9911796707
TMI Blog1981 (4) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... profits. The claim for the deduction of the above amount was made by the assessee in the following circumstances. The assessee was constrained, from time to time, to borrow monies on hundis for financing its business in the manufacture and sale of ice cream. For this purpose, it engaged the services of a broker (hereinafter referred to as " Nand Lal ") who was a partner in a firm known as M/s. Nandlal Chuggamal Co. The services of the broker had been engaged some time in 1954 and the assessee was periodically borrowing monies for the purpose of its business with the help of Shri Nand Lal, between 1954-57. Transactions through Nand Lal were recorded in a general loan account till July, 1957. From July, 1957, a separate hundi loan account was opened for transactions through Nand Lal. That there were substantial transactions through Nand Lal is seen from the fact that the loan obtained with his help amounted to Rs. 1,72,000 as on December 31, 1957, Rs. 2,75,000 as on December 31, 1958, and Rs. 90,000 as on March 31, 1959. Some time in 1960 (there is a controversy about the actual date to which we shall make a reference later on) it came to the knowledge of the assessee that Na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been transferred to it by Nand Lal was credited. Thereafter, the assessee proceeded to debit to the account the various amounts which it had to pay in order to honour the other hundis which were presented to it from time to time. It is said that number of hundis were presented to the assessee between October, 1960, and April, 1961, and the total amount of the hundis so paid by the assessee came to Rs. 3,77,500. On December 31, 1960, the assessee also credited to the account a sum of Rs. 24,013 which was the amount of interest due from M/s. G. L. Hotels Pvt. Ltd. in respect of the deposit which stood previously in the name of Nand Lal and which had been transferred to the assessee. After setting off the sum of Rs. 1,85,000 and interest of Rs., 24,013 against the payment aggregating to Rs. 3,77,500 the assessee found itself in the red to the extent of Rs. 1,68,487 as on December 31, 1961. This amount was carried forward up to December 31, 1964, and claimed as a deduction in the assessment year 1965-66. It may be clarified at this juncture that, according to the assessee, the debit balance of Rs. 1,68,487 which had appeared in the Nand Lal advance account, as early as December 31, 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery established broker with a very good reputation, that the assessee had necessarily to give signed hundi khokhas to him for negotiating the loans, that due to bad luck he fell on evil days, that he abused the trust placed on him by the assessee, that he tried to make good as much loss as possible and that only the balance amount which he could not repay and which it was not possible to recover from him was written off by the assessee. It was also pointed out that the income-tax authorities had not doubted the genuineness of the arrangement between the assessee and Nand Lal, and that the fact of the loss also was not questioned. It was contended that the circumstances in which the loss was suffered were no doubt peculiar, but the circumstances arose in the course of the business and, therefore, the loss was clearly allowable. It was pointed out that if, as observed by the Income-tax Officer, the loss was suffered in order to preserve the reputation and existence of the business, it could not be treated as a capital loss. On the other hand, on behalf of the Department, three contentions were raised-(i) that the circumstances in which the assessee claimed to have suffered the loss w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee was raising the loan through Nand Lal, that for this purpose it bad necessarily to give hundi khoka signed by it to Nand Lal some time earlier than the actual receipt of money, that this arrangement worked satisfactorily for about five years, that only in the middle of 1960 due to the turn of the fortune for Nand Lal he took to undesirable ways, that as soon as it was found out, he tried to make good as much of the loss of the assessee as possible, and the assessee had not subsequently received even to date any of the amount which it claimed as a loss. In these circumstances we are inclined to hold that the loss clearly arose in the ordinary course of the carrying on of the assessee's business. The assessee had necessarily to raise finance through hundis, that it bad necessarily to act through a broker is one of the unavoidable risks which it had necessarily to take if it had to continue to secure finances. The assessee no doubt was doing the business in ice cream, but in the course of carrying on that business, it had necessarily to secure finance and the risks attendant in securing finance were integral part of the process of carrying on of the business in ice cream." T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lal with G. L. Hotels Ltd., the assessee had agreed to admit Nand Lal to a one-third share in hotel which was to be put up by G.L. Hotels (Pvt.) Ltd. Further, the land and building for the hotel had been purchased in the joint names of the two partners of the assessee-firm and the wife of Nand Lal. It was, therefore, suggested that there was a closer personal relationship between Nand Lal and the assessee firm and this was why the assessee-company did not institute any civil or criminal proceedings against Nand Lal and had refrained from even sending him a simple legal notice calling upon him to make good the losses incurred by the assessee on account of his alleged misappropriation. It was further pointed out that, according to the Tribunal, the position of Nand Lal became straitened some time in the middle of 1960 and that no more loans had been arranged through him after July 30, 1960. This is not correct because a perusal of the relevant details which form part of the statement of case would clearly show that Nand Lal had purchased hundi papers and raised loans even after July, 1960. Substantial amounts of hundis had been issued by him subsequent to July 31, 1960. This, accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reduce the tax effect substantially by writing off a large amount on the last day of the previous year. Shri Wadhera also made a suggestion that, if we were not satisfied with the facts on record, we should remit the matter to the Tribunal for submitting a further and better statement of the case. Before proceeding to deal with the two points which, according to us, arise in this case, it is necessary to observe that the arguments of the departmental counsel travel far beyond the scope of the reference and raise issues which do not properly arise in the context of the orders of the authorities below. The