Appeal No 149 of 1956
Appeal by special leave from the judgment and order dated December 22 1954 of the former Nagpur High Court in Misc
Civil Case No 36 of 1954
R J Kolah J M Thakar Ramesh A Shroff J B Dadachanji section N Andley and Rameshwar Nath for the appellant
H N Sanyal Additional Solicitor General of India KN Rajagopala Sastri and R H Dhebar for the respondent
April 25
The Judgment of the Court was delivered by VENKATARAMA AIYAR J
This is an appeal against the judgment of the High Court of Nagpur in a reference under section 661 of the Indian Income tax Act 1922 hereinafter referred 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 692 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 231944 the agent withdrew from the firm s bank account sums aggregating to Rs 230636 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the power of attorney given to the agent and by notice dated December 6 1944 called upon him to pay the amounts withdrawn by him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 misappropriation of the amounts and pleading for mercy
On January 161945 the appellant filed a suit against him in the High Court of Bombay for recovery of Rs 230636 4 0 and that was decreed on February 20 1945
A sum of Rs 28000 was recovered from Chandratan and adjusted towards the decree and the balance of Rs 202442 13 9 was written off at the end of the accounting year as irrecoverable
Before the Income tax authorities the dispute related to the question whether this amount of Rs 202442 13 9 was an admissible deduction
The Tribunal found that the amount in question represented the loss sustained by the appellant owing to misappropriation by his agent Chandratan but held on the authority of the decision in Curtis vs J  G Oldfield Limited 1 that it was not a trading loss and therefore could not be allowed
On the application of the appellant the Tribunal referred the following question of law for the decision of the High Court Nagpur Whether the said sum of Rs 202442 13 9 being part of the amount embezzled by the assessee s Munim is allowable as a deduction under the Indian Income 1 693 tax Act either under Section 101 or under the general principles of determining the profit and loss of the assessee or Section 102xv   The learned Judges held that the case was governed by the decision in Curtis vs J  G Oldfield Limited 1 and answered the question against the appellant
An application under section 66A2 for a certificate was also dismissed and thereafter the appellant applied for and obtained leave to appeal to this Court under article 136 and that is how the appeal comes before us
The question whether moneys embezzled by an agent or employee are allowable as deduction in computing the profits of a business under section 10 of the Act has come up for consideration frequently before the Indian courts and the decisions have not been quite uniform
Before discussing them it is necessary that we should examine the principles that are in law applicable to the determination of the question
Three grounds have been put forward in support of the claim for deduction 1 that the los 3 sustained by reason of embezzlement is a bad debt allowable under section 102xi of the Act 2 that it is a business expense falling within section 102xv of the Act and 3 that it is a trading loss which must be taken into account in computing the profits under section 101 of the Act
As regards the first ground the authorities have consistently held that the deduction is not admissible under section 102xi 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 and 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
11925 694 Nor can a claim for deduction be admitted under section 102xv 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 expenditure laid out or expended wholly and exclusively  for the purpose of the business
The controversy therefore narrows itself to the question whether amounts lost through embezzlement by an employee are a trading loss which could be deducted in computing the profits of a business under section 101
It is to be noted that while section 101 imposes a charge on the profits or gains of a trade it does not provide how those profits are to be computed
Section 102 enumerates various items which are admissible as deductions but it is well settled that they are not exhaustive of all allowances which could be made in ascertaining profits taxable under section 101
In Incometax commissioner vs chitnavis 1 the point for decision was whether a bad debt could be deducted under section 101 of the Act there having been in the Act as it then stood no provision corresponding to section 102xi for deduction of such a debt
In answering the question in the affirmative Lord Russel observed  Although the Act nowhere in terms authorizes the deduction of bad debts of business such a deduction is necessarily allowable
What are chargeable in income tax in respect of a business are the profits and gains of a year and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred otherwise you would not arrive at the true profits and gains
 It is likewise well settled that profits and gains which are liable to be taxed under section 101 are what are understood to be such according to ordinary commercial principles
The word  profits  is to be understood  observed Lord Halsbury in Gresham Life Assurance Society vs Styles 2  in its natural and proper sense in a sense which no commercial man would misunderstand 
