1. BY an order under sub-section (2) of section 66 of the Indian Income-tax Act, 1922 (11 of 1922), this court directed the Tribunal to refer to us the following two questions of law which arose out of the out of the order made in appeal by the Income-tax Appellate Tribunal :
'Whether, on the facts and under the circumstances of the case, the petitioner-firm was entitled to deduct from their taxable income, the loss suffered by them due to their stock-in-trade and book debts amounting to Rs. 1,94,495 being lost by the action of Japanese authorities in July, 1941, by way of trading loss or loss of revenue nature
(2) Whether the petitioner-firm was entitled in law to claim the amount of the said loss suffered by them converted into Indian currency at the rate of exchange prevailing at the time of such loss ?'
2. The facts of this case in brief are that the assessee, a partnership firm, is doing business in silk in different parts of the world, its head office being at Bombay. In the year of assessment 1942-43, the relevant previous year being one commencing on 6th of April, 1941, and the Government of India and the said amount included also ending with 31st of March, 1942, it had its branches at Yokohama and Kobe. In July, 1941, the property of the assessee-firm as well as the property of the other Indian nationals was frozen by the Japanese Government. The properties so frozen consisted of cash in the bank account of the assessee-firm both at Yokohama and Kobe, cash in hand, amounts which were due to the assessee-firm from the persons to whom the goods had been supplied, stock-in-trade at both the aforesaid branches, immovable properties, furnitures and household articles. Japan declared war on the 8th of December, 1941. In the assessment year 1942-43, the assessee-firm claimed that in the relevant previous year it suffered loss on account of the aforesaid action of the Japanese authorities - loss both in respect of the book debts which were due to the assessee-firm and stock-in-trade. The total loss claimed amounted to 2,38,644 Yens which at the rate of the currency then prevailing in the assessment year came to Rs. 1,94,495. In the aforesaid amount the loss claimed by way of loss in stock-in-trade amounted to 2,17,061 Yens. In support of its claim, the assessee placed reliance on the inventory which is stated to have been submitted to the British Counsel showing the value of the property so lost to it on account of the enemy action. The income-tax department on the other hand claimed that the Japanese Government had admitted the claim of the assessee as a result of which bonds the value of 5,22,855 Yens were issued by the Japanese Government to the assessee, The position however was not accepted by the assessee. In the alternative, the assessee claimed loss on account of the depreciation in the value of Yen resulting from the change in the exchange rates from 1941 to 1945. The assessee's contentions were rejected. In the appeal before the Income-tax Appellate Tribunal, the Tribunal held that the case throughout had been that the loss to the assessee in respect of the stock-in-trade occurred in the previous year relevant to the assessment year 1942-43 at the time the Japanese Government froze the properties of the assessee, including the stock-in-trade, as enemy property. On considering the evidence, it held that the loss accrued to the assessee as a result of the enemy action. But, according to the Tribunal, the loss was not a business loss but it was of a capital nature. On the same line of reasoning, the Tribunal took the view that whatever compensation the assessee had received from the Japanese Government could not be of a revenue nature. It appears that on this reasoning the Tribunal held that the loss resulting on account of the change in the exchange rates was not relevant. In this view of the matter, the Tribunal rejected the assessee's claim for deductions on the ground of loss in stock-in-trade and book debts. The application made by the assessee under sub-section (1) of section 66 of the Indian Income-tax Act, 1922, was rejected by the Tribunal. On an application made by the assessee to this court under sub-section (2) of section 66 of the Indian Income-tax Act, this court directed the Income-tax Appellate Tribunal to refer to this court the aforesaid two questions of law. The reference first came for hearing on the 25th of September, 1957. On that day this court remanded the case to the Tribunal giving the following directions to the Tribunal :
'We, therefore, remand the matter back to the Tribunal to submit a supplementary statement of the case indicating therein the facts on which the Tribunal came to the conclusion that the loss occurred to the assessee as a result of enemy action, and also the facts as a result of which the assessees claimed that the goods which were frozen were ultimately lost to them and the point of time at which the book debts and stock-in-trade were lost to the assessees.'
