TMI Blog1971 (2) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... utilised that amount for purchasing two immovable properties for himself. In 1945, the disputes between him and the company, including the one over the embezzlement, were referred to an arbitrator who passed an award directing him to pay the amount to the company. Under the award, a mortgage was created on the two properties in favour of the company to secure the payment of the amount due to it. A decree was passed by this court in terms of the award on the 3rd of October, 1947. Later, the company brought the mortgaged properties to sale and purchased them with the permission of the court for Rs. 9 lakhs and Rs. 6 lakhs each. Sir Alwyn Ezra was adjudicated insolvent in 1951. On the 31st of December, 1957, that is, at the close of the accounting year relevant for the assessment year 1958-59, the company wrote off the sum of Rs. 9 lakhs. In its revised return for that year, the company claimed the amount under the head "Bad debts". In its letter dated the 24th of April, 1959, to the Income-tax Officer, the company explained the circumstances in which the deduction was claimed stating that: "It is clear from the above that the amount of Rs. 9,00,000 forming part of the above su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of compensation on termination of their services. This amount includes the annuity payable to A. E. Joseph. The first instalment of the annuity was paid to Joseph in the assessment year 1957-58. We are concerned in this reference with the annuity payments made to him in the assessment years 1958-59, 1959-60 and 1960-61. The claim of the company that the amount is deductible under section 10(2)(xv) of the Act has been rejected by the income-tax authorities and by the Tribunal following the view taken by them in the orders pertaining to the year 1957-58. Briefly, they had held in those orders that the payment had no commercial purpose, that it was made merely to effectuate the agreement between the company and Messrs. Tata Sons Pvt. Ltd. and was, therefore, not admissible as a deduction. The assessee had asked the Tribunal to refer to us two more questions covering a payment of Rs. 8,000 and, on its declining to do so, the assessee approached this court under section 66(2) of the Act. In accordance with the directions of this court, the Tribunal has submitted a statement of the case on the following question: "Whether, with regard to the assessment year 1959-60, the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Ezra the latter was authorised to manage the company's business, to deposit in the bank moneys which would come to his hands is an agent of the company, to withdraw the amounts standing to the credit of the company in its bank account and to invest the same in the name and for the benefit of the comany; (viii) Sir Alwyn Ezra was in sole charge of the business from 1929 to 1943; (ix) He withdrew a sum of Rs. 27 1/2 lakhs from the company's account with the Bank of India between 15th March and 1st of December, 1943, and utilised that amount for his private ends; (x) He was as adjudicated insolvent on 20th February, 1951, and that (xi) A sum of Rs.9 lakhs from out of the amount embezzled by him was legitimately written off by the company at the close of the accounting year corresponding to the assessment year 1958-59. These facts have all been accepted by the Tribunal as correct but it holds: "The question undoubtedly is whether the withdrawal, from the bank was de hors the business or was incidental to it and we consider that the decision in Curtis v. J. G. Oldfield is applicable. It is difficult to agree with the assessee's counsel that Sir Alwyn Ezra was no more than a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey conferring large powers of management on him, including the authority to operate bank accounts, withdrew from the firm's account sums aggregating to over Rs. 2 lakhs tnd applied them in satisfaction of his personal debts in speculative transactions. A small amount was recovered by the assessee under a decree passed against the agent and the balance of Rs. 2 lakhs odd was written off. The Tribunal as well as the High Court relied on the decision in Curtis v. J. G. Oldfield and held that the amount embezzled by the agent was not a trading loss and could not, therefore, be allowed. The Supreme Court reversed the decision of the High Court and held that though the loss could not be claimed under section 10(2)(xi) or section 10(2)(xv) of the Act, viewing the question as a businessman would, it was difficult to maintain that the loss did not arise out of the carrying on of the business and was not incidental to it. The loss could, therefore, be claimed under section 10(1). In coming to this conclusion, the Supreme Court applied the following tests: "(1) When a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The nature of this business, particularly the business in sale