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TMI Blog1988 (12) TMI 167X X X X Extracts X X X X X X X X Extracts X X X X ..... receipts of Rs. 35,37,552 and commission receipts of Rs. 3,19,216. The amount of Rs. 20 lakhs was claimed by the bank as bad debts under s. 36(1)(vii) or as a loss by reason of embezzlement by an employee. Certain facts in respect of this claim require to be stated at greater length. 4. The assessee-bank opened a branch at Mandvi, Masjid, Bombay, on 24th Feb., 1975. One G.T. Patil and one B.T. Patil were appointed as Branch Manager and Accountant respectively of the said branch. On 26th Feb., 1975, and 15th April, 1975, two current accounts in the names of M/s India Fertilizer Industries and M/s Digvijay Fertilizers were opened with this branch after depositing small amounts. Thereafter, for a period of 8 months i.e. from March 1975 to October, 1975, these parties deposited a number of cheques in the names of their accounts in other banks and at the same time presented cheques for withdrawal of equal amounts. The cheques deposited by these parties were accepted and the parties were allowed to withdraw equivalent sums through the Sangli Bank Ltd., Fort Branch, Bombay, appointed as clearing agent, on the same day by way of cash or pay orders. These two parties were paid as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioned properties of the two firms and directors. This suit is said to be still pending. A criminal complaint against the proprietor/partners of the above two firms and certain others including Mandvi Branch Manager and Branch Accountant, was also filed against the parties, the proceedings in respect of which are also pending. 5. It was the case of the assessee-bank before the ITO that the fraud of Rs. 54 lakhs was committed by the Branch Manager and the Accountant who were in league with the partners of M/s India Fertilizers Industries and M/s Digvijay Fertilizers and the collusion between these two employees of the bank and the partners of the two firms was not known to the Head Office. There was a conspiracy against the bank on the part of the Branch Manager and Accountant of Mandvi Branch which resulted in misappropriation of the funds of the Branch and, therefore, the amount of Rs. 20 lakhs should be allowed as a loss by embezzlement or loss incurred in the course of trading or as a bad debt. 6. This claim was disallowed by the ITO on the ground that this was not a loss in the ordinary course of business. The ITO also held alternatively and without prejudice that the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds the inclusion of Rs. 9,42,696 the CIT (A) held, following the decision of the Madras High Court in CIT vs. Motor Credit Co. (P) Ltd. (1981) 127 ITR 572 (Mad), that the assessee could not be taxed on an income which it had not earned or which had not accrued to it. All these three issues were hotly argued by both the parties before us. We will now proceed to deal with the same. 10. The learned Departmental Representative, Shri Mahadeswar, took us through the order of the ITO and particularly paragraphs 5 to 13 where he has dealt with this issue. He argued firstly that the amount was not loan given in the ordinary course of business of banking. The proper banking procedure and practice was not observed when the amounts were handed over. The care that a prudent businessman would take while entering into such transaction was not taken. Securities obtained from parties concerned were not realised. The civil suit was filed long after the close of the accounting year as also the resolution of Board of Directors, inasmuch as, this resolution was passed on 29th Dec., 1977. The accounting year ended on 31st Dec., 1977 and the civil suit was filed on 10th Feb., 1978. The Branch manager h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out that the assessee was a public limited company, it was an artificial entity, a body corporate and in conducting its business activities it had to rely on its employees and the appointment of the Branch Manager as well as the Accountant was for the purposes of the business. Shri Patil argued that when we speak of loss by embezzlement, how the embezzlement is done is not as important as who has done it. There was no suggestion by the Department that there was complicity on the part of the management in the embezzlement of funds. The two individuals, who were appointed as Branch Manager and Accountant, were in no way connected with the management of the bank or with the directors or shareholders of the bank. They were recruited in the normal course. All possible steps were taken as Shri Patil has filed a chronology of all the steps taken by the head office. When the persons are employed in the course of the business of banking, everything that they do is incidental to the business. If as a result of their conduct there was any loss, it was a loss incidental to the business and should have been allowed as such. Whether authorised or unauthorised, what was given to the