judgement:
:Civil Appeal No. 1970(NT) of 1975 & 855(NT)/1975.
From the Judgment and Order dated 22.4.1974 of the Allahabad High Court in Civil Miscellaneous Writ No. 152 of 1974 Dr. V. Gauri Shankar, Miss A. Subhashini and K.C. Dua for the Appellants.
S.C. Manchanda, Ms. section Janani, Mrs. Urmila Kapoor and Ms. Meenakshi for the Respondent.
The Judgment of the Court was delivered by MISRA, J.
Civil Appeal No. 1970 of 1975 is by the Reve nue by certificate of the High Court while the other is an appeal by the assessee by special leave.
Both arise out of the same judgment of the Allahabad High Court dated 22.4.1974 in an application under article 226 of the Constitu tion by the assessee challenging the notices issued under section 148 read with sections 142(1) and 143(2) of the Income Tax Act of 1981, all dated 7th of March, 1973 relating to the assess ment year 1965 66.
The notice under section 148 was on the basis of three cash credit entries dated 22nd of August, 1964 from Messrs Meghraj Dulichand, Messrs Associated Commercial Organisation Private Limited and Messrs Laxminarain Atmaram, the first two being for a sum of Rs. 30,000 each and the last one for a sum of Rs.40,000.
The High Court ultimately found: "The result is that the notice dated 7th March 1973, was within jurisdiction only in regard to the cash credit entry from the firm Meghraj Dulichand of Calcutta.
In regard to the other two transactions, the case did not fall within the purview of clause (a) of section 147.
607 As seen above, the Income Tax Offi cer had no material in his possession on the basis of which he could have reason to believe (mere suspicion apart) that income had escaped assessment.
For this reason the case was not covered by clause (b) of section 147 either.
In regard to those two items the notice was totally without jurisdiction.
The Income Tax Officer had no jurisdiction to re open the assessment in respect of these two cash credit entries.
In this view it is unnecessary to decide whether the notice was barred by time on the footing that it was covered by clause (b) to section 147.
In the result, the petition succeeds and is allowed in part.
The respondent Income Tax Officer is directed not to re open the assessment of the petitioner firm for the assessment year 1965 66 in relation to the cash credit entries of Rs.30,000 from M/s. Associated Commercial Organisation Private Ltd. and of Rs.40,000 in respect of M/s. Laxminarain Atmaram.
" The appeal by the Revenue is in relation to the two transactions totaling Rs.70,000 and the appeal by the asses see is in regard to the remaining one in respect of a sum of Rs.30,000.
Dr. Gouri Shankar appearing for the Revenue has contended that it was not for the High Court to go into the question as to whether the notice under section 148 of the Act was partly valid and partly not because if the Income Tax Officer proceeded to issue notice under section 148 of the Act for reopening the assessment, he would require the assessee to furnish a fresh return and the entire assessment proceed ing has to be re done after the assessee furnishes the return.
In the present case, along with the notice under section 148 of the Act the Income Tax Officer did call upon the assessee to furnish a return as required under section 142 of the Act.
That notice casts an obligation on the assessee to make a fresh return and therein it was obliged to make a complete disclosure of its income in accordance with law and it was open to the Income Tax Officer to examine not only the three items referred to in the notice but also whatever came within the legitimate ambit of an assessment proceeding.
This being the legal position, Dr. Gouri Shankar for the Revenue contends, once the High Court sustained the notice in respect of a sum of Rs.30,000 that gave full jurisdiction to the Income Tax Officer to reopen the assessment and take to a fresh assessment proceeding.
The High Court should not have examined the tenability of the assessee 's 608 contenton in regard to the two transactions of Rs.30,000 and Rs.40,000 and that aspect should have been left to be con sidered by the Income Tax Officer while making the reassess ment.
A Division Bench of the Punjab High Court in Commission er of Income Tax, Punjab, Himachal Pradesh & Bilaspur, Simla vs Jagan Nath Maheshwary, examined this aspect of the matter with reference to a proceeding for reassessment under section 34 of the earlier Act of 1922 and came to hold: "When a notice is issued under section 34 based on a certain item of income that had escaped assessment, it is permissible for the Income tax authorities to include other items in the assessment, in addition to the item which had initiated and resulted in the notice under section 34." A Division Bench of the Andhra Pradesh High Court in Pulavarthi Viswanadham vs Commissioner of Income Tax, Andhra Pradesh, considered the same position with refer ence to section 34 of the earlier Act.
After extracting the two clauses in sub section
(1) of section 34, the Court held: "It is immediately plain that when once the Income tax Officer reaches the conclusion on the material that is before him that there has been a non disclosure as regards part of the income, profits or gains chargeable to income tax by the assessee, he is entitled to issue a notice either under clause (a) or (b), as the case may be, under section 22(2) of the In come tax Act." After extracting section 22(2) the High Court proceeded to say: "What emerges from sub section (2) of section 22 is that when once an assessee is required to submit a return of his income, he is obliged to disclose the totality of his in come.
The question that falls to be decided on the language of these two sections is whether after notice is issued under section 34(1)(a) the assessment should be limited to items which escaped assessment by reason of the failure on the part of the assessee to dis close all his income, profits or gains which are subject to tax.
The contention of learned counsel for the assessee is that having regard to the terms of clause (b) it was not within the powers of the Income tax 609 Officer to bring to charge such of the items as have escaped from being taxed without any remissness on his part.
It is only items that escaped assessment due to omission or failure of the assessee that come within the range and sweep of section 34, continues learned counsel for the assessee.
We do not think that we can accede to this proposition.
When once the assessment is reopened, no distinction could be made between items falling under clause (a) and those coming within the pale of clause (b).
As pointed out by a Division Bench of this Court in R.C. No. 12 of 1960 (Parimisetti Seetharamamma vs Commissioner of Incometax, , to which one of us was a party: " . . when once an assessment is reopened under section 34, the Income tax Officer proceeds de novo under the relevant sections of the Income tax Act, i.e., he issues notice under section 22(2) and proceeds to assess the assessee.
He has to follow the same procedure as in the case of the first assessment as is clear from the clause in section 34 and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that subsection.
The proceedings under section 34 must be deemed to relate to proceedings which commence with publication of notice under section 22(1).
" The view taken by the two High Courts has been supported by this Court in V. Jaganmohan Rao & Ors.
vs Commissioner of Incometax & Excess Profits Tax, Andhra Pradesh, There, repelling the same argument on behalf of the assessee this Court said: "This argument is not of much avail to the appellant because once proceedings under section 34 are taken to be validly initiated with regard to two thirds share of the income, the jurisdiction of the Income tax Officer cannot be confined only to that portion of the income.
Section 34 in terms states that once the Income tax Officer decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice under section 22(2) and may proceed to assess or reassess such income, profits or gains.
It is, therefore, manifest that once assessment is reopened 610 by issuing a notice under sub section (2) of section 22 the previous under assessment is set aside and the whole assessment proceedings start afresh.
When once valid proceedings are started under section 34(1)(b) the Income tax Officer had not only the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year.
" No serious effort, however, was made by Mr. Manchanda appearing for the assessee respondent to counter this sub mission advanced on behalf of the Revenue.
Accepting the legal position indicated in these cases we come to the conclusion that it was not for the High Court to examine the validity of the notice under section 148 in regard to the two items if the High Court came to the conclusion that the notice was valid at least in respect of the remaining item.
Whether the Income Tax Officer while making his reassessment would take into account the other two items should have been left to be considered by the Income Tax Officer in the fresh assessment proceeding.
With this conclusion the decision of the High Court would ordinarily have been reversed.
