T.L.VENKATARAMA AIYAR, J.

T(1) THIS is an appeal against the judgment of the High court of Nagpur in a reference under s. 66(1) of the Indian Income-tax Act, 1922, hereinafter referred to as the Act.

(2) THE appellant is the sole proprietor of a firm called Bansilal Abirchand Kasturchand, which carries on business as money-lenders, dealers in shares and bullion and commission agents in Bombay, Calcutta and other places. He is a resident of Bikaner, and manages the business at the several places through agents. During the relevant period, the agent of the firm at Bombay was one Chandratan, who held a power-of-attorney dated 13/05/1944, conferring on him large powers of management including authority to operate on bank accounts. During the period, 15/11/1944, to No 23/11/1944, the agent withdrew from the firms bank account sums aggregating to Rs. 2,30,636.40, and applied them in satisfaction of his personal debts incurred in speculative transactions. On 25/11/1944, 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 3/12/1944, and on the 4th, cancelled the power-of-attorney given to the agent, and by notice dated 6/12/1944, called upon him to pay the amounts withdrawn by him. The agent replied on 8/12/1944, admitting the misappropriation of the amounts and pleading for mercy. On 16/01/1945, the appellant filed a suit against him in the High court of Bombay for recovery of Rs. 2,30,636.40 and that was decreed on 20/02/1945. A sum of Rs. 28,000.00 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.

(3) 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. Oldfield, Limited (1) that it was not a trading loss and therefore could 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 assessees Munim is allowable as a deduction under the Indian Incometax Act either under Section 10(1) or under the general principles of determining the profit and loss of the assessee or Section 10(2)(xv) ? ` The learned Judges held that the case was governed by the decision in Curtis v. J. & G. Oldfield, Limited (1), and answered the question against the appellant. An application under s. 66(A)(2) for a certificate was also dismissed and thereafter, the appellant applied for and-obtained leave to appeal to this court under Art. 136, and that is how the appeal comes before us.

(4) 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 should 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 los 3 sustained by reason of embezzlement is a bad debt allowable under s. 10(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 be