whole suggestion of the learned counsel has been that the claim put forward by the assessee is a bogus claim and that the assessee has not in fact incurred any loss whatsoever and that an incredible claim has been accepted by the Tribunal. Unfortunately, the case has not proceeded on this footing at any earlier stage, as rightly pointed out by Shri Harish, who appears for the assessee. Even the Income-tax Officer does not appear to have doubted the genuineness of the assessee's claim. At the very outset, while referring to the facts of the case, the Income-tax Officer points ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had advertised the breach of trust in the newspaper or denied responsibility for the hundis, it may have precipitated insolvency proceedings against Nand Lal and there was a danger of the assessee losing even the benefit of the sum of Rs. 1,85,000 which Nand Lal was prepared to give it by assigning the debt due from G. L. Hotels Pvt. Ltd., which was his only asset. There was, therefore, nothing extraordinary about the way the assessee chose to deal with the matter or about its omission to initiate any prosecution or other legal proceedings against Nand Lal. The departmental counsel suggested that Nand Lal was really in an affluent position. This contention is untenable. We have already referred to the findings of the Income-tax Officer accepting the position that Nand Lal was not financially solvent and that no useful purpose would be served by proceeding against him. Learned counsel for the Department suggested that there were other assets of Nand Lal and his wife, which had not been proceeded against. This is also incorrect. The assessment order makes it clear that Nand Lal had deposited a sum of Rs. 1,85,000 in order to obtain shares of G. L. Hotels Pvt. Ltd. to the extent of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the documents under which the borrowals were made or the transactions entered into. We do not, however, think that these decisions are in point in considering the issue before us in the present case. On the facts which have been found by the Tribunal it is clear that the monies were borrowed by Nand Lal on behalf of the assessee and on the strength of hundi papers signed by it. The loss which has occurred to the assesses is a loss which falls on it in its character as a trader and because of the breach of trust of an agent in whom it had placed implicit faith. The Supreme Court, in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, has pointed out that not only short-term loans but even long-term loans which may have to be borrowed by an assessee for the purpose of carrying on its business cannot be treated as creating any asset or enduring benefit to the assessee but should be treated as a transaction incidental to the carrying on of the business. In the above case, the question for consideration was whether the expenditure incurred by the assessee towards stamp fees, registration charges, etc., by way of expenses in connection with raising of a loan of Rs. 40 lakhs from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possibility of an employee misappropriating the funds of his employer or otherwise causing loss to him by his conduct and the loss arising from such misappropriation must be held to arise out of the carrying on of the business and to be incidental to it. It has also been specifically made clear by the Supreme Court that it will make no difference to the admissibility of the loss whether the employee occupies a subordinate position in the establishment, or is an agent with large powers of management. The findings of fact arrived at by the Tribunal can be summed up thus : The assessee, for the purpose of its business, needed to raise loans from time to time. That these were all short-term loans intended for the carrying on of the business is clear from the details given in the annexures. It has been found as a fact that the arrangement was entered into for business purposes and worked satisfactorily for a period of about five years. The loss arose subsequently on account of the misappropriation of the agent and the breach of faith committed by him. The assessee was able to recoup a part of the amount of such loss from him but could only get a promissory note in respect of the balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osure of his conduct, there is nothing to indicate that on that very date the assessee had also certain knowledge that Nand Lal would not be in a position to pay these amounts. There is no suggestion that even the promissory note dated 29-9-1960 was only taken as pretence or make-believe and there is no ostensible reason shown why, if the assessee had really known that Nand Lal had no resources, it would not have claimed that balance as a loss in that very year. On the other hand, the fact that the assessee got Rs. 1.85 lakhs from Nand Lal and promissory note for any further amounts he may have to pay and started an account to reckon against the credit entry of Rs. 1,85 lakhs the subsequent payments, as and when made indicate that the assessee was then not quite certain of what the final resultant position would be. Mr. Wadhera also threw suspicions on the second pronote and asked what the purpose was of obtaining another promissory note on the same terms as the earlier one on 21st July, 1961, and suggested that the only idea was to prolong the period of limitation. This argument also proceeds on a number of basic assumptions which are not correct. In the first place, there is subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis in fact but merely on the basis of general guess-work that the learned counsel for the Department is pleading that the claim made by the assessee on the basis of the second promissory note is an afterthought. Lastly, the Department has placed on record no material to rebut the normal presumption arising out of the entries in the assessee's books of account (vide observations of Chagla C. J. in Lord's Dairy Farm Ltd. v. CIT [1955] 27 ITR 700 (Bom)), and to establish that the loss does not pertain to the year in which it is written of. Indeed, the Department's stand in regard to the year of allowability of the loss is not quite clear or consistent. Before the Tribunal the suggestion on behalf of the Department appears to have been that the loss was claimed prematurely but the Tribunal rejected this contention. Before us, while reiterating the plea that the assessee had not exhausted its remedies against Nand Lal, Sri Wadhera also raised the plea that the amount should have been claimed, if at all, as a loss in 1960 and that the claim should not have been postponed till 1964. For the reasons which we have already discussed, we are of the opinion that the assessee's conduct was qu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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