1958 (4) TMI 2 - SC - Income Tax

Whether the said sum of Rs. 2, 02, 442-13-9 being part of the amount embezzled by the assessee s munim is allowable as a deduction under the Indian Income-tax Act either under section 10(1) or under the general principles of determining the profit and loss of the assessee or section 10(2)(xv) ? Held that - We are of opinion that the loss sustained by the appellant as a result of misappropriation by Chandratan is one which is incidental to the carrying on of his business and that it should therefore be deducted in computing the profits under section 10(1) of the Act. In this view the order of the lower court must be set aside and the reference answered in the affirmative. Appeal allowed.

Summary

Issues Involved:
1. Whether the amount embezzled by the appellant's agent can be allowed as a deduction under the Indian Income-tax Act, 1922.
2. Applicability of Section 10(1), Section 10(2)(xi), and Section 10(2)(xv) of the Indian Income-tax Act, 1922.
3. Interpretation of "trading loss" and its admissibility under the Act.

Detailed Analysis:

1. Admissibility of Embezzled Amount as Deduction:
The primary issue was whether the sum of Rs. 2,02,442-13-9, embezzled by the appellant's agent, Chandratan, could be allowed as a deduction under the Indian Income-tax Act, 1922. The Tribunal found that the amount represented a loss sustained due to misappropriation but held it was not a trading loss based on Curtis v. J. & G. Oldfield Limited.

2. Applicability of Section 10(1), Section 10(2)(xi), and Section 10(2)(xv):
- Section 10(2)(xi): The court held that the loss could not be considered a bad debt under this section, as a debt arises from a contract, and misappropriation does not constitute a contractual obligation.
- Section 10(2)(xv): The court ruled that the embezzled money could not be considered an expenditure laid out wholly and exclusively for the purpose of the business.
- Section 10(1): The court focused on whether the loss was a trading loss incidental to the business. It emphasized that profits and gains are to be understood according to ordinary commercial principles, and losses incidental to the business operations are deductible.

3. Interpretation of "Trading Loss":
The court examined whether the loss from embezzlement by an employee could be considered a trading loss under Section 10(1). It concluded that:
- Losses due to embezzlement by an employee are incidental to the business if the employment of agents is necessary for the business.
- The loss must spring directly from the carrying on of the business and be incidental to it.
- The court distinguished between losses from embezzlement by employees and thefts by strangers, emphasizing that the former is incidental to the business while the latter is not.

Case Law Analysis:
- Jagarnath Therani v. Commissioner of Income-tax: Embezzlement by an employee was allowed as a deduction.
- Ramaswami Chettiar v. Commissioner of Income-tax: Theft by strangers was not allowed as a deduction.
- Bansidhar Onkarmal v. Commissioner of Income-tax: Embezzlement outside office hours was not allowed as a deduction.
- Curtis v. J. & G. Oldfield Limited: The court clarified that this case did not establish a rule that embezzlement after receipt is not connected with the business. It depended on the facts of each case.
- Lord's Dairy Farm Ltd. v. Commissioner of Income-tax: Loss by defalcation of an employee was considered a trading loss.
- Motipur Sugar Factory Ltd. v. Commissioner of Income-tax: Loss due to robbery of an employee on duty was allowed as a deduction.

Conclusion:
The court concluded that the loss sustained by the appellant due to misappropriation by Chandratan was incidental to the business and should be deducted in computing the profits under Section 10(1) of the Act. The judgment of the lower court was set aside, and the reference was answered in the affirmative. The appellant was awarded costs for the appeal and the reference in the lower court.

Final Judgment:
Appeal allowed.