B.R. Maheshwari and Co. Vs. Assistant Commissioner of - Court Judgment

Excerpt:
1. this is an appeal by the assessee against an order of the commissioner of income-tax (appeals)-iv, new delhi, pertaining to the assessment year 1985-86.2. the grievance of the assessee in this appeal is that the commissioner of income-tax (appeals) erred in not allowing loss of rs. 26,500 as a business loss. the assessee is a firm of chartered accountants. during the assessment year under consideration, the assessee claimed deduction of rs. 26,500 in respect of loss incurred by it on account of fraudulent withdrawal of money from its bank account by somebody for which a report was lodged in the police station as, according to the firm, the loss was a business loss. the income-tax officer mentioned that, according to the assessee, the cheque was presented in the bank with the forged signature of shri b.r.maheshwari, one of the partners, and the payment was made by the bank.he was of the view that the loss claimed was not either business loss or a loss incidental to the profession carried on by the assessee.therefore, the same was not admissible.3. when the matter came up before the commissioner of income-tax (appeals), he confirmed the order of the income-tax officer basically on the same reasoning. the assessee is aggrieved.4. learned counsel for the assessee, shri k. sampath, very vehemently argued that the loss incurred by the assessee-firm was incidental to its profession where somebody or the employee of the assessee forging the signature of the partner has taken out the money from his bank.therefore, it is a business loss. it was also pointed out that as soon as it came to the knowledge of the assessee that the amount has been withdrawn with a forged signature, he lodged a report to station house officer, lahori gate police station, on july 11, 1984. it was pointed out that, after the expiry of eight years, nothing has come out where the assessee can hope that he will be able to get back his money. it was pointed out that the police were not able to catch the culprits even after the expiry of eight years. therefore, there was no hope of getting the money back. it was submitted that the case of the assessee is similar to cases where embezzlement takes place in the business which is allowable as a business loss. reliance was placed on the following decisions : (4) associated banking corporation of india ltd. v. cit [1965] 56 itr 1 (sc) ; and as against this, the learned departmental representative, shri b.k.sinha, submitted that it is not a loss which has occurred in the business of the assessee nor is it incidental to the business.therefore, it cannot be allowed. it was also pointed out that no complaint was lodged against the bank personnel. the assessee has still hope of recovery. therefore, the decisions cited by learned counsel for the assessee are not applicable to the facts of the present case. the learned departmental representative tried to distinguish the decision in the case of associated banking corpn. of india ltd. [1965] 56 itr 1 (sc).5. we have considered the rival submissions. in the case of associated banking corpn. of india ltd. [1965] 56 itr 1 (sc), the facts were that the secretary of a bank misused the powers conferred on him under a power of attorney and withdrew rs. 18 lakhs by posting false entries in the books of the bank in the accounting year ending june 30, 1947. the withdrawals, for the first time, came to the knowledge of the liquidator of the bank after the end of the accounting year, and the liquidator had to pay to the constituents of the bank rs. 10,15,000 pursuant to an order of the court made in 1949 and a settlement in 1951.6. in the case of cit v. nainital bank ltd. [1965] 55 itr 707 (sc), the assessee-company carried on the business of banking at a branch situated at ram nagar. in the usual course of business, large amounts were kept in various safes in the premises of that branch. at about 7 p.m., on june 11, 1951, there was a dacoity and the dacoits carried away cash amounting to rs. 1,06,000. in these circumstances, the supreme court has observed that the loss incurred by dacoity was incidental to the carrying on of the business of banking and was deductible as a trading loss in computing the income of the respondent from banking business. it was observed that retention of moneys in the premises of a bank to meet the demands of its constituents, which is a part of the operation of banking, carries with it the ordinary risk of being subject to embezzlement, theft, dacoity or destruction by fire, etc. such risk of loss is incidental to the carrying on of the operations of banking business. it will be pertinent to mention here that the supreme court referred to the decision of the high court of australia in the case of charles moore and co. (w. a.) pty ltd., v.federal commr, of taxation [1956] 95 clr 344. in that case, the assessee was carrying on the business of running a departmental store and he banked the takings thereof daily. it was the practice on every business morning for the cashier accompanied by another employee to take the previous day's takings to the bank some two hundred yards away and pay them to the credit of the assessee. one day, while on their way to the bank, the two employees were held up at gun point and robbed of a large amount which formed part of the receipts of the assessee for the previous day. a question arose as to whether this amount would be allowed as a business loss. the australia high court has observed as under (at page 713 of 55 itr) : "the 'occasion of the loss' in the present case was the course pursued in banking the money.... there is no difficulty in understanding the view that involuntary outgoings and unforeseen or unavoidable losses should be allowed as deductions when they represent that kind of casualty, mischance or misfortune which is a natural or recognised incident of a particular trade or business the profits of which are in question. these are characteristic incidents of the systematic exercise of a trade or the pursuit of a vocation. even if armed robbery of employees carrying money through the streets had become an anachronism, which we no longer knew, these words would apply. for it would remain a risk to which, of its very nature, the procedure gives rise. but unfortunately it is still a familiar and recognised hazard and there could be little doubt that if it had been insured against, the premium would have formed an allowable deduction. phrases like the foregoing or the phrase 'incidental and relevant' when used in relation to the allowability of losses as deductions do not refer to the frequency, expectedness or likelihood of their occurrence or the antecedent risk of their being incurred, but to their nature or character. what matters is their connection with the operations which more directly gain or produce the assessable income." 