1. This case relates to the assessment year 1960-61. The assessee was a dealer in semi-precious stones at Colombo. On February 18 and 19, 1960, he purchased a total of 750 Feutura and Romer watches for Rs. 33,125. On the night of February 19, 1960, at about 10 p. m. while he carried the watches in a bag from his shop to his house, two police constables stopped him and forcibly removed the bag from his possession. On a complaint by him to the police and as a result of investigation, 489 watches only were recovered from the police constables and restored to the assessee. These watches he sold in the course of the next year, the profit of which was treated as business income and brought to tax. The theft of the remaining watches resulted in a loss of Rs. 13,271. For the year in question, the assessee returned an income of Rs. 1,040 from the Colombo business, which was computed after deducting the loss. These facts are not in dispute. The Income-tax Officer declined to allow it as a business loss on the view that the watches did not form part of the assessee's stock-in-trade and that further the theft did not occur in his business premises or during business hours. The Appellate Assistant Commissioner differed and held that in view of the fact that in the subsequent year the profit made by the assessee out of the sale of the watches was treated as businessincome, the watches should be regarded as constituting his stock-in-trade. He remarked that the number of watches in the possession of the assessee by purchase was not acquired by him for the pride of possession nor as a collection of curios. In his view, since the loss of the stock-in-trade occurred during the course of the assessee's business, it should be allowed. The Tribunal substantially concurred in that view, though its reason was influenced by Pohoomal Bros. v. Commissioner of Income-tax, (1) : 34ITR64(Bom) . The Commissioner of Income-tax has now brought up this reference and the question for our consideration is:
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that a sum of Rs. 13,271 was an allowable loss ?'
2. Business loss resulting from deprivation by theft or enemy action or by other means of stock-in-trade of an assessee is not covered for allowance by any of the specific items under Section 10(2) of the Income-tax Act, 1922. But it is well recognised by now that all the same, business loss should be allowed as a deduction in the computation of the profits and gains of business under Section 10(1) itself. But what tests or principles should govern granting of such allowance will presently be considered. For the revenue it has been suggested that the assessee being a dealer only in semiprecious stones, the watches lost could not be regarded as stock-in-trade of the assessee. We are wholly unable to accept this view. That the assessee was engaged in dealing in semi-precious stones did not mean that at the same time he could not pursue the business of dealing in watches. The very quantity of the watches which he purchased by two instalments itself shows that it should have been for trading purposes. Surely, no man would purchase as many as 750 watches for his personal use, whatever might be the extent of his fad for such watches. Also we have this fact that in the very next year, the watches recovered from the constables, numbering 489, were sold by him at a profit, which was promptly brought to tax by the revenue as business income. We have no doubt from these premises that the watches constituted the stock-in-trade of the assessee.
3. On behalf of the revenue, the next argument is that the loss by theft committed by the constables was not a business loss. The loss occurred to the assessee on his way from his business premises to his house and at late hours. We are told, therefore, that the loss was not connected with any trading in watches or incidental to it, and that there was really no nexus between the loss of the watches with his carrying on business in such watches. That takes us to the question as to when and in what circumstances an allowance as for business loss can be granted under Section 10(1). That provision merely speaks of tax being payable on theincome of an assessee from a business carried on by him. Prima facie the language of this provision does not seem to suggest any positive test for grant of allowance as business loss. But this much seems from it to be required. The profits and gains should be from the business and it should be one carried on by the assessee. It follows from this that, if a loss is claimed as an allowance, it must be connected with or related to the business carried on by the assessee and the profits or gains made thereout. In England, the law seems to have been developed from a statutory provision enabling business loss as a deduction. Strong and Company of Romsey Ltd. v. Woodifield ,  5 T.C. 215, is one of the earliest cases, and the Lord Chancellor, with whom the other law Lords concurred in the result, stated:
'I think only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself. They cannot be deducted if they are mainly incidental to some other vocation, or fall on the trader in some character other than that of trader.'
4. The two requisites therefore are: (1) the loss is incidental to the trade itself, that is to say, there must be a nexus between the loss and the trade which should have been incurred in the course of the trade ; and (2) the loss should have been incurred by one in the character of a trader and the same should fall on him in that character. That English case related to a brewery company which owned an inn and which conducted the business through a manager. By the falling of a chimney upon a sleeping customer in the inn, he was injured, and the brewery had to pay a sizable sum of money to him in costs and damages because of the fall of the chimney due to the negligence of its servants, whose duty it was to see that the premises were in proper condition. The Court of Appeal were of opinion that the loss sustained by the brewery was not incidental to its trade as an inn-keeper and that it did not fall on it in its character as a trader but of a house-holder. One of the learned law Lords doubted whether that would be a proper conclusion, but eventually felt that his doubt was not so strong as to enter a dissent. This doubt only illustrates how in later cases diverse views have been possible in granting or refusing allowance of business loss in a particular set of facts. Nevertheless, it seems to us that the principles to govern such allowance or grant do not appear to be in doubt since the decision in Strong and Company of Romsey Ltd. v. Woodifield. Rowlatt J. in Commissioners of Inland Revenue v. E. C. Warnes and Co. Ltd.,  12 T.C. 227, 231 did not gain very much by going through a number of analogies in reported cases, but accepted the principles in Strong and Company of Romsey Ltd. v. Woodifield, though he used a different phraseology in doing so, namely:
'I think that a loss connected with or arising out of a trade must, at any rate, amount to something in the nature of a loss which is contemplable, and in the nature of a commercial loss.'
