M. S. MENON C.J. - This is a reference by the Income-tax Appellate Tribunal, Madras Bench, under section 66(1) of the Indian Income-tax Act, 1922. The assessment year concerned is 1953-54; and the accounting period, the twelve months ended on 30th June, 1952. The question referred is :
'Whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of Pounds 12,611 under section 10 of the Income-tax Act ?'
Sub-section (2) of section 10 of the Indian Income-tax Act, 1922, expressly provides for certain allowances. It is not contended that the deduction claimed in this case will come within the ambit of sub-section (2).
The list of allowances enumerated in sub-section (2), however, is not exhaustive; an item of loss incidental to the carrying on of a business may be deducted in computing the profits and gains of that business, even if it does not fall within any of the clauses of sub-section (2). This has been definitely established by the Privy Council in Commissioner of Income-tax v. Chitnavis, where a bad debt was held to be an admissible deduction, though there was no special allowance for bad debts in the Act as it then stood. Lord Russell, delivering the judgment of the Board, said :
'Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to 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.'
Sub-section (1) of section 10 of the Act provides :
'10. (1) The tax shall be payable by an assessee under the head Profits and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him.'
The Supreme Court dealt with this provision as follows in Badridas Daga v. Commissioner of Income-tax :
'While section 10(1) of the Indian Income-tax Act, 1922, imposes a charge on the profits or gains of a business, it does not provide how these profits are to be computed. Section 10 (2) enumerates various items which are admissible as deductions but they are not exhaustive of all allowances which could be made in ascertaining the profits of a business taxable under section 10 (1). Profits and gains which are liable to be taxed under section 10 (1) are what are understood to be such under ordinary commercial principles.
When a claim is made for a deduction for which there is no specific provision under 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 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 not any loss sustained by the assessee even if it has some connection with his business. If that is established, then the deduction must be allowed, provided that there is no provision against it, express or implied, in the Act.' (Headnote).
It is thus clear that business losses, though they fall outside the purview of any of the clauses of sub-section (2), are allowable on ordinary commercial principles of computing profits, provided (a) the losses are of a non-capital nature; and (b) they are not merely connected with the trade but are really incidental to the trade itself. It is not contended that the loss in this case is not of a non-capital nature. The only question for determination, therefore, is whether the loss is really incidental to the trade of the assessee or not.
The assessees business consists of processing mineral sand and exporting the processed product. The quantities of sand involved are considerable. The stock of raw sand on 30th June, 1952, according to the books of the assessee, should have been 75,975 truck loads. The actual stock on that date, as calculated by the assessee, however, was only 16,343 truck loads. The deduction of Pounds 12,611 claimed by the assessee and mentioned in the question referred represents the value of the difference between the two figures, namely, the value of 59,632 truck loads of sand. The weight of a truck load of sand, we are told, is one and five-eight tons.
According to the assessee the writing off of Pounds 12,611 was necessitated by the fact that 59,632 truck loads of sand were found to be of very poor mineral content and hence of uneconomic quality for the purpose of processing. This version of the assessee has not been accepted by any of the three authorities concerned, the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal.
According to the Income-tax Officer and the Appellate Assistant Commissioner, the 59,632 truck load of sand, though paid for by the assessee, were never delivered at its premises as a result of the fraudulent collusion between its manager, Mr. Growther, its chief engineer, Mr. Declase, and its contractor, Mr. Chellappan Pillai. The Income-tax Officer said :
'The loss has evidently occurred through the misconduct or fraud played by the employees of the company. On detection of the deficiency of stock of 59,632 trucks of sand when the inventory was taken on 30th June, 1952, the proper thing for the company is to proceed against the employees of the company who have caused the same for making good the loss. The amount represented by the writ off has not become a trading loss but is in fact a debt recoverable from the employees concerned. The writ off is therefore premature.
The Appellate Assistant Commissioner dealt with the matter as follows :
'I think the facts as discussed in paragraph 5 clearly lead to the conclusion that Shri Chellappan Pillai had not supplied the full quantity of sand which had been accounted for in the books. This obviously must have been done with the connivance of at least the chief engineer if not of the general manager. Assuming for a moment that all the three were involved, then the proper course for the appellant would have been to proceed against all of them for recovery of the amount. I take it that the two employees were entitled to the benefits of provident fund and other amounts and the appellant could have appropriated such amounts towards the amount of loss. In any event no action has been taken by the appellant against any of these persons. In any case the appellant should have proceeded against Shri Chellappan Pillai for having defrauded it by not supplying the full quantities of sand for which payments had been made. It was the case of the appellant as discussed in the letter of Messrs. Price Waterhouse & Company (the auditors of the assessee) dated 1st July, 1955, addressed to Mr. Parsons that in the absence of definite proof it was not possible to proceed against the employees. However, this argument will not apply to the case of Shri Chellappan Pillai who as the contractor was bound to supply the quantities for which he had received payments. Certainly proceedings could have been taken and should have been taken against Shri Chellappan Pillai. It was contended by Mr. Krishna Menon that it was not possible to proceed against him in view of his financial conditions but I cannot accept this argument in the absence of any evidence whatsoever and particularly because this is the case of a contractor who had been paid several lakhs by the appellant. There is absolutely no evidence that he was in embarrassed financial circumstances. I would therefore hold that the appellant should have proceeded against Shri Chellappan Pillai and also against the employees and not having done so it cannot claim that the amount was a loss which was definite and had arisen in the year of account.'
'Since the loss had not become actual and certain in the year of account but was merely a civil liability of the person or persons concerned, it cannot be allowed as a deduction.'