7. a similar view was expressed by the supreme court in the case of ramchandar shivnarain [1978] 111 itr 265. now applying these principles of law to the facts of the present case before us, it would be seen that the assessee had lost the money because some one forging the signature of shri b.r. maheshwari, one of the partners of the firm, has taken payment from the bank in connivance with the bank officials. this incident has occurred in april, 1984, but it came to the notice of the assessee in the month of july. immediately after that, the assessee lodged a report at the police station on july 11, 1984. ever since, the assessee had not received any information about the detection of the person who has taken out the money from the police. there is nothing on record to show that the assessee could pinpoint the responsibility of taking out the money on any person or on any employee of the firm or the bank. under these circumstances, there is no prospect and nothing was heard so far about the fate of the proceedings against the bank. it is also not known whether the police will be able to bring the culprits to book. merely because the bank is involved, we do not think it is possible to say that the chances of recovery are bright unless it is shown that it is because of the negligence of the bank that the assessee incurred the loss. keeping in view the fact that 8 years have elapsed and there is no prospect of recovery of the sum or bringing the culprits on record, it cannot be said that the loss in question was not allowable in the year under appeal and also as a business loss. the supreme court, in the above cited case, has observed that the expenses did not relate to the frequency of the happening of the risk but to their nature and character, that is to say, the loss must be connected with the operation to produce income. the assessee-firm retained the money in the premises of the bank to meet the business needs and expenses for purchasing stock-in-trade, which is a part of the business activity. with the retention of the money, there is a risk of embezzlement also. such risk or loss is incidental to the operation of the assessee's business. if he loses such money in the ordinary course of business, the loss is deductible as a trading loss. the loss should be considered in the commercial sense even if no real business loss has occurred. keeping in view that there are no chances of recovery of the amount, we are of the opinion that the loss incurred by the assessee is incidental to the carrying on of business. we, therefore, allow it as a business loss. consequently, we set aside the order of the commissioner of income-tax (appeals) and direct the income-tax officer to allow the same as business loss.9. i have gone through the order proposed by my learned brother. i have, however, not been able to go along with my learned brother. my reasons for not agreeing with the view of my learned brother are as follows : this is not a case where the money was lying in the assessee's till or was handed over to the employees either for payment or for deposit. the assessee's money was lying in current deposit account no. 12074 with the union bank of india, khari baoli, delhi. the assessee's case is that, on reconciling the bank statement, it was found that two cheques bearing nos. 2106552 and 2105654 were stolen along with their counter-foils and that the assessee came to know of the theft when cheque no. 2105654 for rs. 26,500 had been fraudulently encashed by forging the signature of shri b.r. maheshwari, one of the partners. as the money was lying in the assessee's account with the bank, it was the bank's responsibility to exercise care and caution before clearing the cheque. if the cheque has been cleared, it means that either there was no forgery in the signatures as alleged or that the bank did not exercise proper care and caution. in case it could be established that the fraud took place due to the negligence of the bank, the assessee was certainly entitled to recover the money from the bank. except for filing a first information report dated july 11, 1984, before the station house officer, lahori gate police station, delhi-6, in which it has been alleged that without the connivance and active participation of the bank staff this fraud could not have been committed, the assessee has not taken any steps by way of filing a civil suit, etc., against the bank. no notice has been given by the assessee to the bank for making good the assessee's loss. no evidence has been brought on record to show that the assessee, in fact, took up the matter with the bank at all for the purpose of recovery of the amount alleged to have been lost as a result of forgery. in my opinion, it is the bank which should have filed the f.i.r. on the complaint of the assessee, because it is the bank which had lost the money. the assessee only lost two blank cheques at the most, as alleged. no steps have been taken by the assessee to recover the money from the bank.the entire case-law cited on behalf of the assessee is not germane to the issue. it is not the assessee's money which has been lost, if at all; on the contrary, it is the bank's money. the money was not lying with the assessee or with any of the employees of the assessee and hence the entire case-law relied upon on behalf of the assessee is distinguishable. it was the duty of the bank to tally the signatures before clearing the cheque.10. when the assessee does not take any effective steps for the recovery of rs. 26,500, it is immaterial whether a period of eight years or more has passed without recovering a single penny, as stated on behalf of the assessee. since no steps have been taken by the assessee against the bank, the loss, if any, is not allowable. i also agree with the revenue authorities that the loss claimed was not incidental to the profession carried on by the assessee. i, therefore, uphold the orders of the revenue authorities and dismiss the assessee's appeal.11. we, having differed on an issue, proceed to state the point of difference as below and refer it to the president, income-tax appellate tribunal: "whether, on the facts and in the circumstances of the case, the loss of rs. 26,500 claimed by the assessee-firm was allowable as a loss under the head 'profits and gains of business or profession' ?" 12. the assessee is a firm of chartered accountants, practising in delhi for the past several years. in this appeal, i am concerned with the disallowance of a claim made by the assessee for the deduction of a sum of rs. 26,500 which represented loss incurred by the assessee by a fraudulent withdrawal made by an unknown person from the bank account by forging the signature of one of the partners, b.r. maheshwari.13. the income-tax officer disallowed the claim of the assessee on the ground that this loss was not incidental to the profession carried on by the assessee-firm. the reasons that prevailed with him may be quoted in his own words: "the assessee has claimed deduction of rs. 26,500 in respect of loss incurred by it on account of fraudulent withdrawal from his bank account by somebody for which a report has been filed in the police station as according to him the loss is business loss. according to the assessee, cheque was presented in the bank with the forged signature of shri b.r. maheswari, one of the partners and payment was made by the bank. as the loss claimed is not incidental to the profession carried on by the assessee, the same is not admissible. hence not allowed." aggrieved, the assessee preferred an appeal to the commissioner of income-tax (appeals) who agreed with the stand taken by the income-tax officer and confirmed the disallowance of the loss. in other words, the concurrent finding recorded