P L D 1963 (W (PLP)

INAMULLAH, J.-The following question has been referred under section 66 (1) of the Income-tax Act, (hereinafter called the Act), by the Income-tax Tribunal Karachi Bench, for our opinion "Whether in the facts and circumstances of this case the total loss of Rs. 16,645 sustained by the assessee as a result of the robbery committed by the driver on the assessee's account ant was an admissible deduction." The facts as disclosed in the statement of the case by the Tribunal are these :- The applicant carried on the business in. sanitary goods, marble pieces and other allied goods. On July 15, 1954 Ghulam Hussain, Accountant of the assessee was going to the-Custom House to pay the sum of Rs. 15,221- on account of the Custom dues of the sales tax. He was driven by Asghir Ali, driver of the applicant who at the point of knife robbed the accountant of he money and absconded. A sum of Rs. 1,424 was spent on tracing the driver. The assessee thus claimed a sum of Rs. 16,645 as deduction under section 10 of the Act. The Income tax Officer disallowed the claim. On appeal the Appellate Assistant Commissioner allowed the deduction claimed by the assessee. He allowed the amount claimed mainly on the ground that the loss had been incurred in the normal course of business. He held\that it was a trading loss and not a business expenditure.

2. The Income-tax Commissioner went' in appeal to, the Tribunal. It was contended on behalf of the Commissioner that loss ty robbery was admissible deduction under section 10 ,(1) of the Income-tax Act only if it wag shown that the loss was incidental to the business of the assessee. In the circumstances of the assessee's case, it was contended, the loss by robbery could not be said to be incidental to the business. The Tribunal had summed up its reasons for holding that the loss incurred by the applicant was not an admissible deduction as under :- "After giving our close consideration to all the authorities referred to above we have formed the opinion that in the cir cumstances of the instant case it is impossible for us to hold that the loss by robbery was incidental to the business of the assessee which is condition precedent for allowing such a loss under section 10 of the Income-tax Act. We hasten to add that 27 I T R relied upon on behalf of the assessee is not in point inasmuch as the point involved in that case related to defalcation by a cashier of the assessee who in the course of his assigned duty had to collect moneys from banks. While in the case in hand it is a case of robbery. As regards the decision in Motipur Sugar Factory Ltd. v. C. I. T. the facts of the case are clearly distinguishable from the facts of the present case, in that case it was held therein that the loss arose out of the business of the assessee and springs from the statutory necessity of sending money to various purchasing centres for distribution and the loss was consequently incidental to the business. To put it differently before claim for allowance can be allowed the assessee must prove that the loss was incidental to the business. Applying the above test to the instant case we do not see any remote connection much less close connection of the robbery with the business of the assessee which as already stated traded in sanitary goods etc. It is important to note that their Lordships in Motipur Sugar Factory Ltd. v. C.

1. T. (28 I T R) did not over rule the decision of Ramaswami Chettiar v. C. I. T. but approved of it as indicated in the following remarks at page 135 : "On behalf of the income-tax Department Mr. R. J. Bahadur strongly relied upon a decision of the Madras High Court in Ramaswami Chettiar v. Commissioner, of Income-tax, Madras. But that case is not really in point for the finding of the majority of the learned Judges was that the loss by theft was not incidental to business."

3. Before we consider the cases relied upon by the assessee and distinguished by the Tribunal, it is necessary that we should examine the principles that are in law applicable to the determination of the question whether money lost in the circumstances alleged by the assessee is allowable as deduction in computing the profits of a business under section 10 of the Act. It may at the very outset 41 mentioned that there is no express provision under section 10 of the Act permitting deduction of moneys embezzled by an agent or the loss that was incidental to the business of the assessee. Section 10 (2) of the Act enumerates various, items which are admissible as deductions. It would however appears from the Privy Council case in Commissioner of Income-tax v. Chitnavis (59 I A 290) that the enumeration of various items as admissible deduction under section 10 (2) is not exhaustive. The point for decision in that case was whether a bad debt could be deducted under section 10 (1) of the Act, there being in the Act, as it then stood, no provision corresponding to section 10 (2) (xi) for deduction of such a debt. In answering the question in the affirmative Lord Russell observed :- "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." The result is that when a claim is made for a deduction for which there is no specific provision under section 10 (2) what has to be seen is whether the deduction claimed can be said to arise in the course of the business and incidental to it. If that is established the deduction must be allowed provided there is no provision in the Act either express or implied. We would however emphasise that the loss for which deduction can be permitted under section 10 (1) must be one which is directly incidental to the carrying on of the business and not any loss suffered by the assessee. If for example, a theft is committed in the house of the assessee the loss suffered by the assessee cannot be said to be one incidental to the business. The loss in such a case is no doubt the loss of the assessee but not connected with or incidental to the business.

4. We would now proceed to examine the authorities distinguished by the Tribunal and those relied by Mr. Noorul Arfin in support of the contention that the total loss of Rs. 16,645 sustained by the assessee was not an admissible deduction. We have come to the conclusion,, after considering the various authorities which we propose to mention that only the sum of Rs. 15221 could be said to be the loss incidental to the business of the assessee and therefore could be deducted while computing the profits and gains of the assessee. The sum of Rs. 1,424 spent by the assessee in tracing out the driver cannot be said to be connected with the business of the assessee or incidental thereto.