constituen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Manager and the Accountant were arrested and released on bail. A civil suit for the recovery of Rs. 61 lakhs including interest upto December, 1977 on the original outstanding of Rs. 42 lakhs was filed in the Bombay High Court and was pending. Shri Patil has rightly pointed out that even if the civil suit is decided in their favour and the entire amount of Rs. 42 lakhs covered by the securities is released, the chances of recovering the balance of Rs. 20 lakhs are very remote. In terms of the Agreement dt. 3rd Feb., 1976, between the bank and Tiple Alliance Productions of which Jayantilal Shah was a partner, the latter had agreed to pay a sum of Rs. 25 lakhs to the bank out of the sale proceeds of distribution rights of the film in various territories. The film was to be completed within a period of 18 months. The party had not made any progress in the production of the film. As stated earlier, only three reels had been completed. The bank was not in a position to finance the completion of the film. The firm Tiple Alliance Productions, according to Shri Patil, had expressed its inability to proceed further in completion of the film and, therefore, this was not much of a security. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not possible to recover the loss from the persons responsible for the same. xx xx xx xx xx xx xx If the assessee has made the necessary attempts to recover the loss from the persons concerned and failed or if the assessee did not make such attempts because it was useless to make them in view of the financial position of the persons concerned, then and then alone the answer to the question is in the affirmative, that is, in favour of the assessee and against the Department. Shri Mahadeshwar's argument that this was not a debt incurred in the course of the business or incidental to it or money lending in the ordinary course of business does not appear to be convincing having regard to the facts of the case. Shri Mahadeshwar relied on A.V. Thomas Co. Ltd. without bringing to our notice the fact that in that case the assessee-company was neither a banker nor a money lender and, therefore, the advances paid by the assessee-company to the private company could not be said to be incidental to the trading activities of the assessee. This type of reliance on decisions, where facts are torn out of context, certainly would not advance th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be shown or established from the materials on record that the write-off was not proper or bona fide. In the present case, we are satisfied that the write off was both proper and bona fide. The Gujarat High Court in Sarangpur Cotton Mfg. Co. Ltd. vs. CIT (1982) 31 CTR (Guj) 247 : (1983) 143 ITR 166 (Guj) held that when a businessman writes off an amount, there is prima facie evidence that the amount is irrecoverable. It mainly relied on the aforementioned decision in Jethabhai Hirji's case. We would, therefore, hold that the conditions for admissibility of bad debt under s. 36(1) (vii) r/w s. 36(2) have been fulfilled. The amount written off represented money lent in ordinary course of business. The amount has been written off as irrecoverable in the accounts of the assessee and, thirdly, we are satisfied that the amount had become bad in the accounting year ended 31st Dec., 1977. We have gone through the papers relating to the complain in respect of the suit filed by the assessee for recovery of this amount. Amount the papers filed before us is a statement of general ledger balance sent by the Mandvi branch every week. In the statement for the week ended 9th Aug., 1975, under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Credit Co. Pvt. Ltd. (1987) 127 ITR 572 (P H) and Calcutta High Court in CIT vs. Raigarh Jute Mills Ltd. (1982) 26 CTR (Cal) 25 : (1981) 132 ITR 702 (Cal). The Calcutta High Court held that in a case where a suit had been filed, the right to get interest for a period subsequent to the institution of the suit would depend not on the bargain between the parties but on the discretion of the Court as contemplated by s. 34 of the CPC, 1908. Whether, there was accrual of interest or not should be judged from a realistic point of view. In that case, no interest was charged on a loan, about the recovery of which the assessee company was doubtful. After considering all the case law, we are satisfied that assessee company was doubtful. After considering all the case law, we are satisfied that in the present case since the amount is written off and since further the interest is not charged in the books, the ratio of decision of the Supreme Court in State Bank of Travancore would not apply. The CIT (A)'s decision in respect of the addition of estimated interest is confirmed. 17. In the result, the departmental appeal for the asst. yr. 1978-79 is dismissed. 18. The departmental appeal fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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