# BADRIDAS DAGA v. THE COMMISSIONER OF INCOME-TAX - **Citation:** [1959] 1 S.C.R. 690 - **Court:** Supreme Court of India - **Decided:** 1959 - **Bench:** Venkatarama Aiyar, Gajendragadkar, A. K. Sarkar - **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/badridas-daga-v-the-commissioner-of-income-tax-1538 - **Pages:** 13 ## Headnote Income Tax-Deduction-Misappropriation by employee-Loss incidental to the conduct of the business--Indian Income-tax Act, I922 (II of I922), s. IO(I), (z)(xi), (z)(xv). The appellant engaged an agent for the purposes of carrying on his business and conferred on him large powers of manage~ ment including authority to operate on bank accounts. While acting under such authority the agent \vithdrew moneys from the bank and used them for the discharge of his personal debts. The appellant was able to recover from the agent only a parl of the amount misappropriated by him, and the balance had to be written off at the end of the accounting year as irrecoverable. The question ~as \vhether the amount which was misappropriated and found~·irrecoverable was allowable as a deduction under the Indian Income-tax Act in determining the profits of the appellant: Held, that the amount in question is not allowable either as a bad debt under s. 10(2)(xi) or as a business expenditute under . s. 10(2)(x") of the Indian Income-tax Act, 1922. It can, however, be deducted in computing the profits of the appellant under • • • S.C.R. SUPREME COURT REPORTS 691 s. 10(1) of the Act as a loss incidental to the carrying on of his r958 busin~ss. Badridas Daga Where an agent or an employee of a businessman in charge of the business is given authority to operate on the bank accourits Th C v. . . d · h · . e ommissioner an wit draws moneys m the purported exercise of that authof 1 1 rity, his action is referable to his character as such authorised 0 ncome- ax agent or employee and any loss resulting from misappropriation of the money by him would be one incidental to the carrying on of the business, and it is not necessary to show that the money was withdrawn for the conduct of the business. Curtis v. ]. & G. Oldfield, (1925) 9 Tax Cas. 319 and Ramaswami Chettiar v. Commissioner of Income-tax, Madras, (1930) I.LR. 53 Mad. 904, explained and distinguished. Venkatachalapathy Iyer v. Commissioner of Income-tax, (1951) 20 I.T.R. 363, Lord's Dairy Farm Ltd. v. Commissioner of Incometax, (1955) 27 l.T.R. 700 and Motipur Sugar Factory Ltd. v. Commissioner of Income-tax, (1955) 28 I.T.R. 128, approved. Cr;IL APPELLATE JURISDICTION : Civil Appeal No. 149of1956. Appeal by special leave from the judgment and order dated December 22, 1954, of the former Nagpur High Court in Misc. Civil Case No. 36 of 1954. R. J. Ko"lah, J. M. Thakar, Ramesh A. Shroff, J. B. Dadachanji, S. N. Andley and Rameshwar Nath, for the appellant. H. N. Sanyal, Additional Solicitor-General of India, K. N. Rajagopa"la Sastri and R. H. Dhebar, for the respondent. 1958. April 25. The Judgment of the Court W!tS delivered by VENKATARAMA ArYAR J.-This is an a.Ppeal against the judgment of the High Court of Nagpur in a refe.rence under s. 66(1) of the Indian Income-tax Act, 1922, hereinafter referred to as the Act. • l'he appellant is the sole proprietor of a firm called Bansilal Abirchand Kasturchand, which carries on b11siness as money-lenders, dealers in shares and bullion i1nd .ccmimission agents ~n B0m4ay, Calcutta a:r;i.d other :Places. .He is a resident of ]3ik11.1:u:~r, a:r;i.d m!l>?J.ages tht:? SS Venkatarama Aiyar ]. 692 SUPREME COURT REPORTS (1959] , 95s business at the several places through agents. During the relevant period, the agent of the firm at Bombay Badridas Daga was one Chandratan, who held a power-of-attorney ... . . dated May 13, 1944, conferring on him large powers The Commissioner of management including authority to operate on of Income-tax · · d N bank accounts. Durmg the per10 , ~ ovember 15, venkatarama 1944, to November 23, 1944, the agent withdrew from Aiyar J. the firm's bank account sums aggregating to Rs. 2,30,636-4-0, and applied them in satisfaction of his personal debts incurred in speculative transactions. On November 25, 1944, the cashier of the firm sent a telegram to the appellant informing him of the true state of affairs. Thereupon, the appellant went to Bombay on D ## Text 690 SUPREME COURT REPORTS [1959] z958 As regards the Madhya Pradesh Act we likewise declare that it is constitutionally valid in so far as it Mnhd. Hanij Quareshi prohibits the slaughter of cows of all ages and calves v. of cows, male and female, but that it is void in so far The State of Biha• as it totally prohibits the slaughter of breeding bulls - and working bullocks without prescribing any test or Da' c. J. requirement as to their age or usefulness. W c also hold that the Act is valid in so far as it regulates the slaughter of other animals under certificates granted by the authorities mentioned therein. In the premises we direct the respondent