9911796707
TMI Blog1993 (1) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... for an amount of Rs. 35,000. The said amount along with the commission of Rs. 17.50 was debited to the assessee's current account. The said amount was duly paid by the bank to the payee at Ahmedabad. The case of the assessee was that the letter on the basis of which the said demand draft was issued was a forged letter written to the bank under the forged signature of the secretary of the company. It had lodged a civil suit in that behalf. In its assessment for the year under consideration, the assessee claimed the above amount of Rs. 35,017.50 as a deduction in the computation of its business income. The claim was rejected by the Income-tax Officer on various grounds. Firstly, that the assessee had not shown how the loss in question had any relation to its day-to-day business ; secondly, that it was not a debt incurred by the assessee in the course of its business ; and, thirdly, that it was not something incidental to the business carried on by the assessee. The disallowance so made by the Income-tax Officer was upheld by the Appellate Assistant Commissioner of Income-tax. The second appeal before the Tribunal was also rejected and the findings of the Income-tax Officer and the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to certain express deductions or allowances and to certain express prohibitions on deductions. It is well-settled that the list of allowances enumerated in these sections is not exhaustive of all allowances which could be made in ascertaining the profits of a business taxable under section 28 of the Act and an item of loss or expenditure incidental to business may be deducted in computing-profits and gains of business or profession even if it does not fall in any of these sections. It is likewise well-settled that profits and gains which are liable to be taxed under section 28 are what are understood to be such according to ordinary commercial principles. In the words of Lord Halsbury, the word " profits " is to be understood in its natural and proper sense in a sense which no commercial man would misunderstand. This legal position has been very aptly summed up by the Supreme Court in Badridas Daga v. CIT[1958] 34 ITR 10 (at page 15 ) in the following words : "When a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Supreme Court also emphasised that the loss for which a deduction could be made must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business. In Badridas Daga's case [1958] 34 ITR 10, the Supreme Court also referred with approval to the decision of this court in Lord's Dairy Farm Ltd. v. CIT [1955] 27 ITR 700, where the loss caused to a business by defalcation of an employee was held to be a trading loss. The legal position in this regard came up for consideration before the Supreme Court again in CIT v. Nainital Bank Ltd. [1965] 55 ITR 707. The Supreme Court summarised the legal position thus ( at page 715): "Under section 10(1) of the Act, the trading loss of a business is deductible for computing the profit earned by the business. But every loss (is) not so deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. Whether loss is incidental to the operation of a business is a question of fact to be decided on the facts of each case, having regard to the nature of the operations carried on and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar J. to that of the majority. " The proposition that emerges from the decision of the Supreme Court in Nainital Bank Ltd. [1965] 55 ITR 707 is that for determining whether any loss from theft, dacoity, embezzlement, etc., is deductible or not, what is material is whether the loss incurred by theft, dacoity, etc., is incidental to the carrying of the business. It does not make much difference whether such act is committed by the employees of the assessee or by strangers. The test for determining whether a particular loss will be deductible in computing business profits or not was again considered by the Supreme Court in Ramchandar Shivnarayan v. CIT [1978] 111 ITR 263. The law was summed up by the Supreme Court in the following words (at page 271 ) : " It is to be remembered that the direct and proximate connection and nexus must be between the business operation and the loss. It goes without saying that a businessman has to keep money either when he gets it as sale proceeds of the stock-in-trade or for disbursement to meet the business expenses or for purchasing stock-in-trade and if he loses such money in the ordinary course of business, the loss is a deductible trading los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve facts, this court held that the loss in question was incidental to the carrying on of business by the assessee and, as such, an allowable deduction in computing the profits. From a perusal of the various decisions of the Supreme Court and this court referred to above, it is clear that the principles in regard to allowability of loss in the computation of income under section 28(i) are well-settled. The only dispute that arises from time to time is in regard to the applicability of the principles laid down therein to the facts of each case. The real controversy that falls for determination in such cases is whether the loss is incidental to the operation of the business and this question evidently has to be decided on the facts of each case having regard to the nature of the business and the operations carried on by the assessee. If the loss incurred by the assessee is found to be incidental to the carrying on of his business, it will be deductible as a trading loss in computing the profits of the assessee from the said business. Applying these principles to the facts of the present case, we find that the loss caused to the assessee in this case was by embezzlement from its ba ..... X X X X Extracts X X X X X X X X Extracts X X X X
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