Judgment :- Usha, J. This reference under S.256(1) of the Income Tax Act, 1961 at the instance of the assessee, raises the following question of law arising out of the order of the Income-tax Appellate Tribunal, Cochin Bench: "Whether, on the facts and in the circumstances of the case, the Tribunal is correct in holding that the defalcation of funds of the applicant to the tune of Rs. 3,31,5651- is not admissible as a business loss?" 2. The matter arises out of the income-tax assessment for the assessment year 1977-78. The assessee, a private limited Company, claimed deduction to the extent of Rs. 3,31,565.65 as business loss. The company owned estates at Vandiperiyar. The Directors of the Company M/s. K. Krishnamurthy, K. Ramachandran, K. Srinivasan and S. Subramaniam were brothers. During the calender years 1973 and 1974 the management of the affairs of the Company was entrusted with the Managing Director Sri. Krishnamurthy. One Anandamurthy, a close relative of the Managing Director was a trusted employee of the Managing Director. It was later found that during the calender years 1973 and 1974, Anandamurthy committed defalcation of the funds of the assessee-company to the tune of Rs. 6,90,887.65. 3. When the defalcation was noticed by the assessee-company in August, 1974, a special audit was arranged and the report of the audit was received on 6-2-1976. The Company could recover an amount of Rs. 3,59,322/- which related to the bank transactions by filing a suit against the Bank and obtaining a decree from the Madras High Court. On 24-1-1977, Anandamurthy was declared insolvent and the amount due from him was written off by the assessee on 31-3-1977 and claim for deduction into the extent of Rs. 3,31,5 65.65 was put forward as business loss. The assessing authority took the view mat Anandamurthy was not an employee of the assessee-company and therefore loss sustained due to his misappropriation cannot be claimed as business loss by the Company. The above view was affirmed by the Commissioner of Income-tax (Appeals) as well as the Tribunal. 3,31,5 65.65 was put forward as business loss. The assessing authority took the view mat Anandamurthy was not an employee of the assessee-company and therefore loss sustained due to his misappropriation cannot be claimed as business loss by the Company. The above view was affirmed by the Commissioner of Income-tax (Appeals) as well as the Tribunal. It was held that Anandamurthy was only an agent or employee of the Managing Director that the managing Director was responsible for what Anandamurthy did, that it was the conduct of the Managing Director which enabled Anandamurthy to commit defateation and therefore the loss cannot be said to have been suffered by the assessee-company in the course of its carrying on the business. 4. It is contended on behalf of the assessee that the manner in which Anandamurthy was functioning with reference to matters relating to the business of the assessee-company would show that he was in effect acting as an employee of the Company even though there was no direct formal appointment by the Company. He was associated with the assessee-company for over 25 years. The cheque books and the bank account statements were in his custody. He used to go often to the Bank for withdrawing amounts and making deposits for the past several years and also deputies for the Managing Director in all transactions relating to the assessee-company as well as its sister concern, Harska Company. The manner in which he committed defateation is seen from the report of the special audit. The Managing Director used to sign cheques prepared by Anandamurthy with the narration 'cash' and 'pay yourselves'. The cheques were made up in such a way that sufficient space was left to effect alterations. After obtaining the Managing Director's signature, the figures were altered and in respect of some cheques the words 'to the credit of Anandamurthy' were interpolated. Cheque leaves of the sister concern Harska Company were used in some cases after erasing the seal of that Company and fixing the seal of the assessee-company. In such cheques also, figures were altered. There were cases where . substantial amounts were transferred from the account of the assessee-company to that of Anandamurthy and such withdrawals were shown in cash book of the assessee-company as cash withdrawal. Sale proceeds of rubber, pepper and coffee were also misappropriated. 5. In such cheques also, figures were altered. There were cases where . substantial amounts were transferred from the account of the assessee-company to that of Anandamurthy and such withdrawals were shown in cash book of the assessee-company as cash withdrawal. Sale proceeds of rubber, pepper and coffee were also misappropriated. 5. It is the case of the assessee that in view of the long period during which Ananda moorthy was involved in the management of the Company and in view of the close relationship between the parties, it must be taken that he was treated as an employee of the Company for all purposes. Under these circumstances, the loss sustained by the Company as a result of his defateation is liable to be treated as business loss. In support of the above contention, the assessee relied on two decisions of the Supreme Court, Badridas Daga v. Commissioner of Income-tax, (1958) 34 ITR 10 and Commissioner of Income-tax, U.P. v. Nainital Bank Ltd., (1965) 55 ITR 707. Reliance was also placed on the following decisions of High Courts also. Khaitan and Company v. Commissioner of Income-tax, West Bengal III, (1979) 118 ITR 728, Punjab Steel Stockholders Syndicate Ltd. v. Commissioner of Income-tax, (1980) 125 ITR 519, G.C. Dandekar Machine Works Ltd. v. Commissioner of Income-tax (1993) 202 ITR 161, Kotliari & Sons v. Commissioner of Income-tax, Madras, (1966) 61 ITR 23. 