As we have already stated, the assessee has also appealed against that part of the judgment of the High Court which was adverse to it.
Mr. Manchanda contended that in this case the regular assessment had been made for the assessment year 1965 66 on 22.1.1966.
Notice under section 147 of the Act was issued on 7th of March, 1973, i.e., more than seven years after the assessment had been completed.
The three amounts mentioned in the notice under section 148 of the Act were found in the assessee 's accounts by the Income Tax Officer when he exam ined the same in course of the assessment proceedings.
We had called upon the assessee to substantiate the genuineness of the transactions and the assessee had produced material to support the same.
The Income Tax Officer accepted the documents produced and treated all the three transactions to be genuine and on that footing completed the assessment.
The primary facts were before the Income Tax Officer at the time of the regular assessment and he called upon the assessee to explain to his satisfaction that the entries were genuine and on the basis of materials provided by the assessee satisfaction was reached.
It was then open to the Income Tax Officer to make further probe before completing the assess ment if he was of the view that the material provided by the assessee was not sufficient for him to be satisfied that the assessee 's contention was correct.
This Court in Calcutta Discount Company Limited vs I. T. 0., held that the expression 'Material facts ' used in el.
(a) 611 referred only to primary facts and the duty of the assessee was confined to disclosure of primary facts and he had not to indicate what factual or legal inferences should properly be drawn from the primary facts.
In the facts appearing on the record we are in agreement with Mr. Manchanda that cl.
(a) of section 147 did not apply to the facts of the case as the alleged escapement of income for assessment had not resulted from failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for that year.
The notice in the instant case did not indi cate whether it was a case covered by cl.
(a) or cl.(b).
On our finding that cl.
(a) was not invokable, the power under cl.
(b) could be called in aid under section 149(1)(b) of the Act within four years from the end of the relevant assessment year.
Admittedly, the notice has been issued beyond a period of four years and, therefore, the notice itself was beyond the time provided under the law.
On the facts appearing in the case the High Court overlooked to consider this aspect of the matter.
Since the proceedings before the High Court were under article 226 of the Constitution and not by way of reference under the Act, the jurisdiction of this Court is not advisory and confined to the questions referred for opinion.
On the facts we are satisfied that ends of justice require our intervention and we would accordingly allow the appeal of the assessee by holding that the notice under section 148 of the Act cannot be sustained in law for the reasons indicated above.
The appeal by the assessee is allowed and the appeal by the Revenue is dismissed.
The notice under section 148 of the Act is quashed.
Both parties are directed to bear their respec tive costs throughout.
G.N. Appeal by the assessee is allowed and Appeal by the revenue is dismissed.

summary:
In respect of assessment year 1965 66, the Income tax Officer issued notices to the assessee under section 148 read with sections 142(1) and 143(2) of the Act on the ground that income has escaped assessment in respect of three cash credit entries totaling Rs. 1 lakh.
The assessee challenged the notices by way of writ petitions before the High Court.
The High Court gave a finding that the notice was within jurisdiction only in respect of an entry of Rs.30,000 and in respect of the other two entries viz. Rs.40,000 and Rs.30,000 it directed the Income tax Officer not to reopen the assessment.
These two appeals are against the High Court 's judgment.
The appeal by ReVenue, by certificate, is in respect of the two entries of Rs.40,000 and Rs.30,000 and the other appeal of the assessee, by special leave, is in respect of the entry of Rs.30,000.
On behalf of the Revenue, it was contended that once the High Court sustained the notice in respect of a sum of Rs.30,000, that gave full jurisdiction to the Income tax Officer to reopen the assessment and that the High Court should not have examined time tenability of the assessee 's contention in regard to the two transactions of Rs.30,000 and Rs.40,000 and that aspect should have been left to be considered by the Income tax Officer while making the reas sessment.
The contention of the assessee was that the notice was issued more than 7 years after the assessment was completed and was also beyond the period of limitation, viz., four years, that the escapement of the income from assessment had not resulted from failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment.
605 Allowing the appeal of the assessee, and dismissing the appeal by the Revenue.
HELD: 1.
The notice issued under section 148 of the Act is quashed.
It was not for the High Court to examine the valid ity of the notice under section 148 in regard to the two items if the High Court came to the conclusion that the notice was valid at least in respect of the remaining item.
Whether the Income tax Officer while making the reassessment would take into account the other two items, should have been left to be considered by the Income tax Officer in the fresh assess ment proceeding.
[610C D] CIT.
Punjab, H.P. & Bilaspur, Simla vs Jagan Nath Ma heshwary, 32 AIR 418 and Pulavarthi Viswanadham vs CIT.
A.P., approved.
V. Jagan Mohan Rao & Ors.
vs CIT & Excess Profits Tax, A.P., and Parimisetti Seetharamamma vs CIT, referred to.
2.1 The three amounts mentioned in the notice under section 148 of the Act were found in the assessee 's account by the Income tax Officer when he examined the same in course of the assessment proceedings.
He had called upon the assessee to substantiate the genuineness of the transactions and the assessee had produced material to support the same.
The Income tax Officer accepted the documents produced and treated all the three transactions to be genuine and on that footing completed the assessment.
The primary facts were before the Incometax Officer at the time of the regular assessment and he called upon the assessee to explain to his satisfaction that the entries were genuine and on the basis of materials provided by the assessee, satisfaction was reached.
It was then open to the Income Tax Officer to make further probe before completing the assessment if he was of the view that the material provided by the assessee was not sufficient for him to be satisfied that the assessee 's contention was correct.
[610E H] 2.2 The expression 'material facts ' used in section 147(a) referred only to primary facts and the duty of the assessee was confined to disclosure of primary facts and he had not to indicate what factual or legal inferences should properly be drawn from primary facts and this clause did apply to the facts of the present case as the alleged escapement of income for assessment had not resulted from failure on the part of the assessee to disclose fully and truly all materi al facts necessary for its assessment for that year.
The notice in the instant case, did not indicate 606 Whether it was a case covered by cl.
(a) or cl.
On the finding of this Court that cl.
(a) was not invokable, the power under cl.
(b) could be called in aid under section 149(1)(b) of the Act within four years from the end of the relevant assessment year.
Admittedly, the notice has been issued beyond a period of four years and, therefore, the notice itself was beyond the time provided under the law.
The High Court overlooked to consider this aspect of the matter.
[610H; 611A C] Calcutta Discount Company Ltd. vs ITO, , followed.


judgement:
Appeal No. 149 of 1956.
Appeal by special leave from the judgment and order dated December 22, 1954, of the former Nagpur High Court in Misc.
Civil Case No. 36 of 1954.
R. J. Kolah, J. M. Thakar, Ramesh A. Shroff, J. B. Dadachanji, section N. Andley and Rameshwar Nath, for the appellant.
H. N. Sanyal, Additional Solicitor General of India, K.N. Rajagopala Sastri and R. H. Dhebar, for the respondent.
April 25.
The Judgment of the Court was delivered by VENKATARAMA AIYAR J.
This is an appeal against the judgment of the High Court of Nagpur in a reference under section 66(1) of the Indian Income tax Act, 1922, hereinafter referred to as the Act.
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 692 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 May 13, 1944, conferring on him large powers of management including authority to operate on bank accounts.
During the period, November 15, 1944, to November 23,1944, the agent withdrew from the firm 's bank account sums aggregating to Rs. 2,30,636 4 0, and applied them in satisfaction of his personal debts incurred in speculative transactions.
On November 25, 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 December 3, 1944, and on the 4th, cancelled the power of attorney given to the agent, and by notice dated December 6, 1944, called upon him to pay the amounts withdrawn by him.
