9911796707
TMI Blog1958 (4) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... gating to Rs. 2,30,636-4-0, and applied them in satisfaction of his personal debts incurred in speculative transactions. On November 25, 1944, the cashier of the firm sent a telegram to the appellant informing him of the true state of affairs. Thereupon, the appellant went to Bombay on December 3, 1944, and on the 4th, cancelled the power-of-attorney given to the agent, and by notice dated December 6, 1944. called upon him to pay the amounts withdrawn by him. The agent replied on December 8, 1944, admitting the misappropriation of the amounts and pleading for mercy. On January 16, 1945, the appellant filed a suit against him in the High Court of Bombay for recovery of Rs. 2,30,636-4-0 and that was decreed on February 20, 1945. A sum of Rs. 28,000 was recovered from Chandratan and adjusted towards the decree and the balance of Rs. 2,02,442-13-9 was written off at the end of the accounting year as irrecoverable. Before the income-tax authorities, the dispute related to the question whether this amount of Rs. 2,02,442-13-9 was an admissible deduction. The Tribunal found that the amount in question represented the loss sustained by the appellant owing to misappropriation by his agent, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the business the amounts embezzled are shown as debits, the amounts realised towards them, if any, as credits, and the balance is finally written off. They are merely journal entries adjusting the accounts and do not import a contractual liability. Nor can a claim for deduction be admitted under section 10(2)(xv), because moneys which are withdrawn by the employee out of the business till without authority and in fraud of the proprietor can in no sense be said to be an expenditure laid out or expended wholly and exclusively for the purpose of the business. The controversy therefore narrows itself to the question whether amounts lost through embezzlement by an employee are a trading loss which could be deducted in computing the profits of a business under section 10(1). It is to be noted that while section 10(1) imposes a charge on the profits or gains of a trade, it does not provide how those profits are to be computed. Section 10(2) enumerates various items which are admissible as deductions, but it is well settled that they are not exhaustive of all allowances which could be made in ascertaining profits taxable under section 10(1). In Commissioner of Income-tax v. Chitnavis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 would be dealt with according to ordinary commercial principles of trading. At the same time, it should be emphasised that the loss for which a deduction could be made under section 10(1) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid a sum due to him as profits and he puts that in his pocket and on his way home is robbed of it, it would be, I think, difficult to contend that such a loss was incidental to his business. Still more so when he has reached his home and put these profits in a strong room or some other place regarded by him to be a place of safety. I can well understand that in cases where the collection of profits or payment of debts due, is entrusted to a gumastha or, servant for collection and that person runs away with the money or otherwise improperly deals with it, the assessee should be allowed a deduction because such a loss as that would be incidental to his business. He has to employ servants for the purpose of collecting sums of money due to him and there is the risk that such servant may prove to be dishonest and instead of paying the profits over to him convert them to his own use. But I cannot distinguish the present case from the case of any professional man or trader who, having collected his profits, is subsequently robbed of them by a stranger to his business. In this case, none of the thieves were the then servants of the assessee although one of them had formerly been his cook. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the negative by Rowlatt, J. Now, it should be observed that the learned Judge did not say that amounts embezzled by an employee in the course of business would not be admissible deductions. On the other hand, he observed : "I quite think, with Mr. Latter, that if you have a business ...... in the course of which you have to employ subordinates, and owing to the negligence or the dishonesty of the subordinates some of the receipts of the business do not find their way into the till, or some of the bills are not collected at all, or something of that sort, that may be an expense connected with and arising out of the trade in the most complete sense of the word." He went on to observe : "I do not see that there is any evidence at all that there was a loss in the trade in that respect. It simply means that the assets of the company, moneys which the company had got and which had got home to the company, got into the control of the managing director of the company, and he took them out. It seems to me that what has happened is that he has made away with receipts of the company dehors the trade altogether in virtue of his position as managing director in the office and being in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Oldfield family, that the company had no auditor and no minutes book, that there was "an almost entire absence of balance-sheets", and that one of the members, Mr. J. E. Oldfield, was in management with wide powers. In view of the fact that he had a large number of shares in the company and that it was in substance a private company, his withdrawals would be more like a partner overdrawing his account with the firm than an agent embezzling the funds of his employer, and it could properly be held that such overdrawing has nothing to do with the trading activities of the firm, whose profits are to be taxed. It would, therefore, be an error to suppose that the observations made by Rowlatt, J., in the above context could be regarded as an authority for the broad proposition that as a matter of law, and irrespective of the nature of business, there could be no business activities with reference to moneys after they have been collected, and that, in consequence, embezzlement thereof could not be incidental to the carrying on of business. And we should further add that it would make no difference in the admissibility of the deduction whether the employee occupies a subordinate positio ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