States not ~ April :15. to enforce their respective Acts in so far as they have ' just been declared voitl by us. The parties will bear and pay their own costs of these applications. Petitions partly allowed . • BADRIDAS DAGA v. THE COMMISSIONER OF INCOME-TAX (VENKATARAMA AIYAR, GAJENDRAGADKAR and A. K. SARKAR JJ.) Income Tax-Deduction-Misappropriation by employee-Loss incidental to the conduct of the business--Indian Income-tax Act, I922 (II of I922), s. IO(I), (z)(xi), (z)(xv). The appellant engaged an agent for the purposes of carrying on his business and conferred on him large powers of manage~ ment including authority to operate on bank accounts. While acting under such authority the agent \vithdrew moneys from the bank and used them for the discharge of his personal debts. The appellant was able to recover from the agent only a parl of the amount misappropriated by him, and the balance had to be written off at the end of the accounting year as irrecoverable. The question ~as \vhether the amount which was misappropriated and found~·irrecoverable was allowable as a deduction under the Indian Income-tax Act in determining the profits of the appellant: Held, that the amount in question is not allowable either as a bad debt under s. 10(2)(xi) or as a business expenditute under . s. 10(2)(x") of the Indian Income-tax Act, 1922. It can, however, be deducted in computing the profits of the appellant under • • • S.C.R. SUPREME COURT REPORTS 691 s. 10(1) of the Act as a loss incidental to the carrying on of his r958 busin~ss. Badridas Daga Where an agent or an employee of a businessman in charge of the business is given authority to operate on the bank accourits Th C v. . . d · h · . e ommissioner an wit draws moneys m the purported exercise of that authof 1 1 rity, his action is referable to his character as such authorised 0 ncome- ax agent or employee and any loss resulting from misappropriation of the money by him would be one incidental to the carrying on of the business, and it is not necessary to show that the money was withdrawn for the conduct of the business. Curtis v. ]. & G. Oldfield, (1925) 9 Tax Cas. 319 and Ramaswami Chettiar v. Commissioner of Income-tax, Madras, (1930) I.LR. 53 Mad. 904, explained and distinguished. Venkatachalapathy Iyer v. Commissioner of Income-tax, (1951) 20 I.T.R. 363, Lord's Dairy Farm Ltd. v. Commissioner of Incometax, (1955) 27 l.T.R. 700 and Motipur Sugar Factory Ltd. v. Commissioner of Income-tax, (1955) 28 I.T.R. 128, approved. Cr;IL APPELLATE JURISDICTION : Civil Appeal No. 149of1956. Appeal by special leave from the judgment and order dated December 22, 1954, of the former Nagpur High Court in Misc. Civil Case No. 36 of 1954. R. J. Ko"lah, J. M. Thakar, Ramesh A. Shroff, J. B. Dadachanji, S. N. Andley and Rameshwar Nath, for the appellant. H. N. Sanyal, Additional Solicitor-General of India, K. N. Rajagopa"la Sastri and R. H. Dhebar, for the respondent. 1958. April 25. The Judgment of the Court W!tS delivered by VENKATARAMA ArYAR J.-This is an a.Ppeal against the judgment of the High Court of Nagpur in a refe.rence under s. 66(1) of the Indian Income-tax Act, 1922, hereinafter referred to as the Act. • l'he appellant is the sole proprietor of a firm called Bansilal Abirchand Kasturchand, which carries on b11siness as money-lenders, dealers in shares and bullion i1nd .ccmimission agents ~n B0m4ay, Calcutta a:r;i.d other :Places. .He is a resident of ]3ik11.1:u:~r, a:r;i.d m!l>?J.ages tht:? SS Venkatarama Aiyar ]. 692 SUPREME COURT REPORTS (1959] , 95s business at the several places through agents. During the relevant period, the agent of the firm at Bombay Badridas Daga was one Chandratan, who held a power-of-attorney ... . . dated May 13, 1944, conferring on him large powers The Commissioner of management including authority to operate on of Income-tax · · d N bank accounts. Durmg the per10 , ~ ovember 15, venkatarama 1944, to November 23, 1944, the agent withdrew from Aiyar J. the firm's bank account sums aggregating to Rs. 2,30,636-4-0, and applied them in satisfaction of his personal debts incurred in speculative transactions. On November 25, 1944, the cashier of the firm sent a telegram to the appellant informing him of the true state of affairs. Thereupon, the appellant went to Bombay on December 3, 1944-, and on the 4th, cancelled the power-of.attorney given to the agent, and by notice dated December 6, 1944, called upon him to pay the amounts witr.drawn by him. The "agent replied on December 8, 1944, admitting the misappropriation of the amounts and pleading for mercy. On January 16, 1945, the appellant filed a suit against him in the High Court of Bombay for recovery of Rs. 2,30,636-4-0 and that was decreed on February 20, 1945. A sum of Rs. 28,000 was recovered from Chandratan and adjusted towards the decree and the balance of Rs. 2,02,442-13-9 was written off at the end of the accounting year as irrecoverable. Before the Income-tax authorities, the dispute related to the question whether this amount of Rs. 2,02,442-13-9 was an admissible deduction. The Tribunal found that the amount in question represented the loss sustained by the appellant owing to misappropriation by his agent, Chandratan, but held on the authority of the decision in Curtis v. J. & G. OUfield, Limited (') that it was not a trading loss and therefore copld not be allowed. On the application of the appellant, the Tribunal referred the following question of law for the decision of the High Court, Nagpur: . "Whether the said sum of Rs. 2,02,442-13-9 being part of the amount embezzled by the assessee's Munim · is allowable as a deduction under the Indian Income- (•) (1925). 