TMI Blog1994 (11) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... fairs of the company was entrusted with the managing director, Sri Krishnamurthy. One Anandamurthy, a close relative of the managing director, was a trusted employee of the managing director. It was later found that during the calendar years 1973 and 1974, Anandamurthy committed defalcation of the funds of the assessee-company to the tune of Rs. 6,90,887.65. When the defalcation was noticed by the assessee-company in August, 1974, a special audit was arranged and the report of the audit was received on February 6, 1976. The company could recover an amount of Rs. 3,59,322 which related to bank transactions by filing a suit against the bank and obtaining a decree from the Madras High Court. On January 24, 1977, Anandamurthy was declared insolvent and the amount due from him was written off by the assessee on March 31, 1977, and the claim for deduction to the extent of Rs. 3,31,565.65 was put forward as business loss. The assessing authority took the view that Anandamurthy was not an employee of the assessee-company and, therefore, the loss sustained due to his misappropriation cannot be claimed as business loss by the company. The above view was affirmed by the Commissioner of Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss sustained by the company as a result of his defalcation is liable to be treated as business loss. In support of the above contention, the assessee relied on two decisions of the Supreme Court in Badridas Daga v. CIT [1958] 34 ITR 10 and CIT v. Nainital Bank Ltd. [1965] 55 ITR 707. Reliance was also placed on the following decisions of the High Courts also, Khaitan and Co. v. CIT [1979] 118 ITR 728 (Cal), Punjab Steel Stockholders' Syndicate Ltd. v. CIT [1980] 125 ITR 519 (P H), G. G. Dandekar Machine Works Ltd. v. CIT [1993] 202 ITR 161 (Bom) and Kothari and Sons v. CIT [1966] 61 ITR 23 (Mad). According to the Revenue, the decisions of the Supreme Court relied on by the assessee have no application to the facts of the assessee's case. On the other hand, the dictum laid down by this court in Yoosuf Sagar Abdulla and Sons (P.) Ltd. v. CIT [1990] 185 ITR 371 and that in Curtis v. J. and G. Oldfield Ltd. [1925] 9 TC 319 (KB) are directly applicable. Since Anandamurthy was not an employee of the company, but was only employed by the managing director, according to the Revenue, any loss sustained through him cannot be treated as business loss of the company. In Badridas' case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set off. In G. G. Dandekar Machine Works Ltd. v. CIT [1993] 202 ITR 161 (Bom), the claim of the assessee was in connection with embezzlement of its money by an unknown person. The assessee had a current account with a bank which was maintained for running its business. The assessee's case was that on the basis of a forged letter written to the bank under the forged signature of the secretary of the assessee-company, the bank had issued an account payee draft in favour of a stranger. It was held that the loss caused to the assessee by embezzlement from its bank account was a loss incidental to the business of the assessee. In the light of these decisions, it is contended by the assessee before us that if loss sustained on dacoity, embezzlement, by a stranger or on defalcation, responsibility for which could not be even fixed on any particular employee, can be treated as business loss, there is no justification for denying the claim put forward by the assessee on the ground that Anandamurthy was not an agent or employee of the company. In Yoosuf Sagar Abdulla and Sons (P.) Ltd. v. CIT [1990] 185 ITR 371, a decision of this court, a contention was raised that the unaccounted profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sister concern, Harska Company. It is relevant to note that even the auditors were also under the impression that Anandamurthy was an employee of the company. It is in the background of these facts, we have to consider whether the two decisions relied on by the Revenue is of any help to support its stand. In Curtis v. J. and G. Oldfield Ltd. [1925] 9 TC 319 (KB), Rowlatt J., had observed : "...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. " But, this was not what has happened in that case as is clear from the following observation of the learned judge : " It seems to me that what has happened is that he has made away with receipts of the company de hors the trade altogether in virtue of his position as managing director in the office and being in a position to do exactly what he likes. " So also in Yoosuf Sagar Abdulla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of stock-in-trade such as of a banking company or a money-lender or is directly connected with other business operations. The risk is inherent in carrying on the business and is either directly connected with it or incidental to it. As mentioned earlier, Anandamurthy committed defalcation when he was engaged in activities which arose directly in the course of the business of the assessee-company. We are, therefore, of the view that the fact that Anandamurthy was not appointed as an employee or agent directly by the company is irrelevant for the company to claim loss sustained by it as a result of defalcation as a deductible loss, if other conditions are satisfied. Defalcation came to the notice of the company in August, 1974. A special audit was arranged and the report of the audit was received on February 6, 1975. A suit was filed against the bank and a decree was obtained to the extent of Rs. 3,59,322. A police complaint was filed against Anandamurthy on February 13, 1985. On January 24, 1977, Anandamurthy was declared insolvent. Under the circumstances, the assessee found that there was no reasonable chance of obtaining restitution of the amounts. The amount was then writte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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