The Appellate Tribunal proceeded on a different basis, namely, that the 59,632 truck loads of sand were as a matter of fact delivered but was subsequently removed before they were processed. It said :
'The report of Price Waterhouse and Company (the auditors of the assessee) would appear to indicate the more probable way in which the loss might have occurred. This is what they state in their letter dated 1st July, 1955, addressed to W. J. Parsons, an officer of the assessee-company :
Apparently from the investigation you made there was no evidence that the delivery records were not genuinely in order and it was quite probable that the quantities recorded were actually delivered but that when the trolleys were supposed to be taking away the worked materials for dumping, they were in fact taking away the unworked sand.
They went on to say :
It is also probable that the quality of some of the sand delivered was abnormally low.
Now in a manner of speaking the raw material is the assessees stock-in-trade as much as money is of the money-lender and when it had come into possession and loss occurs thereafter, it would appear from the observation of the Supreme Court in Badridas Dagas case that the loss arising therefrom is not one falling on the assessee as a person carrying on business but as owner of funds.
Any depletion in the stock-in-trade owing to natural causes may be considered as incidental to the business. The loss, if any, that has occurred in the assessees case in the manner indicated above cannot come under that category.
We, therefore, consider that the loss was not a business loss allowable under section 10(1). Any discussion about the necessity for action would appear to be unnecessary.'
We gather from the above extract that the Appellate Tribunal was of the opinion that the sand was as a matter of fact delivered but was removed prior to processing as a result of the neglect or fraud of the assessees employees and contractor. The question for consideration, therefore, is whether such a loss is incidental to the carrying on of the business of the assessee and thus an admissible deduction under section 10(1) of the Indian Income-tax Act, 1922.
As we read the decision mentioned by the Appellate Tribunal in Badridas Daga v. Commissioner of Income-tax, the assessee will be entitled to succeed if the loss did occur in the manner found by the Appellate Tribunal, namely, by the negligence or fraud of the assessees employees and contractor. In that case the assessee was a money-lender, dealer in shares and bullion and commission agent. He was carrying on his business though 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 sums aggregating to Rs. 2,30,636-4-0 and applied them in satisfaction of his personal debts incurred in speculative transactions. On being informed of the true state of affairs, the assessee cancelled the power of attorney and called upon the agent to pay the amounts withdrawn by him. The assessee later filed a suit against the agent for the recovery of the amount but could recover only a sum of Rs. 28,000, and wrote off the balance as irrecoverable. The Supreme Court held that the loss sustained by the assessee as a result of the misappropriation of his agent was one which was incidental to the carrying on of the business of the assessee and should, therefore, be deducted in computing the profits under section 10(1) of the Act.
In the light of what is stated above we are of the opinion that the deduction claimed in this case is an admissible deduction under section 10 (1) of the Indian Income-tax Act, 1922, provided it is not possible to recover the loss from the persons responsible for the same. Both the Income-tax Officer and the Appellate Assistant Commissioner were clearly of the opinion that no steps had been taken by the assessee to recover the amount and that the claim made was hence premature and unsustainable. The Appellate Tribunal has not dealt with the matter. It only stated, as can be seen from the extract given in paragraph 10 above, that 'any discussion about the necessity for action would appear to be unnecessary.' In these circumstances, we can answer the question referred only on a hypothetical basis. If the assessee has made the necessary attempts to recover the loss from the persons concerned and failed or if the assessee did not make such attempts because it was useless to make them in view of the financial position of the persons concerned, then and then alone the answer to the question is in the affirmative, that is, in favour of the assessee and against the department.
Such a conditional answer, however, will not be in consonance with the advisory jurisdiction of this court under section 66 of the Indian Income-tax Act, 1922. We have, therefore, no other option but to refer the case back to the Appellate Tribunal under sub-section (4) of section 66 for making such additions thereto as are necessary to enable us to answer the question with definiteness and not on a hypothetical basis. Order accordingly.
A decision in which the case was referred back for finding to the Appellate Tribunal under section 66 (4) of the Act is Hassan Kassam v. Commissioner of Income-tax. The findings required by that decision were on the following questions :
'(1) Whether the partnership deed of the 30th of October, 1940, is a genuine document in the sense that it evidenced real partnership ?
(2) Whether the business which is sought to be assessed was at any time charged under the provisions of the Income-tax Act (7 of 1918) and
(3) Whether the business which is sought to be assessed is identical with the business which was carried on by the deceased in 1926 ?'
In Zoraster and Company v. Commissioner of Income-tax, the Supreme Court dealt with a situation somewhat similar to the one before us as follows :
'The next question is whether the High Court has transgressed the second limitation implicit in section 66 (4), that is to say, that the question must arise out of the facts admitted and/or found by the Tribunal. The High Court has observed that :.. it would be necessary for the Appellate Tribunal to find, inter alia, whether the cheques were sent to the assessee-firm by post or by hand and what directions, if any, had the assessee-firm given to the department in that matter. If the Tribunal has to make a fresh enquiry leading to the admission of fresh evidence on the record, then this direction offends against the ruling of this court in Jehangir Vakil Mills case. If, however, the direction be interpreted to mean that the Tribunal in giving the finding must confine itself to the facts admitted and/or found by it, the direction cannot be described as in excess of the jurisdiction of the High Court. It would have been better if the High Court had given directions confined to the record of the case before the Tribunal; but, in the absence of anything expressly to the contrary, we cannot hold that the direction would lead inevitably to the admitting of fresh evidence.'
See also Keshav Mills Co. Ltd. v. Commissioner of Income-tax.
We make it clear that the Tribunal should not admit any fresh evidence and that it should confine itself to what is already on record.