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TMI Blog2014 (7) TMI 961X X X X Extracts X X X X X X X X Extracts X X X X ..... regarding the particular transactions involved in each transaction required to be specified by the assessee" 3. Briefly stated facts are that AO during the course of assessment proceedings noted that assessee is deriving income from business, speculation, capital gains i.e. long term and short term and income from other sources. The AO assessed capital gains declared by the assessee i.e. LTCG and STCG as business income by observing that the major part of earning of profits or gains is derived from capital gains and this is out of transactions of shares frequently carried out and in a big quantity. The AO has noted complete details of transactions in page 3, 4 and 5 of the assessment order. The AO noted the general observations and treated the capital gains i.e. LTCG and STCG declared by assessee as business income at Rs. 43,13,388/-. Aggrieved, assessee preferred appeal before CIT(A), who considered the gains arising out of share transactions as LTCG and STCG by observing in para 3.2 as under: "3.2. I have considered facts of the case. It is seen that the appellant has been maintaining two portfolios of shares- one for investment and other for stock in trade, since long and such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Sheet and found that the assessee is having investment in mutual funds for the sum of Rs. 2,37,75,000/- and investment in shares at Rs. 95,87,519/-. The total investment comes to Rs. 3,33,61,509/-. The assessee's total capital is to the tune of Rs. 4.89 cr., it means that this investment is out of his own funds and no borrowed funds were used for the purposes of investment. This claim was made by the assessee before the AO and before CIT(A) and even now before us. The closing stock of shares consist of Rs. 1,79,853/-. From the books of account, it is clear that the assessee is maintaining two separate port folios, one in respect of trading and other in respect of investments. It is also a fact that the assessee has declared losses i.e. speculation loss and carried forward in the computation against future years' speculation income at Rs. 9,93,414/-. The assessee computed long term capital gain at Rs. 20,25,500/- and short term capital gain at Rs. 21,55,499/- from share transactions carried out of investment port folio and declared the same as capital gains. In respect to long term capital gains, the assessee has paid STT but in respect to short term capital gain STT wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd business in shares is being carried out by the assessee for more than a decade. The assessee was in close contact with one share broker of Calcutta Stock Exchange viz., Harish Chandra Biyani, who was having huge clientle base in Kolkata and established name in share market. The assessee was doing business with Shri Harish Chandra Biyani that of purchase and sale of shares and taking advice in share market. During FY 2000-01 relevant to AY 2001- 02, assessee advanced a sum of Rs. 35 lacs on short term basis to Shri Harish Chandra Biyani. This amount was advanced for interest and was also advanced for the reason that he was next to the assessee in assessee's business hierarchy and was instrumental in the business of the assessee as a broker and also earning huge profit in lieu of that. The assessee filed adequate details in respect of advance made by assessee to Shri Harish Chandra Biyani. Copies of such letter of advance in three installments, the share received by assessee, copies of demat account reflecting such shares, valuation of such shares on the dates of advance have been submitted during the course of appellate proceedings. It was claimed that the assessee tried to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome. 4.3. The alternate plea taken by the appellant has also been considered. It is well settled that any loss incidental to business has to be considered for allowance while computing business income. It is seen from the return of income for A.Y. 2001-02, that nature of business mentioned in the tax audit report included Financing and the interest income from loan to Sri Harish Chandra Biyani was offered for taxation as business income and accepted in the scrutiny assessment. Sri Biyani was the broker through whom the appellant regularly conducted his share transaction and dealing in shares was the principal business of the appellant. As stated by the appellant in the course of hearing, Shri Biyani was, in those days, considered an expert in stocks and the appellant used to take advice from him. On perusal of the loan document produced by the appellant, which is a letter dated 24.10.2000 from Shri Biyani it is seen that he has stated that "I am hopeful of earning more in view of the booming share market pleased to give more returns to you". The reference in the loan document to give higher return indicates that the loan was, apart from earning interest, advanced