GURTU J. - The following question has been referred to us for an answer :
'Whether the loss of cash of Rs. 1,06,000 by dacoity is admissible as a deduction under section 10(1) of the Act in computing the assessees income from banking business ?'
The following facts which have been stated in the referring order may be mentioned. The assessee, the Nainital Bank Ltd., is a public limited company which carries on the business of banking. The previous year of the assessee company is the calendar year, the relevant previous year for the assessment in question being the calendar year 1951. The assessee company had various branches. One of the branches of the assessee was situated at Ramnagar. The money of the branch was kept in iron safes. On June 11,1951, at about 7 p.m. eleven persons dressed in olive green uniforms of military pattern and armed with rifles and other lethal weapons raided the Ramnagar branch of the assessee bank and extorted the keys of various safes from the manager. The dacoits opened the safes and took away cash amounting to Rs. 1,06,000 and various ornaments etc., which had been pledged with the bank. The assessee claimed as a deduction in computing its income from the banking business for the assessment year 1952-53 the sum of Rs. 1,06,000 which had been taken away from the Ramnagar branch. The Income-tax Officer refused to allow this amount as a deduction on the ground that the loss was not incidental to the business of the bank. This order was confirmed on appeal by the Appellate Assistant Commissioner. The assessee preferred an appeal to the Tribunal and contended that the above sum is admissible as a deduction for the following reasons :
(a) that the cash is the stock-in-trade of the banking company and the loss of cash would be admissible as a deduction irrespective of the circumstances in which the loss occurred and
(b) that the loss of cash in the present case was incidental to the carrying on of the banking business and would be admissible as a commercial loss.
The same contentions have been advanced before us.
From the order of the Income-tax Appellate Tribunal it is clear that it has been held that the cash lost in the dacoity was the stock-in-trade of the bank, a money-lender. It is well settled that in the case of banking and money-lending business money is the stock-in-trade and circulating capital. See Arunachalam Chettiar v. Commissioner of Income-tax and Commissioner of Income-tax v. Subramanya Pillai.
It must also be noted at once that this is not a case of an embezzlement by an employee though cases dealing with embezzlement are helpful as they cover the ground as to when loss by embezzlement can be considered to be incidental to the business and deducted. This is a case of loss by dacoity.
Learned counsel for the appellant assessee relied on Venkatachalapathy Iyer v. Commissioner of Income-tax, and contended that the profits and gains of any business should be ascertained by ordinary commercial principles of trading and in order to constitute a trade loss it must be either a loss of stock-in-trade or a loss incurred in the course of the business and as incidental to it. He contended that it was enough that the stock-in-trade with the bank had been lost and it was not necessary to show anything else. Alternatively he contended that whether it was a loss in the course of business and is incidental to it has to be determined on the facts and circumstances of each case as no general principles governing all cases can be laid down. He contended that in this particular case the bank was bound to keep money which was needed every morning by the bank to carry on its business effectively and the money had to be kept with the manager and in the bank premises and the key had to be left with the manager. He contended that the cash was held in this way by the manager in the safes of the bank in the course of the banks business and incidental to it and that the loss was in the course of carrying on the banks business and was incidental to it even though the loss occurred after the close of banking hours and even though the loss occurred not by the embezzlement of any employee nor by an act of God or enemy action but by the act of the breakers of law. He contended that the risk of a bank being broken into, dacoity being committed, was a risk which was incidental to the carrying on of the business and that in the present case the money had been kept for the carrying on of the business and, therefore, the loss by the dacoity in this case was in the course of business and therefore incidental to it.
In the recent case of Badridas Daga v. Commissioner of Income-tax it has been laid down that where a claim is made for deduction for which there is not specific provision under section 10(2) whether it is admissible will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out out of the carrying on of the business and be incidental to it. The loss for which a deduction is claimed must be one that springs directly from the carrying on of the business and is incidental to it, and now any loss sustained by the assessee even if it has some connection with his business. If that is established, them the deduction must be allowed, provided that there is no provision against it, express or implied, in the Act.