The agent replied on December 8, 1944, admitting the misappropriation of the amounts and pleading for mercy.
On January 16,1945, the appellant filed a suit against him in the High Court of Bombay for recovery of Rs. 2,30,636 4 0 and that was decreed on February 20, 1945.
A sum of Rs. 28,000 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.
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 vs 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 assessee 's Munim is allowable as a deduction under the Indian Income (1) 693 tax 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 vs J. & G. Oldfield, Limited (1), and answered the question against the appellant.
An application under section 66(A)(2) for a certificate was also dismissed and thereafter, the appellant applied for and obtained leave to appeal to this Court under article 136, and that is how the appeal comes before us.
The question whether moneys embezzled by an agent or employee are allowable as deduction in computing the profits of a business under section 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 section 10(2)(xi) of the Act; (2) that it is a business expense falling within section 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 section 10(1) of the Act.
As regards the first ground, the authorities have consistently held that the deduction is not admissible under section 10(2)(xi) of the Act, and that, in our view, is correct.
A debt arises out of a contract between the parties, express or implied, and when an agent misappropriates monies belonging to his employer in fraud of him and in breach of his obligations to him, it cannot be said that he owes those monies under any agreement.
He is no doubt liable in law to make good that amount, but that is not an obligation arising out of a contract, express or implied.
Nor does it make a difference that in the accounts of the business the amounts embezzled are shown as debits, the amounts realised towards them, if any, as credits, and the balance is finally written off.
They are merely journal entries adjusting the accounts and do not import a contractual liability.
(1)(1925) 694 Nor can a claim for deduction be admitted under section 10(2)(xv), because moneys which are withdrawn by the employee out of the business till without authority and in fraud of the proprietor can in no sense be said to be " an expenditure laid out or expended wholly and exclusively " for the purpose of the business.
The controversy therefore narrows itself to the question whether amounts lost through embezzlement by an employee are a trading loss which could be deducted in computing the profits of a business under section 10(1).
It is to be noted that while section 10(1) imposes a charge on the profits or gains of a trade, it does not provide how those profits are to be computed.
Section 10(2) enumerates various items which are admissible as deductions, but it is well settled that they are not exhaustive of all allowances which could be made in ascertaining profits taxable under section 10(1).
In Incometax commissioner vs chitnavis (1), the point for decision was whether a bad debt could be deducted under section 10(1) of the Act, there having been in the Act, as it then stood, no provision corresponding to section 10(2)(xi) for deduction of such a debt.
In answering the question in the affirmative, Lord Russel observed: " Although the Act nowhere in terms authorizes the deduction of bad debts of business, such a deduction is necessarily allowable.
What are chargeable in income tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains.
" It is likewise well settled that profits and gains which are liable to be taxed under section 10(1) are what are understood to be such according to ordinary commercial principles.
,The word " profits. . is to be understood ", observed Lord Halsbury in Gresham Life Assurance Society vs Styles (2), " in its natural and proper sense in a sense which no commercial man would misunderstand ".
Referring to these observa (1) (1932) L. R. 59 I.A. 290, 296, 297.
(2)(1892) A.C. 309, 315 ; , 188.
695 tions, Lord Macmillan said in Pondicherry Railway Co.v.
Income tax Commissioner (1):" English authorities can only be utilized with caution in the consideration of Indian income tax cases owing to the differences in the relevant legislation, but the principle laid down by Lord Chancellor Halsbury in Gresham Life Assurance Society V. Styles (2), is of general application unaffected by the specialities of the English tax system.
" The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it.
If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act.
These being the governing principles, in deciding whether loss resulting from embezzlement by an employee in a business is admissible as a deduction under section 10(1) what has to be considered is whether it arises out of the carrying on of the business and is incidental to it.
Viewing the question as a businessman would, it seems difficult to maintain that it does not.
A business especially such as is calculated to yield taxable profits has to be carried on through agents, cashiers, clerks and peons.
Salary and remuneration paid to them are admissible under section 10(2)(xv) as expenses incurred for the purpose of the business.
If employment of agents is incidental to the carrying on of business, it must logically follow that losses which are incidental to such employment are also incidental to the carrying on of the business.
Human nature being what it is, it is impossible to rule out the possibility of an employee taking advantage of his position as such employee and misappropriating the funds of his employer, and the loss arising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it.
(1) (1931) L.R. 58 I.A. 239, 252.
(2) , 315; , 188 696 And that is how it would be dealt with according to ordinary commercial principles of trading.
At the same time, it should be emphasised that the loss for which a deduction could be made under section 10(1) must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business.
If, for example, a thief were to break overnight into ,he premises of a moneylender and run away with funds secured therein, that must result in the depletion of the resources available to him for lending and the loss must, in that sense, be a business loss, but it is not one incurred in the running of the business, but is one to which all owners of properties are exposed whether they do business or not.
The loss in such a case may be said to fall on the assessee not as a person carrying on business but as owner of funds.
This distinction, though fine, is very material as on it will depend whether deduction could be made under section 10(1) or not.
We may now examine the authorities in the light of the principles stated above.
In Jagarnath Therani vs Commissioner of Income tax (1), the facts were that the assessee who was carrying on business entrusted a sum of Rs. 25,000 to his gumastha for payment to a creditor, but he embezzled it.
The question referred for the opinion of the High Court was whether that sum could be allowed as deduction in the computation of profits.
In answering it in the affirmative, the learned Judges observed that according to the practice obtaining in England, sums embezzled by employees were allowed as deductions and referred to statements of the law to that effect from Sanders ' Income tax and Super tax, Murray and Carters ' Guide to Income tax Practice and to the following passage in Snellings ' Dictionary of Income tax and Super Tax Practice: ,,If a loss by embezzlement can be said to be necessarily incurred in carrying on the trade it is allowable as.
deduction from profits.
In an ordinary case it springs directly from the necessity of deputing (1)(1925) I.L.R. 4 Pat.
697 certain duties to an employee, and should therefore be allowed.
" They accordingly allowed the deduction as "a loss incidental to the conduct of the business".
In Ramaswami Chettiar vs Commissioner of Income Tax, Madras (1), the assessee was carrying on banking business in several places in India and in Burma.
On October 21, 1926 thieves broke into the strong room in the business premises at Moulmiengyum and stole cash and currency notes of the value of Rs. 9,335.
The question was whether this amount could be allowed as a deduction.
It was held by the majority of the Jndges that it could not be.
In the judgment of the learned Chief Justice, the law was thus stated: " If any one is paid a sum due to him as profits and he puts that in his pocket and on his way home is robbed of it, it would be, I think, difficult to contend that such a loss was incidental to his business.
Still more so when he has reached his home and put those profits in a strong room or some other place regarded by him to be a place of safety.
1 can well understand that, in cases where the collection of profits or payment of debts due is entrusted to a gumastha or servant for collection and that person runs away with the money or otherwise improperly deals with it, the assessee should be allowed a deduction because such a loss as that would be incidental to his business.
He has to employ servants for the purpose of collecting sums of money due to him and there is the risk that such servant may prove to be dishonest and instead of paying the profits over to him, convert them to his own use.
But I cannot distinguish the present case from the case of any professional man or trader who, having collected his profits, is subsequently robbed of them by a stranger to his business.
In this case, none of the thieves were the then servants of the assessee, although one of them had formerly been his cook. " These observations, while they support the right of the asssee to deduction of loss resulting from (1)(1930) I.L. R. , 906, 907.
698 embezzlement by an employee, also show the extent and limits of that right.