by the department was that this loss incurred by the assessee was not incidental to the profession carried on by the assessee. to put it differently, implied in this concurrent finding was an admission that the assessee incurred the loss but the same was not admissible as a deduction as it did not relate to the profession carried on by the assessee.14. aggrieved by this decision, the assessee had filed a second appeal before the income-tax appellate tribunal. after hearing the assessee's counsel and the departmental representative, the learned judicial member came to the conclusion that the loss was allowable as a deduction and gave very detailed reasons for his conclusion, drawing support from several decisions of the high courts and the supreme court, particularly the decision of the supreme court in the case of ramchandar shivnarayan v. cit [1978] 111 itr 263. according to him, this was embezzlement but had taken place in the profession carried on by the assessee akin to the embezzlement that took place in the business carried on by the assessee before the supreme court, in the above-mentioned case, and also in the other cases. the learned judicial member, after analysing the facts, came to the conclusion that the assessee had irretrievably lost the money on account of forgery committed by some one on the cheque making use of which the above amount was withdrawn from the bank. though it was negligence of the employees of the bank and yet, in so far as the assessee was concerned, it lost the money and, therefore, incurred the loss and that loss was incidental to the carrying on of the profession and "was a part of professional hazards. he particularly referred to the f.i.r. lodged with the police and the inaction or no action by the police for about eight years in bringing the culprits to book, be it the person who withdrew the money by forging the signature or the employee of the bank who was negligent in permitting the encashment of such forged cheque.there being no prospect of the assessee recovering the money, the assessee was justified in writing it off as a loss.15. but, the learned accountant member was of a totally different opinion. according to him, this was not a case where the money was lying in the assessee's till or was handed over to the employees either for payment for the purpose of the business or for deposit. the assessee's money was lying in a current deposit account with the union bank of india, khari baoli, delhi. as the money was lying in the assessee's account with the bank, it was the bank's responsibility to exercise care and caution before clearing the cheque. when the cheque was cleared it meant that there was no forgery or that the bank did not exercise proper care and caution. in case it could be established that the fraud took place due to the negligence of the bank, the assessee was entitled to recover the money from the bank. therefore, the loss was that of the bank and not that of the assessee. except for filing an f.i.r. with the police, no other action was taken by the assessee particularly suing the bank for making good the loss. there was also no evidence that the assessee had taken up the matter with the bank for the purpose of recovery of the amount. therefore, the assessee was not entitled to claim this loss as a business loss or as a loss relating to profession. referring to the case law, relying upon which the learned judicial member allowed the assessee's claim, the learned accountant member observed that those cases related to the loss of the assessee's own money and, therefore, they stood on a different footing, whereas, in this case, the money that was lost was not of the assessee but that of the bank. in other words, he laid great stress on the fact that since no steps were taken by the assessee against the bank, the loss, if any, was not allowable. he held that the loss claimed was not incidental to the profession carried on by the assessee.16. it was on account of these divergent views that the members could not agree on the conclusion and, therefore, formulated the difference of opinion in the following words and referred it to me for my opinion as a third member in accordance with the procedure laid down in section 255(4) of the income-tax act, 1961 : "whether, on the facts and in the circumstances of the case, the loss of rs. 26,500 claimed by the assessee-firm was allowable as a loss under the head 'profits and gains of business or profession' ?" i have heard shri sampath for the assessee and shri khan for the department. the arguments addressed on behalf of the assessee were on the same lines as were urged before the commissioner of income-tax (appeals) and the income-tax officer and elaborately discussed by the learned judicial member in his order. the arguments addressed on behalf of the department were on the same lines as were put down by the learned accountant member in his differing order. in particular, the departmental representative pointed out that this was not a case of loss by embezzlement by the assessee's own employees. if at all there was any loss that accrued to the assessee, it was a capital loss because the money that was deposited in the bank for safe custody as well as for earning income in the current account got converted into capital and, therefore, if there was any loss, it was capital loss and not revenue loss. secondly, the loss took place not at the assessee's own premises but in the bank's premises. therefore, the loss has nothing to do with the carrying on of the business or profession by the assessee.17. i have perused the case records and considered the arguments very carefully. the principles of law underlying the allowance of loss of cash by theft either by an employee or by a stranger are well-settled and are laid down by the supreme court in the recent case of ramchandar shivnarayan v. cit [1978] 111 itr 265. the supreme court laid down the principles thus (headnote) : "a businessman has to keep moneys 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 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." it is thus clear that to constitute a loss occurring on account of embezzlement of money, misappropriation or by fraud, the money lost should have a connection with the business operations and the risk should be inherent in the carrying on of the business. once the connection is established, then the loss has to be allowed as a deduction. the departmental representative argued that this loss could not be said to have any connection with the business carried on by the assessee because the money deposited in the bank got converted into capital. to my mind, there seems to be an apparent contradiction in this kind of thinking. whether it is revenue loss or capital loss, there was loss to the assessee and that loss had a nexus with the business operations. unless the capital of the business was lost, it cannot be designated as capital loss. similarly, unless loss occurs on revenue account, it cannot be called a revenue loss. thus, whether it is revenue loss or capital loss, it must have connection with the business either on account of capital or on account of revenue earning process. here, it is said that this is a capital loss, i.e., the capital of the profession was lost. when the capital of the profession was lost, it must have connection