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TMI Blog1960 (4) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... efalcation committed by M.C. Javeri, the bank's secretary, in respect of certain banking transactions. He also claimed as business expenditure a sum of ₹ 98,892, which represented another defalcation committed by the bank's secretary in respect of another transaction. The Tribunal held that the liquidator was not entitled to any deductions claimed by him. The questions, as originally referred to this court on this reference, were as under: (1) Whether on the facts and in the circumstances of the case the assessee is entitled to claim bad debts amounting to ₹ 48,50,689, or any lesser sum? (2) Whether on the facts and in the circumstances of the case the assessee is entitled to claim two sums of ₹ 10,15,000 and ₹ 98,892, as a business loss under section 10(2)(XV) of the Income-tax Act? When the matter was before this court on the previous occasion considerable arguments were advanced on either side on the first question relating to bad debts. Admittedly, the debts were not written off by the liquidator in the books of account. What we had to consider was whether looking at the provisions of section 10(2)(xi) of the Act, it was competent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r any part thereof had become irrecoverable in the year of account. It is unnecessary for us to say anything more in this judgment about question No. 1 save that our answer to question No. 1 as amended by us is in the negative. Regarding question (2) we felt that the necessary facts were not before us and directed the Tribunal to find the same bearing in mind the position in law pointed out in our judgment. We also mentioned in our judgment that the Tribunal had fallen into another error in respect of this question (2). The Tribunal had held that the losses of ₹ 10,15,000, and ₹ 98,892 claimed by the assessee could not be allowed because there was nothing on the record to show that the losses had come to the knowledge of the liquidator in the year of account. Now that was not in accordance with the view taken by this court in the case of Lord's Dairy Farm Ltd. v. Commissioner of Income-tax [1955] 27 I.T.R. 700. That being the position, we directed the Tribunal also to state in the supplementary statement of the case the necessary facts from the point of view as to whether the loss was caused to the assessee in respect of those embezzlements or defalcations in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase falls under section 10(2)(XV). What he has augured is that this is a case of trading loss and must be considered as falling within the purview of section 10(1). The argument has proceeded that we must have regard to the true profits of the bank for the year of account and the true profits can be determined only by taking into account any such loss resulting from embezzlement in any year in which he can show that the loss has occurred, and it is urged that in the case before us the loss occurred when the embezzlement of the amount of ₹ 10,15,000 took place. The defalcation or embezzlement, whatever one may call it, took place before the bank went into liquidation and if the crucial period of time relating to any such trading loss is the date when the embezzlement took place, then indubitably the assessee is in a strong position. On the other hand, if the assessee is unable to establish that the trading loss occurred in the year of account, the decision must go against him. Not because he wanted to rely on that decision, but in apprehension of the argument of learned counsel for the Revenue, Mr. Kolah argued that the decision of this court in the case of Lord's Dairy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld accept the to observations quoted above as laying down the ultima ratio to be applied to all cases falling under the head of embezzlement. The true principle of the matter has been expressed in a decision of the Supreme Court of the United States and we find ourselves in respectful agreement with what is there stated. We would have given a brief analysis of the facts of that case, but refrain from doing so as the rule there stated enunciates a broad general principal and it is possible to appreciate the principle without going into any factual examination of that case. In that case, Burnet v. Huff 77 Supreme Court Reports, Law, 670 at 673, it is observed: But the mere existence of liability is not enough to establish a deductible loss....And whether a taxpayer will actually sustain a loss through embezzlement of trust funds of which he is trustee will depend upon a variety of circumstances. If there is liability on his part for the misappropriation, it does not create a certainty of loss, as the defalcation may be made good by the one who caused it....The requirement that losses be deducted in the year in which they are sustained calls for a practical test. The loss mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be any absolute rule of universal applicability. Neither in the decision of this court in the case of Lord's Dairy Farm Ltd. [1955] 27 I.T.R. 700 nor in the Madras decision, of which we have made mention, has any attempt been made to lay down any comprehensive standard or rule. It seems to us impossible to expect any rule exclusive or inclusive, which will cover every situation and every set of facts and circumstances and not fail in some cases. it seems permissible, therefore, to enter a caveat against any attempt in that direction. The question in any such case would be a mixed question of fact and law and the conclusion in each case would turn on its own facts and circumstances and would of course have to be in consonance with the basic principle that the loss must be actual and present. The test of knowledge on the part of the liquidator and the time when such knowledge was acquired has, as we have already mentioned, been rejected by this court. The test about the occurrence of the loss only when the amount is shown by the assessee to be irrecoverable though often useful in practice cannot be regarded as determinative of every case. Consideration must, of course, be give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had misused his powers and passed fictitious entries in the books of account. Then it is stated: Accordingly, the misfeasance summons were taken out on April 17, 1950. After this Mr. M.C. Javeri accepted liability for an amount of ₹ 10,00,000 in lieu of his liability under the misfeasance summons. This offer was accepted by the official liquidator, and. consequently, the High Court passed a decree on February 27, 1951, for ₹ 10,00,000 against M.C. Javeri. It does emerge from these facts that the liquidator even after he came to know of the true position about the embezzlement of M.C. Javeri, took action against him and obtained a decree against him for ₹ 10,00,000, These facts are, in our opinion, eloquent and it seems difficult to us how in view of these facts we would be justified in acceding to the contention of Mr. Kolah that the loss had occurred as early as the end of 1946, that is, when fictitious entries had been passed in the books of account of the bank at the instance of Javeri. No further facts are brought in the original statement of the case or in the supplementary statement of the case and our attention has also not been drawn to any fact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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