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Khaitan and Co. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 115 of 1976
Judge
Reported in[1979]118ITR728(Cal)
ActsIncome Tax Act, 1961 - Section 41(1)
AppellantKhaitan and Co.
RespondentCommissioner of Income-tax
Appellant AdvocateD. Pal, ;R.N. Bajoria, ;S.K. Bagaria and ;A.K. Dey, Advs.
Respondent AdvocateB.K. Bagchi, Adv.
Cases ReferredKshetra Mohan Dass v. Offl. Liq.
Excerpt:
- .....the assessee preferred an appeal and contended before the aac that the maintenance of the said bank account was essential for conducting the business of the assessee and that the said account was maintained for collecting cheques from; clients and making disbursements on the latter's behalf. it was contended further on the basis of a statement filed that large sums ofmoney were from time to time drawn from the said account by bearer cheques for making payments on behalf of the assessee's clients and also for disbursements of the assessee's expenditure. it was contended that money lost from the bank was a loss incidental to the assessee's business.4. the aac found that money was kept in current account in the bank in the course of the assessee's business and that such money stood on.....
Judgment:

Sen, J.

1. The facts found and/or admitted in these proceedings are, inter alia, as follows :

Khaitan & Co., a firm of solicitors, are the assessee. The assessment year involved is 1969-70 and the corresponding previous year is the one ended on the 31st October, 1968. At the material time the assessee had a current account in the National & Grindlays Bank Ltd., Church Lane, Calcutta. From the weekly statement for the period from the 26th December to the 29th December, 1967, sent by the said bank it was noticed by the assessee that a sum of Rs. 30,000 had been wrongly debited. On an enquiry it was found that the amount had been drawn against a cheque made payable self or bearer. On investigation it was found further that an unknown person had forged the signature of Shri P.K. Khaitan, one of the partners of the assessee, and had withdrawn the money from the bank.

2. By its letter dated the 8th January, 1968, the assessee called upon the bank to credit the said sum back to the account and advised the bank to report the matter to the police. This was done and also the services of handwriting experts were requisitioned. It was ultimately found that the signature on the forged cheque was not that of the authorised person whose signature appeared in the specimen card of the bank. It was also established that the cheque was forged by none of the persons working in the cash department of the assessee and none of them were party to the forgery. The assessee thereafter again requested the bank to credit the said sum to its account which the bank refused to do. The bank, however, continued to contend that it had no liability in the matter and that there was no negligence on the part of the bank's employees. Thereupon, the assessee filed a suit in this court against the bank claiming, inter alia, a decree for Rs. 30,000 and other incidental reliefs. This suit is still pending in this court.

3. In the assessment proceeding for the said assessment year the ITO disallowed the deduction of Rs. 30,000 claimed by the assessee as a loss, as the suit filed by the assessee was then pending. Being aggrieved, the assessee preferred an appeal and contended before the AAC that the maintenance of the said bank account was essential for conducting the business of the assessee and that the said account was maintained for collecting cheques from; clients and making disbursements on the latter's behalf. It was contended further on the basis of a statement filed that large sums ofmoney were from time to time drawn from the said account by bearer cheques for making payments on behalf of the assessee's clients and also for disbursements of the assessee's expenditure. It was contended that money lost from the bank was a loss incidental to the assessee's business.

4. The AAC found that money was kept in current account in the bank in the course of the assessee's business and that such money stood on the same footing as money kept in the till of a business. If the bank made a payment by mistake or negligence it would be as much a loss to the assessee as a theft of cash from its business premises. He concluded that the loss claimed was admissible for the purpose of the assessee's business and hence allowable as a deduction. He also found that a suit for the amount lost was pending which was of no relevance and if the assessee succeeded in recovering the amount it would be treated as its income in the relevant subsequent year.

