Income-tax---

----Capital gains---Deductions---Sale of immovable property---Amount embezzled by person who assisted in, sale--Loss incurred by transferor as owner and not in the course of sale transaction---Not deductible---Indian Income Tax Act, 1961, Ss. 45 & 48.

The assessee appointed her mother, S, as her attorney and agent to sell her property. S took the help of R. R found a buyer and received the sale consideration in cash and cheques. Subsequent to deposit of the cheques, R misappropriated huge sums from it. The assessee offered for assessment the capital gains, which she actually received excluding the amount embezzled by R. The Income-tax Officer held that for the purpose of computing the capital gains tax the entire amount of Rs.5 lakhs under the sale-deed should be taken into account. This was upheld by the Tribunal. On a reference:

Held, that the amounts embezzled were not expenditure incurred wholly and exclusively in connection with such transfer. Therefore, clause (i) of section 48 of the Income Tax Act, 1961, had no application. Even if the principles of accepted commercial practice and trading principles of business are applicable, still in order to claim a deduction, the assessee must establish that the loss is incurred in the carrying on of the operations of the transaction and is incidental to the operations of the transaction. Whether the loss is incidental to the operations of the transaction is a question of fact to be decided on the facts of each case? In the instant case the loss occurred after the transaction was completed and the loss was not incidental to the transaction. It was a loss incurred as owner of the property. The assessee was not entitled to deduction of the amount misappropriated by R.

Badridas Daga v. CIT (1958) 34 ITR 10 (SC); Bansidhar Onkarmal v. CIT (1949) 17 ITR 247 (Orissa); CIT v. Nainital Bank Ltd. (1965) 55 ITR 707 (SC) and Dhun Dadabhoy Kapadia (Miss) v. CIT (1967) 63 ITR 651 (SC) ref

Y. Ratnakar for the Assessee.

J. V. Prasad for the Commissioner.

JUDGMENT

MS. S. V. MARUTHI, J.---This is a reference under section 256(1) of the Income=tax Act (for short "the Act"), at the instance of the assessee.

The facts in brief are as follows:

The assessee, Mr. G. Y. Chenoy, appointed her mother, Sint. Soona N. Chenoy, as her attorney and agent to sell property bearing No. 1-1-130 to 139, Sarojini Devi Road, Secunderabad, and to do all acts and things incidental thereto, Sint. Soona N. Chenoy took the help of one Sri. R. P. Karai alias Rustomji in settling the property. Sri Rustomji found a buyer and on behalf of Sint. Soona N. Chenoy received the sale consideration from Nataraj Constructions company either by cash or by cheques. The sale-deed was executed on April 10, -1980, and registered on May 6, 1980. The cheques were deposited by him in the bank account of Sint. Soona N. Chenoy Cash amounting to Rs.1,12,500 is stated to have not been deposited in her account. Subsequent to deposit of the cheques, in the account of Smt. Soona N. Chenoy, Sri Rustomji obtained her signature on blank cheques and withdrew money, which was not turned over either to Sint. Soona N. Chenoy or Sint. G. Y. Chenoy. Thus, he misappropriated huge sums. Sri Rustomji had a general power of attorney executed by Sint. Soona N. Chenoy to look after her properties of which she is the trustee. Since the assessee received consideration for the sale of the property less than the amount embezzled by Sri Rustomji, she claimed that for the purpose of computation of capital gain the consideration which was received by her is relevant and not the full amount of consideration under the sale deed. She offered for assessment the capital gains which she actually received excluding the amount embezzled by Sri Rustomji The Income-tax Officer rejected the claim of the assessee and held that for the purpose of computing the capital gains tax the entire amount of Rs.5 lakhs under the sale deed should be taken into account and not the consideration which she has actually received after excluding the amount embezzled by Sri Rustomji. On appeal, the Commissioner of Income-tax (Appeals) dismissed the same. On further appeal to the Tribunal, the Tribunal held that the amount of Rs.3,37,500 misappropriated by Sir Rustomji cannot constitute an expenditure incurred in connection with the transfer of the asset. It was also held by the Tribunal that it cannot be considered as a loss of a capital asset to be set off against the capital gains. According to the Tribunal, capital loss in order to be set off must arise on the transfer of a capital asset. In order to bring in any embezzlement within the meaning of capital loss, there should be a nexus between the extinguishment of any right in a capital asset and the loss arising there from. In the light of the said view, the appeal filed by the assessee was dismissed.

