Deductions analysis: Losses from embezzlement allowed, annuity payments not deductible, business debt settlement expense admissible.

Sassoon J. David And Co. Pvt. Limited Versus Commissioner Of Income-Tax, Bombay City I

Sassoon J. David And Co. Pvt. Limited Versus Commissioner Of Income-Tax, Bombay City I - [1975] 98 ITR 50 Issues Involved:
1. Admissibility of Rs. 9 lakhs as a deduction under section 10(1), 10(2)(xi), or 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Admissibility of Rs. 16,885 as a deduction under section 10(2)(xv) for the assessment years 1958-59, 1959-60, and 1960-61.
3. Admissibility of Rs. 8,000 as a deduction under section 10(2)(xv) for the assessment year 1959-60.

Detailed Analysis:

1. Admissibility of Rs. 9 lakhs as a Deduction:

- Facts:
The assessee company wrote off Rs. 9 lakhs, part of Rs. 27.5 lakhs embezzled by its director, Sir Alwyn Ezra, and claimed it as a deduction under "Bad debts" in the assessment year 1958-59. The income-tax authorities disallowed the claim under sections 10(2)(xi), 10(2)(xv), and 10(1) of the Indian Income-tax Act, 1922.

- Tribunal's View:
The Tribunal rejected the claim, holding that the embezzlement was not incidental to the business but akin to a partner overdrawing his account.

- Court's Analysis:
The Court disagreed with the Tribunal, emphasizing that the embezzlement by Sir Alwyn Ezra was incidental to the business. The Court applied the Supreme Court's ruling in Badridas Daga v. Commissioner of Income-tax, which established that losses due to embezzlement by an agent are incidental to the business if the employment of agents is necessary for the business operations.

- Key Points:
- The company had no option but to appoint an agent as it could not act in its own person.
- The embezzlement arose out of the carrying on of the business and was incidental to it.
- The loss was actual, present, and caused in the relevant year of account.

- Conclusion:
The Court held that the loss of Rs. 9 lakhs was an admissible deduction under section 10(1) but not under sections 10(2)(xi) or 10(2)(xv).

2. Admissibility of Rs. 16,885 as a Deduction:

- Facts:
The company terminated the services of its employees, including manager A. E. Joseph, and decided to pay him an annuity of Rs. 16,885 for five years. The claim for deduction under section 10(2)(xv) was rejected by the income-tax authorities and the Tribunal.

- Tribunal's View:
The Tribunal held that the payment had no commercial purpose and was made merely to effectuate the agreement between the company and Tata Sons Pvt. Ltd.

- Court's Analysis:
The Court upheld the Tribunal's view, referencing a previous judgment that the payment was not made for commercial considerations and expediency.

- Conclusion:
The Court held that the annuity payments were not admissible deductions under section 10(2)(xv).

3. Admissibility of Rs. 8,000 as a Deduction:

- Facts:
The company paid Rs. 8,000 to Mrs. Messaffi, widow of a constituent who had advanced money to the company. The payment was made in lieu of interest she claimed from 1945 to 1958.

- Income-tax Authorities' View:
The claim was disallowed on the grounds that the payment was ex gratia and unconnected with the business.

- Court's Analysis:
The Court found that the payment was made as a matter of commercial expediency and for adequate consideration, even though it was described as ex gratia. The payment was connected with a business debt and was made to settle a claim arising from a business dealing.

- Key Points:
- The payment was not a voluntary act of bounty but influenced by business considerations.
- The payment was made in settlement of a claim arising out of a business dealing.

- Conclusion:
The Court held that the expenditure of Rs. 8,000 was incurred wholly and exclusively for the purpose of the business and was an admissible deduction.

Final Judgments:

1. The sum of Rs. 9 lakhs is an admissible deduction under section 10(1) but not under sections 10(2)(xi) or 10(2)(xv).
2. The annuity payments of Rs. 16,885 are not admissible deductions under section 10(2)(xv).
3. The expenditure of Rs. 8,000 was incurred wholly and exclusively for the purpose of the business and is an admissible deduction.