9 Tax, Cas. 319. .• • I l S.C.R. SUPREME COURT REPORTS 693 tax Act either under Section 10( I) or under the general x958 principles of determining the profit and loss of the . assessee or Section 10(2)(xv)? " Badridas Da&a The learned Judges held that the case was governed The c0.:;;..issio by the decision in Curtis v. J. &: G. Oldfield, Limited (1), of Income-ta:'' and answered the question against the appellant. An application under s. 66(A)(2) for a certificate was also Venkatarama dismissed and thereafter, the appellant applied for Aiyar J, and obtained leave to appeal to this Court under Art. 136, and that is how the appeal comes before us. The question whether moneys embezzled by an agent or employee are allowable as deduction in computing the profits of a business under s. 10 of the Act has come up for consideration frequently before the Indian courts, and the decisions have not been quite uniform. Before discussing them, it is necessary that we sliould examine the principles that are in law applicable to the determination of the question. Three grounds have been put forward in support of the claim for deduction: (1) that the loss sustained by reason of embezzlement is a bad debt allowable under s. l0(2)(xi) of the Act; (2) that it is a business expense falling within s. 10(2)(xv) of the Act; and (3) that it is a trading loss, which must be taken into account in computing the profits under s. 10(1) of the Act. As regards the first ground, the authorities have consistently held that the deduction is not admissible under s. 10(2)(xi) of the Act, and that, in our view, is correct. A debt arises out of a contract between the parties, express or implied, and when an agent misappropriates monies belonging to his employer in fraud of him and in breach of his obligations to him, it cannot be said that he owes those monies under any agreement. He is no doubt liable in law to make good that amount, but that is not an obligation arising out of a contract, express or implied. Nor does i1; make a difference that in the accounts of the business the amounts embezzled are shown as debits, the amounts realised · towards them, if any, as credits, and the balance is finally written •off. They are merely journal entries adjusting the accounts and do not import a contractual !iability .. (1) (1925) 9 Tax Cas. 319. • 694 SUPREME COURT REPORTS [1959) '958 Nor can a claim for deduction be admitted under . s. 10(2)(xv), because moneys which are withdrawn by Badridas Daga the employee out of the business till without authority The co,;:;,.issioner and in fraud of the proprietor can in no sense be said of Income-tax to be " an expenditure laid out or expended wholly and exclusively " for the purpose of the business. The Venkatarama controversy therefore narrows itself to the question Aiyar J. whether amounts lost through embezzlement by an employee are a trading loss which could be deducted in computing the profits of a business under s. 10(1). It is to be noted that whiles. 10(1) imposes a charge on the profits or gains of a trade, it does not provide how those profits are to be computed. Section 10(2) enumerates various items which are admissible as deductions, but it is well settled that they are not exhaustive of all allowances which could be mllde in ascertaining profits taxable under s. 10(1). In Incometax Commissioner v. Ohitnavis (1 ), the point for decision was whether a bad debt could be deducted under s. 10( 1) of the Act, there having been in the Act, as it then stood, no provision corresponding to s. 10(2)(xi) for deduction of such a debt. In answering the question in the affirmative, Lord Russel observed : • "Although the Act nowhere in terms authorizes the deduction of bad debts of business, such a deduction is necessarily allowable. What are chargeable in income-tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains." It is likewise well settled that profits and gains which are liable to be taxed under s. 10(1) are what are understood to be such according to ordinary commercial principles. "The word ' profits ' ...... is to be understood", observed Lord Halsbury in Gresham Life Assurance Society v. Styles('), "in its natural and proper sense-in a sense which no commercial man would misunderstand ". Referring to these observa- (1) (1932) L. R. 59 I.A. 290, 296, 297 . (2) (1892) A.C. 309, 315; 3 Tax Cas. 185, 188. • S.C.R. SUPREME COURT REPORTS 695 tions, Lord Macmillan said in Pondicherry Railway Co. r95B v. Income-tax Commissioner (1): Badridas Daga " English authorities can only be utilized with v. caution in the· consideration of Indian income-tax The Commissioner cases owing to the differences in the relevant · legislaof Income-tax tion, but the principle laid down by Lord Chancellor Halsbury in Gresham Life Assurance Society v. Styles (2), Venkatarama Aiyar J. is of general application unaffected by the specialities of the English tax system. " The result is that when a claim is made for a deduction for which there is no specific provision· in s. 