(1) The facts that led to this reference under Sec. 66 of the Indian Income-tax Act of 1922 are within a narrow compass, and they can be put down briefly.
(2) The assessment year is 1942-43 and for accounting year ending on 12-4-1942. The assessee S. N. A. A. S. A. Annamalai Chettiar, executor to the estate of the late S. M. A. S. Chockalingam Chettiar of Karaikudi, carried on extensive money lending business sin India and abroad. In the course of the money lending business properties were taken over in settlement of debts as and when occasion arose. During the second World War, on account of Japanese bombing, properties of the assessee thus acquired in Malaya suffered damage. We are concerned in this reference with losses suffered during such bombing in December 1941, estimated at Rs. 1,93,750. It is common ground that this bombing in December 1941, estimated at Rs. 1,93,750. It is common ground that this bombing in December 1941 fell within the accounting year. When the assessee claimed that these losses should be deducted under S. 10(2) of the Income-tax Act, the department held that the losses in question represented capital assets and, therefore, would not be an allowable deduction.
When the assessee appealed to the tribunal it held that the loss was of the stock-in-trade of the money lending business, but such loss suffered owing to enemy action, was not a risk incidental to the carrying on of the business, in accordance with the ratio of the decision of the Supreme Court in Badridas Daga v. Commissioner of Income-tax, : 34ITR10(SC) . The Tribunal upheld the decision of the Appellate Assistant Commissioner, and held that the loss was not a permissible deduction under Sec. 10(2) of the Act. On this finding the Tribunal has submitted to this Court for decision, the following question.
'Whether on the facts and circumstances of the case, the loss of Rs. 1,93,750 was an allowable deduction under Sec. 10 of the Indian Income-tax Act'.
Under Sec. 10(1) of the Income-tax Act, 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. Sub-sec (2) and (3) of Section 10 make provision for making certain statutory allowances before the computation of profits or gains. Sub-secs. (4) and (5) amplify the scope of allowances permissible under the above sub-sections. But the term 'business losses' does not find specific mention in this section. But, though they fell outside the purview of any o the clauses of sub-sec. (2) of Sec. 10, they are allowable on ordinary commercial principles of computing profits; provided the losses are of a non-capital nature and they are not merely connected with a trade but are really incidental to the trade itself.
(3) It appears to us, on a careful consideration of the arguments as well as of the authorities cited at the Bar, that the authorities below have misdirected themselves by dealing with the question of what is essentially destruction of stock-in-trade, as a business loss, to which the tests mentioned above should be applicable before they could be allowed as a deduction. on the other hand, in dealing with such a question, namely, destruction of stock-in-trade, other than money, the more proper way is not to deal with it from the point of view of loss incidental to the business. In fact such destruction of stock-in-trade or trading assets, gets reflected in the accounting procedure adopted by the assessee, not as a loss per se incidental to the trade, but as the basis of the computation of profit sand gains. In that procedure, the well known accounting practice is to show opening stock and expenditure in one column and receipts and closing stock in another column.
If the total of latter columns is greater than the total of the former column there is a business profit, but if the total is less there is a business loss. If a part of the stock-in-trade is destroyed by fire, and it happens also to be insured, the insurance money received in lieu of such stock, will be shown as receipts in the second column and it will go towards the income of the profits in the process of account keeping. Prior decisions, which have dealt with loss of stock-in-trade (other than money) by fire or other similar cause, have approached the problem from the point of view mentioned just now. The leading English decision is Green v. Gliksten and Son Ltd., (1929) 14 T.C. 364. In that decision, timber which was the stock-in-trade of the assessee was destroyed, and the assessee received insurance money for the stock thus destroyed, and the receipt was much more than the book value of the timber. Rowlatt J. pointing out the nature of a trading account, which is the accounting procedure to be adopted in such cases, observed (at p. 375):
'It starts with the stock-in-trade in hand and at the beginning of the year on the left hand side, then the amount of purchases and then the amount of expenses, and then there is the total. On the other side, there is, of course, the amount of sales and the stock-in-trade that is left at the end of the year; that is totalled and the difference between the two would normally show the gross profit or the gross loss on the year's trading. But in the year in question, owing to the fire, some of the stock which they had at the beginning of the year and which they bought during the year is not accounted for either by the sales or by the stock-in-trade which is left, because it has been burnt'.
