PATHAK J. - The Income-tax Appellant Tribunal has referred the following question to his court for its opinion :
'Whether, on the facts and in the circumstance of the case, the loss of Rs. 53,121 due to theft was an allowable ?'
The assessee is a private limited company manufacturing and selling sugar. The assessment year is 1959-60, the previous Year being the year ending October 31, 1958.
The Tribunal has found that a theft was committed on November 10, 1957, at 3 oclock of the morning in the factory premises of the assessee and a sum of Rs. 75,031 was stolen. A certain amount was recovered from the thieves who included an employee of the, but the sum of Rs. 53,121 remained untraced. It accepted the case of the assessee that large sums of money were necessary at the factory for conducting its day to day business, that on the eve of commencing sugarcane crushing, a large sum in cash had to be kept available at the factory for dispatching funds of different centers to enable the purchase of sugarcane and for meeting other expenses, and the money had to be kept in the safe-room at the factory as the bank was situated about eighteen miles from the factory.
The Tribunal has held that as the money had been kept for meeting incidental expenses necessary or carrying on of the assessees business the assessee was entitled to a deduction of the loss in computing income from business.
This reference has now been made at the instance of the revenue.
There is no dispute between the parties that the deduction cannot be claimed under any of the clauses of sub-section (2) of section 10 of the Indian Income-tax Act, 1922. The question is whether the loss should be deduced in computing the profits under sub-section (1) of section 10. As to that, it is now fairly well-established that profit and gains which are liable to be taxed under that sub-section are what are understood to be such according to ordinary commercial principles. In Gresham Life Assurance Society v. Styles Lord Halsbury pointed out :
'The thing to be taxed is the amount of profits and gains. The word profit I think is to be understood in its natural and proper sense - in a sense which no commercial men would misunderstand.'
And again at another place in his speech :
'Profits and gains must be ascertained on ordinary principles of commercial trading....'
The principle was declared by the Privy Council in Pondicherry Railway Co. v. Commissioner of Income-tax, to be of general application also to cases arising under the Indian income-tax law.
The law governing a claim to deduction under sub-section (1) of section 10 was clearly enunciated by the Supreme Court in Badridas Daga v. Commissioner of Income-tax in the following terms.
'.... 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 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.'
Therefore, we are here concerned with the question whether the loss of Rs. 53,121 can be said to arise out of the carrying on the assessees business and to be incidental to it if regard be had to accepted commercial practice and trading principles.
There can be little doubt, we think, that the money was withdrawn from the bank and put into a cycle of movement involved in the carrying on of the business. The business required large sums of money for carrying it on from day to day. The chance crushing season was about to commence and in order to purchase sugarcane at the different centers, various sums of money had to be sent from the factory to those centers. The bank was at a distance of eighteen miles from the factory, an inconvenient distance for operating on it from moment to moment. The factory was considered a convenient place for keeping ready funds for disbursement. To met the needs of business, money was withdrawn from the bank, the money ceased to be part of the general fund of the assessee. Instead, it was put into progressive movement for the purpose of carrying on the business of the assessee. The money traveled from the bank to the factory sage-room. That was the first stage of its progress. Before it could be disbursed, it was necessary to lodge it in safekeeping. Its retention in the safe marked the second stage. It was then sent on its way to different destinations according to the needs of business expenditure. Now, it is important to note that the money which was stolen has been found by the Tribunal to form part of the fund maintained for business expenses. There is no material, so far as we know, that the profits earned in the business formed part of that fund. Nor is there any suggestion that any part of the fund was diverted to expenditures not connected with the assessees business.