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 tbat is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act. These being the governi11g principles, in deciding whether loss resulting from embezzlement by an employee in a business is admissible as a deduction under s. 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 s. 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. Human nature being what it is, it is impossible w rule out the possibility of an employee taking advantage of his position as such ·employee and misappropriating the funds of his employer, and the loss arising from such misap.!Jropriation must be held to arise out of the carrying on of business and· to be inciden~al t() it~ (1) (1931) L.R. 58 I.A. 239, 252. (2) (1892) A.C. 309, 315; 3 Tax Cas. 185, 188,' • 696 SUPREME COURT REPORTS [1959) And that is how it would be dealt with according to ordinary commercial principles of trading. Badridas Daga v. At the same time, it should be emphasised that the The Commission" loss for which a deduction could be made under s. 10(1) of Income-ta• must be one that springs directly from the carrying on of the business and is incidental to it and not any V enkalaratua Aiyar ]. • loss sustained by the assessee, even if it has some · connection with his business. If, for example, a thief were to break overnight into ~.he premises of a moneylender and run away with fonds secured therein, that must result in the depletion of the resources available to him for lending and the loss must, in that sense, be a business loss, but it is not one incurred in the running of the business, but is one to which all owners of properties are exposed whether they do business or not. The loss in such a case may be said to foJl on the assessee not as a person carrying on business but as owner of funds. This distinction, though fine, is very material as on it will depend whether deduction could be made under s. 10(1) or not. We may now examine the authorities in the light of the principles stated above. In Jagarnath Therani v. Commissioner of Income-tax (1), the facts were that the assessee who was carrying on business entrusted a sum of Rs. 25,000 to his gumastha for payment to a creditor, but he embezzled it. The question referred for the opinion of the High Court was whether that sum could be allowed as deduction in the computation of profits. In answering it in the affirmative, the learned Judges observed that according to the practice obtaining in England, sums embezzled by employees were allowed as deductions and referred to statements of the law to that effect from Sanders' Income-tax and Super-tax, Murray and Carters' Guide to Income-tax Practice and• to the following passage in Snellings' Dictionary of Income-tax and Super-Tax Practice: " If a loss by embezzlement can be said to be necessarily incurred in carrying on the ·trade it is allowable as deduction from profits. In an ordinary case it springs directly from the necessity of deputing (r) (1925) I.L.R. 04 Pat. 385. . ...., • • .. S.C.R. SUPREME COURT REPORTS 697 certain duties to an employee, and should therefore be allowed." Badridas Daga They accordingly allowed the deduction as "a loss v. incidental to the conduct of the business". The Commissioner In Ramaswami Ohettiar v. Commissioner of Jn. of Income-ta:¥ come-Tax, Madras (1), the assessee was carrying on Venkatarama banking business in several places in India and in Aiy11r 1. Burma. On October 21, 1926 thieves broke into the strong room in the business premises at Moulmiengyum and stole cash and currency notes of the value of Rs. 9,335. The question was whether this amount could be allowed as a deduction. It was held by the majority of the Judges that it could not be. In the judgment of the learned Chief Justice, the law was thus stated: :' If any one is paid a sum due to him as profits and he puts that in his pocket and on his way home is robbed of it, it would be, I think, difficult to contend that such a loss was incidental to his business. Still more so when he has reached his home and put those profits in a strong room or some other place regarded by him to be a place of safety. I can well understand that, in cases where the collection of profits or payment of debts due is entrusted to a gumas. tha