In that case the appellant carried on business as money-lender, dealer in shares and bullion and as commission agent, through an agent who held a power of attorney which conferred on him large powers of management including authority to operate on bank accounts. The agent withdrew from the bank account sums aggregating to Rs. 2,30,636 and applied them in satisfaction of his personal debts incurred in speculative transaction. On being informed of the true state of affairs the appellant in that case cancelled the power of attorney and called upon the agent to pay the amounts withdrawn by him. The appellant later filed a suit against the agent for recovery of the amount but could recover only a sum of Rs. 28,000 and wrote off the balance of rupees two lakhs and odd as irrecoverable. The question was, whether this amount was an admissible deduction in computing the profits of the assessee from business for the purpose of income-tax.
It will thus be seen that Badridas Dagas case was a case of embezzlement but in the course of the judgment their Lordships of the Supreme Court have considered the position in regard to loss by theft. In one of the passages of that judgment they have remarked as follows :
'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 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 the premises of a money-lender 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 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(2) or not.'
In another passage their Lordships observed as follows :
'In Ramaswami Chettiar v. Investigation Commissioner of Income-tax 4 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 deduction. It was held by the majority of the judges that it could not be. In the judgment of the learned Chief Justice, the law was thus stated :
If anyone 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 puts these profits in a strong room or some other place regarded by him to be a place of safety. I 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 collection 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 assessee to deduction of loss resulting from embezzlement by an employee, also show the extent and limits of that right.'
There is then a third passage in which their Lordships have expressed agreement with the decision in the case of Motipur Sugar Factory Ltd. v. Commissioner of Income-tax.
We have now to apply the principle of Dagas case to the facts of the present case. The report of Motipur Sugar Factorys case shows that the assessee company which was carrying on business in the manufacture of sugar and molasses out of sugarcane deputed an employee, in compliance with the statutory rules, with cash for distribution to sugarcane cultivators at spot of purchase. The cash was robbed on the way. The Income-tax Officer disallowed the claim of the assessee to deduct this loss from the income. The Tribunal found that the loss was incidental to the business of the assessee but that they were bound by the decision in Mulchand Hiralal v. Commissioner of Income-tax 3 and, therefore, the loss was not deductible from the gross income of the assessee. On a reference under section 66(1) it was held that the case was not covered by section 10(2); but the deductions expressly mentioned under section 10(2) are not exhaustive and the question of computing the 'profits and gains' of a business under section 10(1) must be approached in a commercial sense. It has been held that the money was stock-in-trade of the assessee and that the loss was incidental to the business of the assessee. The learned judges after referring to the provisions of the Bihar Sugar Factories Control Act, 1937, observed :
'It is manifest, therefore, that the assessee company had to dispatch money to various purchasing centres for payment to sugarcane cultivators. That was an essential part of the business of the assessee for the sugarcane factory cannot work unless there is a supply of sugarcane. It appears to us that the loss of money there in this case is a loss which springs from the statutory necessity of sending money to various purchasing centres, and such a loss is, therefore, incidental to the business carried on by the assessee. To put it differently, the loss of money is a loss connected with or arising out of the business of the assessee, and should, therefore, be taken into account in calculating the profits or gains under section 10(1) of the Income-tax Act for the purpose of computing the taxable income.'
We have already pointed out that their Lordships of the Supreme Court have fully approved of this case. A loss which is occasioned by a robbery or theft of money which is to be sent under statutory rules is, therefore, a loss which must be taken to be incidental to the business. The Nainital bank Limited is a public company doing banking business and it is governed by the Banking Companies Act, 1949. Under section 24 of the Act the bank has to maintain in cash or gold valued at a price not exceeding the current market price an amount which shall not at the close of business on any day be less than 20 per cent. of the total of its time and demand liabilities. In as much as the maintenance of this percentage is related to the demand liabilities it is clear that it is intended by section 24 that there should always be liquid or easily liquidable assets with the bank to enable it to discharge its liabilities at all places where it functions. It is also to be noted that the Nainital Bank is not a scheduled bank and is, therefore, bound to maintain cash reserves also under section 18. Moreover having regard to the character of banking business it is essential for the carrying on of the business to maintain adequate cash at all times in order to be able to meet withdrawals made. It seems to us, therefore, that the present case is on per with the case of Motipur Sugar Factory Ltd.