5. But the learned judge wanted to be cautious in using that phraseology and fortified himself by stating that he did not intend to be exhaustive in his definition of a business loss. On the facts, that was a case of certain individuals carrying on a business of exporting oil to Norway among other places and in connection with the export of a certain cargo, it was alleged that they incurred penalties under the provisions of the Customs (War Powers) Act, 1915. They were sued for a very large sum, but, by consent, judgment was taken for a mitigated penalty. The question was whether this could be allowed as a business loss, which Rowlatt J. answered in the negative. In his view, the loss could not be said to be one connected with or arising out of the trade, that is the business of exporting oil to Norway. We do not propose in the present reference to examine Rowlatt J.'s approach that the loss should be one contemplable. We hesitate to accept it without further examination, because, as advised at the moment, there may be a loss which may not be contemplable, but at the same time may well be treated as a business loss eligible for deduction in computing the taxable profits or gains of a business.
6. A reference to cases decided by the High Courts and the Supreme Court in this country does show the general acceptance of the English test we just referred to as correct and workable, that is to say, the loss must be one connected with the trade in the sense that it must be incidental to trade and should have been incurred in the character of a trader who bears the loss. Pohoomal Bros. v. Commissioner of Income-tax related to a claim to deduction of loss resulting from deprivation of stock-in-trade as a result of enemy invasion. In allowing the deduction, Chagla C.J., who spoke for the Division Bench of the Bombay High Court, gave the following reason :
'Therefore, in this case, this particular stock-in-trade, instead of realising a certain cash equivalent, did not realise anything at all; and from this point of view, the cause of the loss is irrelevant. Whatever may be the cause for the loss of the stock-in-trade, the essential fact to bear in mind is that the stock-in-trade has gone out of the business and it so happens that the stock-in-trade has realised no cash . . . Any loss caused to the stock-in-trade must in its very nature be a loss incidental to the trade. . . '
7. As in this case, so in S. N. A. S. A. Annamalai Chettiar v. Commissioner of Income-tax, : 67ITR584(Mad) , which dealt with facts similar to Pohoomal Bros. v. Commissioner of Income-tax, it does not appear that the principle as earlier set out by us was disputed, but in its application there was perhaps a wider approach to it than justified by the test of the loss being connected with and incidental to the trade. In S.N.A.S.A. Annamalai Chettiar v. Commissioner of Income-tax, the crux of the reasoning for allowing a business loss is stated to be :
'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 destroyed in part or whole to enable the true profit or true loss to be determined at the end of the year.'
8. So put, the proposition, as it seems to us, with due respect, has been rather widely stated, the effect of which would be that every loss of the stock-in-trade, whatever the circumstances, should be regarded as a business loss. That, we think, may perhaps be not justified either on the language of Section 10(1) or the principle so well settled now that a loss to be allowed as a business loss should be, as we have said, connected with the trade or business in the sense that it should be incidental to it and that the loss should further fall on or be borne by the trader in his character as a trader. The decision in S. N. A. S. A. Annamalai Chettiar v. Commissioner of Income-tax has in our view to be only understood as laying down that, in the particular circumstances of that case, the loss was a business loss according to that principle. In our opinion the tests or principles laid down in Commissioner of Income-tax v. Nainital Bank Ltd. cannot reasonably be confined to embezzlement or misappropriation or theft of cash in bank cases, where by the rules entrustment of cash, to employees or agents is necessary or unavoidable in carrying on the banking business. Commissioner of Income-tax v. Nainital Bank Ltd., : 55ITR707(SC) was no doubt a case of dacoity by which moneys belonging to the banking company were lost to it when they were on their transit in the usual course of the business. But the Supreme Court in that case examined the decided cases relating to loss incurred by persons other than banking companies, and summed up the legal position as follows :
'We may now summarize the legal position thus. Under Section 10(1) of the Act, the trading loss of a business is deductible for computing the profit earned by the business. But every loss is not so deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. Whether loss is incidental to the operation of a business is a question of fact to be decided on the facts of each case, having regard to the nature of the operations carried on and the nature of the risk involved in carrying them out. The degree of the risk or its frequency is not of much relevance but its nexus to the nature of the business is material.'
9. These are words, general in character and not confined to the particular facts of that case, and the tests which the Supreme Court has thus summarised are, if we may say so with due respect, in conformity with the cryptic statement of the proposition in Strong and Company of Romsey Ltd. v. Woodifield and Commissioners of Inland Revenue v. E. R. Warnes & Co. Ltd., but with further and clearer exposition of the position.
10. In our opinion, any business toss to be allowed as a deduction under Section 10(1) should satisfy the tests laid down by the Supreme Court in Commissioner of Income-tax v. Nainital Bank Ltd. The question is whether, in the present reference, the loss has been improperly allowed. In our opinion, it has not been. Once it is granted, as indeed we have held, that the watches constituted the stock-in-trade of the assessee, we are unable to accept the revenue's point of view that the loss of a part of the stock-in-trade was traceable only to the assessee observing late hours. No doubt, he had observed late hours, but we do not think that the revenue can complain about it or give it as a reason for disallowing the claim for deduction. When the assessee carried the watches from his business premises, which was mainly used for dealing in semi-precious stones and perhaps was not suited for safe-keeping of the watches, the assessee was not, in doing so, actuated by personal considerations unconnected with his business. The quantity of watches, as many as 750, surely showed that he was carrying them to his house at the late hour for the purpose of safe keeping. We think that this can be reasonably inferred from the facts and the surrounding circumstances. If policemen waylaid and deprived him of the watches, that was a risk which the transit of the watches for safe keeping necessarily or incidentally involved. In our view, therefore, the transit of the watches by the assessee from his business premises to his residence was a business operation and the loss of the watches in the course of the transit by theft was in that sense incidental to the carrying on of the business in watches. It is not possible to accept the revenue's contention that the loss was totally unconnected with the assessee's trade or was in no way incidental to the trade.
11. We answer the question referred to us against the revenue with costs. Counsel's fee Rs. 250.