In Bansidhar Onkarmal V. Commissioner of Incometax (1), there was a theft of money by an accountant, but it took place after the office hours, and it was held, following the decision in Ramaswami Chettiar vs Commissioner of Income tax (2) that it could not be allowed as a deduction under section 10(1) of the Act, as it was not incidental to the carrying on of the trade.
But it was observed by Narasimham J. who delivered the leading judgment that it might have made a difference if the theft had been by the accountant during the office hours.
In Venkatachalapathy Iyer vs Commissioner of Income tax (3), the assessees were a firm of merchants engaged in the business of selling yarn.
Its accountant was one Rajarathnam lyengar, whose duty it was to receive cash on sales, make disbursements and maintain accounts.
He duly entered all the transactions in the cash book but when striking the balance at the end of each day he short totalled the receipts and overtotalled the disbursements and misappropriated the difference.
The question was whether the amounts thus embezzled could be deducted.
On a review of the authorities, Satyanarayana Rao and Raghava Rao JJ. held that the loss was incidental to the carrying on of the business and should be allowed.
The appellant contends that this decision is decisive in his favour ; but the learned Judges of the Court below were of the opinion that on the facts it was distinguishable and that the present case fell within the decision in Curtis vs J. & G. Oldfield, Limited (4).
It is necessary to examine the decision in Curtis vs
J. & G. oldfield (4) somewhat closely, as the main controversy in the Indian courts has been as to what was precisely determined therein.
There, the facts were that the managing director of a company who was in exclusive control of its business, had, availing himself of his position as such managing director, withdrawn large amounts from time to time and applied them to his own personal affairs.
This went on for (1) (3) (2) Mad. 904, 906, 907.
(4) 699 several years prior to his death, and thereafter, the fraud was discovered, and the amounts overdrawn by him were written off as irrecoverable.
The question was whether these amounts could be allowed as a deduction, and it was answered in the negative by Rowlatt J.
Now, it should be observed that the learned Judge did not say that amounts embezzled by an employee in the course of business would not be admissible deductions.
On the other hand, he observed: " I quite think, with Mr. Latter, that if you have a business. in the course of which you have to employ subordinates, and owing to the negligence or the dishonesty of the subordinates some of the receipts of the business do not find their way into the till, or some of the bills are not collected at all, or something of that sort, that may be an expense connected with and arising out of the trade in the most complete sense of the word." He went on to observe: " I do not see that there is any evidence at all that there was a loss in the trade in that respect.
It simply means that the assets of the Company moneys which the Company had got and which had got home to the Company, got into the control of the Managing Director of the Company, and he took them out.
It seems to me that what has happened is that he has made away with, receipts of the Company de hors the trade altogether in virtue of his position as Managing Director in the office and being in a position to do exactly what he likes." Thus, what the learned Judge really finds is that the embezzlement was not connected with the carrying on of the trade but was outside it, and on that finding, the decision can only be that the deduction should be disallowed.
But the learned Judges in the Court below would appear to have read the above observations as meaning that, as a rule of law, embezzlements made prior to the receipts of the amounts by the assessees would be incidental to the carrying on of the trade and therefore admissible, but that embezzlements 89 700 made after receipt are not connected with the carrying on of the trade and are therefore inadmissible.
We do not so read those observations.
It is a question turning on the facts of each case whether the embezzlement in respect of which deduction is claimed took place in the carrying on of the business, and the observations of the learned Judge that it did not so take place have reference to the facts of that case, and can afford no assistance in deciding whether in a given case the embezzlement was incidental to the conduct of the business or not.
Now, in Curtis vs J. & G. Oldfield Limited(1), the company was doing business in wine and spirit, and in such a business it is possible to hold that when once the price is realised and put into the bank, the trading has ceased and that the subsequent operations on the bank account are not incidental to the carrying on of the trade.
But here, we are dealing with a banking business, which consists in making advances, realising them and making fresh advances, and for that purpose, it is necessary not merely to deposit amounts in banks but also to withdraw them.
That is to say, a continuous operation on the bank account is incidental to the conduct of the business.
The theory that when once moneys are put into the bank they have " got home " and that their subsequent withdrawal from the bank would be de hors the business, will be altogether out of place in a business such as banking.
It will be a wholly unrealistic view to take of the matter, to hold that the realisations have reached the till when they are deposited in the bank, and that that marks the terminus of the business activities in money lending.
It should also be mentioned that in Curtis vs J. & 'G. oldfield (1) though the assessee was a company, it was found that the shares were all held by the members of the Oldfield family, that the company had no auditor and no minutes book, that there was Cc an almost entire absence of balance sheets ", and that one of the members, Mr. J. E. Oldfield, was in management with wide powers.
In view of the fact that he (1) 701 had a large number of shares in the company and that it was in substance a private company, his withdrawals would be more like a partner overdrawing his account with the firm than an agent embezzling the funds of his employer, and it could properly be held that such overdrawing has nothing to do with the trading activities of the firm, whose profits are to be taxed.
It would, therefore, be an error to suppose that the observations made by Rowlatt J. in the above context could be regarded as an authority for the broad proposition that as a matter of law, and irrespective of the nature of business, there could be no business activities with reference to moneys after they have been collected, and that, in consequence, embezzlement thereof could not be incidental to the carrying on of business.
And we should further add that it would make no difference in the admissibility of the deduction whether the employee occupies a subordinate position in the establishment or is an agent with large powers of management.
Subsequent to the decision now under appeal, the Bombay High Court had occasion to consider this question in Lord 's Dairy Farm Ltd. vs Commissioner of Income tax (1).
On a review of the authorities including the decision in Curtis vs J. & G. Oldfield, Limited (2), Chagla C. J. and Tendolkar J. held that loss caused to a business by defalcation of an employee was a trading loss, and that it could be deducted under section 10(1).
In Motipur Sugar Factory Ltd. vs Commissioner of Income tax (3), an employee who had been entrusted with the funds of a company for purposes of distribution among sugarcane growers in accordance with statutory rules, was robbed of them on the way.
It was held by Ramaswami and Sahai JJ.
that the loss was incidental to the conduct of the trade, and must be allowed.
We agree with the decisions in Venkatachalapathy Iyer vs Commissioner of Incometax (4), Lord 's Dairy Farm Ltd. vs Commissioner of Income tax (1) and Motipur Sugar Factory Ltd. vs Commissioner of Income tax(3).
(1) (1925) 9 Tax Cas. 319.
(3) 702 It was argued for the respondent that there was no evidence, much less proof, that when Chandratan withdrew funds from the bank, he did so for the purpose of making any advance, and that, therefore, the withdrawal could not be held to have been for the conduct of the trade.
That, in our opinion, is not necessary.
When once it is established that Chandratan was in charge of the business, that he had authority to operate on the bank accounts, and that he with drew the moneys in the purported exercise of that authority, his action is referable to his character as agent, and any loss resulting from misappropriation of funds by him would be a loss incidental to the carrying on of the business.
It was also contended that the power of attorney dated May 13, 1944, under which Chandratan was constituted agent related not only to the business of the appellant but also to his private affairs, and that there was no proof that the embezzlement was in respect of the business assets of the appellant and not of his private funds.
No such question was raised before the Income tax authorities, and their finding assumes that the moneys which were misappropriated were business funds.
We are also not satisfied that, on its true construction,, the authority conferred on the agent by the power of.attorney extended to the personal affairs of the appellant.
In the result, we are of opinion that the loss sustained by the appellant as a result of misappropiriation by Chandratan is one which is incidental to the carrying, on of his business, and that it should therefore deducted in computing the profits under section 10(1) of the, Act.
