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Association Banking Corporation of India Ltd. Versus Commissioner of Income-Tax, Bombay City I

1960 (4) TMI 73 - BOMBAY HIGH COURT

Income-Tax Reference No. 72 of 1957 - Dated:- 22-4-1960 - S. T. Desai And V. S. Desai, JJ. For the Assessee: R. J. Kolah with D. H. Dwarkadas For the Commissioner: G. N. Joshi with R. J. Joshi JUDGMENT S.T. Desai, J. This reference raises some interesting questions and it came up for hearing before Chagla, C.J., and myself on 19th March, 1958. As we shall presently point out, we decided one of the two questions and gave certain directions as to question (2) and required a supplementary statement .....

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nted a defalcation 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 .....

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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 to the assessee to claim a bad debt which had not been actually written off in its books of account. Following the view taken in a series of earlier decisions of this court, we decided the question in favour of the revenue. For myself, I may mention that I had found difficulty in construing the .....

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question by substituting the figure of ₹ 38,35,689, for ₹ 48,50,689, mentioned in question (1). Question (2) referred only to business loss under section 10(2)(XV). We felt that the claim made by the assessee might or might not fall under that provision and very likely it did not fall under that provision in view of the decision of this court in the case of Lord's Dairy Farm [1955] 27 I.T.R. 700. We, therefore, reframed the question so as to read: "Whether on the facts and .....

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h we have put on section 10(2)(XI) and assuming that it is not necessary to write off the amount claimed by the assessee in the books of account of the assessee, even so there must be a finding that these debts were irrecoverable in the year of account, and this fact has not been found by the judicial member..." We then referred to what had been stated by the accountant member. In our view the finding of the accountant member was not clear. We, therefore, directed the Tribunal to submit a s .....

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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. Co .....

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nd the Union Bank of India had remitted ₹ 18,00,000 to the bank towards the purchase of 3% Bhopal Government Loan. The assessee bank entered the receipt of the amount in its books of account. M.C. Javeri, the secretary of the bank, withdrew the amount in December, 1946, without any authority from the two depositing banks and the two banks claimed the amount as preferential creditors in the liquidation proceedings. Their claims were ultimately settled in 1949 by payment of ₹ 10,15,000 .....

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s not in management of the affairs of the bank at any date thereafter and, therefore, the defalcations took place before that date. There is no dispute and it is not disputable that the defalcations by the secretary took place before 21st April, 1947. The assessment year, as we have already mentioned, is 1948-49 and the account year, which was 1946-47, ended on 30th June, 1947. The liquidator filed his return on 23rd August, 1949. A contention of some importance and interest has been advanced be .....

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evenue to suggest that the loss under consideration was not a trading loss. Now Mr. Kolah, learned counsel for the assessee, has not presented any argument before us on the footing that the case 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 determin .....

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ly 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 Farm Ltd. [1955] 27 I.T.R. 700. 708 was distinguishable and required to be distinguished. We shall presently re .....

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mination of this court in the case of Lord's Dairy Farm Ltd [1955] 27 I.T.R. 700. 708. and have to ascertain for ourselves the ratio decidendi of that case. Mr. Joshi has strongly relied on the following observations of Chagla, C.J., in that case: "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 d .....

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ar, but we are not prepared to read those observations as laying down any absolute and unqualified proposition of law applicable to every such case of embezzlement. Mr. Joshi has told us that an absolute test has been laid down by this court in that decision and we are not at liberty to depart from the view there expressed. We have carefully read that decision but are unable to find in it any attempt to lay down any absolute principle of law. We read those observations, so strongly relied on by .....

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he 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 .....

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present'." The concept that the loss in any such case "must be actual and present" was not a new one but was established in a series of earlier decisions of the Supreme Court. Our attention has been drawn to a decision of the Madras High Court, Venkatachalapathy Iyer v. Commissioner of Incometa [1951] 20 I.T.R. 363. Reference was made to the statement of the law in the decision of the Supreme Court of the United States by the learned judges in their judgment in this case and .....

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the learned judges in this case, which can be read as an opinion to the effect that the loss in like cases can occur only when the matter is compromised. The principle adopted as applicable to the case was the one enunciated by the Supreme Court of the United States, namely, that the loss must be actual and present. We see nothing in the decision of the Madras High Court, which lends support to the argument of Mr. Joshi that a loss can never be said to occur when the embezzlement takes place and .....

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fter the compromise and the moment the dispute was settled between the parties. Therefore, it is abundantly clear that the matter was not regarded by the learned judge as one which turned solely on a point of law but was one in which the facts and circumstances of the case had to be regarded. On a question as to the time when loss can be said to occur, it is difficult to see how there can be any absolute rule of universal applicability. Neither in the decision of this court in the case of Lord&# .....

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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 .....

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s and circumstances of the case and not because there is any absolute rule that as a matter of law loss occurs as soon as misappropriation takes place. In tax parlance loss ordinarily occurs when the funds or moneys are lost to the assessee and there is no real chance of getting back the same. The mere fact that in any such case the assessee had made attempts to recover the amount cannot be conclusive of the matter. It is conceivable for instance that an assessee in any such case may very well k .....

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rdstick, for there can be no yardstick applicable to all cases of the nature under consideration that may come up for determination by the court. Considered in the light of the observations we have made the factual position presents little difficulty. We have already mentioned the relevant dates and some other facts which have bearing on this question. A good deal of stress was laid by Mr. Kolah on the circumstance that it was the liquidator who was concerned in this matter and he could get know .....

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is 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 fac .....

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e 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 facts from which we can say that the loss did occur when those fictitious entries were made. We have said it before and it bears repetition to say that mere entries in the books of account are not of great consequence in these matters, and we must look also at the nature and substance of the matter. For all these r .....

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