5. The revenue preferred an appeal from the order of the AAC to the Income-tax Appellate Tribunal. It was contended on behalf of the revenue in the appeal that the loss did not arise in the course of the assessee's business and further that such loss, in any event, did not arise in the year under appeal. The loss having arisen entirely de hors the business the order of the ITO was reasonable and should be upheld. It was contended on behalf of the assessee, on the other hand, that the nature of the assessee's business was such that this loss could be attributed to the assessee's business operations and a normal occupational hazard. Even after police investigations the culprit remained unidentified and the chances of restitution from the unknown culprit were practically nil. The suit filed by the assessee against the bank was only for damages.

6. The Tribunal, inter alia, found as follows :

(a) The loss claimed by the assessee was incurred in the course of the assessee's business and should be treated as incidental to such business.

(b) The reality of the loss was not doubted and the bona fides of the assessee's claim was not in dispute.

7. But the Tribunal held that it could not be said that the loss had arisen in the year under appeal. As the assessee had specifically asked for a decree for Rs. 30,000 in its suit against the bank and the result of the suit was unknown it would not be proper to allow the loss in the year under appeal as the said loss was not 'actual and present' to the assessee for the year under appeal. The cash system of accounts maintained by the assessee would have no effect on the position. The Tribunal allowed the appeal of the revenue.

8. On an application of the assessee under Section 256(1) of the I.T. Act, 1961, the Tribunal has drawn up a statement of case and has referred the following question of law arising out of its order for the opinion of this court :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sums of Rs. 30,000 and Rs. 1,280 were not allowable deduction for the assessment year 1969-70 ?'

9. Mr. R.N. Bajoria, learned counsel for the assessee, contended at the hearing that both the AAC and the Tribunal found as a fact that the assessee had incurred a loss and that such loss had been incurred in the course of and for the purposes of the assessee's business and should be treated as incidental thereto. The reality of the loss and the bona fides of the assessee's claim were undisputed. The only ground on which the Tribunal disallowed the said loss was that a suit by the assessee against the bank was pending. Mr. Bajoria contended that inasmuch as the assessee maintained its accounts according to the cash system, the pendency of the suit could in no way affect the actual loss incurred and must be allowed. If and when the assessee succeeded in its suit the amount received from the bank would be treated as income of the assessee in the year in which the said claim would be realised by the assessee. In this context, Mr. Bajoria referred to Sub-section (1) of Section 41 of the I.T. Act, 1961, which provides, inter alia, as follows:

'Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure...incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure.........the amount obtained by him...shall be deemedto be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not.'

10. Mr. Bajoria also cited a decision of the Rangoon High Court in CIT v. Hajee Abdul Gany Ayoob [1941] 9 ITR 339. The facts in that case were that the assesste maintained a banking account for the purpose of its business with a Chettiar firm who carried on the business as bankers. In 1932, the bankers were adjudged insolvent, when the assessee's account with the bankers stood credited at Rs. 34,367. In 1939-40, such credit was Rs. 24,213-12-6 and in that year the assessee claimed the unrealised credit to be a bad debt and allowable deduction. On these facts, the High Court held that the loss suffered by the assessee was one connected with and arising out of its business and was a bad debt allowable as a deduction.

11. Mr. B.K. Bagchi, learned counsel for the 'revenue, submitted on the other hand that by reason of the special relationship existing between the assessee and its bank, it could not be said that the assessee had suffered any loss till the suit filed by the assessee was decided. In this connection, Mr. Bagchi cited In re Travancore Quilon Bank Ltd., AIR 1939 Mad 337(See A.M. Gopalakrishnan v. Offl. Liquidator T.N. and Q. Bank Ltd. [1939] 9 Comp Cas 60 (Mad)):

'When a person deposits money in current account or fixed deposit, the presumption is that the moment, the amount is deposited, it becomes the banker's money. The amount is treated as a loan to the banker who is required to return the same when demanded or at the expiry of the term of the fixed deposit. The relationship is one of debtor and creditor and not trustee and cestui que trust but when moneys are placed in or remitted to a bank to apply them for a specific purpose, in which case the bank must be deemed to hold it in a fiduciary capacity.'

