Satyanarayana Rao, J.-The Income-tax Appellate Tribunal referred the following two questions to this Court for its opinion:

1. Whether in the circumstances of the case the sum of Rs.21,372 could in law be treated a a loss in the account period of the assessment year 1942-43 and if not;

2. Whether this sum could be deducted as an expenditure under Section 10(2)(xii) or as a bad debt under section 10(2)(xi) of the Income-tax Act.

The assessees, who are the applicants, are a registered firm and carry on business as yarn merchants. They were assessed to income-tax for the assessment year 1942-43 (the accounting year ending with 12th April, 1942) in which they claimed that they were entitled to deduct out of the income a sum of Rs.21,372. The basis of the claim for deduction is that the amount represented the loss sustained by them as the result of embezzlement by one Rajarathnam Aiyangar, a former clerk of their firm. In such capacity the clerk was entrusted with manifold duties. He wrote account books, acted as salesman, received and disbursed cash in the absence of the managing partner and collected bills. The amounts received and spent by him in the course of the day used to