necessarily with the profession. it is, therefore, difficult to say that this loss has no connection with the profession carried on by the assessee.18. the next question that arises is whether the money was deposited in the bank and got converted into capital and whether any loss out of that capital could be allowed as a business loss. here, courts have held repeatedly that having regard to business exigencies, where money kept at home or in the business premises even consisting of capital is lost, such loss could be allowed as a deduction. in other words, the courts have laid emphasis on the view that the loss occurring on account of embezzlement or misappropriation or by fraud must have connection with the business or profession carried on by the assessee irrespective of the fact whether the money so lost was of capital or revenue nature. in the case of nainital bank ltd. [1965] 55 itr 707 (sc), what was lost on account of dacoity was the cash kept at the business premises of one of the branches of the bank. that loss was held to be allowable as business loss. in the case of ramchandar shivnarayan [1978] 111 itr 263 (sc), it was the sale proceeds that reached the assessee that were lost. in the case of associated banking corporation of india ltd. v. cit [1965] 56 itr 1 (sc), it was the money lost by withdrawing the same by posting false entries in the books of the bank. when these losses were held to be allowable as business loss, the question whether it is a capital or revenue loss lost all its significance because the capital invested in the business is none the less a business asset. i am, therefore, unable to agree that this loss could be said to be a capital loss and, therefore, disallowable as if it could be brought under the head "revenue loss", it could be allowed as a deduction.19. coming to the point taken up by the learned accountant member, he had mainly relied upon three aspects to justify his view that the loss was not allowable. one was that the assessee had not made any claim with the bank for making good the loss. the bank having been negligent in its performance of duties should bear the loss and, therefore, the assessee was not visited with the loss. secondly, the money that was lost was not that of the assessee but that of the bank. while the first point may throw a doubt about the complicity of the assessee, it cannot be said that merely because the assessee had not taken any action against the bank, the assessee was not to be allowed the loss if the assessee had incurred the loss. unless it was established that the assessee's inaction in proceeding against the bank for the recovery of the loss could not be held against the assessee for the very simple reason that the assessee is entitled to believe that having filed the f.i.r. with the police, the police would take the necessary action against the bank also because in the f.i.r. filed with the police, the assessee had very specifically mentioned that this loss could not have taken place without the connivance and active participation of the bank's staff. after having lodged the f.i.r. with the police making a specific allegation against the bank, i do not think the assessee need again proceed against the bank by filing a civil suit only to get the loss allowed as a business loss. when several ways are open under the law for the recovery of the loss and if one of the several ways was adopted by the assessee, merely because the way adopted did not bring in results or proved abortive, the claim of the assessee cannot be disallowed because some other ways which were open to the assessee were not adopted. what i mean to convey is that the mere fact that the assessee had not proceeded against the bank cannot be held against the assessee for the disallowance of the loss, unless as i said earlier, a case of collusion was made out. there was only a suggestion about the collusion in making this point but no positive proof was adduced. this may again lead to a high degree of suspicion but suspicion cannot take the place of fact. as i said earlier, the assessee had clearly mentioned in the f.i.r. lodged with the police that it was on account of the connivance and the active participation of the bank staff that fraud had taken place and, therefore, the police should proceed against the bank also. if the police had not proceeded against the bank, the remedies lie elsewhere to seek and not to disallow the loss as a consequence of the inaction of the police.20. regarding the second point i am unable to agree that the loss was not that of the assessee. the bank had debited the assessee's account with this money of rs. 26,500 and the assessee had lost it irretrievably. it cannot, therefore, be said that the assessee's money was not lost. let us assume for the sake of argument that a businessman keeps his money in his own house for custody consisting of the collections made in the business and his own capital or keeps the same in a friend's house for safe custody or transports it to another station for disbursement. further, suppose this money was lost by burglary. now, the view taken by the courts was that such loss was allowable. merely because the money was kept for safe custody in the bank and if a person cheats the assessee by forging his signature and withdrawing the money from the bank and the assessee was not able to recover the money from the bank, can it be said that the assessee has not lost the money and the money so lost was not his own money and that money has no connection with the assessee's business or profession? i think the answer should be in the affirmative (sic) in all the cases.the assessee's practice was to bank all his money receipts and make payments by issue of cheques. the banker, therefore, acts as the custodian of his money. the relationship that exists between the banker and the assessee is both of creditor and debtor as well as fiduciary.therefore, it cannot be said that, if somebody, by cheating the assessee, draws the money from the bank, the assessee had not suffered the loss. the position would have been different if the money kept in the bank was lost by robbery or dacoity and the bank tries to apportion the money so lost among the depositors proportionate to the transactions. in such an event, it can be said that the assessee has not lost the money and the money that was lost was of the bank because once the money was deposited with the bank, that money becomes the bank's money and if the bank has lost that money, it becomes the loss of the bank. it is, therefore, difficult to follow the argument that the assessee had not incurred the loss and the loss was that of the bank. it is now an established fact in this case that all the fees collected by the assessee were deposited in the bank and the money lost by this fraudulent withdrawal was out of such fees. therefore, it had intimate connection with the business and profession carried on by the assessee. for the above reasons, i am unable to agree with the view expressed by the learned accountant member. agreeing with the view expressed by the learned judicial member, which is more justified and reasonable, i hold that the assessee is entitled to the deduction.21. now, the matter will go before the regular bench for disposal of the appeal in accordance with the opinion of the majority.