12. Mr. Bagchi also cited a decision of this court in Kshetra Mohan Dass v. Offl. Liq., East Bengal Sugar Mills Ltd., : AIR1943Cal105 for the following observations (p. 60) :

'Where money is placed by a customer even in the hands of a bank with a specific purpose, a trust is impressed. He places confidence on the bank that the latter would act to his instructions. That creates the trust and makes the bank a trustee for the money so sent, in spite of the fact that the ordinary and normal relation between a customer and a banker is that of creditor and debtor.'

13. Mr. Bagchi also cited a decision of the Supreme Court in Associated Banking Corporation of India Ltd. v. CIT : [1965]56ITR1(SC) . The facts in that case were that the assessee carried on the business of banking. The secretary of the assessee, having extensive powers of management, embezzled large sums from the funds of the assessee in the year of accounting ending the 30th June, 1947. At the material time, the fact of such embezzlement was unknown to the assessee. By an order of the Bombay High Court dated the 21st April, 1947, the assessee was directed to be wound up. On the 23rd August, 1949, the liquidators submitted a return for the assessment year 1948-49 claiming a business loss on account of irrecoverable debts. Later, in 1943, the liquidators informed the ITO that they had discovered the embezzlement committed by the secretary and claimed further allowance for two amounts, respectively, of Rs. 10,15,000 and Rs. 99,892. The claim was rejected by the revenue authorities. The rejection was sustained by the Tribunal and the High Court on the ground that the loss did not occur in that year. There was an appeal to the Supreme Court. The Supreme Court, inter alia, held as follows (pp. 12, 13) :

'Embezzlement of funds by an agent, like a speculative adventure, does not necessarily result in loss immediately when the embezzlement takes place, or the adventure is commenced. Embezzlement may remain unknown to the principal and the assets embezzled may be restored by the agent or servant. In such a case in a commercial sense no real loss has occurred. Again, it cannot be said that in all cases when the principalobtains knowledge of the embezzlement the loss results. The erring servant may be persuaded or compelled by process of law or otherwise to restore wholly or partially his ill-gotten gains. Therefore, so long as a reasonable chance of obtaining restitution exists, loss may not in a commercial sense be said to have resulted......Even after the embezzlementscame to the knowledge of the liquidator, trading loss cannot be deemed to have resulted. We are unable to countenance the proposition that irrespective of other considerations, as soon as the embezzlement takes place of the employer's funds, whether the employer is aware or not of the embezzlement, there results a trading loss. So long as there was a reasonable prospect of recovering the amounts embezzled by the bank, trading loss in a commercial sense may not be deemed to have resulted.'

14. The above principles laid down by the Supreme Court cannot be applied to the facts of the instant case. Here, the loss had been caused to the assessee by person or persons unknown and unidentified and the possibility of restitution by the wrongdoers is nil. The Tribunal has found as a fact that the assessee had suffered loss and this finding has not been challenged by any one. The only question which remains to be decided is the effect of the suit filed by the assessee against the bank. The account maintained by the assessee was a current account and, therefore, on the authorities cited on behalf of the revenue, the relationship between the assessee and the bank is that of a creditor and a debtor. The assessee, admittedly, maintains a cash system of account. In that view, the assessee cannot credit its account on the basis of a pending claim. On the other hand, admittedly, the assessee has lost the use of the sum which has been wrongfully withdrawn from its banking account and this is accepted to be a loss. The order of the Tribunal appears to us to be erroneous inasmuch as the Tribunal having found that the loss had been incurred by the assessee in the course of its business yet maintained that such a loss was not 'actual and present' to the assessee for the year under appeal.

15. For the reasons given above, the assessee succeeds in these proceedings. The question referred is answered in the negative and in favour of the assessee. There will be no order as to costs.

C.K. Banerji, J.

16. I agree.


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