Referring to these observa 1 1932 L R 59 IA 290 296 297
21892 AC 309 315   188
695 tions Lord Macmillan said in Pondicherry Railway Cov
Income tax Commissioner 1 English authorities can only be utilized with caution in the consideration of Indian income tax cases owing to the differences in the relevant legislation but the principle laid down by Lord Chancellor Halsbury in Gresham Life Assurance Society V Styles 2 is of general application unaffected by the specialities of the English tax system
 The result is that when a claim is made for a deduction for which there is no specific provision in section 102 whether 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 101 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 102xv 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 business
Human nature being what it is it is impossible to rule out the possibility of an employee taking advantage of his position as such employee and misappropriating the funds of his employer and the loss arising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it
1 1931 LR 58 IA 239 252
2  315  188 696 And that is how it would be dealt with according to ordinary commercial principles of trading
At the same time it should be emphasised that the loss for which a deduction could be made under section 101 must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee even if it has some connection with his business
If for example a thief were to break overnight into he premises of a moneylender and run away with funds secured therein that must result in the depletion of the resources available to him for lending and the loss must in that sense be a business loss but it is not one incurred in the running of the business but is one to which all owners of properties are exposed whether they do business or not
The loss in such a case may be said to fall on the assessee not as a person carrying on business but as owner of funds
This distinction though fine is very material as on it will depend whether deduction could be made under section 101 or not
We may now examine the authorities in the light of the principles stated above
In Jagarnath Therani vs Commissioner of Income tax 1 the facts were that the assessee who was carrying on business entrusted a sum of Rs 25000 to his gumastha for payment to a creditor but he embezzled it
The question referred for the opinion of the High Court was whether that sum could be allowed as deduction in the computation of profits
In answering it in the affirmative the learned Judges observed that according to the practice obtaining in England sums embezzled by employees were allowed as deductions and referred to statements of the law to that effect from Sanders  Income tax and Super tax Murray and Carters  Guide to Income tax Practice and to the following passage in Snellings  Dictionary of Income tax and Super Tax Practice If a loss by embezzlement can be said to be necessarily incurred in carrying on the trade it is allowable as
deduction from profits
In an ordinary case it springs directly from the necessity of deputing 11925 ILR 4 Pat
697 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 vs Commissioner of Income Tax Madras 1 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 Rs 9335
The question was whether this amount could be allowed as a deduction
It was held by the majority of the Jndges that it could not be
In the judgment of the learned Chief Justice the law was thus stated  If any one 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 those profits in a strong room or some other place regarded by him to be a place of safety
1 can well understand that in cases where the collection of profits or payment of debts due is entrusted to a gumastha or servant for collection and that person runs away with the money or otherwise improperly deals with it the assessee should be allowed a deduction because such a loss as that would be incidental to his business
He has to employ servants for the purpose of collecting sums of money due to him and there is the risk that such servant may prove to be dishonest and instead of paying the profits over to him convert them to his own use
But I cannot distinguish the present case from the case of any professional man or trader who having collected his profits is subsequently robbed of them by a stranger to his business
In this case none of the thieves were the then servants of the assessee although one of them had formerly been his cook  These observations while they support the right of the asssee to deduction of loss resulting from 11930 IL R  906 907
698 embezzlement by an employee also show the extent and limits of that right
In Bansidhar Onkarmal V Commissioner of Incometax 1 there was a theft of money by an accountant but it took place after the office hours and it was held following the decision in Ramaswami Chettiar vs Commissioner of Income tax 2 that it could not be allowed as a deduction under section 101 of the Act as it was not incidental to the carrying on of the trade
But it was observed by Narasimham J who delivered the leading judgment that it might have made a difference if the theft had been by the accountant during the office hours
In Venkatachalapathy Iyer vs Commissioner of Income tax 3 the assessees were a firm of merchants engaged in the business of selling yarn