or servant for collection and that person runs away with the money or otherwise improperly deals with it, the assessee should be allowed a deduction because such a loss as that would be incidental to his business. He has to employ servants for . the purpose of collecting sums of money due to him and there is the risk that such servant may prove to be dishonest and instead of paying the profits over to him, convert them to his own use. But I cannot distinguish the present case from the case of any professional man or trader who, having collected his profits, i~subsequently robbed of them by a stranger to his business. In this case, none of the thieves were the· then servants of the assessee, although one of them had formerly been his cook." These "observations, while they support the right of the assessee to deduction of loss resulthig J'roni • (1) (1930) I.L.R. 53 Mad. 904. 9o6, 907. 698 SUPREME COURT REPORTS [1959] z95B embezzlement by an employee, also show the extent and limits of that right. Badridas Daga v. In Bansidhar Onkarmal v. Commissioner of IncomeThe commission" tax (1), there was a theft of money by an accountant, of Income-tax but it took place after the office hours, and it was held, following the decision in Ramaswami Chettiar v. ComVenkatarama missioner of Income-tax(') that it could not be allowed Aiyar f. as a deduction under s. 10(1) of the Act, as it was not incidental to the carrying on of the trade. But it was observed by Narasimham J. who delivered the lead- • ing judgment that it might have. made a difference if c the theft had been by the accountant during the office < hours. In Venkatachalapathy Iyer v. Commissioner of Income-tax('), the assessees were a firm of merchants engaged in the business of selling yarn. Its accountant was one Rajarathnam Iyengar, whose duty it was to receive cash on sales, make disbursements and maintain accounts. He duly entered all the transactions in the cash book but when striking the balance at the end of each day he short-totalled the receipts and overtotal!ed the disbursements and misappropriated the difference. The question was whether the amounts thus embezzled could be deducted. On a review of the authorities, Satyanarayana Rao and Raghava Rao JJ. held that the loss was incidental to the carrying on of the business and should be allowed. The appellant contends that this decision is decisive in his favour ; but the learned Judges of the Court below were of the opinipn that on the facts it was distinguishable and that the present case fell within the decision in Curtis v. J. & G. Oldfield, Limited ('). It is necessary to examine the decision in Curtis v. J. & G. Oldfield(') somewhat closely, as the main controversy in the Indian courts has been as to what was precisely determined therein. There, the facts were that the managing director of a company who was in exclusive control of its business, had, availing himself of his position as such managing director, withdrawn large amounts from time to time and applied them to his own personal affairs. This wen't on for (!) [1949] 17 I.T.R. z47. (3) [1951] zo I.T. 0R. 363. (z) (1930) I.L.R. 53 Mad. 904. 906, 907 . (4) (19z5) g Tax Cas. 319. • .,., S.C.R. SUPREME COURT REPORTS 699 several years prior to his death, and thereafter, the z958 fraud was discovered, and the amounts overdrawn by h• 'tt ff ' bl Th t' Badridas Daga im were wn en o as irrecovera e. e ques 10n v. was , whether these amounts could be allowed , as a The Commissioner deduction, and it was answered in the negative by of Income-tax Rowlatt J. Now, it should be observed that the learned Judge did not say that· amounts embezzled by an Venkatarama employee in the course of business would not be Aiyar J. admissible deductions. On the other hand, he observed: "I quite think, with Mr. Latter, that if you have a business ..... .in the course of which you have to employ subordinates, and owing to the negligence or the dishonesty of the subordinates some of the receipts of the business do not find their way into the till, or some of the bills are not collected at all, or something of that sort, that may be an expense connected with and arising out of the tmde in the most complete sense of the word." He went on to observe : "I do not see that there is any evidence at all that there was a loss in the trade in that respect. It simply means that the assetfl of the Company, moneys which the Company had got and which had got home to the Company, got into the control of the Managing Director of the Company, and he took them out. It seems to me that what has happened is that he has made away with receipts of the Company de hors the trade altogether in virtue of his position as Managing Director in the office and being in a position to do exactly what he likes.'' Thus, what the learned Judge really finds is that the embezzlement was not connected with the carrying on of the trade but was outside it, and on that finding, the decision can only be that the deducti