Kerala High Court
Commonwealth Trust (India) Ltd. vs Commissioner Of Income-Tax on 10 November, 1999
Equivalent citations: [2000]242ITR593(KER)
Author: K.S. Radhakrishnan
Bench: Arijit Pasayat, K.S. Radhakrishnan
JUDGMENT K.S. Radhakrishnan, J.
1. Pursuant to the direction of this court in O.P. No. 7485 of 1993, the Income-tax Appellate Tribunal, Cochin Bench (in short "the Tribunal"), referred the following questions of law for opinion under Section 256(2) of the Income-tax Act, 1961 (in short "the Act") :
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the amount of Rs. 69,434 being the amount defalcated by the employee of the assessee-company is not an allowable deduction ?
(2) Whether, on the facts and in the circumstances of the case, there were materials for the Tribunal to hold that the employee concerned was not competent to disburse the amount and hence it cannot be considered as an act during the course of business of the assessee ?"
2. The short facts which are necessary for the disposal of this reference are as follows. The assessment year in question is 1981-82. The assessee-company is an industrial company engaged in the manufacture and sale of tiles and hand-woven goods. For the assessment year under consideration, the Income-tax Officer added a sum of Rs. 68,434 being net provision for defalcated amount of wages, to the total income of the assessee. Aggrieved by the said addition, the assessee took up the matter before the Commissioner of Income-tax (Appeals), who deleted the addition holding that the employee of the assessee-company was entrusted with the cash for payment of wages in the course of the assessee's business and, therefore, the defalcation made was a trading loss and hence allowable. The matter was then taken up in appeal by the Revenue before the Tribunal. The Tribunal set aside the order of the Commissioner of Income-tax (Appeals) relying on the admission made by the assessee's representative that the employee of the assessee, who defalcated the amount, was not authorised to disburse the amount. The Tribunal therefore confirmed the addition made by the Income-tax Officer.
3. Counsel appearing for the assessee, Sri P. Balachandran, submitted that defalcation made by the employee is to be treated as a trading loss, which, according to the assessee, arose in the course of carrying on the business. According to him, it is the employee of the assessee-company who made defalcation after being entrusted with cash for payment of wages to the employees in the course of the assessee's business. In support of his contention, he relied on the decisions of the Supreme Court in Badridas Daga v. CIT, [1958] 34 ITR 10 and also Ramchandar Shivnarayan v. CIT, [1978] 111 ITR 263. Reliance was also placed on the decision of this court in Churakulam Tea Estates Pvt. Ltd. v. CIT, [1995] 214 ITR 457.
4. Counsel for the Revenue, Shri P.K. Ravindranatha Menon, on the other hand, contended that since the employee who had defalcated the amount was not authorised to disburse the amount, the same cannot be considered as an act during the course of carrying on the assessee's business and consequently not a trading loss. Counsel further submitted that the duty to make payment is on the manager or cashier and not on the employee who defalcated the amount.
5. The test for determining whether a particular loss will be deductible in computing the business profit or not was laid down by the Supreme Court in Ramchandar Shivnarayan's case [1978] 111 ITR 263 as follows (page 269) :
"If there is a direct and proximate nexus between the business operation and the loss or it is incidental to it, then the loss is deductible, as, without the business operation and doing all that is incidental to it, no profit can be earned. It is in that sense that from a commercial standard such a loss is considered to be a trading one and becomes deductible from the total income, although, in terms neither in the 1922 Act nor in the 1961 Act, there is a provision like Section 51(1) of the Australian Act."
6. In Badridas Daga's case [1958] 34 ITR 10 (SC), loss was sustained by the assessee-firm carrying on business as money-lenders as a result of misappropriation by an agent who had a power of attorney conferring on him powers of management including authority to operate bank accounts. The Supreme Court held that the loss sustained by the assessee as a result of misappropriation was one incidental to the carrying on of the business and, therefore, it should be deducted in computing the profit under Section 10(1) of the Indian Income-tax Act, 1922. In CIT v. Nainital Bank Ltd., [1965] 55 ITR 707 (SC), the Supreme Court held that the loss occurred by dacoity should be treated as business loss. The Calcutta High Court in Khaitan and Co.'s case [1979] 118 ITR 728, also took the view that the loss sustained by a firm of solicitors by an unknown person forging the signature of one of the partners and withdrawing money from the bank account would be loss incurred by the firm in the course of business and was incidental to its carrying on its business.
7. This court in Churakulam Tea Estates Pvt Ltd. v. CIT, [1995] 214 ITR 457, held that the loss sustained due to misappropriation of money by a trusted and long-time employee of the managing director who has been associated with the working of the assessee-firm is a loss to be deducted as a business loss. In that case this court took the view that even though the employee defalcated the amount, he was not appointed directly by the company, but by the managing director. This court took the view that the amount defalcated would amount to trading loss.
8. The above mentioned decisions would amply establish that if there is direct and proximate nexus between the business operation and the loss, or it is incidental to it, then the loss is deductible as without the business operation and doing all that is incidental to it, no profit can be earned. In the instant case, we notice that in the course of the assessee's business money was entrusted with an employee of the assessee for disbursement of wages. The entrustment was in the course of the assessee's business. The mere fact that the duty to make payment of wages is cast on the manager or cashier is no reason to hold that the entrustment of money to the employee is not in the course of carrying on the business of the assessee. The employee defalcated the amount when he was engaged in the activities of the assessee's business. Therefore, the finding of the Tribunal that no duty is cast on the employee to disburse the amount, and therefore it will not amount to trading loss, cannot be sustained. The competency of the employee to disburse the amount will have no consequences since the loss sustained was during the course of business of the assessee.
9. We therefore hold that the loss sustained by the assessee was directly connected with the business operation and was incidental to the carrying on of the business of the assessee. We are of the view that the Tribunal erred in coming to the conclusion that since the employee was not authorised to disburse the amount, the same cannot be treated as a trading loss. We, therefore, answer the questions in the negative, that is, in favour of the assessee and against the Revenue.
10. Reference is answered as above.
11. A copy of this judgment under the seal of the High Court and signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, for information.