Dr. B.P. Saraf, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961 (for short 'the Act'), at the instance of the assessee, the Income-tax Appellate Tribunal has referred the following question of law for opinion :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 35,017.55 constitutes an admissible deduction in the computation of the business income of the assessee ?'
2. The facts giving rise to this reference are in a narrow compass. The assessee is a company incorporated under the Companies Act and this reference relates to assessment year 1973-74, the relevant previous year being year ending on June 30, 1972. The assessee had a current account with the Bank of Maharashtra, Bombay. On October 18, 1971, the said bank had issued an account payee demand draft on its Ahmedabad Branch in favour of one Manganlal R. Shah for an amount of Rs. 35,000. The said amount along with the commission of Rs. 17.50 was debited to the assessee's current account. The said amount was duly paid by the bank to the payee at Ahmedabad. The case of the assessee was that the letter on the basis of which the said demand draft was issued was a forged letter written to the bank under the forged signature of the secretary of the company. It had lodged a civil suit in that behalf. In its assessment for the year under consideration, the assessee claimed the above amount of Rs. 35,017.50 as a deduction in the computation of its business income. The claim was rejected by the Income-tax Officer on various grounds. Firstly, that the assessee had not shown how the loss in question had any relation to its day-to-day business; secondly, that it was not a debt incurred by the assessee in the course of its business; and, thirdly, that it was not something incidental to the business carried on by the assessee. The disallowance so made by the Income-tax Officer was upheld by the Appellate Assistant Commissioner of Income-tax. The second appeal before the Tribunal was also rejected and the findings of the Income-tax Officer and the Appellate Assistant Commissioner were confirmed. The Tribunal held that the loss in question could not be allowed as a business loss as, in its opinion, it was not a loss incurred by the assessee in the course of its business. The assessee applied for reference under section 256(1) of the Act and at its instance, the Tribunal has referred the aforesaid question of law to this court for opinion.
3. We have heard counsel for the parties. Learned counsel for the assessee, Mr. Dwarkadas, submits that on the facts of the case the Tribunal was not justified in arriving at the conclusion that the loss in question had nothing to do with the business of the assessee or that it was not incidental to its business. According to him, on the admitted facts, it was a business loss which had to be taken into consideration in computing the business income of the assessee under section 28(i) of the Act. In support of this contention, reliance is placed on the decision of the Supreme Court in CIT v. Nainital Bank Ltd. : [1965]55ITR707(SC) and Ramchandar Shivnarayan v. CIT : [1978]111ITR263(SC) . Reliance is also placed on the decisions of this court in Sassoon J. David and Co. (P.) Ltd. v. CIT : [1975]98ITR50(Bom) and CIT v. P. V. Gore and Co. : [1983]143ITR922(Bom) .
4. Learned counsel for the Revenue, Mr. Jetley, on the other hand, submits that the loss in the instant case has nothing to do with the business of the assessee - not to speak of its being incidental to the business of the assessee. It has no connection whatsoever with the business. Reliance is placed in this connection on the decision of the Supreme Court in Badridas Daga this connection on the decision of the Supreme Court in Badridas Daga v. CIT : [1958]34ITR10(SC) . Mr. Jetley also referred to the decision of the Supreme Court in the case of Nainital Bank Ltd. : [1965]55ITR707(SC) , which has also been relied upon by counsel for the assessee.
5. We have carefully considered the rival submissions. Section 28(i) read with section 4 of the Act imposes a charge on the profits and gains of any business or profession carried on by the assessee. The word 'profits' has not been defined in this section or in section 29 of the Act which lays down the manner of computation of such profits and lays down that it shall be computed in accordance with the provisions of sections 30 to 43C. Section 30 to 43C deal with deductions and allowances. The scheme of these provisions is that profits and gains should be computed subject to certain express deductions or allowances and to certain express prohibitions on deductions. It is well-settled that the list of allowances enumerated in these sections is not exhaustive of all allowances which could be made in ascertaining the profits of a business taxable under section 28 of the Act and an item of loss or expenditure incidental to business may be deducted in computing profits and gains of business or profession even if it does not fall in any of these sections. It is likewise well-settled that profits and gains which are liable to be taxed under section 28 are what are understood to be such according to ordinary commercial principles. In the words of Lord Halsbury, the word 'profits' is to be understood in its natural and proper sense - in a sense which no commercial man would misunderstand. This legal position has been very aptly summed up by the Supreme Court in Badridas Daga v. CIT : [1958]34ITR10(SC) in the following words :
'When a claim is made for a deduction for which there is no specific provision in section 10(2), 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.'
