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Issues:
Whether the assessee is entitled to claim a certain amount lost due to an employee's defalcation as a permissible deduction under the Income-tax Act. Analysis: The case involved the question of whether an assessee could claim a sum of Rs. 32,000 lost as a result of an employee's defalcation as a permissible deduction. The Tribunal held that the loss caused by embezzlement could be claimed under section 10(2)(xv) of the Income-tax Act. However, it limited the deduction to Rs. 13,800, the amount embezzled in the accounting year. The assessee argued that the loss should be treated as a bad debt under section 10(2)(xi) or as a trading loss. The court rejected the bad debt argument, stating that a loss caused by defalcations of a servant does not qualify as a bad debt. Instead, the court analyzed whether the loss could be considered a trading loss. It was established that the loss arose from the necessity of delegating duties to an employee, making it inseparable from the ordinary business activities of the assessee. The court referred to the Madras High Court's decision in Venkatachalapathy Iyer v. Commissioner of Incometax, which supported the view that losses due to embezzlement could be considered trading losses. The court also discussed the test applied in Snelling's Dictionary of Income-tax and Super-tax Practice, stating that if a loss by embezzlement is necessarily incurred in carrying on the trade, it should be allowed as a deduction. Applying this test to the case, the court concluded that the loss caused by the employee's embezzlement was a trading loss and, therefore, deductible. The court distinguished the case from a decision by the Patna High Court regarding theft, emphasizing that the material date for claiming a trading loss is when the loss is caused, not when the embezzlement occurred. Since the assessee wrote off the amount in the year of account and there was no evidence to suggest the amount was recoverable, the court held that the assessee was entitled to claim the full amount of Rs. 32,000 as a trading loss in the assessment year 1947-48. The court rephrased the question and answered it in the affirmative, directing the Commissioner to pay the costs. In conclusion, the court ruled in favor of the assessee, allowing the claim for the full amount lost due to the employee's defalcation as a permissible deduction under the circumstances of the case.
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