The House of Lords, which confirmed the view of the Court of Appeal, observed at page 384:--
'..................the book value of the timber in the company's books has nothing at all to do with the amount of the loss or with the amount which has been recovered in respect of the loss. That amount is a gain of the company in the course of its business no less than the sale price of the timber would have been if the timber had been sold in the course of ordinary sales during the continuance of the company's business; and in estimating the balance of the profits or gains which the company has to bring into account for the purposes of income-tax, the amount of the excess of the sum recovered over the book value of the timber in the company's books has to be brought into account just as fully and completely as if there had been a sale in the ordinary course of business at that price'.
In a Bench decision of the Bombay High Court reported in Pohoomal Bros. v. Commissioner of Income-tax, : AIR1958Bom461 , Chagla C. J., speaking for the Bench, applied the aforesaid test laid down in (1929) 14 T.C. 364 to a case of loss of stock-in-trade of assets due to enemy action in the Second World War. In that case, the assessee had business in Malaya, Saigon and other places where the Japanese bombing occurred Chagla C. J., observed at page 75:--
'We must apply the same test to the loss of timber (by enemy action) as we would have applied if the timber had been sold in the ordinary course of business and had fetched no price whatever...... In that case the assessee got rid of the timber by reason of the fire and got insurance money which was profit. In this case the stock-in-trade had been got rid of by a process which has been neither profitable to the assessee nor to the Department'.
The above said Bombay decision followed an earlier judgment of the Patna High Court in Motamal Jethamal v. Commissioner of Income-tax B and O : 15ITR155(Patna) , where Manohar Lal J., applied the principles in (1929) 14 T.C. 364, for allowing an assessee to deduct from the computation of his profits and gains a sum of money representing the value of goods destroyed by fire. Manohar Lal J. observed that loss of a stock-in-trade due to fire is allowable as a trading loss on ordinary principles of commercial accountancy irrespective of the fact whether any part of it is insured or any sum is received from the insurance company, if it is insured. A later decision of the Bombay High Court reported in Pohoomal Bros. (Silk Shop) v. Commissioner of Income-tax Bombay City, : 55ITR112(Bom) , applied the above principles to a case of loss of stock-in-trade by enemy action.
(4) Learned counsel for the Revenue, on the other hand, argued that even in such cases it must be found that the loss was incidental to the trade or business before a deduction can be allowed and that while fire can be considered as incidental to business, enemy action cannot. For the test of loss being incidental to the business, the learned counsel relies on the decision in Badridas Daga v. Commissioner of Income-tax, : 34ITR10(SC) as well as Commissioner of Income-tax, U. P. Lucknow v. Nainital Bank Ltd., : 55ITR707(SC) . For understanding the scope of these two decisions, a brief reference to the concerned facts will be necessary. In the former case, the assessee was a money lending firm, and the question arose in respect of loss of money resulting from embezzlement by an employee or agent of the firm. In that case, the Supreme Court observed at pages 15 and 16:--
'If employment of agents is incidental to the carrying on of business it must logically follow that losses which are incidental to such employment are also incidental to the carrying on of the business. Human nature being what it is, it is impossible to rule out the possibility of an employee taking advantage of his position as such employee and misappropriating the funds of his employer and the loss arising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it'.
In the same decision there is also an observation:--
'If 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 it is not one incurred in the running of the business, but is one to which 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 fund'.