In this view, the order of the lower court must be set aside and the reference answered in the, affirmative.
The appellant will get his costs of this appeal and of the reference in the Court below.
appeal allowed.

dataset_name: IN-Abs

summary:
The appellant engaged an agent for the purposes of carrying on his business and conferred on him large powers of manage ment including authority to operate on bank accounts.
While acting under such authority the agent withdrew moneys from the bank and used them for the discharge of his personal debts.
The appellant was able to recover from the agent only a part of the amount misappropriated by him, and the balance had to be written off at the end of the accounting year as irrecoverable.
The question was whether the amount which was misappropriated and found irrecoverable was allowable as a deduction under the Indian Income tax Act in determining the profits of the appellant.
Held, that the amount in question is not allowable either as a bad debt under section 10(2)(Xi) or as a business expenditure under section 10(2)(XV) Of the Indian Income tax Act, 1922.
It can, however, be deducted in computing the profits of the appellant under 691 section 10(1) of the Act as a loss incidental to the carrying on of his business.
Where an agent or an employee of a businessman in charge of the business is given authority to operate on the bank accounts and withdraws moneys in the purported exercise of that authority, his action is referable to his character as such authorised agent or employee and any loss resulting from misappropriation of the money by him would be one incidental to the carrying on of the business, and it is not necessary to show that the money was withdrawn for the conduct of the business.
Curtis vs J. & G. Oldfield, and Rama swami Chettiar vs Commissioner of Income tax, Madras, Mad. 904, explained and distinguished.
Venkatachalapathy Iyer vs Commissioner of Income tax, , Lord 's Dairy Farm Ltd. vs Commissioner of Incometax, and Motipur Sugar Factory Ltd. vs Commissioner of Income tax, , approved.


judgement:
ivil Appeal No. 2717 of 1985.
From the Judgment and Order dated 2.12.
1980 of the Madras High Court in T.C. No. 573 of 1976.
Harish N. Salve, A.S. Chandrashekaran, K.J. John and Sanjay Grover for the Appellants.
Dr. V. Gauri Shankar, Ms. A. Subhashini and M.K. Sha shidharan for the Respondent.
The Judgment of the Court was delivered by KULDIP SINGH, J.
The question in this appeal is whether the grant of a mining lease for a period of ten years by the assessee can give rise to a capital gain taxable under section 45 of Income tax Act, 1961.
599 The assessee, a body of individuals, purchased two pieces of land in the year 1966 measuring 14.55 acres at a price of Rs.27,260.
By an instrument of lease cum licence dated 10th September, 1970 they granted a mining lease in favour of M/s. Sri Krishna Tiles and Potteries (Madras) Private Limited (hereinafter called the 'Company '), an allied concern of the assessee.
The lease was for a period of 10 years and the lessee had to pay a premium or salami of Rs.5 lakhs in addition to the payment of royalty of Rs. 12 per hundred cubic ft. of clay extracted subject to a minimum of Rs.60,000 per year.
The Income tax Officer construed the lease deed as transferring a lease hold interest in the land in favour of the company and came to the conclusion that the transfer was assessable to capital gains tax.
For the purpose of comput ing the extent of tax the Income tax Officer assessed the market value of the entire land at Rs.8 lakhs.
Since the lease hold interest was transferred for a sum of Rs.5 lakhs, he valued the lease hold interest at 5/8th of the sale price of the entire land.
On that basis the Income tax Officer computed the cost of acquisition of the lease hold interest at Rs. 17,040, being 5/8th of Rs.271,260.
Thereafter deduct ing Rs. 17,040 from the sale consideration of Rs.5 lakhs, he treated the sum of Rs.4,82,960 as long term capital gains.
The assessee preferred an appeal to the Appellate As sistant Commissioner.
The Appellate Commissioner held that the value of the right to excavate the land in terms of money is included in the purchase price paid by the assessee for the land.
He rejected the argument of the assessee that the cost of acquisition of the said assets could not be determined.
He then proceeded to consider the cost of acqui sition of such right and differing with the Income Tax Officer held that on the facts of the case the cost for the purpose of ascertaining the capital gains would be the total price of the land paid by the assessee, that is, Rs.27,260.
On all other points he upheld the order of the Income tax Officer.
The assessee preferred an appeal to the Tribunal.
The Tribunal observed that the entire ownership of the property means the ownership of a bundle of rights and a limited interest which can be severed and disposed off for a speci fied period in the form of lease or mortgage or the like is part of that bundle.
According to the Tribunal the purchase price paid by the assessee for the land includes therein a component of purchase price attributable to various kinds of interests embedded in the said land.
The Tribunal confirmed the order of the Appellate Commissioner and dismissed the appeal.
600 Arising from the said decision of the Tribunal.
the following two.
questions were referred to the High Court for determination: (i) Whether, on the facts and in the cir cumstances of this case, the instrument of lease dated September 10, 1970 effected the transfer of a capital asset within the meaning of section 45 of the Income tax Act, 1961 and, accordingly, liable to capital gains tax? (ii) Whether, on the facts and in the circumstances of the case the Tribunal is right in law in holding that the cost of lease hold right is capable of valuation and, as such, capital gains can be computed? The High Court opined that the right conferred on the lessee under the lease deed was also a capital asset in the hands of the assessee lessor.
By giving a liberal meaning to the word "transfer" in section 2(47) of the Act the High Court held that there was a transfer of capital asset for a consideration of Rs. 5 lakhs under the instrument dated 10th September, 1970.
It was further held that the rights of owner of a land include a fight to grant the lease to ex ploit the land.
The High Court answered the two questions in the affirmative and against the assessee.
The High Court granted a certificate under section 261 of the Act to appeal to this Court.
The relevant provisions of sub section 14 of section 2 which defines "capital asset" and section 45(1) of the said Act which provides for the levy of tax on capital gains is as under: "2(14) "capital asset" means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include .
45(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provid ed in section be chargeable to income tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place.
" Mr. Harish Salve, learned counsel appearing for the appellant, without disputing that the grant of a lease would constitute a transfer of an ,asset, has raised the following two contentions: 601 (i) That conceptually there is no "cost of acquisition" which is attributable to the right of limited enjoyment transferred by the grant of the lease.
There is no nexus between the "cost of acquisition" of the free hold land and the right granted under the lease.
For the same reason it is contended that there is no question of apportionment of such "cost of acquisition".
(ii) That since the cost of acquisition of the right granted under the lease cannot be determined the computation provisions under the Act cannot apply at all and as such sec tion 45 of the Act is not attracted.
Reliance for this contention is placed on the judgment of this Court in C.I.T.v.
B.C. Srinivas Shetty; , As regards the first contention, section 2(14) of the Act defines "capital asset" as "property of any kind held by an assessee".
What is parted with under the terms of the lease deed is the right to exploit the land by extracting clay which fight directly flows from the ownership of the land.
The said right evaluated in terms of money forms part of the cost of acquiring the land.
In Traders and Mining Ltd. vs C.I.T., , a Division Bench of the Patna High Court, interpreting the expression "transfer of a capital asset" held as under: "We think that the expression "transfer" in the section includes not only a permanent transfer but also a temporary transfer of title to the property in question and lease of mines for any period would fall within the ambit of section 12B of the Act.
It was also contended by Mr. Dutt that a transaction of a lease was not tantamount to a transfer of a title but that a mere contractual right was created.
We do not think that this argument is correct.
A lease of land is transfer of inter est in the land and creates a right in rem: and there is a transfer of title in favour of the lessee though the lessor has right of reversion after the period of the lease termi nates.