At the instances of the assessee, the following question was referred for the opinion of this Court:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that capital gains could be computed without allowing the deduction of or by excluding the amount embezzled while effecting the sale?"

The main argument of learned counsel for the assessee is that in working out capital gain or loss, the principles that have to be applied are those which are a part of the commercial practice or which an ordinary man of business will report to when making computation for his business purposes. Therefore, in order to point out the net capital gain or loss arising out of a transaction the principles, which are part of commercial practice have to be followed. In support of this contention, he relied on the judgment of the Supreme Court in Miss Dhun Dadabhoy Kapadia v. CIT (1967) 63 ITR 651. Learned counsel submitted that if the principle of ordinary commercial practice are applied, the misappropriation of a part of the consideration is incidental and in the course of the transaction and, therefore, the amount misappropriated should be deducted in arriving at the capital gains received by the assessee for the purpose of computing the capital gains tax.

It is true that in Dadabhoy Kapadia's case (1967) 63 ITR 631 the Supreme Court held that while computing the net capital gain or loss, the principle of commercial practice applied for business purpose is to be followed. Therefore, even accepting the argument of learned counsel for the assesses that the ordinary principle of commercial practice for the purpose of business be followed, we have to see whether the misappropriation made by the power of attorney holder or the agent of the assessee is to be excluded for the purpose of computing the net to refer to section 48 of the Act which reads as follow:

"48 The income chargeable under the head capital gain shall be computed by deducing from the full value of the consideration received or occurring as a result of the transfer of the capital asset the following amounts, namely:---

(i) expenditure incurred wholly and transfer;

(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. "

It is not the case of the assessee that it is an expenditure incurred wholly and exclusively in connection with such transfer. Therefore, clause (i) of section 48 has no application. The main argument of learned counsel for the assessee is that the capital gains shall be computed on the value of the consideration received since the assessee has received less than the amount misappropriated and it is only that amount that is to be assessed under section 48 of the Act. It is difficult to accept the argument of learned counsel for the assessee in view of the law laid down by the Supreme Court in various decisions. We may refer in this context to the judgment in CIT v. Nainital Bank Ltd. (1965) 55 ITR 707 (SC). It was a case where there was a dacoity in the bank and the dacoits carried away cash amounting to Rs.1,06,000 and some ornaments. The bank claimed the said amount as a deduction in computing its income from the banking business on the ground that it was a trading loss. The matter went up to the Supreme Court. The Supreme Court held that the branch of the bank had kept large amounts in the bank premises in the usual course of its business in order to meet the demands of its constituents and that the cash is the stock-in-trade of a banking company. It was also held that the loss of cash, which is the stock-?in-trade of a banking company, in the course of its business under varying circumstances is deductible as a trading loss in computing the total income of the business. While holding so, the learned Judges pointed out that every loss of a stock-in-trade in what so ever way it is caused is not a trading loss, but the said loss should have been caused not only in the course of the business but also should have been incidental to it. It was also pointed out that whether it is admissible deduction or not will depend on the accepted commercial practice and trading principles if it can be said to arise out of the carrying on of the business and to be incidental to it. The learned Judges also referred to the observations made by the Supreme Court in Badridas Daga v CIT (1958) 34 ITR 10, 15 and pointed out that if for example a thief were to break overnight into the premises of a money-lender 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. According to the learned Judges, 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 one as on it will depend whether deduction could be made under section 10(1) or not. The legal position was summarised stating that under section 10(1) of the Act the trading loss of a business is_ deductible for computing the profit earned by the business. But every loss is not so deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. Whether loss is incidental to the operation of a business is a question of fact to be decided on the facts of each case, having regard to the nature of the operations carried on and the nature of the risk involved in carrying them out. The degree of the risk or its frequency is not of much relevance but its nexus to the nature of the business is material. It was further held by the Supreme Court that it is an integral part of the process of banking that sufficient moneys should be kept in the bank duly guarded to meet the demands of the constituents. The retentions of the money in the bank is a part of the operation of banking. The retention of the money in the bank premises carries with it the ordinary risk of its being subject to embezzlement, theft, dacoity or destruction by fire and such other things. Such risk of loss is incidental to the carrying on of the operations of the business of banking.