In the Nainital Bank's case, : 55ITR707(SC) , the assessee was a Bank, and in the course of its business, it kept large amounts in various safes in the premises of the bank. Decoits broke into the bank and carried away a large amount of cash, ornaments and other articles pledged with the bank. The Revenue urged, relying on the observations in Daga's case, : 34ITR10(SC) , that such loss, though a business loss, was not one in the course of business, as the risk of burglary is not incidental to the business of banking. For the assessee, learned counsel Sri Viswanatha Sastri contended that the money lost by burglary was the stock-in-trade of the banking business, that the risk of its loss was incidental to the carrying on of the said business and that, therefore, the amount lost was a trading loss liable to be deducted under Section 10(1) of the Act.
The Supreme Court, however, was prepared to treat the embezzlement of money of money-lender by an agent as well as the loss of money kept in a safe by a bank, through dacoity, as a loss which would be incidental to their respective business. Holding that whether loss is incidental to the operation of a business or not, is a question of fact to be decided on the facts of each case, the Supreme Court stated at page 715 (of ITR) = (at p. 1231 of AIR):--
'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, dacoity 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'.
(5) It is necessary to point out that except for an observation at page 712 of the report in (ITR) = (at pp. 1229-1230 of AIR) in the Nainital Bank's case, : 55ITR707(SC) , that in the case of a Bank the deposits received by it formed part of its circulating capital and at the time of the theft formed part of its stock-in-trade, there is absolutely no indication in that judgment or in the judgment in Daga's case, : 34ITR10(SC) , that the Supreme Court considered the loss of money in such cases on the same footing as the loss of the stock-in-trade of a businessman, who for the purpose of calculating his profits and gains has necessarily to take into account the value of the stock-in-trade at the beginning of the accounting year and the value of the stock-in-trade at the end of the accounting year and make provision for the incomings and outgoings in the course of the year by adding them or subtracting them as the case may be.
In other words, the Supreme Court in these two decisions was concerned with loss of money in regard to which no further computation of its value for the purpose of accounting procedure was necessary. Loss of money of a money lender or a bank whether by embezzlement or theft or dacoity appears in the accounts only as a deduction of an amount to be written off as one coverable, but in the case of stock-in-trade lost by fire or other causes, it is not viewed as loss per se. The very procedure which enables the assessee to estimate his profits and gains requires that he should take into account his opening stock as well as closing stock, and in such computation, an allowance has necessarily to be made for stock-in-trade in part of whole to enable the true profits or true loss to be determined at the end of the year.
If the assessee is required, as the Revenue seeks to do in this case, to add to his profits and gains already computed in the above manner, a notional value for the loss of stock, it amounts to compelling the assessee to adopt something which his accounting procedure-recognised as a valid trading practice in the decisions cited earlier-does not permit him to do. It is also interesting to note that in : 55ITR707(SC) , the decision in : AIR1958Bom461 , was cited, but the Supreme Court has not expressed disapproval of the principles stated in Pohoomal's case, : AIR1958Bom461 , which adopt the principles of accounting as the two criterion, where the stock-in-trade lost is not money, but goods.
(6) In the present case, the appellate Tribunal has clearly found that the properties of the assessee in Malaya, which were destroyed by enemy bombing in December 1941, were part of his stock-in-trade. In paragraphs 6 to 8, the Tribunal has discussed at length this aspect of the case before it came to the above conclusion. There was no attack before us by the Department on this finding, and, therefore, the finding must be treated as conclusive. But the Revenue relied upon the short consideration that loss of goods forming stock-in-trade by enemy action must be viewed on the same footing as the loss of money of a bank or money-lender occasioned by theft or embezzlement and that such loss cannot be viewed as a risk incidental to the assessee's carrying on of business.
(7) For the reasons given above by us, we hold that the decision of the Bombay High Court in : AIR1958Bom461 , following the earlier decision of the Patna High Court in : 15ITR155(Patna) , set out the correct principles to be applied to this case, and we answer the question referred to us in favour of the assessee and against the department. The assessee will get his costs. Advocate's fee Rs. 250.
(8) Answered accordingly.