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TMI Blog1955 (2) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the moneys of the assessee company were kept and withdrawn the moneys and bring the moneys to the office of the company for making payments from time to time in cash. In the course of discharging his duties Chhaganbhai defalcated various amounts aggregating to ₹ 53,000. When these defalcations took place between May, 1946, and April, 1947, and when the defalcations were discovered the company took from Chhaganbhai a promissory note for ₹ 21,000. This promissory note was taken on the 28th of April, 1947. A criminal prosecution was launched against Chhaganbhai and certain amount was spent in connection with this litigation and in the assessment year 1948-49 the company claimed a sum of ₹ 34,053 as a permissible deduction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be entitled to claim the whole of the amount of ₹ 32,000 as a deduction. In our opinion it is impossible to take the view that a loss caused by defalcations of a servant is a bad debt. Before a debt can be claimed as bad debt it must be a debt in law. At some times it must be an amount due to the assessee and at some time the debt must form part of the assets of the assessee. It is only when the amount becomes irrecoverable that it becomes a bad debt and can be claimed as a deduction. It is difficult to understand how any amount was due by the employee to the assessee company which amount become irrecoverable, and therefore the subject-matter of a deduction under section 10(2)(xi). Then it is suggested that even if the case falls ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is very simple. As has been often pointed out, the object of section 10 is to ascertain the true profits and gains of an assessee. The profits must be ascertained from a commercial point of view. The sub-section (2) of section 10 deals with certain specific cases of permissible deductions. But even apart from these Permissible deductions, if there is any loss which from the commercial point of view can be considered to be a trading loss, then that loss must be deducted before the true profits can be ascertained. If therefore we take the view that a loss caused to a businessman by reason of the defalcations committed by his employee is a trading loss, then he would be entitled to deduct that loss although such a loss may not fall within th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reviewed the English authorities and have also considered the English practice with regard to claiming embezzlement as a trading loss. In that judgment reference is made to the well-known case of Curtis v. Oldfield Ltd. [1925] 9 Tax Cas. 319 There Mr. Justice Rowlatt drew the line between a case where the loss caused by embezzlement can be successfully claimed by the assessee and where it cannot be so done, and it is there laid down that if the money of the assessee has reached the till and the embezzlement took place after that, then the loss caused by the embezzlement cannot be claimed as a trading loss, but if the money is intercepted before it reaches the till then the loss can be properly claimed. Mr. Justice Rowlatt also puts it this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case may not come within the ratio of Mr. Justice Rowlatt's decision. Therefore, it seems to us that the better and more satisfactory test is the test which is pointed out at page 372 of the judgment and which finds place in Snelling's Dictionary of Income-tax and Super-tax Practice, and the test is: If a loss by embezzlement can be said to be necessarily incurred in carrying on the trade, it is allowable as a deduction from profits. In the ordinary case, it springs directly from the necessity of deputising certain duties to an employee, and should therefore be allowed . Therefore if in any case it is found that it was necessary to deputise certain duties to an employee and it was also found that the loss sprang directly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed under section 10(2)(xv), and, with respect, we entirely agree with the Patna High Court that if a claim be made under section 10(2)(xv), whether the loss is claimed by the theft or embezzlement, a deduction is not permissible as falling under the provisions of that sub-clause. The next question that we have to consider is whether the whole of this amount can be permitted as an allowance to the assessee. If we are right in the view that we have taken that what is claimed as a trading loss is not a permissible deduction under section 10(2)(xv), then the material date obviously is not the date when the embezzlement took place but the material date is when the loss is caused. So long as there is any possibility of the money being rec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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