of shares and securities, was such that large moneys which would come into the hands of the company would be required to be deposited in the bank and to be withdrawn from the bank from time to time. A continuous operation on the bank account was, therefore, a necessary incident of the business and the agent had to be authorised to operate on that account. The company appointed Sir Alwyn Ezra as agent for its business in 1929, which was four years after he joined the company. In 1931, he became a director of the company but that did not affect his position as an agent of the company one way or the other. He discharged his duties honestly and faithfully till 1943--in any case there is nothing to indicate to the contrary. In 1943, he embezzled a large amount during a span of about nine months. He withdrew the amount as if the withdrawal was for the purpose of the business of the company and then pocketed it. In other words, he withdrew the amount in the purported exercise or under colour of authority conferred upon him by the power of attorney and misappropriated it. In these circumstances, it seems to us clear that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s engaged in the business of selling yarn. The accountant of the firm entered all the transactions in the cash book but while striking the balance at the foot of each day, he used to short-total the receipts and over total the disbursements. It was held by the Madras High Court that the amount misappropriated by him was deductible under section 10(1). In Lord's Dairy Farm Ltd.'s case the assessee was a limited company whose business was that of dairy farming. The cashier of the company, whose duty it was to withdraw the moneys from the company's account in the bank, defalcated various amounts. It was held by this court that, as it was necessary for the assessee to employ the cashier and to depute to him the duty of withdrawing moneys from the bank, the loss directly arose from the necessity of deputing that duty to the cashier and was, therefore, a trading loss. In the case of Motipur Sugar Factory the assessee-company carried on business in the manufacture of sugar and had entrusted an employee with its funds for the purpose of distribution among sugarcane growers. The employee was robbed on way and the loss caused by theft was claimed by the company under section 10(1). It was he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le from the gross income of the assessee. In Kothari and Sons v. Commissioner of Income-tax, the assessee carried on business as share dealers and stock brokers. It was held by the Madras High Court that though the business was not one of money lending or banking, the assessee had to entrust cash to the employees for the purposes of day-to-day transactions and if the employees embezzled the amounts entrusted to them, the loss must be held to have been occasioned in the course of the business and was undoubtedly incidental to that business. In Commissioner of Income-tax v. K. T. M. S. Mahmood, the assessee was a dealer in semi-precious stones and while he was carrying a large quantity of watches to his house late at night, he was robbed by two police constables. The Madras High Court held that: "The tests or principles laid down in Commissioner of Income-tax v. Nainital Bank Ltd. cannot reasonably be confined to embezzlement or misappropriation or theft of cash in bank cases, where by the rules entrustment of cash to employees or agents is necessary or unavoidable in carrying on the banking business." On the facts and circumstances of the case it was held that the loss o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted by Sir Percival David in favour of Sir Alwyn Ezra in 1941 in support of his submission that Sir Percival gave to Sir Alwyn Ezra even the power to direct the trustees to act in regard to the 75 per cent. of the share capital held by them. Now clause 5 of the power empowers Sir Alwyn to attend, vote at and otherwise take part in all meetings held in connection with any company or corporation with which Sir Percival was concerned or in relation to any of his investments and to sign proxies for the purpose of voting or for any other purpose connected therewith as freely as he himself could do. Clause 29 is a residuary clause under which the attorney was empowered in general to do all other acts in regard to the estate, property and affairs of the principal to all intents and purposes as he himself could do.These provisions in the power of attorney executed by Sir Percival cannot, in our opinion, empower Sir Alwyn Ezra to exercise the powers of Sir Percival qua the shares held by the trustees. Such a specific power cannot by any known rule of construction be held to fall under a residuary clause like clause 29, and clause 5 does not by its terms convey such a power. It is not po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference to the facts of that case, and can afford no