TMI Blog1958 (4) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to as the Act. The appellant is the sole proprietor of a firm called Bansilal Abirchand Kasturchand, which carries on business as money-lenders, dealers in shares and bullion and commission agents in Bombay, Calcutta and other places. He is a resident of Bikaner, and manages the business at the several places through agents. During the relevant period, the agent of the firm at Bombay was one Chandratan, who held a power-of-attorney dated May 13, 1944, conferring on him large powers of management including authority to operate on bank accounts. During the period November 15, 1944, to November 23, 1944, the agent withdrew from the firm's bank account sums aggregating to ₹ 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 called upon him to pay the amounts withdrawn by him.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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss, which must be taken into account in computing the profits under section 10(1) of the Act. As regards the first ground, the authorities have consistently held that the deduction is not admissible under section 10(2)(xi) of the Act, and that, in our view, is correct. A debt arises out of a contract between the parties, express or implied, and when an agent misappropriates monies belonging to his employer in fraud of him an in breach of his obligations to him, it cannot be said that he owes those monies under any agreement. He is no doubt liable in law to make good that amount, but that is not an obligation arising out of a contract, express or implied. Nor does it make a difference that in the accounts 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 Nor can a claim for deduction be admitted under section 10(2)(xv), because moneys which are withdrawn by the employee out of the business till without authority and in fraud of the proprietor can in no sense be said to be an expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act. These being the governing principles, in deciding whether loss resulting from embezzlement by an employee in a business is admissible as a deduction under section 10(1) what has to be considered is whether it arises out of the carrying on of the business and is incidental to it. Viewing the question as a businessman would, it seems difficult to maintain that 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 busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs directly from the necessity of deputing certain duties to an employee, and should therefore be allowed. They accordingly allowed the deduction as a loss incidental to the conduct of the business . In Ramaswami Chettiar v. Commissioner of Income-tax, Madras, the assessee was carrying on banking business in several places in India and in Burma. On October 21, 1926 thieves broke into the strong room in the business premises at Moulmiengyum and stole cash and currency notes of the value of ₹ 9,335. The question was whether this amount could be allowed as a deduction. It was held by the majority of the judges that it could not be. In the judgment of the learned Chief Justice, the law was thus stated : If anyone is paid 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision in Curtis v. J. G. Oldfield Limited. It is necessary to examine the decision in Curtis v. J. G. Oldfield somewhat closely, as the main controversy in the Indian courts has been as to what was precisely determined therein. There, the facts were that the managing director of a company, who was in exclusive control of its business, had, availing himself of his position as such managing director, withdrawn large amounts from time to time and applied them to his own personal affairs. This went on for several years prior to his death, and, thereafter, the fraud was discovered, and the amounts overdrawn by him were written off as irrecoverable. The question was whether these amounts could be allowed as a deduction, and it was answered 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 bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts in banks but also to withdraw them. That is to say, a continuous operation on the bank account is incidental to the conduct of the business. The theory that when once moneys are put into the bank they have got home and that their subsequent withdrawal from the bank would be de hors the business, will be altogether out of place in a business such as banking. It will be a wholly unrealistic view to take of the matter, to hold that the realisations have reached the till when they are deposited in the bank, and that that marks the terminus of the business activities in money-lending. It should also be mentioned that in Curtis v. J. G. Oldfield though the assessee was a company, it was found that the shares were all held by the members of 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 emb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as agent, and any loss resulting from misappropriation of funds by him would be a loss incidental to the carrying on of the business. It was also contended that the power-of-attorney dated 13th May, 1944, under which Chandratan was constituted agent related not only to the business of the appellant but also to his private affairs, and that there was no proof that the embezzlement was in respect of the business assets of the appellant and not of his private funds. No such question was raised before the income-tax authorities, and their finding assumes that the moneys which were misappropriated were business funds. We are also not satisfied that, on its true construction, the authority conferred on the agent by the power-of-attorney extended to the personal affairs of the appellant. In the result, we are of opinion that the loss sustained by the appellant as a result of misappropriation by Chandratan is one which is incidental to the carrying on of his business, and that it should therefore be deducted in computing the profits under section 10(1) of the Act. In this view, the order of the lower court must be set aside and the reference answered in the affirmative. The appellant wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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