" This decision has been referred to with approval by this Court in R.K. Palshikar (HUF) vs Commissioner of Income.
Tax, M.P. Nagpur, If transfer of capital asset in section 45 of the Act includes grant of Mining Lease for any period .then obviously the "cost of acquisi tion" of the land would include the "cost of acquisition" Of the Mining right under the lease.
Undisputedly the grant of alease being a transfer of an asset there is no escape from the conclusion that 602 there is a live nexus between the "cost of acquisition" of the land and the rights granted under the lease.
The amount of Rs.27,260 paid by the Assessee was not only the cost of acquiring the land but also of acquiring bundle of fights in the said land including the right to grant lease.
There is, thus no force in the contention of the learned counsel that conceptually there is no "cost of acquisition" which is attributable to the fight of limited enjoyment transferred by the grant of the lease.
So far as the apportionment of the cost of acquisition is concerned it is a question of fact to be determined by the Income Tax Officer in each case on the basis of evidence.
The determination of the cost of the right to excavate clay in the land in terms of money may be difficult but is none the less of a money value and the best valuation possible must be made.
Viscount Simon in Gold Coast Selection Trust Ltd. vs Inspector of Taxes, (supp) observed "valuation is not an exact science.
Mathe matical certainty is not demanded, nor indeed is it possi ble.
" The Income tax Officer in this case worked out the cost of lease hold interest by adopting the 5/8th ratio, though the Appellate Commissioner gave the benefit to the Assessee of the Full Price of the land paid by him.
In Traders and Mines Ltd. vs Commissioner of Income tax, (supra) the Income tax Officer had also determined the cost of the lease hold fights on proportionate basis.
Once the cost of the lease hold fights is determined then there is no difficulty in making apportionment.
We, therefore, do not find any force in the first contention of Mr. Salve and reject the same.
In view of our finding on the first contention the second contention does not survive.
The value of lease hold fights in the cost of acquisition of land being determinable the computation provisions under the Act are applicable and section 45 would be attracted.
In Shetty 's case the question was whether the transfer of the goodwill of a newly com menced business can give rise to a capital gain taxable under section 45 of the Act.
This Court answered the ques tion in the negative.
Referring to the charging section and the computation provisions under the Act this Court held that none of those provisions suggest the inclusion of an asset under the Head "Capital Gain," in the acquisition of which no cost at all can be conceived.
Good will generated in an individual 's business was held to be an asset in which no cost element can be identified or envisaged.
It was also held that the date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains and in the case of self generated good will it is not possible to determine the same.
The third reason for holding that the good will generated in a newly commenced business cannot be described as an 'asset ' within the terms of section 45 of the 603 Act was that it is impossible to determine its cost of acquisition.
None of the three reasons given by this Court in Shetty 's case are applicable in the present case.
We have held that the cost of acquisition of lease hold rights can be determined.
The date of acquisition of the right to grant lease has to be the same as the date of acquiring the free hold rights.
The ratio of Shetty 's case is thus not attract ed to the question involved in the present case.
We, there fore, do not find any force in the second contention also.
Accordingly the appeal is dismissed with costs.
N.V.K. Appeal dis missed.

summary:
The appellant assessee, a body of individuals, purchased two pieces of land in the year 1966.
In 1970 it granted a mining lease to a private company (an allied concern) to extract clay for a period of ten years at a premium of Rs. 5 lakhs in addition to payment of royalty.
The Income tax Officer construed the lease deed as transferring a lease hold interest in the land in favour of the company and came to the conclusion that the transfer was assessable to capital gains tax.
For the purpose of comput ing the extent of tax, the Income tax Officer valued the lease hold interest at 5/8th of the sale price of the entire land, computed the cost at acquisition of the lease hold interest say Rs. 17,040, and after deducting this sum from the sale consideration of Rs.5 lakhs, determined a sum of Rs.4,82,960 as long term capital gains.
Being aggrieved by the aforesaid order of the Income tax Officer the assessee preferred an appeal to the Appellate Assistant Commissioner.
The Appellate Assistant Commissioner confirmed the assessment but allowed deduction on the entire price of the land on the ground that the cost for the pur pose of ascertaining the capital gains would be the total price of the land paid by assessee.
Not being satisfied, the assessee preferred an appeal to the Income tax Appellate Tribunal which confirmed the order of the Appellate Commissioner and dismissed the appeal.
The High Court on a reference held that the right conferred on 597 the lessee under the lease deed was also a capital asset in the hands of the assessee lessor, and that there was a transfer of capital asset for a consideration of Rs.5 lakhs.
The High Court accordingly answered the reference against the assessee, .but granted a certificate under section 261 of the Act to appeal to this Court.
On behalf of the assessee appellant it was contended: (1) that conceptually there is no 'cost of acquisition ' which is attributable to the right of limited enjoyment transferred by the grant of the lease, and (2) relying on the decision of this Court in C.I. T. vs B.C. Srinivas Sherry, ; SC it was submitted that since the cost of acquisition of the right granted under the lease cannot be determined the computation provisions under the Act cannot apply at all, and as such section 45 of the Act is not attracted.
On the question: whether the grant of a mining lease for a period of ten years by the assessee can give rise to a capital gain taxable under section 45 of the Income tax Act, 1961.
Dismissing the appeal, the Court, HELD: 1(a) Section 2(14) of the Income Tax Act defines "capital asset" as "property of any kind held by an asses see.
" What is parted with in the instant case, under the terms of the deed is the right to exploit the land by ex tracting clay which right directly flows from the ownership of the land.
The said right evaluated in terms of money forms part of the cost of acquiring the land.
[601C D] 1(b).
If a transfer of a capital asset in section 45 of the Act includes grant of a mining lease for any period, then obviously, the "cost of acquisition" of the land would include the "cost of acquisition" of the mining right under the lease.
The grant of a lease being a transfer of an asset, there is no escape from the conclusion that there is a live nexus between the "cost of acquisition" of the land and the right granted under the lease.
[601G H; 602A] In the instant case, the amount of Rs.27,260 paid by the assessee was not only the cost of acquiring the land but also acquiring a bundle of rights in the said land including the right to grant lease.
[602A] 1(c) The apportionment of the cost of acquisition is a question of fact to be determined by the Income tax Officer in each case on the basis of evidence.
The determination of the cost of the right to excavate 598 clay in the land in terms of money may be difficult but is nonetheless of a money value and the best valuation possible must be made.
In the instant came, the Income tax Officer worked out the cost of the lease held interest by adopting the 5/8th ratio, though the Appellate Assistant Commissioner gave the benefit to the assessee of the full price of the land paid by him.
[602B D] 1(d) Once the cost of lease hold right is determined than there is no difficulty in making apportionment.
[602E] Gold Coast Selection Trust.
Ltd. vs Inspector of Taxes, (supp); Traders and Mining Ltd. vs
C.I.T., ; R.K. Palshikar (HUF) vs Commissioner of Income Tax, M.P. Nagpur, ; , referred to.
2(a) The value of lease hold rights in the cost of acquisition of land being determinable the computation provision under the Act are applicable, and section 45 would he attracted.
[602E F] 2(b) The date of acquisition of the right to grant lease has to be the same as the date of acquiring the free hold rights.
[603B] C.I.T. vs B.C. Srinivas Shetty, ; distinguished.


judgement:
ivil Appeal No. 2014 of 1986.
From the Judgment and Order dated 24.4.
1986 of the Delhi High Court in C.W. No. 477 of 1986.
Dr. Anand Prakash, D. Mehta, Atul Nanda and S.K. Mehta for the Appellant.
S.K. Bisaria for the Respondent.