3. In the supplementary statement submitted by the Tribunal on November 13, 1959, the Tribunal found as a fact that the goods which were originally frozen in July, 1941, were at the end of 1941, declared to be the enemy property and were lost to the assessee before the end of the year 1941 on declaration of war. These goods were therefore lost to the assessee in the year of account. The Tribunal further held that the assessee received some compensation in Yens in respect of loss of goods in the year 1945. The value of the Yen had at that time considerable gone down and the equivalent amount in Indian money would be only about Rs. 2,000 in 1945. It appears that before the Tribunal drew up the supplementary statement of the case but after the report had been made by the Appellate Assistant commissioner, the department filed an affidavit of the Income-tax Officer in which it was alleged that the assessee had received about Rs. 3 lakhs as compensation from the Government of India and the said amount included also compensation for loss of stock-in-trade in Japan. The Tribunal considered that it was surprising that the department did not bring this fact forward at an earlier stage and it therefore refused to go into the matter and rejected even to include the relevant affidavit and the document as parts of the statement of the case. Dealing with the department's contention that the loss did not occur in the year of account, the Tribunal held that the assessee did suffer the loss in respect of the stock-in-trade and book debts in the year of account. Notice of motion was taken out by the department for inclusion of the aforesaid affidavit and the relevant documents which went to show that the Government had paid compensation to the assessee to the tune of Rs. 3 lakhs which amount included the compensation for the loss of stock-in-trade also. On the said notice of motion, this court, after hearing the parties at considerable length, made an order on April 19, 1960, directing the tribunal to submit a further supplementary statement of case. The operative part of this order is in the following terms :
'That the said Tribunal do re-submit the supplementary statement of case after including therein the affidavit of the Income-tax Officer affirmed on the first day of July, one thousand nine hundred and fifty-nine and the counter-affidavit of Kishinchand Lekhraj affirmed on the twenty-eight day of September, 1959, being exhibits 'H' and 'I' respectively to the said supplementary statement of case and for making necessary changes in the said supplementary statement of case on the footing that the said two affidavits form part of the said supplementary statement of case.'
4. The Tribunal in re-submitting the statement of case only included the aforesaid two exhibits, 'H' and 'I', in their statement of case, but did not record its finding on the rival contentions of the department and the assessee, the department claiming that Rs. 3 Lakhs compensation paid by the Government of India to the assessee included compensation for loss of stock-in-trade and the assessee contending that compensation paid by the Government of India did not include any compensation for the loss of stock-in-trade. This court wrote an elaborate order on 6th October, 1962, and brought it to the notice of the Tribunal that in order to determine the question before this court, it was necessary to have the findings of the Tribunal on the following three issues :
'(1) What amount was paid by the Government of India to the assessee as compensation ?
(2) Whether the amount, if any, received by the assessee from the Government of India, included therein any amount representing the price of the stock-in-trade of the assessee frozen in Japanese action; and
(3) The quantum of loss, if any, suffered by the assessee by reason of the freezing of his stock-in-trade by the Japanese authorities, in the light of its finding on the aforesaid two issues.'
5. The Tribunal in its supplementary statement of the case of date 5th July, 1963, answered the aforesaid three issues in the following terms :
'(1) The Government of India paid Rs. 2,87,517 as compensation to the assessee.
(2) The amount received by the assessee from the Government of India included therein some amount representing the price of Stock-in-trade of the assessee frozen as a result of the Japanese action. The amount is estimated at 37,750 Yens equivalent to Rs. 30,766.
(3) The quantum of loss suffered by the assessee by reason of the freezing of its stock-in-trade by the Japanese authorities would be 1,79,311 Yens equivalent to Rs. 1,46,130.'
