Period to which loss can be attributed.

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 be noted on slips of paper by him and he would hand over the slips with the cash balance in his hands to the managing partner at the close of the day. He maintained also cash chitta of transactions conducted by him including collections and expenses. In May, 1941, it was discovered that he had embezzled a total sum of Rs.36,298-3-6 during the period between 17th October, 1939, and 24th October, 1940. The modus operandi adopted by him to embezzle the money was: While he entered the transactions faithfully in the books maintained by him, in totalling the receipts and payments of each day, he short-totalled the receipts and over-totalled the payments and prepared a statement of daily cash balance on the basis of such wrong totals and the cash actually handed over at the end of the day to the managing partner was only the cash as per the cash balance statement prepared by him on that basis. He pocketed therefore each day the difference between the actual balance on the basis of the correct totals and the balance as per the statement of cash prepared on the basis of wrong totals. The particulars of the amounts so misappropriated during the period are set out in the order of assessment of the Income-tax Officer. Misappropriation by short-totalling receipts, misappropriation by over-totalling payments, misappropriation by carrying forward wrong totals and various other heads amount to Rs.36,298-3-6. The suspicion of the managing partner was aroused in October, 1940 and Rajarathnam Aiyangar absented himself from his work and ceased to be an employee of the firm in November, 1940. In June, 1941, a criminal prosecution was launched against him and about the same time a civil suit for the recovery of the amount was also instituted. As a result of the intervention of certain mediators, the matter was compromised between the assessees and Rajarathnam Aiyangar in August, 1941 and he paid in full settlement of the claim of the applicants a sum of Rs.16,250. The amount now claimed as a deduction from the income is the difference, between the total amount embezzled and the amount paid by Rajarathnam Aiyangar under the compromise.

The Income-tax Officer refused to recognise the deduction of the amount as a loss on the ground that the assessees failed to establish the embezzlement. On appeal the Appellate Assistant Commissioner practically agreed with that finding of the Income-tax Officer. The Appellate Tribunal, however, differed from this finding and found as a fact that the embezzlement of Rs.36,298-3-6 was true. But the Tribunal refused the claim to deduct the amount on the ground that the loss did not fall during the accounting year as, according to it the loss had occurred in the year 1939-40, i.e., previous to the accounting year. The assessees rested their cla