Law: Income Tax Act, 1922

Section: 10(2)(xi)

Section 36(1)(vii)/(viia) of the Income-tax Act, 1961 [corresponding to section 10(2)(xi) of the Indian Income-tax Act, 1922] - Bad debts - Assessment year 1948-49 - Whether writing off in the books of account is a condition precedent to admissibility of allowance for bad debts - Held, no Section 28(i) of the Income-tax Act, 1961 [corresponding to section 10(1) of the Indian Income-tax Act, 1922] - Business loss/deduction - Allowable as - Assessment year 1948-49 - Whether where an servant or agent embezzle money, so long as a reasonable change of restitution exist, trading loss may not in a commercial sense be said to have resulted - held, yes - Secretary of assessee bank embezzled money - However there was no evidence that he could not have net obligation to refund - Further, Tribunal found that misapplication of funds come to knowledge of liquidator of company only after accounting year ended - Whether loss must be deemed to have occurred to bank only after liquidator come to know about embezzlements and about its irrecoverability - Held, yes FACTS In the return submitted by the assessee company business loss was computed after debiting against the gross profits in the profit and loss account an amount of debts which become irrecoverable. Further, a huge amount was embezzled by the secretry. The departmental authorities and the Tribunal rejected the claim for allowance of bad debts on the ground that the bad debts were not written off in the books of account of the bank as required by section 10(2)(xi) of the 1922 Act. The claim for allowance of Rs. 10,15,000 and Rs. 99,892 being the loss resulting from embezzlements by the secretary was rejected by the departmental authorities on the grounds, that the embezzlements did not relate to the business of the bank and could not be treated as loss suffered by the bank in the course of the business, and in any event the loss was not suffered in the year of account because it was not ascertained in that year. The Tribunal affirmed the view. On reference, the High Court held that they were bound by the finding recorded at the earlier hearing that bad debts were not admissible deductions because the debts were never…

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