TMI Blog1989 (9) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... of Sundaram Finance Private Ltd., exclusively to the assessee. The Corporation had to transport iron ore from the mines to the assessee's place. The assessee also, in consideration of the Corporation plying all its lorries exclusively for the assessee, undertook to pay Sundaram Finance Private Ltd., from whom the Corporation got the lorries under a hire-purchase scheme, a sum of Rs. 21,240.30 towards insurance premium and advance payment for the ten vehicles. During the year ended March 31, 1961, the Corporation transported 15,078 tons and the freight charges for this came to Rs. 2,10,889. For the year ending March 31, 1962, the transport was 7,892 tons and the freight charges being Rs. 76,998. During the year ending March 31, 1963, there was no transport by the Corporation for the assessee. The contract itself is only for a period of three years. As the Corporation defaulted in payment to Sundaram Finance Private Ltd. in respect of the ten lorries as per the hire-purchase agreement, the assessee had to intervene and guarantee the payment of instalments to the said Sundaram Finance Private Ltd. for the release of the lorries seized by Sundaram Finance Private Ltd. for the defaul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim was allowable either as an expenditure under section 37(1) of the Income-tax Act or as a, bad debt. He, however, held that Rs. 9,662.86 being the amount credited to the interest account and subsequently written off and Rs. 3,242 being the legal charges incurred in connection with the suit filed against the Corporation were allowable. Thus, he disallowed the claim of the assessee for deduction of Rs. 2,09,768 from the total taxable income. Aggrieved by the order passed by the Appellate Assistant Commissioner, the assessee preferred an appeal to the Income-tax Appellate Tribunal. Before the Tribunal, it was contended on behalf of the assessee that the loss or expenditure incurred by tile assessee by advancing for the Corporation outstanding payments due to the financing company in order to maintain the continuous supply of iron ore to the Corporation through its vehicles was intimately connected with, the business of the assessee and was a proper deduction either on the ground of business expenditure or as a trading loss or at any rate, as a bad debt. The advance was only to the Corporation, the transport contractor, to enable the contractor to perform his duties of transpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and cited several decisions. Finally, he allowed the appeal holding that the assessee is entitled to deduction of a sum of Rs. 2,09,768 on all the grounds, viz., as business expenditure, bad debt as well as trading loss. The Judicial Member agreed with the Accountant Member with regard to the finding that the loss is allowable as a trading loss. However, he disagreed with the Accountant Member that the same is also allowable under other grounds, viz ., as business expenditure and bad debt. The result is, the assessee succeeded before the Income-tax Appellate Tribunal with the result that the entire sum of Rs. 2,09,768 was ordered to be deducted from the total income of the assessee. At the instance of the Revenue, the Tribunal has formulated the question of law as stated earlier and referred it to this court for opinion. Thiru J. Jayaraman, senior standing counsel for income-tax, contended that the said amount is not deductible from the income of the assessee for the assessment year 1963-64 under any of the three grounds as found by the Accountant Member. As stated earlier, though the Revenue had contended earlier that the expenditure will be of capital nature, learned senior s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or agent is not an admissible deduction under section 10(2)(xi) of the Act, for when an agent or employee misappropriates moneys belonging to his employer in fraud of him and in breach of his obligations to him, it cannot be said that he owes these moneys under an agreement. Nor can a claim for deduction of loss by embezzlement 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 employer can in no sense be said to be an 'expenditure laid out or expended wholly or exclusively' for the purpose of the business. Loss resulting from embezzlement by an employee or agent in a business is; however, admissible as a deduction under section 10(1) of the Indian Income-tax Act if it arises out of the carrying on of the business and is incidental to it. It makes no difference in the admissibility of the deduction whether the employee occupies a subordinate position in the establishment or is an agent with large powers of management. It is a question turning on the facts of each case whether the embezzlement in respect of which deduction is claimed took place in the carrying on of the business." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conduct of the business ; (iii) once it was established that the agent was in charge of the business, that he had authority to operate on the bank account, and that he withdrew moneys in the purported exercise of that authority, his action was referable to his character as agent and any loss resulting from misappropriation of funds by him was a loss incidental to the carrying on of the business ; and (iv) the loss sustained by the appellant as a result of misappropriation by the agent was one which was incidental to the carrying on of the business and should, therefore, be deducted in computing the profits under section 10 (1) of the Act. " . In the decision reported in CIT v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649 (SC), the facts are briefly as follows : The assessee was a manufacturer of sugar. He used to advance seedlings, fertilisers and money to sugarcane growers under an agreement by which the growers agreed to sell the next crop of the sugarcane grown by them exclusively to the assessee at current market rates and to have the advances adjusted towards the price of the sugarcane to be delivered to the company. In a certain year, owing to drought, the sugarcane growers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he branch office at Ramnagar. There was a dacoity and cash and jewels were carried away by the dacoits. During the relevant assessment year, the bank claimed the said amount as a deduction in computing its income from the banking business on the ground that it was trading loss. The Income-tax Officer disallowed the claim on the ground that it was not a loss incidental to the banking business. On appeal, both the Appellate Assistant Commissioner and the Tribunal confirmed that finding. The Allahabad High Court held that the loss by dacoity was incidental to the banking business and was, therefore, a trading loss and that the assessee was entitled to a deduction of the same under section 10(1) of the old Act. The Revenue appealed to the Supreme Court. The Supreme Court upheld the finding of the Allahabad High Court observing as follows (at p. 715) "The retention of the money in the bank is a part of the operation of banking. The retention of money in the bank premises carries with it the ordinary risk of its being subject of embezzlement, theft, dacoity or destruction by fire and such other things. Such risk of loss is incidental to the carrying on of the operations of the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration, the Corporation had to regularly transport iron ores from various mines to the places indicated by the assessee. As the transport Corporation was in financial strain, in order to pay off its dues under the hire-purchase agreement to Sundaram Finance Private Ltd. and to clear off its other debts, the assessee had been making advances to the transport Corporation on the understanding that the freight charges payable by the assessee to the Corporation for transporting iron ore are to be adjusted from the advances paid by the assessee. The statement of case shows that, in fact, during the first year of the three year period, the freight charges payable by the assessee to the Corporation came to Rs. 2,10,389. During the second year of the agreement also, a sum of Rs. 76,993 has been paid by the assessee as freight charges. Only during the third year, the Corporation did not transport any iron ore and, as such, no liability as freight charges payable by the assessee to the Corporation arose. After adjusting the freight charges towards the liabilities, a sum of Rs. 2,09,768 remained payable by the Corporation to the assessee at the end of the assessment year 1963-64. Transport o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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