In Badridas Dagas case the Supreme Court held that a loss resulting from embezzlement by the agent of a firm who enjoyed large powers of management including authority to operate on bank accounts, and who withdraw the moneys in the purported exercise of that authority, was a loss incidental to the carrying on of the business and should therefore be deducted in computing the profits under sub-section (1) of section 10. To the same effect is the view taken by the Patna High Court in Jagannath Therani v. Commissioner of Income-tax and by the Madras High Court in M. P Venkatachalapathy Iyer v. Commissioner of Income-tax. There is also the decision of the Bombay High Court, in Lords Dairy Farm Ltd. v. Commissioner of Income-tax. A case somewhat similar on facts to the instant case, was considered by the Patna High Court in Motipur Sugar Factory Ltd. v. Commissioner of Income-tax and it was held that the theft of funds of the company entrusted to an employee for the purpose of distribution among sugarcane growers resulted in a loss incidental to the conduct of the trade and was an admissible deduction.
But the revenue points out that these are all cases in which the loss took place during the hours of business, and the principle adopted there would not apply where, as in the instant case, the loss arose from something done outside the hours of business. It is pointed out that the theft took place in the early hours of the morning when there was no business activity whatever. The submission, it seems to us, proceeds upon a fallacy. It rests on an unreasonably limited view of the time during which the assessees business can be said to have been conducted. As we have pointed out, the money was stolen at a stage when it had been put into a cycle of movement invoked in the carrying on of the business. The distinction drawn by the Supreme Court in Commissioner of Income-tax v. Nainital Bank Ltd. is relevant here. The Nainital Bank Ltd. a public limited company, carried on the business of banking. At 7 oclock of an evening in June, 1951, there was a dictate in the bank resulting in the removal of a large amount of cash kept in the safes at a branch at Ramnagar. The bank claimed a deduction of the amount in the computation of its business profits under sub-section (1) of section 10. The claim was resisted by the revenue, one of the submissions being that the loss was suffered after business hours and was, therefore, not incurred in the running of business. It was urged that the loss was one to which all owners of properties are exposed, whether they do business or not. Reliance was placed on a passage in Badridas Dagas case, which appeared to support the revenue. The Supreme Court did not accept the submission. It said.
'That passage in terms refers to a money-lender and does not deal with a public company carrying on banking business. In the case of a money-lender the profits he made may form part of the private funds kept in his house which he may or may not invest in his business. It is indistinguishable from his other manners. But in the case of a bank the deposits received by it form part of its circulating capital and at the time of the theft formed part of its stock-in-trade. In one case it cannot be posited that the amount robbed is part of the stock-in-trade of the trader till he invests it in his business; in the other it forms part of the stock-in-trade without depending on the intention of the banking company.'
The 'reason' for the distinction, it is clear, lay in the circumstance that whereas, in the case of a money-lender, the money may form part of his private funds so long as it was not invested in the business, in the case of a banking company the money formed part of its circulating capital and its stock-in-trade. There was also the consideration that :
'It is an integral part of the process of banking that sufficient moneys should be kept in the bank duly guarded to meet the demands of the constituents. The retention of the money in the bank is a part of the operation of banking. The retention of money in the bank premises carries with it the ordinary risk of its being subject of embezzlement, theft, dictate or destruction by fire and such other things. Such risk of loss is incidental to the carrying on of the operations of the business of banking.'
Here, in the instant case we have an assessee who finds it necessary for the purposes of its business to withdraw from the bank and lodge in the factory safe-room a sufficient amount of money for paying out to canegrowers and for meeting other business expenses. There is no mixing of the money with profits earned by the assessee or with private funds. It is money appropriate, as it were, to business expenditure. It is money which, upon withdrawal from the bank, has been put into movement for payment ultimately in discharge of the business liabilities of the assessee. The lodging of the money in the factory safe-room is, like the retention of the money in the bank, a part of the operation of its business. We are clear, upon this, that the loss by theft in the instant case is a loss arising our of the carrying on of assessees business and incidental to it. The assessee is entitled to the deduction.
The question is answered in the affirmative. The assessee is entitled to its costs which we assess at Rs. 200. Counsels fee is also assessed at Rs. 200.