Law: Income Tax Act, 1961

Section: 256

Income-tax----Business loss---Defalcation of certain amount by employee--­Employee entrusted with cash for disbursement of wages ---Entrustment in course of business-Loss incidental to business---Allowable. If there is a direct and proximate nexus between the business operation and the loss or it is incidental to it, then the loss is deductible as without the business operation and doing all-that is incidental to it, no .profit can be earned. The assessee claimed a deduction of a sum of Rs.68,434 from its total income as trading loss on account of the defalcation made by the employee. According to the assessee, the employee was entrusted with the cash for payment of wages and, therefore, the defalcation was a trading loss and allowable. The Income-tax Officer disallowed the claim and made an addition. The Commissioner of Income-tax (Appeals) allowed the claim but the Tribunal confirmed the addition made by the Income-tax Officer on the ground that the employee of the assessee who defalcated the amount was not authorised to disburse the amount. On a reference: Held, that the mere fact that the duty to make-payment of wages is cast on the Manager or Cashier is no reason to hold that the entrustment of money to the employee is not in the course of carrying on the business of the assessee. The entrustment of money with an employee for disbursement of wages was in the course of the assessee's business and, since the employee defalcated the amount when he was engaged in the activities of the assessee's business the loss sustained by the assessee was directly connected with the business operation and hence allowable as trading loss. Badidas Daga v. CIT (1958) 34 ITR 10 (SC); Churakulam Tea Estates (Pvt.) Ltd. v. CIT (1995) 214 ITR 457 (Ker.); CIT v. Nainital Bank Ltd. (1965) 55 ITR 707 (SC); Khaitan & Co. v. CIT (1979) 118 ITR 728 (Cal.) and Ramchandar Shivnarayan v.. CIT (1978) 111 ITR 263 (SC) ref. JUDGMENT K.S. RADHAKRISHNAN, J.---Pursuant to the direction of this Court in O.P. No.7485 of 1993, the Income-tax Appellate Tribunal, Cochin Bench (in short "the Tribunal"), referred the following questions of law for opinion under section 256(2) of the Income Tax…

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