with a view to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2000-01 despite sincere efforts and Shri Biyani being a broker involved in stock market scam, there were practically no chances for recovery. In fact, the assessing officer has also not doubted that write-off was not bona fide. Thus, the factual position that emerges is that the appellant gave an advance in regular course of trading activity, which became irrecoverable. The loss on account of its non-recovery thus has close nexus with and is, in fact, incidental to business. Though the various decisions cited by the appellant are not exactly on the same facts, their ratio, that any loss incidental to business should be allowed as deduction, does support the appellant's claim. Considering all the facts and circumstances in entirety I am of the view that the claim under consideration, though not allowable as bad debt written-off, is allowable as a business loss. The assessing officer is directed to allow the same accordingly." Aggrieved revenue came in appeal before us. 7. We have heard rival submissions and gone through facts and circumstances of the case. We find that the entry shown by the assessee in his books of account was advance made in the year 2000-01 by the end of De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing words: "These being the governing principles, in deciding whether loss resulting from embezzlement by an employee in a business is admissible as a deduction under section 10(1) what has to be considered is whether it arises out of the carrying on of the business and is incidental to it. Viewing the question as a businessman would, it seems difficult to maintain that it does not. A business especially such as is calculated to yield taxable profits has to be carried on through agents, cashiers, clerks and peons. Salary and remuneration paid to them are admissible under section 10(2)(xv) as expenses incurred for the purpose of the business. If employment of agents is incidental to the carrying on of business, it must logically follow that losses which are incidental to such employment are also incidental to the carrying on of the business. Human nature being what it is, it is impossible to rule out the possibility of an employee taking advantage of his position as such employee and misappropriating the funds of his employer, and the loss arising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it. And that is how it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at night in a wholesale cloth shop was held to be allowable. In U. P. Vanaspati Agency v. Commissioner of Income-tax [1968] 68 ITR 120 (All), money entrusted to an employee for being deposited in the bank but lost in the way by robbery was held to be deductible. To the same effect is the view expressed by the Allahabad High Court in the case of Commissioner of Income- tax v. Sarya Sugar Mills (P.) Ltd. [1968] 70 ITR 109, by the Madras High Court in Commissioner of Income-tax v. K.T.M.S. Mahmood [1969] 74 ITR 100, by the Madhya Pradesh High Court in Commissioner of Income-tax v. Ganesh Rice Mill [1970] 77 ITR 889 and the Rajasthan High Court in Chhotulal Ajitsingh v. Commissioner of Income-tax [1973] 89 ITR 178. The contrary view expressed in the case of Bansidhar Onkarmal v. Commissioner of Income-tax [1949] 17 ITR 247 (Orissa) and in the Madras Full Bench case of Chettiar's AIR 1930 Mad 808 [FB] is no longer good law. The ratio of Daga's case [1958] 34 ITR 10 (SC) does not seem to have been correctly applied by the Punjab High Court in Ram Gopal Ram Sarup v. Commissioner of Income-tax [1963] 47 ITR 611. Now, we proceed to point out the persistently wrong application of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of the assessee." 9. According to us, considering the above legal propositions, facts of the case and principle laid down in various cases cited above, we are of the view that the assessee who was in the business of trading and investment in shares, had advanced a sum of Rs. 35 lacs to a share broker with whom the assessee has regular dealings in earlier years and the advance made were during the course of assessee's business against which assessee had given shares, which are more than the value of the advance given as on that date. But due to scam in the market there was a loss to the assessee which was directly connected to the assessee's business. According to us, here it is immaterial whether the assessee claims the same as bad debt or business loss, it is a fact that the assessee lent this money to a stock broker who is a close finance associates, the money is advanced in the direct and proximate connection of the business and there is a nexus between business operation of the assessee and this loss. Accordingly, the same should have been allowed as business loss by the AO. We confirm the order of CIT(A) but for different reasoning as noted above. Appeal of re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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