiced by the misconduct of the employee. It overestimates the form and underestimates the substance of the defalcation. It identifies the resultant balance which the account books reveal with the till itself by ft fiction which imports that if the former are correct the latter must be treated as sound and that all monies which have got into the make up of the former must be deemed to have necessarily got into the contents of the latter. It overlooks too that the process of short totalling of receipts and over-totalling of items of expenditure by the employee as shown by slips of paper written on by him so as, to mislead the manager and help himself to defalcation was resorted to by him in the ordinary course of his duties in connection with the company's business although in violation of such duties. It proceeds, in other words, on the assumption that no trade loss in the sense of a loss connected with and arising out of the trade can, for the purpose of deduction from profits under the Income-tax Act, be postulated so long as the account books maintained by the company suffer from no errors with reference to its receipts and disbursements, although, in fact, loss has been sustained by the company by reason of things done by the subordinates of the company dishonestly or negligently.
28. Rowlatt J. was concerned in 'Curtis's case', (1925) 9 Tax Cas 319 with the question whether certain monies which had been passing through the company's accounts and 'which were not the. company's business but which were Mr. Oldfield's business' -- Oldfield being the Managing Director of the company in charge of the whole thing could be allowed as either a. bad debt or an expense connected with and arising out of the trade. As to the former head of allowance, the learned Judge rejects it holding that
'when, the Rule speaks of bad debt it means a debt which is a debt that would have come into the balance sheet as a trading debt in the trade that is in question and that is bad'. The learned Judge proceeding further observes: 'It does not really mean any bad debt which when it was good debt would not have come in to swell the profits.'
29. Dealing next with the claim of allowance as an expense connected with and arising out of the trade, the learned Judge draws attention to a business in the course of which
'you have to employ subordinates and owing to the negligence or 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'.
In each one of these cases, says the learned Judge, the expense may be one connected with and arising out of the. trade in the most complete sense of the word. The abstraction of receipts while on their way to the till, it will be noticed, is not the only instance of negligent or dishonest conduct of the subordinates which justifies an allowance on the ground of 'an expense connected with and arising out of the trade'.
30. In my opinion, the learned Judge must be taken, so far as his observation last extracted goes, to consider all losses attributable to the negligence or dishonesty of subordinates acting in the course of their employment in the trade as being deductible trade losses. The learned Judge then proceeds thus to distinguish the case before him from the illustrations referred to by him in that observation :
'But here that is not the 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 monies went through the books into his pocket. I do not see that there was any evidence at all that there was a loss in the trade in that respect.'
Pausing there, I am of opinion that the learned Judge's reference to Oldfield's position as Managing Director does not imply that only trade losses for which subordinates and not Managing Directors, are responsible can come in for deductions. It was an accident of fact in that case that Oldfield was Managing Director. It was likewise an accident of fact that monies went through the books into his pocket. This does not involve that the loss cannot be regarded as a trade loss if monies did not go through account books as in that case-but through slips of paper as here, Into the pocket of the defalcator.
31.The essence of the reasoning of the learned Judge is that there was on the evidence in that case no loss in the trade 'In that respect', that is in respect (a) that some of the receipts of the business did not find their way into the till, (b) that some of the bills were not collected at all, and (c) or something of that sort. Having said that, the learned Judge proceeded to observe thus:
'It simply means that the assets of the company, monies which the company 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 put. It seems to me that what has happened is that he has made away with the receipts of the company 'de hors' the trade altogether in virtue of his position as Managing Director in the office and being in the position to do exactly what he likes'.
A loss in the trade may befall a person or company carrying it on, although the account books by themselves may not reveal the loss, and no authority has been cited before us to the effect that if the loss is due to an embezzlement by an employee it cannot come in for deduction, because the mischief has been done in a manner incapable of detection by a mere scrutiny of the books. The process of embezzlement may sometimes be too highly refined or too cleverly veiled to be readily suspected or easily detected. It may, as here, be due to the implicit faith reposed in the integrity of the subordinate by the superior which keeps the latter off the track of vigilance which he ought to treat; but however practised and wherever proved the consequent loss must in ordinary fairness be allowed for.
32. If a debt not collected by a subordinate who was bound to collect it can according to Rowlatt J. be treated as a loss in the trade, although the account books are quite in order, I am unable to see why a loss by embezzlement is not liable to be regarded as such loss merely because the accounts are, as to receipts and disbursements, apparently open to no exception. The learned Judge after instancing the two cases of failure of funds to reach their destination, the till of the company, and non-collection of debts due to the company mentions the third category in terms of 'something of that sort', something 'ejusdem generis', it may be, with the two cases mentioned earlier but in terms sufficiently comprehensive to take in a case of loss due to negligence or dishonesty on the part of the subordinate, however occurring, if only occurring in the course of his employment and as incidental to the business, and not, as was the factual position in 'Curtis's case', (1925) 9 TC 319 'de hors' the trade.
33. The way in which I am reading 'Curtis'scase', (1925) 9 TC 319 is indeed the way in whichthe law is stated by Beasley C.J. though in different language to that of Rowlatt, J., at page 906 ofthe report of the Pull Bench case in 'Ramaswamiv. Commissioner of Income-tax, Madras', 53 Mad904 which was a case of a theft of money used in a money lending business by persons who were notat the time of the offence employed as clerks orservants in the business of the assessee. Says thelearned Chief Justice:
'If anyone is paid a sum due to him as profits and the puts that in his pocket and on his way he is robbed or it, it would be, I think, difficult to contend that such a loss was incidental to his business. Still more so when he has reached his home and put those profits in a strong room or some other place regarded by him to be a place of safety. I can well understand that, in cases where the collection of profits or payment of debts due is entrusted to a gumastah or servant for collection and that person runs away with the money or otherwise improperly deals with it, the assessee should be allowed a deduction because such a loss as that would be incidental to his business. He has to employ servants for the purpose of collecting sums of money due to him and there is the risk that such servant may prove to be dishonest and, instead of paying the profits over to him, convert them to his own use. But I cannot distinguish the present case from the case of any professional man or trader who, having collected his profits, is subsequently robbed of them by a stranger to his business'.