Its accountant was one Rajarathnam lyengar whose duty it was to receive cash on sales make disbursements and maintain accounts
He duly entered all the transactions in the cash book but when striking the balance at the end of each day he short totalled the receipts and overtotalled the disbursements and misappropriated the difference
The question was whether the amounts thus embezzled could be deducted
On a review of the authorities Satyanarayana Rao and Raghava Rao JJ held that the loss was incidental to the carrying on of the business and should be allowed
The appellant contends that this decision is decisive in his favour  but the learned Judges of the Court below were of the opinion that on the facts it was distinguishable and that the present case fell within the decision in Curtis vs J  G Oldfield Limited 4
It is necessary to examine the decision in Curtis vs
J  G oldfield 4 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 1 3 2 Mad 904 906 907
4 699 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 business do not find their way into the till or some of the bills are not collected at all or something of that sort that may be an expense connected with and arising out of the trade in the most complete sense of the word He went on to observe  I do not see that there is any evidence at all that there was a loss in the trade in that respect
It simply means that the assets of the Company moneys which the Company had got and which had got home to the Company got into the control of the Managing Director of the Company and he took them out
It seems to me that what has happened is that he has made away with receipts of the Company de hors the trade altogether in virtue of his position as Managing Director in the office and being in a position to do exactly what he likes Thus what the learned Judge really finds is that the embezzlement was not connected with the carrying on of the trade but was outside it and on that finding the decision can only be that the deduction should be disallowed
But the learned Judges in the Court below would appear to have read the above observations as meaning that as a rule of law embezzlements made prior to the receipts of the amounts by the assessees would be incidental to the carrying on of the trade and therefore admissible but that embezzlements 89 700 made after receipt are not connected with the carrying on of the trade and are therefore inadmissible
We do not so read those observations
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 and the observations of the learned Judge that it did not so take place have reference 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
Now in Curtis vs J  G Oldfield Limited1 the company was doing business in wine and spirit and in such a business it is possible to hold that when once the price is realised and put into the bank the trading has ceased and that the subsequent operations on the bank account are not incidental to the carrying on of the trade
But here we are dealing with a banking business which consists in making advances realising them and making fresh advances and for that purpose it is necessary not merely to deposit 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 vs J  G oldfield 1 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 Cc 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 1 701 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 embezzling the funds of his employer and it could properly be held that such overdrawing has nothing to do with the trading activities of the firm whose profits are to be taxed
It would therefore be an error to suppose that the observations made by Rowlatt J in the above context could be regarded as an authority for the broad proposition that as a matter of law and irrespective of the nature of business there could be no business activities with reference to moneys after they have been collected and that in consequence embezzlement thereof could not be incidental to the carrying on of business
And we should further add that it would make 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
Subsequent to the decision now under appeal the Bombay High Court had occasion to consider this question in Lord s Dairy Farm Ltd vs Commissioner of Income tax 1
On a review of the authorities including the decision in Curtis vs J  G Oldfield Limited 2 Chagla C J and Tendolkar J held that loss caused to a business by defalcation of an employee was a trading loss and that it could be deducted under section 101
In Motipur Sugar Factory Ltd vs Commissioner of Income tax 3 an employee who had been entrusted with the funds of a company for purposes of distribution among sugarcane growers in accordance with statutory rules was robbed of them on the way
It was held by Ramaswami and Sahai JJ
that the loss was incidental to the conduct of the trade and must be allowed
We agree with the decisions in Venkatachalapathy Iyer vs Commissioner of Incometax 4 Lord s Dairy Farm Ltd vs Commissioner of Income tax 1 and Motipur Sugar Factory Ltd vs Commissioner of Income tax3
1 1925 9 Tax Cas 319
3 702 It was argued for the respondent that there was no evidence much less proof that when Chandratan withdrew funds from the bank he did so for the purpose of making any advance and that therefore the withdrawal could not be held to have been for the conduct of the trade
That in our opinion is not necessary
