JUDGMENT
1. A statement of the case has been submitted by the Income-tax Appellate Tribunal, ‘B’ Bench, Patna, on the following question of law, which has been referred for the opinion of this court under Section 256(1) of the , I.T. Act, 1961 (hereinafter to be referred to as ” the Act”):
” Whether, on the facts and in the circumstances of this case, the Tribunal was correct in law in holding that the loss of Rs. 10,025 which was taken by the munim was trading loss incidental to the business ? ”
2. The facts are not in controversy. The assessee deals in grains and groceries. The assessee sent the munim, Shri Shib Paul, to Ranchi on
September 12, 1969, with cash amounting to Rs. 10,025 for making purchase of some grocery articles and for making payment of some outstanding dues to some of the constituents. The munim made certain purchases from various firms and sent the same to the assessee by truck on September 20, 1969. According to the assessee, the munim, Shri Shib Paul, informed that he would be coming back shortly and when he did not turn up on September 30, 1969, the assessee contacted the parties at Ranchi and learnt that payments were not made to them. The assessee lodged a report with the police on October 2, 1969, after he came back from Ranchi where he had gone personally to find out the whereabouts of the munim. On these facts, the assessee claimed before the ITO that the said loss should be allowed as a trading loss as the amount in question had been embezzled by the munim. The ITO did not accept the contention as, in his opinion, the assessee had not made any reasonable effort to find out the whereabouts of the munim and recover the amount from him. The assessment order of the ITO forms part of the statement of the case as annex. A.
3. This action of the ITO was confirmed by the AAC in appeal. The order in appeal forms part of the statement of the case as annex. B. It is worthwhile to note here an observation of the AAC made in the appellate order:
“The said munim is said to have disappeared thereafter and all attempts through police to trace him were unsuccessful and his fate is not known yet. In my opinion, this cannot be treated as business loss.”
4. Being aggrieved by the order of the learned AAC, the assessee filed an appeal before the Tribunal where it was submitted on behalf of the assessee that the loss was suffered in the ordinary course of business as it was part and parcel of the assessee’s business to send an employee with cash to purchase goods from various places, and, therefore, the loss of the amount in question caused to the assessee on account of its embezzlement by his munim was an allowable expenditure. The Tribunal allowed the loss as a business loss, while holding in para. 8 of its judgment that :
” The fact that the assessee’s business required purchasing of goods from outstation parties when employees were sent with huge cash cannot be denied. He has to place reliance for such work on old employee. The said munim was in service for over 7 years and was drawing salary of Rs. 250 per month. On earlier occasion also he has gone for such work. The factum of loss has also been proved inasmuch as the assessee has lodged a F.I.R. with the police on 2-10-69 only shortly after the incident. Merely because the assessee has not taken any step to recover, it cannot be said to be a ground for not allowing such item as a business loss. ”
5. On these facts, the question that arises for consideration is as to whether the amount embezzled by the aforesaid munim, Shri Shib Paul, while engaged in the regular course of business, could be allowed as a trading loss or not. The point is squarely covered by a decision of the Supreme Court in Badridas Daga v. CIT [1958] 34 ITR 10, wherein it has been held that such a case is squarely covered by Section 10(1) of the Indian I.T. Act, 1922, corresponding to Section 28 of the Act. There are decisions of this court as well as other courts which have been approved by the Supreme Court in principle. Such decisions are Jagarnath Thtrani v. CIT [1925] ILR 4 Patna 385; 2 ITC 4 (Pat), M. P. Venkatachalapathy Iyer v. CIT [1951] 20 ITR 363 (Mad), Lord’s Dairy Farm Ltd, v. CIT [1955] 27 ITR 700 (Bom) and Molipur Sugar Factory Ltd. v. CIT [1955] 28 ITR 128 (Pat).
6. On the contrary, Mr. B.P. Rajgarhia, learned senior standing counsel for the department, contended that such amount could not be treated as a trading loss in view of the decision of the Supreme Court in the case of Associated Banking Corporation of India Ltd, v. CIT [1965] 56 ITR 1. He also relied on some observations in the decisions of the High Courts in M. P. Venkatachalapathy Iyer v. CIT[1951] 20 ITR 363 (Mad) and Lord’s Dairy Farm Ltd. v. CIT [1955] 27 ITR 700 (Bom). In all these cases, the only question for consideration and, which was referred for the opinion of the High Court, was as to in which assessment year, corresponding to the relevant accounting year, such a loss could be treated as an allowable deduction. It was in that context that those observations were made. That is not the point in question here. Here the only question is as to whether such a loss could be treated as a trading loss or not. It would bear repetition to say that in view of the decision of the Supreme Court in Badridas Daga v. CIT [1958] 34 ITR 10, it has to be treated as a trading loss, although under Section 28 of the Act corresponding to Section 10(1) of the 1922 Act. It is well settled that the loss sustained 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 1922 Act corresponding to Section 28 of the Act.
7. We thus have no hesitation in answering the question in the affirmative, in favour of the assessee and against the Revenue. We, accordingly, hold that, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the loss of Rs. 10,025, which was taken away by the munim, was a trading loss incidental to the business. The assessee should be entitled to the costs–hearing fee at Rs. 250.