6. While arriving at this conclusion, the Supreme Court also referred to the decision of the Privy Council in CIT v. S. M. Chitnavis [1932] 6 ITC 453, where a bad debt was held to be an admissible deduction, though there was no specific provision for allowance of bad debts in the Indian Income-tax Act, 1922 (for short, 'the 1922 Act'), as it then stood. The Supreme Court referred with approval to the following observation of Lord Russel in the above case (at page 15 of 34 ITR) :
'Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to 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.'
7. The question before the Supreme Court in the case of Badridas Daga : [1958]34ITR10(SC) was whether monies embezzled by an agent or employee are allowable deduction in computing the profits of business under section 10 of the 1922 Act (section 28 of the present Act). Referring to the principles discussed above, the Supreme Court observed (at page 15) :
'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 business.'
8. However, in the above case, the Supreme Court also emphasised that the loss for which a deduction could be made 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 Badridas Daga's case : [1958]34ITR10(SC) , the Supreme Court also referred with approval to the decision of this court in Lord's Dairy Farm Ltd. v. CIT : [1955]27ITR700(Bom) , where the loss caused to a business by defalcation of an employee was held to be a trading loss. The legal position in this regard came up for consideration before the Supreme Court again in CIT v. Nainital Bank Ltd. : [1965]55ITR707(SC) . The Supreme Court summarised the legal position thus (at page 715) :
'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 of operation of the business and in 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.'
9. In the above case, the Supreme Court referred to the decision in Motipur Sugar Factory Ltd. v. CIT : [1955]28ITR128(Patna) (Patna), which was accepted by the Supreme Court in Badridas Daga's case : [1958]34ITR10(SC) . This was not a case of misappropriation by a servant of the company but a case of loss to the company by reason of its cash being robbed from its servant. Referring to this decision, the Supreme Court in the case of Nainital Bank Ltd. : [1965]55ITR707(SC) observed as follows (at page 712) :
'What is important to notice is that robbery of cash from the hands of an employee is held to be incidental to the business of the assessee. It that be so, why should a different principle be adopted if the loss was not caused by robbery from the hands of the employee on his way to a particular place in discharged of his duty, but is was a loss caused by dacoity from the premises of the bank itself. In one case, the employee carried cash for disbursement to sugarcane cultivators, and in the order, funds were lodged in the bank with reasonable safeguards for disbursement of the same to its constituents. If the los was incidental to the business in one case, it should equally be so in the other case.'
10. The Supreme Court did not approve the majority view of the Special Bench of the Madras High Court in Ramaswami Chettiar v. CIT : AIR1930Mad808 , which held that the loss incurred by theft of money used in money-lending business and kept in the business premises should not be allowed in computing the income-tax as the theft was committed by persons who were not at the time of commission employed as clerks or servants by the assessee. The Supreme Court observed (at page 713) :
'This judgment, if we may say so with respect, takes a narrow view of the problem. Indeed in the Motipur Sugar Factory's case : [1955]28ITR128(Patna) (Patna), which was approved by this court, the theft was committed not by the employee of the company but by robbers. To that extent the correctness of the Madras decision is shaken. That apart, the judgment of Anantakrishna Ayyar J., who recorded a dissent, contains a constructive criticism of the majority view. We prefer the view of Anantakrishna Ayyar J. to that of the majority.'
11. The proposition that emerges from the decision of the Supreme Court in Nainital Bank Ltd. : [1965]55ITR707(SC) is that for determining whether any loss from theft, dacoity, embezzlement, etc., is deductible or not, what is material is whether the loss incurred by theft, dacoity, etc., is incidental to the carrying of the business. It does not make much difference whether such act is committed by the employees of the assessee or by strangers.