But is was contended that the observation of their Lordships of the Supreme Court in Badridas Dagas case which we have quoted earlier clearly indicates that the loss of money to a money-lender by theft cannot be allowed to be deducted as a loss. It seems to us that the passage in Dagas case, in which it has been said that 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, must be read in conjunction with the passage approving the case of Motipur Suagr Factory and that that passage was intended to apply to private money-lenders and not to limited public banks owned by shareholders and which banks have to limited public banks owned by shareholders and which banks have to conform to statutory provisions. Where the money is with a private money-lender, although that money may be utilised by him for his money-lending business.
So far as the case of Ramaswami Chettiar v. Commissioner of Income-tax, also approved, is concerned their Lordships of the Supreme Court have considered it to be a case which lays down the limits of the right of an assessee to deduct the loss resulting from embezzlement by an employee. The passage quoted by the Supreme Court from the judgment of the Chief Justice of Madras seems to suggest that the learned Chief Justice of Madras had in mind a case where the sum stolen was a sum which had come to the assessee as profits. If the sum that the assessee lost by theft constituted his profits then obviously at the moment of the theft the sum could not be considered to be part of the stock-in-trade, but as a sum apart from the business. So far as the money held by an incorporated bank is concerned it cannot be said that it constitutes profits of the bank; it is really the banks circulating capital. The profits of the year can only be known at the end of the year when the accounts are made up and it is only then that such profits as are earmarked to be distributed could be said to be held outside the stock-in-trade; the undistributed profits ploughed back would however lose their character of profits.
Learned counsel for the assessee referred us to the case of Pohoomal Bros. v. Commissioner of Income-tax. In that case the stock-in-trade of the three foreign branches of the assessee were robbed as a result of enemy action. It was argued on behalf of the Income-tax Department that the loss was not incidental to trade and, therefore, could not be claimed as a deduction and that enemy action did not constitute a risk to the business and was not incidental to it. It was none the less held that it was a trading loss which the assessee was entitled to claim as a deduction.
It would appear that the Motipur Sugar Factory case which has won the Supreme Courts approval is the case nearest in point of similarity. It cannot be said that there is no incidental risk of theft or robbery to circulating capital of a bank. That there is such a risk is proved by the fact of which judicial notice may be taken that banks are heavily guarded and sometimes by armed guards. It is true that robbery and theft are not an every day affair but dacoity in banks is not unknown and that it is not very frequent would not show that it cannot be considered incidental to banking business.
In all the circumstances of the case and having regard to what has been said above the answer to this question should, in my view, be in the affirmative.
UPADHYA J. - The deduction claimed is not specifically provided for by the statute but it has to be to 'arrive at the true profits and gains'. When a grain dealer is deprived of a part of his stocks by rats it cannot reasonably be suggested that the loss suffered is of a capital nature and cannot be taken into account to determine the income of the accounting period. Losses or shortage due to errors in counting receipts from customers are commonly allowed. Amounts embezzled by employees entrusted with money in due course of business have been allowed to be taken into consideration in determining the real profits or income. In the instant case the loss suffered by the assessee was suffered in due course of business and having regard to its business was of a part of its stock-in-trade. It is not suggested that it , materially damaged : its profit-making structure. My esteemed brother has examined the various authorities in coming to the conclusion that in the circumstances of the case the 'true profits' of the assessee cannot be arrived at without taking this loss into account. It would evidently offend all ideas of commercial propriety or even common sense to ignore this loss and to hold that the bank had made profits despite the burglary.
I respectfully agree that the answer should be in the affirmative.
BY THE COURT. - The question referred is answered in the affirmative. The assessee will have its costs which we assessee at Rs. 300. The fee of the learned counsel for the Department is fixed at the same amount.
Question answered in the affirmative.