Therefore, if the principles of accepted commercial practice and trading principles of business are applicable, still in order to claim a deduction, the assessee must establish that the loss is incurred in carrying on the operations of the transaction and is incidental to the operations, of the transaction. Whether the loss is incidental to the operations of the transaction is a question of fact to be decided on the facts of each case.

In Badri Das Daga v. CIT (1958) 34 ITR 10 (SC), the facts in brief are that the assessee is the sole proprietor of a firm called Bansilal Abirchand Kasturchand- which carries on business as money-lenders, etc. He is a resident of Bikaner and manages the business at several places through agent to. During the relevant, period, the agent of the firm at Bombay was one Chandratan, who "held a power of attorney, dated May 13, 1944. Under the power of attorney, he is authorised to operate the bank account. The agent withdrew from the firm's bank account sums aggregating to Rs.2,30,636.40 and applied them in satisfaction of his personal debts incurred in speculative transactions. On corning to know, the power of attorney of the agent was cancelled and on failure to repay the amount by the agent and admitting misappropriation a suit was filed. The suit was decreed pursuant to which an amount Rs.28,000 was recovered from the agent and the balance amount was written off at the end of the accounting year as irrecoverable. The Supreme Court upheld the claim of the assessee for deduction of the said amount.

While upholding the claim of the assessee for deduction of the loss, it observed that 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 business. It was pointed out that the loss for which a deduction could be made under section 10(1) of the Act 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. In other words, the learned Judges distinguished a loss sustained by the assessee as an owner of tire property from the loss sustained by carrying on business and such loss having connection with the business and incidental to the carrying on of the business.

Bunsidhar Onkarmal v. CIT (1948) 17 ITR 247 (Orissa), is a case where the assessee carried on the business of selling yarn, speculating on cotton and money-lending. He claimed deduction of a certain sum, which was stolen from an iron safe inside his shop by one of his relations who was also working as the accountant of his firm. The theft took place after the shop was closed at about 8.00 p.m. It was held that the sum was not allowable either as a trading loss or as expenditure laid out or expended wholly and exclusively for the purposes of the business within the meaning of section 10(2)(xv) of the Indian Income-tax Act. Justice Narasimham observed that the position might have been quite different if the theft had occurred during office hours, prior to the crediting of the sum to the account of the employer. In other words, a distinction is drawn between the loss which took place in the course of the business and the loss which is incidental to the carrying on of the business and the loss which has no connection with the carrying on of the business and which has no nexus with the carrying on of the business or which is not incidental to the carrying on of the business.

In the light of the above principles laid down by the Supreme Court, we have to examine whether in the present case the loss had occurred in the course of transactions and incidental to the carrying on of the transactions.

The undisputed facts are that the amounts of sale consideration are credited to the account of the agent of the assessee. The transaction was also completed, sale-deeds were executed and the properties were delivered and the cash considerations were received by the assessee through the agent/power of attorney holder Mr. Rustomji. It is undisputed that the receipt of the sale consideration by the agent on behalf of the principal ?debtor is a receipt by the principal-debtor. It is only after the amounts were credited to the account of the agent/principal -debtor the power of attorney holder misappropriated the amount by withdrawing the amounts through blank cheques obtained from the agent. It is a case where the loss occurred after the transaction is completed and the loss is not incidental to the carrying on of the business. It is a loss incurred as an owner of the property. In other words, this falls within the category of those cases where the loss is incurred by the owner as an owner and not a loss incurred while carrying on of the business and the loss is incidental to such carrying on of the business. Therefore, the Tribunal is right in its view that the assessee is not entitled to deduction of the amounts misappropriated by Mr. Rustomji, the power of attorney holder or agent of the assessee.

In view of the above, we answer the question in the affirmative and against the assessee. The reference is answered accordingly. No costs.

M.B.A./3388/FC ??????????????????????????????????????????????????????????????????????????????? Reference answered.