assistance in deciding whether in a given case the embezzlement was incidental to the conduct of the business or not." In the paragraph following this passage the Supreme Court has rejected the "got home" theory as being altogether out of place in a business such as banking. It is important to bear in mind that apart from the fact that in Curtis' case the allowance was claimed as a bad debt, the business of the company, "J. G. Oldfield Ltd.", was managed by a member belonging to the Oldfield family who as the managing director was in sole control of the business. The shares of the company were held by the members of Oldfield family, the company had no auditor, no minutes book and there was "an almost entire absence of balance-sheets". The managing director was allowed very great latitude in the management of the company and the accountants who had prepared the balance-sheets found that many cash payments which passed through the company's accounts did not refer to the company's business but related to the private affairs of J. E. Oldfield, the managing director. The accountants dissected the accounts and by that method as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is embezzled after it was "got home" the loss caused to the principal on account of the embezzlement is not a trading loss. As we have stated earlier, Curtis' case is not an authority for such a proposition and, therefore, it would not be correct to attach any particular importance to the observation made by the Appellate Assistant Commissioner that Sir Alwyn Ezra acted more like a director than as an agent in withdrawing the amounts from the bank. We would also like to add that the Tribunal has apparently not taken any such view of the matter. All that the Tribunal has done is to borrow the observations made by the Supreme Court in regard to the peculiar facts of Curtis' case and to conclude on the basis of those observations that Sir Alwyn Ezra's overdrawing had nothing to do with the trading activities of the company. We must, therefore, hold that the loss caused to the company on account of the embezzlement committed by its agent, Sir Alwyn Ezra, must be deducted while computing the company's assessable profits under section 10(1) of the Act of 1922. The third question which is submitted for our opinion under section 66(2) of the Act relates to a sum of Rs. 8,000 paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000 to Mrs. Messaffi. The payment is described in this letter as "ex gratia". The letter states that Mrs. Messaffi demanded payment of interest from 1945 till 1958 which could not be agreed to and that under threat of legal action the company was asked to pay at least a part of the amount. Ultimately, after some discussion, the company decided to pay Mrs. Messaffi "a sum of Rs. 8,000 as an ex gratia payment in respect of the medical and other expenses incurred by her during her stay in Bombay where she was hospitalised for treatment of cancer. Considering the fact that if we had paid the interest it would have been a very big amount, it is submitted that the sum of Rs. 8,000 paid by us should be allowed as an admissible deduction and treated in lieu of interest" This letter, in our opinion, must be read as a whole. So read, it does not justify the view that the sum of Rs. 8,000 was paid to Mrs. Messaffi for a purpose unconnected with the business of the company. The letter undoubtedly says that the amount was paid "ex gratia", but in the context in which the phrase occurs, it is clear that what was intended to be conveyed was that the company denied its liability to pay interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying the sum of Rs. 8,000 to Mrs. Messaffi must be held to be an expenditure incurred wholly and exclusively for the purpose of the business of the company. There is no substance in the contention that the claim cannot be allowed for the reason that the company did not deduct tax from the amount paid to Mrs. Messaffi. The proviso to section 10(2)(iii) of the Indian Income-tax Act, 1922, on which the department relies in this behalf has no application because the amount was not paid as interest but was paid in settlement of a claim for interest. Secondly, section 10(2)(iii) applies to the interest paid "in respect of capital borrowed for the purposes of the business". Assuming that what was paid to Mrs. Messaffi was interest and not an amount "in lieu of interest", the interest was not paid in respect of any amount "borrowed" from Mrs. Messaffi. For these reasons, our answer to the first question is that in computing the assessee's business income of the year 1957, relevant for the assesssment year 1958-59, the sum of Rs. 9 lakhs is an admissible deduction under section 10(1) but not under section 10(2)(xi) or under section 10(2)(xv) of the Indian Income-tax Act, 1922. Our ans ..... X X X X Extracts X X X X X X X X Extracts X X X X
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