34. Curgenven J. in the same case observes as follows at pages 918 and 919 of the Report:
'That such a loss might be classed as a form of expense arising out of the trade was recognised in 'Curtis v. Oldfield Ltd.', (1925) 9 TC 319, although in the particular circumstances of that case, as I read it, too money lost no longer formed part of the stock-in-trade. The test whether the loss was, in the language of the English rule, 'connected with or arising out of trade' was applied in two other English cases, 'Strong and Co., Ltd. v. Woodifield', (1906) 5 TC 215 and 'Inland Revenue Commissioners v. Warnes and Co.', (1919) 12 TC 227. The former related to damages claimed from an inn keeper in respect of injuries caused to a customer by the falling of a chimney; the latter to a penalty incurred by a trading firm for negligently failing to observe certain conditions imposed during war time on the export of goods to neutral countries. The loss was held, in the language of the English rule, to be a loss 'not connected with or arising out of trade'. These cases do not help us further than' to enow what manner of test should be applied.'
The view of law taken by the majority of the Judges in 'Ramaswami v. Commissioner, Income-tax, Madras', 53 Mad 904 is, in my judgment, perfectly correct, and applying it to the facts of the present case I have no doubt but that the loss under consideration now is an admissible deduction whether regarded as in the nature of unobstruction of monies before they reached the till or regarded as in the nature of 'something of that sort' within the language of Rowlatt J. in 'Curtis's case', (1925) 9 TC 319 as explained by me earlier. I regret I cannot in these circumstances find myself in agreement with Mr. Ramrao Sahib's contention which proceeds, as I think, on much too narrow a view of what is or is not a trade loss liable to deduction from profits, viz., that it must be a loss which, on the face of the accounts, is so.
35. Before parting with 'Curtis's case', (1925) 9 TC 319 it seems to me pertinent to observe that possibly the loss in question in the instant case can be resarded as 'an expense connected with and arising out of the trade' in the language of Rowlatt J. so as to attract Section 10 (2) (xv) of the Indian Statute which is much to the same effect. The language of the learned Judge has not however left me happy, and with all respect I have felt that there is somewhat of a strain, on expression involved in His Lordship's equation of 'loss' with 'expense' which cannot be easily appreciated or assented to. I do not desire therefore to express any floar opinion on this point on which I do not feel quite so clear as that learned Judge, especially because, it is unnecessary for me to do so for the decision of this case.
36. I may remark too that though the principlesunderlying me deduction of business loss and business expenditure are almost the same, there is some difference in their nature. LOSS IS not deducted under any statutory authority out under commercial principles ordinarily adopted in arriving at profits. As Warrington L. J. has observed in 'Commr. v. of Inland Revenue v. Alexander Von Giehn & Co. Ltd.', (1919) 12 TC 232
'Trade Joss is not always, -- one may go further ana say is not in general -- measured by definite expenditure of money. Loss in trade may arise in many ways ~ from the depreciation of goods, from the increase or decrease of prices in the market and from many cases o that kind --which is not generally measured by some definite sum expended by the person carrying on the trade'.
37. Then as to the question in what year the loss must be taken to have occurred in the present case which I must confess has occasioned some doubt in my mind, I have alter careful consideration arrived at a decision in favour of the assessee, firstly because that is more consonant on the whole to rules of practical expediency as well as fundamental justice, secondly because I find nothing in the language of the statute forcing me to a different result and thirdly because I think I must give the benefit of the doubt, wherever it exists, to the assessee. The argument for the Commissioner of Income-tax, is that for the purpose of computing income each year is a self-contained period of time as ruled by the Privy Council in the case of 'Sir S.M. Chitnavis', 59 I. A. 290 that the allowance of any expenditure incurred must therefore be an allowance for expenditure incurred in the year in respect of which arise the income, profits and gains forming the basis of the assessment. So far, there is no quarrel on the part of counsel for the assessee.
38. What next Mr. Ramarao Saheb contends is that the disappearance of cash from the company in the year in which that took place must be shown by the assessee as a deduction for that year, while if later the money came back the assessee would have to show it as a gain. This no doubt is perfectly intelligible process of reasoning in itself. What however Mr. Subbaraya Aiyar urges is that merely because the disappearance occurred in a particular year the assessee would not be bound to treat that as an irrecoverable loss for ever. He would be entitled, counsel urges, to wait for a reasonable time in order to take all steps open to him in law for the recovery of the amount should he be penalised, asks counsel, for taking-ail those steps in order to satisfy himself that the loss which occurred with the original disappearance was a permanent loss and if so to define for himself the exact quantum of the loss which he must face after all his efforts? The consideration by which the matter has to be reasonably judged is pithily put in 'Eurnett v. Huff', 288 U.S. Rep. 156: 77 Law Edn. 670 in the passage quoted by my learned brother in his judgment, in this way, viz., 'that the requirement that losses be deducted in the year in which they are sustained calls for a practical test.'
39. For the reasons given in the foregoing as well as in my learned brother's judgment I agree that the answer to the reference must' go in favour of the assessee on the first question. I also agree in the order as to costs proposed by my learned brother I express no opinion on the second question, as I find it unnecessary to do so. In view of my answer to the first.