Judgment:
1. This is an appeal by the assessee against an order of the Commissioner of Income-tax (Appeals)-IV, New Delhi, pertaining to the assessment year 1985-86.

2. The grievance of the assessee in this appeal is that the Commissioner of Income-tax (Appeals) erred in not allowing loss of Rs. 26,500 as a business loss. The assessee is a firm of chartered accountants. During the assessment year under consideration, the assessee claimed deduction of Rs. 26,500 in respect of loss incurred by it on account of fraudulent withdrawal of money from its bank account by somebody for which a report was lodged in the police station as, according to the firm, the loss was a business loss. The Income-tax Officer mentioned that, according to the assessee, the cheque was presented in the bank with the forged signature of Shri B.R.Maheshwari, one of the partners, and the payment was made by the bank.

He was of the view that the loss claimed was not either business loss or a loss incidental to the profession carried on by the assessee.

Therefore, the same was not admissible.

3. When the matter came up before the Commissioner of Income-tax (Appeals), he confirmed the order of the Income-tax Officer basically on the same reasoning. The assessee is aggrieved.

4. Learned counsel for the assessee, Shri K. Sampath, very vehemently argued that the loss incurred by the assessee-firm was incidental to its profession where somebody or the employee of the assessee forging the signature of the partner has taken out the money from his bank.

Therefore, it is a business loss. It was also pointed out that as soon as it came to the knowledge of the assessee that the amount has been withdrawn with a forged signature, he lodged a report to Station House Officer, Lahori Gate Police Station, on July 11, 1984. It was pointed out that, after the expiry of eight years, nothing has come out where the assessee can hope that he will be able to get back his money. It was pointed out that the police were not able to catch the culprits even after the expiry of eight years. Therefore, there was no hope of getting the money back. It was submitted that the case of the assessee is similar to cases where embezzlement takes place in the business which is allowable as a business loss. Reliance was placed on the following decisions : (4) Associated Banking Corporation of India Ltd. v. CIT [1965] 56 ITR 1 (SC) ; and As against this, the learned Departmental Representative, Shri B.K.Sinha, submitted that it is not a loss which has occurred in the business of the assessee nor is it incidental to the business.

Therefore, it cannot be allowed. It was also pointed out that no complaint was lodged against the bank personnel. The assessee has still hope of recovery. Therefore, the decisions cited by learned counsel for the assessee are not applicable to the facts of the present case. The learned Departmental Representative tried to distinguish the decision in the case of Associated Banking Corpn. of India Ltd. [1965] 56 ITR 1 (SC).

5. We have considered the rival submissions. In the case of Associated Banking Corpn. of India Ltd. [1965] 56 ITR 1 (SC), the facts were that the secretary of a bank misused the powers conferred on him under a power of attorney and withdrew Rs. 18 lakhs by posting false entries in the books of the bank in the accounting year ending June 30, 1947. The withdrawals, for the first time, came to the knowledge of the liquidator of the bank after the end of the accounting year, and the liquidator had to pay to the constituents of the bank Rs. 10,15,000 pursuant to an order of the court made in 1949 and a settlement in 1951.

6. In the case of CIT v. Nainital Bank Ltd. [1965] 55 ITR 707 (SC), the assessee-company carried on the business of banking at a branch situated at Ram Nagar. In the usual course of business, large amounts were kept in various safes in the premises of that branch. At about 7 p.m., on June 11, 1951, there was a dacoity and the dacoits carried away cash amounting to Rs. 1,06,000. In these circumstances, the Supreme Court has observed that the loss incurred by dacoity was incidental to the carrying on of the business of banking and was deductible as a trading loss in computing the income of the respondent from banking business. It was observed that retention of moneys in the premises of a bank to meet the demands of its constituents, which is a part of the operation of banking, carries with it the ordinary risk of being subject to embezzlement, theft, dacoity or destruction by fire, etc. Such risk of loss is incidental to the carrying on of the operations of banking business. It will be pertinent to mention here that the Supreme Court referred to the decision of the High Court of Australia in the case of Charles Moore and Co. (W. A.) Pty Ltd., v.Federal Commr, of Taxation [1956] 95 CLR 344. In that case, the assessee was carrying on the business of running a departmental store and he banked the takings thereof daily. It was the practice on every business morning for the cashier accompanied by another employee to take the previous day's takings to the bank some two hundred yards away and pay them to the credit of the assessee. One day, while on their way to the bank, the two employees were held up at gun point and robbed of a large amount which formed part of the receipts of the assessee for the previous day. A question arose as to whether this amount would be allowed as a business loss. The Australia High Court has observed as under (at page 713 of 55 ITR) : "The 'occasion of the loss' in the present case was the course pursued in banking the money.... There is no difficulty in understanding the view that involuntary outgoings and unforeseen or unavoidable losses should be allowed as deductions when they represent that kind of casualty, mischance or misfortune which is a natural or recognised incident of a particular trade or business the profits of which are in question. These are characteristic incidents of the systematic exercise of a trade or the pursuit of a vocation.