The Judgment of the Court was delivered by RANGANATHAN, J.
A very short question as to the inter pretation of the service regulations of the appellant bank comes up for consideration in this appeal.
The relevant service regulation is Regulation No. 20 which reads as under: "20(1) Subject to sub regulation (3) of regu lation 16, the bank may terminate the services of any officer by giving him three months ' notice in writing or by paying him three months ' emoluments in lieu thereof.
615 (2) No officer shall resign from the service of the bank otherwise than on the expiry of three months from the service on the bank of a notice in writing of such resignation.
Provid ed further that the competent authority may reduce the period of three months, or remit the requirement of notice.
" The respondent, a permanent officer in the bank, sent a communication to the bank on 21st January, 1986.
By this letter he purported to resign from the service of the bank due to personal reasons.
He added that the date of receipt of the letter should be treated as the date of the commence ment of the notice period so that, inclusive of the same, his resignation would become effective on 30th June, 1986.
According to the respondent, the Deputy General Manager, who was the competent authority under the Service Regulations, had agreed that the resignation may be accepted with effect from 30th June, 1986.
However, what actually transpired was that the respondent received a letter from the bank on 7th February, 1986 informing him that his resignation letter dated 21st January, 1986 had been accepted by the competent authority with immediate effect by waiving the condition of notice and that, consequently, he was being relieved from the service of the bank with effect from the afternoon of the same date, namely, 7th February, 1986.
The respondent thereupon filed a writ petition in the High Court challeng ing the validity of the purported acceptance of his resigna tion with effect from 7th February, 1986 and for a direction to the bank to treat him as in service of the bank up to 30th June, 1986 and as entitled to all benefits while being in such service.
A further development took place after the filing of the writ petition and before it came up for hearing.
On 15th April, 1986, the respondent wrote a letter to the bank by which he purported to withdraw the resignation letter dated 21st January, 1986.
The High Court, therefore, dealt with the situation resulting from this subsequent development.
The High Court held that the petitioner 's resignation letter would have become effective only on the 30th June, 1986.
Under the regulations there was no jurisdiction whatever in the competent authority to determine his services earlier.
Until the resignation became effective on 30th June, 1986, the petitioner had a right to withdraw the same and in fact had also exercised that right.
The High Court concluded: "We may notice that this writ petition was filed at a stage 616 when the petitioner had not sent his letter dated 15th April, 1986 whereby he withdrew his resignation letter dated 2 Ist January, 1986.
This is a subsequent development during the pendency of the writ petition.
Therefore, we are not called upon to decide the earlier grievance that the resignation could not have been accepted at an earlier date.
Even to that submission we would have said that there is no provision of acceptance but that question does not arise so we will not deal with it further.
Result is that the impugned order dated 7th of February, 1986 is hereby quashed and it is declared that the petitioner continues to be in service with the respondent bank.
However, in view of the facts of the present case, parties are directed to bear their own costs of the present proceedings.
" The bank has preferred this appeal.
Dr. Anand prakash, learned counsel for the appellant bank, submitted that regulation 20(2) provided for a notice to the employer only in order to protect the employer 's interests and to enable the employer, in case it decided to accept the resignation, to make other arrangements in place of the resigning employ ee.
He submitted that, this being a provision for the bene fit of the employer, its requirements could be waived by the employer, if it so desired, unilaterally The proviso to clause (2) of the regulation indeed makes it clear that it is open to the bank to waive the requirement of notice or to reduce the period of the notice to less than three months.
He, therefore, submitted that, when the respondent sent in his resignation on 21st January, 1986, it was not incumbent on the bank to wait till 30th June, 1986 when the notice period would expire.
It was competent for the bank to waive any notice at all and to accept the resignation with immedi ate effect or with effect from such other date as the bank may consider appropriate.
It was further contended by learned counsel that, once the resignation letter of the respondent had been accepted by the bank and given effect to, to there was no further possibility of the respondent seeking to withdraw the resignation letter as he has pur ported to do in this case.
Learned counsel, therefore, submitted that the bank 's letter dated 7th February, 1986 was quite valid and effective and that the respondent 's writ petition ought to have been dismissed.
We have given careful thought to this contention of the learned counsel and we are of the opinion that the High Court was right in the conclusion it reached.
Clause (2) of regulation 20 makes it incumbent on an officer of the bank, before resigning, to serve a notice in writing 617 of such proposed resignation and the clause also makes it clear that the resignation will not be effective otherwise than on the expiry of three months from the service of such notice.
There are two ways of interpreting this clause.
One is that the resignation of an employee from service being a voluntary act on the part of an employee, he is entitled to choose the date with effect from which his resignation would be effective and give a notice to the employer accordingly.
The only restriction is that the proposed date should not be less than three months from the date on which the notice is given of the proposed resignation.
On this interpretation, the letter dated 21st January, 1986 sent by the employee fully complied with the terms of this clause.
Though the letter was written in January, 1986 the employee gave more than three clear months ' notice and stated that he wished to resign with effect from 30th of June, 1986 and so the resig nation would have become effective only on that date.
The other interpretation is that, when an employee gives a notice of resignation, it becomes effective on the expiry of three months from the date thereof.
On this interpretation, the respondent 's resignation would have taken effect on or about 21.4.1986 even though he had mentioned a later date.
In either view of the matter, the respondent 's resignation did not become effective till 21.4.1986 or 30.6.1986.
It would have normally automatically taken effect on either of those dates as there is no provision for any acceptance or rejection of the resignation by the employer, as is to be found in other rules, such as the Government.
Services Con duct Rules.
Much reliance was placed on the terms of the proviso to clause (2) of regulation 20 to justify the action of the bank in terminating the respondent 's services earlier but we do not think that the proviso can be interpreted in the manner suggested by learned counsel for the bank.
The resig nation letter of the officer has to give at least three months ' advance notice under the main part of the clause.
What the proviso contemplates is that in a case where the employee desires that his resignation should be effective even before the expiry, of the period of three months or without notice being given by him, the bank may consider such a request and waive the period or requirement of notice if it considers it fit to do so.
That question does not arise in the present case because the employee had not requested the bank to reduce the period of notice or to waive the requirement of notice.
Dr. Anand Prakash seeks to interpret the proviso as empowering the bank, even without any request= on the part of the employee, to reduce the period or waive the requirement of notice.
In other words, he says the bank has power to accept the resignation with immediate effect even though 618 the notice is only of a proposed future resignation.
We do not think this contention can be accepted.
As we have al ready mentioned, resignation is a voluntary act of an em ployee.
He may choose to resign with immediate effect or with a notice of less than three months if the bank agrees to the same.
He may also resign at a future date on the expiry, or beyond the period, of three months but for this no further consent of the bank is necessary.
The acceptance of the argument of Dr. Ananad Prakash would mean that, even though an employee might express a desire to resign from a future date, the resignation can be accepted, even without his wishes, from an earlier date.
This would not be the acceptance of a resignation in the terms in which it is offered.
It amounts really to forcing a date of termination on the employee other than the one he is entitled to choose under the. regulations.
As rightly pointed out by the High Court, the termination of service under clause (2) becomes effective at the instance of the employee and the services of the employee cannot be terminated by the employer under this clause.
Dr. Anand Prakash emphasises that as clause (2) and its proviso are intended only to safeguard the bank 's interests they should be interpreted on the lines suggested by him.
We are of the opinion that clause (2) of the regulation and its proviso are intended not only for the protection of the bank but also for the benefit of the employee.
It is common knowledge that a person proposing to resign often wavers in his decision and even in a case where he has taken a firm decision tO resign, he may not be ready to go out immediate ly.