6. According to the Revenue, decisions of the Supreme Court relied on by the assessee have no application in the facts of assessees case. On the other hand, the dictum laid down by this Court in Yoosuf Sugar Abdulla & Sons (P) Ltd. v. Commissioner of Income-tax, (1990) 185 ITR 371 and that iCiirtisv. J & C. Old field, (1925) 9 Tax Cases 319 are directly applicable. Since Anandhamoorthy was not an employee of the Company, but was only employed by the Managing Director, according to the Revenue, any loss sustained through him cannot be treated as business loss of the Company. 7. In Badridas's case ((1958) 34 ITR 10), loss was sustained by the assessee-firm carrying on business as money lenders as a result of misappropriation by an agent who had a power-of-attorney conferring on him powers of management including authority to operate bank accounts. He had withdrawn money from the firm's Bank account and applied them in satisfaction of his personal debts. He had withdrawn money from the firm's Bank account and applied them in satisfaction of his personal debts. It was held by the Supreme Court that the loss sustained by the firm as a result of misappropriation was one incidental to carrying on business and therefore it should be deducted in computing the profit under S.10(1) of the Income-tax Act, 1922. In Nainital Bank's case ((1965) 55 ITR 707), the question raised was whether loss incurred by dacoits can be treated as business loss. It was held that in the usual course of its business, a Bank has to keep large amounts in its premises. If dacoits lake away cash from the Bank, the loss incurred was incidental to the carrying on business of the Bank deductible as a trading loss in computing the income from the Banking business. In the above case, after referring to various decisions, the Supreme Court summarised the legal position as follows: "Under S.10(1) of the Act the trading loss of a business is deductible for computing the profit darned by the business. But every loss is not so deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. Whether loss is incidental to the operation of a business is a question of fact to be decided on the facts of each case, having regard to the nature of the operations carried on and the nature of the risk involved in carrying them out." In Khaiian Company's case ((1979)118ITR 728) Cateutta High Court took the view that loss sustained by a firm of solicitors by an unknown person forging the signature of one of partners and withdrawing money from Bank account would be loss incurred by the firm in the course of business and was incidental to its carrying on business when possibility of restitution was nil. 8. In (1980) 125 ITR 519 supra, Punjab and Hariyana High Court took the view that it is not necessary for the assessee to prove that embezzlement was done by a particular employee. If loss by way of embezzlement is proved, assessee is entitled to claim set off. In (1993) 202 ITR 161, supra, the claim of the assessee was in connection with embezzlement of its money by an unknown person. The assessee had a current account with a Bank which was maintained for running its business. If loss by way of embezzlement is proved, assessee is entitled to claim set off. In (1993) 202 ITR 161, supra, the claim of the assessee was in connection with embezzlement of its money by an unknown person. The assessee had a current account with a Bank which was maintained for running its business. The assessee 's case was that on the basis of a forged letter written to the Bank under the forged signature of the Secretary of the assessee-company, the Bank had issued an account payee draft in favour of a stranger. It was held that the loss caused to the assessee by embezzlement from its Bank account was a loss incidental to the business of the assessee. In the light of these decisions, it is contended by the assessee before us that if loss sustained on dacoits, embezzlement by a stranger or on defateation responsibility for which could not be even fixed on any particular employee, can be treated as business loss, there is no justification for denying the claim put forward by the assessee on the ground that Anandamoorthi was not an agent or employee of the Company. 9. In (1990) 185 ITR 371, a decision of this court, contention was raised that the unaccounted profit was diverted away by one of the Directors and the assessee-company had not obtained the benefit of the same. Therefore, according to the assessee, that amount should be treated as business loss. This Court rejected the plea. In Curtis's case ((1925) 9 Tax Cases 319) 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. In view of the fact that he had a large number of shares in the Company and it was in substance a private company, it was considered that his withdrawal would be more like a partner overdrawing his account with the firm than an agent embezzling the funds of the employer. It was held that such withdrawal has nothing to do with the trading activities of the firm and the loss was held inadmissible. 10. It was held that such withdrawal has nothing to do with the trading activities of the firm and the loss was held inadmissible. 10. Relying on the above two decisions, it was contended by the Revenue that in the present case, since Anandamoorthy was the employee of the Managing Director and not of the Company, it is only the Managing Director who is responsible for his action and therefore the loss sustained should be treated as overdrawing by the Managing Director and not as business loss. We find it difficult to accept the above contention of the Revenue. 11. The defateation to the extent of Rs. 3,31,565.65 was by means of providing false vouchers for tax payments, by taking advance from tea brokers, short credit from State Bank of Travancore, appropriation of sale proceeds of rubber and pepper etc. There cannot be any doubt that these are all transactions closely connected with business of the assesse-company. It is true that technically, Anandamoorthy, responsible for defateation, was not an employee or agent of the Company as, admittedly, there was no order of appointment issued to him by the Company. But, it has to be noted that the Directors of the Company were all brothers, Krishnamoorthy the Managing Director was put in charge of the entire management of the Company during the relevant period and anandamoorthi, a close relative of Krishnamoorthi, was associated with the Company for a long period of about 25 years. He was dealing with the Bank transactions of the Company regularly. He even used to deputies for the Managing Director in all transactions relating to the Company as well as its sister concern Harska Company. It is relevant to note that even the auditors were also under the impression that Anandamoorthi was an employee of the Company. 