Even if armed robbery of employees carrying money through the streets had become an anachronism, which we no longer knew, these words would apply. For it would remain a risk to which, of its very nature, the procedure gives rise. But unfortunately it is still a familiar and recognised hazard and there could be little doubt that if it had been insured against, the premium would have formed an allowable deduction. Phrases like the foregoing or the phrase 'incidental and relevant' when used in relation to the allowability of losses as deductions do not refer to the frequency, expectedness or likelihood of their occurrence or the antecedent risk of their being incurred, but to their nature or character. What matters is their connection with the operations which more directly gain or produce the assessable income." 7. A similar view was expressed by the Supreme Court in the case of Ramchandar Shivnarain [1978] 111 ITR 265. Now applying these principles of law to the facts of the present case before us, it would be seen that the assessee had lost the money because some one forging the signature of Shri B.R. Maheshwari, one of the partners of the firm, has taken payment from the bank in connivance with the bank officials. This incident has occurred in April, 1984, but it came to the notice of the assessee in the month of July. Immediately after that, the assessee lodged a report at the police station on July 11, 1984. Ever since, the assessee had not received any information about the detection of the person who has taken out the money from the police. There is nothing on record to show that the assessee could pinpoint the responsibility of taking out the money on any person or on any employee of the firm or the bank. Under these circumstances, there is no prospect and nothing was heard so far about the fate of the proceedings against the bank. It is also not known whether the police will be able to bring the culprits to book. Merely because the bank is involved, we do not think it is possible to say that the chances of recovery are bright unless it is shown that it is because of the negligence of the bank that the assessee incurred the loss. Keeping in view the fact that 8 years have elapsed and there is no prospect of recovery of the sum or bringing the culprits on record, it cannot be said that the loss in question was not allowable in the year under appeal and also as a business loss. The Supreme Court, in the above cited case, has observed that the expenses did not relate to the frequency of the happening of the risk but to their nature and character, that is to say, the loss must be connected with the operation to produce income. The assessee-firm retained the money in the premises of the bank to meet the business needs and expenses for purchasing stock-in-trade, which is a part of the business activity. With the retention of the money, there is a risk of embezzlement also. Such risk or loss is incidental to the operation of the assessee's business. If he loses such money in the ordinary course of business, the loss is deductible as a trading loss. The loss should be considered in the commercial sense even if no real business loss has occurred. Keeping in view that there are no chances of recovery of the amount, we are of the opinion that the loss incurred by the assessee is incidental to the carrying on of business. We, therefore, allow it as a business loss. Consequently, we set aside the order of the Commissioner of Income-tax (Appeals) and direct the Income-tax Officer to allow the same as business loss.

9. I have gone through the order proposed by my learned brother. I have, however, not been able to go along with my learned brother. My reasons for not agreeing with the view of my learned brother are as follows : This is not a case where the money was lying in the assessee's till or was handed over to the employees either for payment or for deposit. The assessee's money was lying in current deposit Account No. 12074 with the Union Bank of India, Khari Baoli, Delhi. The assessee's case is that, on reconciling the bank statement, it was found that two cheques bearing Nos. 2106552 and 2105654 were stolen along with their counter-foils and that the assessee came to know of the theft when cheque No. 2105654 for Rs. 26,500 had been fraudulently encashed by forging the signature of Shri B.R. Maheshwari, one of the partners. As the money was lying in the assessee's account with the bank, it was the bank's responsibility to exercise care and caution before clearing the cheque. If the cheque has been cleared, it means that either there was no forgery in the signatures as alleged or that the bank did not exercise proper care and caution. In case it could be established that the fraud took place due to the negligence of the bank, the assessee was certainly entitled to recover the money from the bank. Except for filing a first information report dated July 11, 1984, before the Station House Officer, Lahori Gate Police Station, Delhi-6, in which it has been alleged that without the connivance and active participation of the bank staff this fraud could not have been committed, the assessee has not taken any steps by way of filing a civil suit, etc., against the bank. No notice has been given by the assessee to the bank for making good the assessee's loss. No evidence has been brought on record to show that the assessee, in fact, took up the matter with the bank at all for the purpose of recovery of the amount alleged to have been lost as a result of forgery. In my opinion, it is the bank which should have filed the F.I.R. on the complaint of the assessee, because it is the bank which had lost the money. The assessee only lost two blank cheques at the most, as alleged. No steps have been taken by the assessee to recover the money from the bank.

The entire case-law cited on behalf of the assessee is not germane to the issue. It is not the assessee's money which has been lost, if at all; on the contrary, it is the bank's money. The money was not lying with the assessee or with any of the employees of the assessee and hence the entire case-law relied upon on behalf of the assessee is distinguishable. It was the duty of the bank to tally the signatures before clearing the cheque.

10. When the assessee does not take any effective steps for the recovery of Rs. 26,500, it is immaterial whether a period of eight years or more has passed without recovering a single penny, as stated on behalf of the assessee. Since no steps have been taken by the assessee against the bank, the loss, if any, is not allowable. I also agree with the Revenue authorities that the loss claimed was not incidental to the profession carried on by the assessee. I, therefore, uphold the orders of the Revenue authorities and dismiss the assessee's appeal.

11. We, having differed on an issue, proceed to state the point of difference as below and refer it to the President, Income-tax Appellate Tribunal: "Whether, on the facts and in the circumstances of the case, the loss of Rs. 26,500 claimed by the assessee-firm was allowable as a loss under the head 'Profits and gains of business or profession' ?" 12. The assessee is a firm of chartered accountants, practising in Delhi for the past several years. In this appeal, I am concerned with the disallowance of a claim made by the assessee for the deduction of a sum of Rs. 26,500 which represented loss incurred by the assessee by a fraudulent withdrawal made by an unknown person from the bank account by forging the signature of one of the partners, B.R. Maheshwari.

13. The Income-tax Officer disallowed the claim of the assessee on the ground that this loss was not incidental to the profession carried on by the assessee-firm. The reasons that prevailed with him may be quoted in his own words: "The assessee has claimed deduction of Rs. 26,500 in respect of loss incurred by it on account of fraudulent withdrawal from his bank account by somebody for which a report has been filed in the police station as according to him the loss is business loss. According to the assessee, cheque was presented in the bank with the forged signature of Shri B.R. Maheswari, one of the partners and payment was made by the bank. As the loss claimed is not incidental to the profession carried on by the assessee, the same is not admissible.