12. The test for determining whether a particular loss will be deductible in computing business profits or not was again considered by the Supreme Court in Ramchandar Shivnarayan v. CIT : [1978]111ITR263(SC) . The law was summed up by the Supreme Court in the following words (at page 271) :
'It is to be remembered that the direct and proximate connection and nexus must be between the business operation and the loss. It goes without saying that a businessman has to keep money either when he gets it as sale proceeds of the stock-in-trade or for disbursement to meet the business expenses or for purchasing stock-in-trade and if he loses such money in the ordinary course of business, the loss is a deductible trading loss. It is immaterial whether the money is a part of the stock-in-trade, such as, of a banking company or a money-lender, or is directly connected with the other business operations. The risk is inherent in the carrying on of the business and is either directly connected with it or incidental to it.'
13. In the above case before the Supreme Court, the assessee had borrowed a sum of Rs. 50,000 from some creditor. The money was brought in cash to Rajahmundry by its employee. Such a mode of business operation was very common and well-known. Out of the said sum of Rs. 50,000 which was meant for purchase of Government securities, a sum of Rs. 30,000 was lost by theft. The question was whether this loss was an allowable deduction under section 10(1) of the 1922 Act. The Supreme Court held that the loss was directly connected with the business operation and was incidental to the carrying on of the business of purchase of the Government securities to earn profits. It was immaterial whether Government securities were purchased by the remaining sum of Rs. 20,000 or not. In such a situation, it was a part of the trading loss and deductible as such in arriving at the true profits of the assessee.
14. In Sassoon J. David and Co. (P.) Ltd. v. CIT : [1975]98ITR50(Bom) , this court was also required to consider a somewhat similar controversy. The dispute related to a claim for deduction of Rs. 9 lakhs caused to the assessee due to embezzlement. Following the decisions of the Supreme Court in Badridas Daga's case : [1958]34ITR10(SC) and in Nainital Bank Ltd.'s case : [1965]55ITR707(SC) , this court allowed the deduction of loss of Rs. 9 lakhs caused to the assessee-company on account of embezzlement in the computation of the assessee's profits under section 10(1) of the 1922 Act.
15. Reference may also be made to a decision of this court in CIT v. P. V. Gore and Co. : [1983]143ITR922(Bom) . The facts of this case are as follows : One of the partners of the assessee-firm was carrying the cash balance of the firm amounting to Rs. 20,000 from the shop to his house for safe custody at night. The bag containing the amount fell off the scooter on which it was being carried and was lost. A dispute arose in regard to allowability of this loss as deduction in the computation of profits. Applying the decision of the Supreme Court in Ramchandar Shivnarayan v. CIT : [1978]111ITR263(SC) to the above facts, this court held that the loss in question was incidental to the carrying on of business by the assessee and, as such, an allowable deduction in computing the profits.
16. From a perusal of the various decisions of the Supreme Court and this court referred to above, it is clear that the principles in regard to allowability of loss in the computation of income under section 28(i) are well-settled. The only dispute that arises from time to time is in regard to the applicability of the principles laid down therein to the facts of each case. The real controversy that falls for determination in such cases is question evidently has to be decided on the facts of each case having regard to the nature of the business and the operations carried on by the assessee. If the loss incurred by the assessee is found to be incidental to the carrying on of his business, it will be deductible as a trading loss in computing the profits of the assessee from the said business.
17. Applying these principles to the facts of the present case, we find that the loss caused to the assessee in this case was by embezzlement from its bank account. The account in the bank was current account maintained for the running of the business. The amount kept there was also the amount required for the purpose of the business. There is no dispute that by forging the signature of the secretary of the bank the amount in question was withdrawn by some unknown person which resulted in a loss to the assessee to that extent. Looking from a businessman's angle, we find it difficult to hold that such a loss is not incidental to the business of the assessee. We find it difficult to draw a distinction between embezzlement of the amount from the bank and theft of the amount from the cash box of the businessman from his sales counter or business premises. What is material is whether the loss was caused to the assessee in the course of his business activity and closely connected with his business. If that is so, it will be an allowable deduction in computing the 'profits'. In the instant case, we are satisfied that it is so and that being so, the loss suffered by the assessee is clearly a loss which is deductible in the computation of income under section 28(i) of the Act.
18. Accordingly, the question referred to us is answered in the affirmative that is in favour of the assessee and against the Revenue.
19. Under the facts and circumstances, we make no order as to costs.