When once it is established that Chandratan was in charge of the business that he had authority to operate on the bank accounts and that he with drew the moneys in the purported exercise of that authority his action is referable to his character 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 May 13 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 ofattorney 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 misappropiriation by Chandratan is one which is incidental to the carrying on of his business and that it should therefore deducted in computing the profits under section 101 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 will get his costs of this appeal and of the reference in the Court below
appeal allowed


Summary:
The respondent firm manufactured patent and proprietary P  P medicines failing under TI 14E and also pharmaco poeial preparations falling under TI 68 of the Central Excise Tariff of an aggregate value of Rs205933860 and cleared the same during the period 1479 to 31380 without payment of duty availing the benefit of exemption of excise duty under Notification No 80 of 1980
The respondent also cleared during the period from 1st April 1980 to 29th October 1980 P  P medicines failing under TI14E valued at Rs43205009
The respondent filed a declaration for exemption under Notification No 71 of 1978 dated 131978 and furnished particulars of only the value of P  P medicines manufac tured and cleared during the preceding financial year 1979 80 and did not furnish the particulars of the value of the goods under Tariff Item 68 during that financial year
The manufacturer also did not file any declaration under Notifi cation No 111 of 1978 dated 951978 claiming exemption from the licensing control
However on July 30 1980 the firm filed a classification list in respect of P  P medi cines claiming exemption under Notification No 8080
The appellant issued a show cause notice to the respond ent to explain as to why excise duty in respect of patent and proprietary medicines manufactured and cleared by it should not be demanded under proviso a to Rule 101 of the Central Excise Rules and why penalty should not be imposed under Rule 173Q of the Central Excise Rule 1944 for having cleared the goods without payment of duty in contra vention of Rule 173Qa and d of the Rules
On receipt of reply the appellant held the respondent to be ineligible for the benefit of the 712 two notifications and demanded duty in respect of the goods cleared by them for the period 141980 to 291080
He also held that in view of the respondent s failure to reveal correct position the firm was liable to pay the duty and that the time limit for the recovery of the duty under Rule 10 Section 11A of the Central Excise Rules would run for five years
The respondent filed an appeal before the Tribunal contending that the demand for the period beyond six months from the receipt of the show cause notice was time barred inasmuch as there was no suppression or mis statement of facts by the appellant with a view to evade payment of duty
The Revenue s plea was that there was suppression andor misdeclaration andor wrong information furnished in the declaration itself
Hence the appeal by the Revenue
Dismissing the appeal HELD 11 In order to make the demand for duty sustain able beyond a period of six months and up to a period of 5 years in view of the proviso to sub section
11A of the Act it has to be established that the duty of excise had not been levied or paid or short levied or short paid or erroneously refunded by reasons of either fraud or collusion or wilful mis statement or suppression of facts or contravention of any provision of the Act or Rules made thereunder with intent to evade payment of duty
Something positive other than mere inaction or failure on the part of the manufactur er or producer or conscious or deliberate withholding of information when the manufacturer knew otherwise is re quired before it is saddled with any liability beyond the period of six months
717A C 12 Whether in a particular set of facts and circum stances there was any fraud or collusion or wilful mis statement or suppression or contravention of any provision of any Act is a question of fact depending upon the facts and circumstances of a particular case
717C D In the instant case the assessee declared the goods on the basis of their belief of the interpretation of the provisions of the law that the exempted goods were not required to be included and these did not include the value of the exempted goods which the assessee manufactured at the relevant time
The Tribunal found that that the explanation was plausible and also noted that the Department had full knowledge of the facts about manufacture of all the goods manufactured by the respondent when the declaration was filed by the respondent
The 713 respondent did not include the value of the product other than those falling under Tariff Item 14E manufactured by the respondent and this was in the knowledge according to the Tribunal of the authorities
The findings of the Tribunal have not been challenged before this Court
717D F The Tribunal also found that the facts of case did not warrant any inference of fraud
717D Having regard to these and in view of the requirements of section 11A of the Act the claim had to he limited to a period of six months prior to the date of issue of show cause notice
The Tribunal was right in its conclusion
717G