Hence not allowed." Aggrieved, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals) who agreed with the stand taken by the Income-tax Officer and confirmed the disallowance of the loss. In other words, the concurrent finding recorded by the Department was that this loss incurred by the assessee was not incidental to the profession carried on by the assessee. To put it differently, implied in this concurrent finding was an admission that the assessee incurred the loss but the same was not admissible as a deduction as it did not relate to the profession carried on by the assessee.

14. Aggrieved by this decision, the assessee had filed a second appeal before the Income-tax Appellate Tribunal. After hearing the assessee's counsel and the Departmental Representative, the learned Judicial Member came to the conclusion that the loss was allowable as a deduction and gave very detailed reasons for his conclusion, drawing support from several decisions of the High Courts and the Supreme Court, particularly the decision of the Supreme Court in the case of Ramchandar Shivnarayan v. CIT [1978] 111 ITR 263. According to him, this was embezzlement but had taken place in the profession carried on by the assessee akin to the embezzlement that took place in the business carried on by the assessee before the Supreme Court, in the above-mentioned case, and also in the other cases. The learned Judicial Member, after analysing the facts, came to the conclusion that the assessee had irretrievably lost the money on account of forgery committed by some one on the cheque making use of which the above amount was withdrawn from the bank. Though it was negligence of the employees of the bank and yet, in so far as the assessee was concerned, it lost the money and, therefore, incurred the loss and that loss was incidental to the carrying on of the profession and "was a part of professional hazards. He particularly referred to the F.I.R. lodged with the police and the inaction or no action by the police for about eight years in bringing the culprits to book, be it the person who withdrew the money by forging the signature or the employee of the bank who was negligent in permitting the encashment of such forged cheque.

There being no prospect of the assessee recovering the money, the assessee was justified in writing it off as a loss.

15. But, the learned Accountant Member was of a totally different opinion. According to him, this was not a case where the money was lying in the assessee's till or was handed over to the employees either for payment for the purpose of the business or for deposit. The assessee's money was lying in a current deposit account with the Union Bank of India, Khari Baoli, Delhi. As the money was lying in the assessee's account with the bank, it was the bank's responsibility to exercise care and caution before clearing the cheque. When the cheque was cleared it meant that there was no forgery or that the bank did not exercise proper care and caution. In case it could be established that the fraud took place due to the negligence of the bank, the assessee was entitled to recover the money from the bank. Therefore, the loss was that of the bank and not that of the assessee. Except for filing an F.I.R. with the police, no other action was taken by the assessee particularly suing the bank for making good the loss. There was also no evidence that the assessee had taken up the matter with the bank for the purpose of recovery of the amount. Therefore, the assessee was not entitled to claim this loss as a business loss or as a loss relating to profession. Referring to the case law, relying upon which the learned Judicial Member allowed the assessee's claim, the learned Accountant Member observed that those cases related to the loss of the assessee's own money and, therefore, they stood on a different footing, whereas, in this case, the money that was lost was not of the assessee but that of the bank. In other words, he laid great stress on the fact that since no steps were taken by the assessee against the bank, the loss, if any, was not allowable. He held that the loss claimed was not incidental to the profession carried on by the assessee.

16. It was on account of these divergent views that the Members could not agree on the conclusion and, therefore, formulated the difference of opinion in the following words and referred it to me for my opinion as a third Member in accordance with the procedure laid down in Section 255(4) of the Income-tax Act, 1961 : "Whether, on the facts and in the circumstances of the case, the loss of Rs. 26,500 claimed by the assessee-firm was allowable as a loss under the head 'Profits and gains of business or profession' ?" I have heard Shri Sampath for the assessee and Shri Khan for the Department. The arguments addressed on behalf of the assessee were on the same lines as were urged before the Commissioner of Income-tax (Appeals) and the Income-tax Officer and elaborately discussed by the learned Judicial Member in his order. The arguments addressed on behalf of the Department were on the same lines as were put down by the learned Accountant Member in his differing order. In particular, the Departmental Representative pointed out that this was not a case of loss by embezzlement by the assessee's own employees. If at all there was any loss that accrued to the assessee, it was a capital loss because the money that was deposited in the bank for safe custody as well as for earning income in the current account got converted into capital and, therefore, if there was any loss, it was capital loss and not revenue loss. Secondly, the loss took place not at the assessee's own premises but in the bank's premises. Therefore, the loss has nothing to do with the carrying on of the business or profession by the assessee.

17. I have perused the case records and considered the arguments very carefully. The principles of law underlying the allowance of loss of cash by theft either by an employee or by a stranger are well-settled and are laid down by the Supreme Court in the recent case of Ramchandar Shivnarayan v. CIT [1978] 111 ITR 265. The Supreme Court laid down the principles thus (headnote) : "A businessman has to keep moneys 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 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." It is thus clear that to constitute a loss occurring on account of embezzlement of money, misappropriation or by fraud, the money lost should have a connection with the business operations and the risk should be inherent in the carrying on of the business. Once the connection is established, then the loss has to be allowed as a deduction. The Departmental Representative argued that this loss could not be said to have any connection with the business carried on by the assessee because the money deposited in the bank got converted into capital. To my mind, there seems to be an apparent contradiction in this kind of thinking. Whether it is revenue loss or capital loss, there was loss to the assessee and that loss had a nexus with the business operations. Unless the capital of the business was lost, it cannot be designated as capital loss. Similarly, unless loss occurs on revenue account, it cannot be called a revenue loss. Thus, whether it is revenue loss or capital loss, it must have connection with the business either on account of capital or on account of revenue earning process. Here, it is said that this is a capital loss, i.e., the capital of the profession was lost. When the capital of the profession was lost, it must have connection necessarily with the profession. It is, therefore, difficult to say that this loss has no connection with the profession carried on by the assessee.