12. It is in the background of these facts, we have to consider whether the two decisions relied on by line Revenue is of any help to support its stand. In Curtis v. J & G. Old field Ltd. (1925) 9 Tax Cases 319, Rowlatl, J. had observed: "If you have a business.... 12. It is in the background of these facts, we have to consider whether the two decisions relied on by line Revenue is of any help to support its stand. In Curtis v. J & G. Old field Ltd. (1925) 9 Tax Cases 319, Rowlatl, J. had observed: "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". But, this was not what has happened in that case as is clear from the following observation of the learned judge: "It seems to me that what lias 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." So also in Yoosuf Sagar Abdulla & Sons (P) Ltd. v. C.I.T., (1990) 185 ITR 371, this Court came to the definite conclusion that the company had, as a matter of fact, earned the income and it was assessable, in its hands. But, one of the Directors who held 155 out of 161 shares unauthorisedly appropriated it or diverted it and in the absence of a plea that Company and its officers were unaware of his action and that in spite of taking proceedings there was no chance of restitution of the amounts, it was held that no loss was incurred by the Company. But, it is a case of one of the Directors appropriating the income already earned by the company. But, the facts in the present case as detailed above, would clearly give an entirely different picture. Here, as a matter of tact, the Company has sustained loss as a result of the defateation committed by Anandamoorthy. 13. But, it is a case of one of the Directors appropriating the income already earned by the company. But, the facts in the present case as detailed above, would clearly give an entirely different picture. Here, as a matter of tact, the Company has sustained loss as a result of the defateation committed by Anandamoorthy. 13. We find merit in the contention raised by the assesses that if loss sustained by theft, dacoits, embezzlement by unknown persons etc., can be treated as business loss, there is no reason to deny the claim of the assessee in the present case on the loss sustained by it due to defateation committed by Anandamoorthy, trusted employee of the Managing Director, who had been associated with the working of the Company for a long period of time, even though not as an employee appointed by the Company. The test for determining whether a particular loss will be deductible in computing business profits or not was again laid down by the Supreme Court in Raniachandar Shivnarayan v.CIT, A.P. (1978) 111 ITR 263 as follows: "If there is a direct and proximate nexus between the business operation and the loss or it is incidental to it, then the loss is deductible, as without the business operation and doing all that is incidental to it, no profit can be earned. It is in that sense that from a commercial standard such a loss is considered to be a trading one and become deductible from the total income, although in terms neither in the 1922 Act nor in the 1981 Act, there is a provision like S.51(1) of the Australian Act." In the above decision, Supreme Court affirmed the view that if money kept in the business premises is stolen by a stranger, it has to be taken that the businessman loses such money in the ordinary course of business and the loss is deductible treating as business loss. It is immaterial whether the money is a part of stock-in-trade such as of a banking company or a money lender or is directly connected with other business operations. The risk is inherent in carrying on the business and is either directly connected with it or incidental to it. As mentioned earlier, Anandamurthy committed defateation when he was engaged in activities which arose directly in the course of the business of the assessee-company. The risk is inherent in carrying on the business and is either directly connected with it or incidental to it. As mentioned earlier, Anandamurthy committed defateation when he was engaged in activities which arose directly in the course of the business of the assessee-company. We are therefore of the view that the feet that Ananthamurthy was not appointed as an employee or agent directly by the Company is irrelevant for the Company to claim loss sustained by it as a result of defateation as a deductible loss, if other conditions are satisfied. 14. Defateation came to the notice of the Company in August, 1974. A special audit was arranged and report of the audit was received on 6-2-1975. Suit was filed against the Bank and decree was obtained to the extent of Rs. 3,59,322/-. A police complaint was filed against Anandamoorthi on 13-2-1985. On 24-1-1977, Anandamoorthi was declared as insolvent. Under the circumstances, the assessee found that there was no reasonable chance of obtaining restitution of the amounts. The amount was then written off by the assessee on 31-3-1977. The loss thus suffered by the Company was directly connected with the business operation and was incidental to the carrying on the business of the assessee company. We are of the view that the Tribunal has erred in coming to a contra conclusion. Assessee was also justified in assuming that there was no possibility of its recovering the amount from Anadamoorthi. We therefore answer the question referred in the negative in favour of the assessee and against the Revenue. A copy of thus judgment under the seal of this Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench for information.