In most cases he would need a period of adjustment and hence like to defer the actual date of relief from duties for a few months for various personal reasons.
Equally an employer may like to have time to make some alternative arrangement before relieving the resigning employee.
Clause (2) is carefully worded keeping both these requirements in mind.
It gives the employee a period of adjustment and rethinking.
It also enables the bank to have some time to arrange its affairs, with the liberty, in an appropriate case, to accept the resignation of an employee even without the requisite notice if he so desires it.
The proviso in our opinion should not be interpreted as enabling a bank to thrust a resignation on an employee with effect from a date different from the one on which he can make his resignation effective under the terms of the regulation.
We, therefore, agree with the High Court that in the present case the resignation of the employee could have become effective only on or about 21st April, 1986 or on 30th June, 1986 and that the bank could not have "accepted" that resignation on any earlier date.
The letter dated 7th February, 1986 was, therefore, without jurisdiction 619 The result of the above interpretation is that the employee continued to be in service till the 21st April, 1986 or 30th June, 1986, on which date his services would have come normally to an end in terms of his letter dated 21st January, 1986.
But, by that time, he had exercised his right to withdraw the resignation.
Since the withdrawal letter was written before the resignation became effective, the resignation stands withdrawn, with the result that the respondent continues to be in the service of the bank.
It is true that there is no specific provision in the regulations permitting the employee to withdraw the resignation.
It is, however, not necessary that there should be any such specif ic rule.
Until the resignation become effective on the terms of the letter read with regulation 20.
it is open to the employee, on general principles, to withdraw his letter of resignation.
That is why, in some cases of public services, this right of withdrawal is also made subject to the permis sion of the employer.
There is no such clause here.
It is not necessary to labour this point further as it is well settled by the earlier decisions of this Court in Raj Kumar vs Union of India, [1963] 3 SCR 857; Union of India vs Gopal Chandra Misra, ; and Balram Gupta vs Union of India, ; Learned counsel for the appellant relied on certain observations in Delhi Electric Supply Undertaking vs Tara Chand, Certain other decisions were also cited by Dr. Anand Prakash but we do not think that they have any bearing on the issue before us.
Tara Chand was a case under regulation 8 of the regulations made by the Delhi Electric Supply Undertaking under the .
The regulation permitted the termination of the services of a servant of the undertaking "on notice of three months from either side without any cause to be assigned in case of permanent servants".
The employee in that case sent a letter to the employer stating that "he was compelled to resign for various reasons" and this resignation was accept ed by the undertaking.
The Delhi High Court in its judgment (to which one of us was a party) observed that notice under the regulation was intended for the benefit of the employer which could, if it considered necessary or proper, waive the period of notice and accept the resignation with immediate effect.
But that was a case where the employee, though bound to give three months ' notice, expressed his desire to resign with immediate effect and it was also accepted by the em ployer.
It was not the case that he had given notice indi cating a desire to be relieved at a future date.
The analogy of that case would have applied to the present case as well if the respondent here had expressed his desire to be re lieved immediately even before the expiry of the three months ' notice period and the bank had accepted it.
The 620 employer would then certainly have been entitled to accept the resignation, as requested by the employee, waiving the notice period.
The distinction between that case and the present one is that, here, the employee has chosen a future date on which his resignation would be effective but he is being forced to "resign" before such date.
For the reasons discussed above, we affirm the decision of the High Court and dismiss this appeal.
As the employee has got a relief much larger than the one for which he initially came to Court and which has been made possible by his subsequent conduct, we make no order as to costs.
P .S.S.
Appeal dis missed.

summary:
Clause (2) of Regulation 20 of the Service Regulations of the Punjab National Bank lays down that no officer shall resign from the service of the bank otherwise than on the expiry of three months from the service on the bank of a notice in writing of such resignation.
The proviso thereto empowers the competent authority to reduce the period of three months or remit the requirement of notice.
The respondent, a permanent officer of the bank, made an application on 21st January 1986, purporting to resign from the service with effect from 30th June, 1986.
He, however, received a letter from the bank on 7th February, 1986 in forming him that his resignation letter had been accepted by the competent authority with immediate effect by waiving the condition of notice.
He thereupon filed a writ petition in the High Court challenging the validity of the purported acceptance of his resignation with effect from 7th February, 1986 and for a direction to consider him as in service up to 30th June, 1986.
Thereafter, on 15th April, 1986 he wrote another letter to the Bank purporting to withdraw the resignation letter dated 21st January, 1986.
The High Court held that the petitioner 's resignation letter would have become effective only on the 30th June, 1986, that under the Regulations there was no jurisdiction whatever in the competent authority to determine his service earlier than that and that until the resignation became effective on 30th June, 1986 he had a right to withdraw the same.
Consequently, it quashed the order dated 7th February, 1986 and declared that the petitioner continued to be in service with the bank.
613 In this appeal by special leave it was contended for the appellant that Regulation 20(2) provided for a notice to the employer only in order to protect the employer 's interests, that its requirements could, therefore, be waived by the employer if it so desired unilaterally, that under the proviso to clause (2) it was competent for the bank to waive any notice at all and to accept the resignation with immedi ate effect or with effect from such other date as the bank may consider appropriate.
Dismissing the appeal, HELD: 1.
Until the resignation becomes effective on the terms of the letter read with Service Regulation 20 of the Punjab National Bank, it is open to the employee, on general principles, to withdraw his letter of resignation.
[619C] Raj Kumar vs Union of India, ; Union of India vs Gopal Chandra Misra, ; and Balram Gupta vs Union of India, ; 2.
Clause (2) of Regulation 20 makes it incumbent on an officer of the bank, before resigning, to serve a notice in writing of such proposed resignation.
The clause also makes it clear that the resignation will not be effective other wise than on the expiry of three months from the service of such notice.
[616H; 617A] 3.
What the proviso to clause (2) contemplates is that in a case where the employee desires that his resignation should be effective even before the expiry of the period of three months or without notice being given by him, the bank may consider such a request and waive the period or require ment of notice if it considers it fit to do so.
It does not empower the bank to thrust a resignation on an employee with effect from a date different from the one on which he can make his resignation effective under the terms of the resig nation.
In the instant case, the employee had not requested the bank to reduce the period of notice or to waive the requirement of notice.
[617F; 618G] 4.
There are two ways of interpreting clause (2).
One is that the resignation of an employee from service being a voluntary act on his part he is entitled to choose the date with effect from which his resignation would be effective and give a notice to the bank accordingly.
The only restric tion is that the proposed date should not be less than three months from the date on which the notice is given.
In the instant case, the letter dated 21st January 1986, sent by the employee purporting to 614 resign with effect from 30th June, 1986 fully complied with the terms of this clause and so the resignation would have become effective only on that date.
The other interpretation is that when an employee gives a notice or resignation, it becomes effective on the expiry of three months from the date thereof.
On this interpretation the respondent 's resig nation would have taken effect on or about 21st April, 1986 even though he had mentioned a later date.
In either view of the matter, the respondent 's resignation did not become effective till 21st April, 1986 or 30th June, 1986.
The bank could not have accepted that resignation on any earlier date.
The letter dated 7th February, 1986 was, therefore, without jurisdiction.
[617A B; 618A B, G H] The respondent had thus continued to be in service till the 21st April, 1986 or 30th June, 1986.
But, by that time, he had exercised his right to withdraw the resignation.
Since the withdrawal letter was written before the resigna tion became effective, the resignation stood withdrawn with the result that the respondent continued to be in the serv ice of the bank.
[619A B] Delhi Electric Supply Undertaking vs Tara Chand, , distinguished.