6. The material finding thus which could be gathered together from the original statement of case as well as the supplementary statement of case are that the quantum of loss suffered by the assessee by reason of the freezing of the stock-in-trade by the Japanese authorities amounts to Rs. 1,46,130 and that loss occurred or accrued to the assessee in the assessment year 1942-43, relevant previous year being one commencing from April 6, 1941, and ending with 26th of March, 1942. These are the findings of facts and on these findings of facts and, in accordance with the ratio of the decision of this court in Pohoomal Bros. v. Commissioner of Income-tax, it would follow that the assessee-firm is entitled to claim deduction by way of trading loss or loss of revenue nature. The first question therefore will have to be answered accordingly with the modification that the figure of Rs. 1,46,130 be substituted in place of Rs. 1,94,495 as appearing in question No 1 referred to us.
7. Mr. Joshi, however, contends that in the year 1941 the goods were only frozen which meant that the assessee was not allowed to trade in those goods. The goods were not lost to the assessee. The Tribunal was therefore wrong in holding that loss in trade occurred or accrued to the assessee in the assessment year 1942-43. In our opinion, there is a difficulty in the way of Mr. Joshi, the learned counsel for the revenue. That difficulty, in our view, is that it is not open to the revenue to raise this contention before us. In the appropriate order the Tribunal recorded two findings, namely, (1) that there was a trading loss to the assessee by reason of the Japanese action; and (2) that not only that the goods were frozen but on the declaration of war at the end of 1941, the goods were declared as enemy property and permanently lost to the assessee. The Tribunal, however, took the view that the loss was of a capital nature and was not a trading loss of the revenue nature. The finding of the Tribunal that the loss occurred in the year of accounting was not challenged by the department either by making an application under section 66(1) of the Act to the Tribunal or by making an application to court under sub-section (2) of section 66 of the Act in the event of rejection of its application by the Tribunal. The reference was sought only by the assessee and the finding of the Tribunal which was challenged was only as regards the nature of the loss. That being the position, in our opinion, the contention now raised by Mr. Joshi is foreign to the question which we have to consider.
8. It is next contended by Mr. Joshi that, on the facts found, the total amount of compensation which the assessee received from the Government of India is Rs. 2,87,517. The said amount represented compensation paid to the assessee in respect of loss of the amount which was in the assessee's account in the banks at Yokohama and Kobe, loss of cash in hand at those places, loss of stock-in-trade, loss of immovable property, furniture and household articles. In estimating the amount of compensation, which represented the price of the stock-in-trade, the Tribunal ought to have apportioned the said amount of Rs. 2,87,517 in proportion to the amounts claimed by the assessee on the aforesaid various claims mentioned by the assessee in respect of its claim of compensation. The argument advanced relates to a question of fact, namely, what amount out of the total amount of Rs. 2,87,517 represented compensation paid by the Government of India to the assessee for loss of goods. The department, in our opinion, should have raised this contention which relates to a question of fact before the Tribunal which was a court of facts.
9. Lastly, Mr. Joshi contends that on the facts found the loss of stock-in-trade amounted to 1,79,311 Yens and the compensation was paid to him some time in the year 1995 according to the exchange rate prevailing at the time, and the equivalent amount in the Indian currency would be very much less than Rs. 1,46,130. It is indeed true that if the loss of 1,79,311 Yens suffered by the assessee is converted into Indian currency at the rate of exchange prevailing in 1945, the amount would be very much less than Rs. 1,46,130. But then we fail to see how the rate of exchange in the year 1945 would be relevant for this purpose when the finding of the Tribunal clearly is that the loss occurred to the assessee in the accounting year relevant to the assessment year 1942-43. In making an assessment, the income-tax authorities have to consider the position as it emerges at the end of the accounting year. It is not in dispute that the equivalent in the Indian currency according to the rate of exchange prevailing in the accounting year of the loss of 1,79,311 Yens would be Rs. 1,46,130. In Our opinion, there is no error in the finding of the Tribunal on the aforesaid third issue also.
10. In the result, our answer to the first issue is in the affirmative subject to the modification of substitution of the figure 'Rs. 1,46,130' in place of the figure 'Rs. 1,94,495'. Our answer to the second issue also is in the affirmative. The department shall pay 3/4th costs of this reference to the assessee.
11. Reference answered accordingly.