18. The next question that arises is whether the money was deposited in the bank and got converted into capital and whether any loss out of that capital could be allowed as a business loss. Here, courts have held repeatedly that having regard to business exigencies, where money kept at home or in the business premises even consisting of capital is lost, such loss could be allowed as a deduction. In other words, the courts have laid emphasis on the view that the loss occurring on account of embezzlement or misappropriation or by fraud must have connection with the business or profession carried on by the assessee irrespective of the fact whether the money so lost was of capital or revenue nature. In the case of Nainital Bank Ltd. [1965] 55 ITR 707 (SC), what was lost on account of dacoity was the cash kept at the business premises of one of the branches of the bank. That loss was held to be allowable as business loss. In the case of Ramchandar Shivnarayan [1978] 111 ITR 263 (SC), it was the sale proceeds that reached the assessee that were lost. In the case of Associated Banking Corporation of India Ltd. v. CIT [1965] 56 ITR 1 (SC), it was the money lost by withdrawing the same by posting false entries in the books of the bank. When these losses were held to be allowable as business loss, the question whether it is a capital or revenue loss lost all its significance because the capital invested in the business is none the less a business asset. I am, therefore, unable to agree that this loss could be said to be a capital loss and, therefore, disallowable as if it could be brought under the head "revenue loss", it could be allowed as a deduction.

19. Coming to the point taken up by the learned Accountant Member, he had mainly relied upon three aspects to justify his view that the loss was not allowable. One was that the assessee had not made any claim with the bank for making good the loss. The bank having been negligent in its performance of duties should bear the loss and, therefore, the assessee was not visited with the loss. Secondly, the money that was lost was not that of the assessee but that of the bank. While the first point may throw a doubt about the complicity of the assessee, it cannot be said that merely because the assessee had not taken any action against the bank, the assessee was not to be allowed the loss if the assessee had incurred the loss. Unless it was established that the assessee's inaction in proceeding against the bank for the recovery of the loss could not be held against the assessee for the very simple reason that the assessee is entitled to believe that having filed the F.I.R. with the police, the police would take the necessary action against the bank also because in the F.I.R. filed with the police, the assessee had very specifically mentioned that this loss could not have taken place without the connivance and active participation of the bank's staff. After having lodged the F.I.R. with the police making a specific allegation against the bank, I do not think the assessee need again proceed against the bank by filing a civil suit only to get the loss allowed as a business loss. When several ways are open under the law for the recovery of the loss and if one of the several ways was adopted by the assessee, merely because the way adopted did not bring in results or proved abortive, the claim of the assessee cannot be disallowed because some other ways which were open to the assessee were not adopted. What I mean to convey is that the mere fact that the assessee had not proceeded against the bank cannot be held against the assessee for the disallowance of the loss, unless as I said earlier, a case of collusion was made out. There was only a suggestion about the collusion in making this point but no positive proof was adduced. This may again lead to a high degree of suspicion but suspicion cannot take the place of fact. As I said earlier, the assessee had clearly mentioned in the F.I.R. lodged with the police that it was on account of the connivance and the active participation of the bank staff that fraud had taken place and, therefore, the police should proceed against the bank also. If the police had not proceeded against the bank, the remedies lie elsewhere to seek and not to disallow the loss as a consequence of the inaction of the police.

20. Regarding the second point I am unable to agree that the loss was not that of the assessee. The bank had debited the assessee's account with this money of Rs. 26,500 and the assessee had lost it irretrievably. It cannot, therefore, be said that the assessee's money was not lost. Let us assume for the sake of argument that a businessman keeps his money in his own house for custody consisting of the collections made in the business and his own capital or keeps the same in a friend's house for safe custody or transports it to another station for disbursement. Further, suppose this money was lost by burglary. Now, the view taken by the courts was that such loss was allowable. Merely because the money was kept for safe custody in the bank and if a person cheats the assessee by forging his signature and withdrawing the money from the bank and the assessee was not able to recover the money from the bank, can it be said that the assessee has not lost the money and the money so lost was not his own money and that money has no connection with the assessee's business or profession? I think the answer should be in the affirmative (sic) in all the cases.

The assessee's practice was to bank all his money receipts and make payments by issue of cheques. The banker, therefore, acts as the custodian of his money. The relationship that exists between the banker and the assessee is both of creditor and debtor as well as fiduciary.

Therefore, it cannot be said that, if somebody, by cheating the assessee, draws the money from the bank, the assessee had not suffered the loss. The position would have been different if the money kept in the bank was lost by robbery or dacoity and the bank tries to apportion the money so lost among the depositors proportionate to the transactions. In such an event, it can be said that the assessee has not lost the money and the money that was lost was of the bank because once the money was deposited with the bank, that money becomes the bank's money and if the bank has lost that money, it becomes the loss of the bank. It is, therefore, difficult to follow the argument that the assessee had not incurred the loss and the loss was that of the bank. It is now an established fact in this case that all the fees collected by the assessee were deposited in the bank and the money lost by this fraudulent withdrawal was out of such fees. Therefore, it had intimate connection with the business and profession carried on by the assessee. For the above reasons, I am unable to agree with the view expressed by the learned Accountant Member. Agreeing with the view expressed by the learned Judicial Member, which is more justified and reasonable, I hold that the assessee is entitled to the deduction.

21. Now, the matter will go before the regular Bench for disposal of the appeal in accordance with the opinion of the majority.