5. The Tribunal has distinguished the case of Lord's Dairy Farm Ltd. v. Commissioner of Income-tax ((1957) 27 I T R 700) on the ground that in that case embezzlement was committed by the cashier of the Company who had in the course of his duties to Col ct money from bank. The distinction sought to be made out of its without any substantial different in the circumstances of the case of the assessee. The accountant was taking a sum of Rs. 15, 21 on account of the custom dues of the sales tax payable\under the Sales Tax Act to the Custom House. The accountant who was an employee of the assessee was taking the amount its relation to the business in order to clear the trading goods fro the Custom House. In Motipur Sugar Factory Ltd. v. C. I. T. ((1955) 28 I T R 128), an employee who had been entrusted with the funds of a Company for purpose of distribution among sugar cane growers in accordance with statutory rules was robbed of the money on the way. It was held that the loss was incidental to the conduct of the trade and must be allowed. This case had been distinguished by the Tribunal on the ground that it was the statutory duty of the Company to send money to various pur chasing centres for distribution and if an employee was robbed while carrying the money to the distributing centre it was incidental to the business. The distinction sought is not of much substance. In the assessee's case also he was required to pay the sales tax before he could clear the goods for trade. The requirement of the payment of sales tax was as much necessary to the proper functioning of the business as the sending of money to various purchasing centres for distribution.

6. The Tribunal had relied on the case of Ramasivami Chettiar v. Commissioner of Income-tax (A I R 1930 Mad. 808) in support of his contention that the deduction claimed by the assessee was not permissible. In that case the assessee was carrying on banking business in South India and Burma. Thieves broke into the strong room in the business premises of the assessee 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 that case Beasley C. J. stated the law as under :- "If anyone is paid a sum due to him as profit 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 put 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 by, is entrusted to a gumastah 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." We think that on the facts of that case no other view was possible except to hold that the loss was not incidental to the business of the assessee. On the other hand, certain observations in the judgment of Beasley, C. J. would support the contention of the learned Advocate for the assessee that the loss by the accoun tant of the money which he was taking for payment of sales tax dues was loss suffered by the assessee in the course of the business:

7. Mr. Ali Athar, the learned Advocate for the petitioner, had relief or. the case of Badridas Daga v. Commissioner of Income-tax ((1958) 34 I T R 10). In that case loss was sustained by the assessee by reason of embezzlement by an employee. The Supreme Court of India allowed the loss as a deduction admissible under section 10 (1) of the Indian Income-tax Act on the ground that in the circumstances of that case the embezzlement was incidental to the business. It would be useful to give the facts of that case in some detail. The agent of the firm who committed the embezzlement held a power of Attorney conferring on him large powers of management including authority to operate on bank accounts. The agent withdrew from the firm's bank accounts sums aggregating to over two lakhs and applied them in satisfaction of his personal debts incurred in speculative transactions. The Supreme Court came to the con clusions that when once it was established that the agent was incharge of the business, that he had authority to operate on the bank account, and that he withdrew moneys in the purported exercise of that authority, his action is referable to his character as agent and any loss resulting from misappropriation of funds by him would be a loss incidental to the carrying on of the business.

8. Mr. Noorul Arifin, the learned Advocate for the Income-tax Commissioner, relied on the case of L. N. Gadodia & Co. ((1934) 2 I T R 322) in support of his contention that loss of cash as a result of dacoity on the assessee's firm by an employee with the assistance of and collusion with others cannot be deducted in computing the profits of the firm. We do not think it necessary to comment upon the decision in that case as it would depend upon the facts and circumstances of each individual case whether the loss suffered by the assessed was incidental to the business or not. The discussion in that case would show that the learned Judges were considering the provision of section 10 (2) of the Act. The relevant observation runs as under :- "This is the case of an assessed who carried on business of piece goods and for that purpose accepts deposits from various people and pays interest on those deposits, the money being used in the business. No money lending business is carried on, so that, if there is any force in the contention that money would be the stock-in-trade of such a busi ness it does not arise in the present case. It is certainly not the stock-in-trade of the business described, nor was it expenditure necessary for carrying on the business or for the purpose of earning the receipts. The loss was clearly a loss of capital and no allowance can be made for it while it was not claimed that it fell within any, of the clauses given in sec tion 10 (2) of the Act," We are not called upon to hold whether in the circumstances of that case it could be said that the dacoity committed of the firm's cash was incidental to the business or not. It is sufficient to state that the circumstances of this case are quite different.

9. Reliance was placed by the learned Advocate for the Department on the case of Bansidhar Onkarmal v. C. I: T., Bihar and Orissa, ((1949) 17 I T R 247). In that case the assessed who carried on the business of selling yarn, speculating on cotton and money lending claimed deduction of a certain sum which was stolen from an iron safe inside his shop by one of his relations who was also working as an accountant of his firm. After the shop was closed at about 8 p. m. the employee secured the keys of the shop, entered it and removed the sum. The Tribunal found that the money kept in the safe was the stock-in-trade of the money lending business and not the capital. It was held that the deduction claimed was not either a trade loss or expenditure laid out or expended wholly and exclusively within the meaning of section 10 (2)(xv) of the Indian Income-tax Act. On the face of it, it could not be said that the act of the employee was in any way incidental to the business. In that very case one of the Judges observed that the position might have been quite different if the theft had occurred during office hours prior to the crediting of the sum to the account of the employer.

10. The principle deducible from the various authorities retied upon at the Bar comes to this that in order that an assessee may claim a deduction on account of loss suffered by him in computing the profits and gains of the business, he must establish that the loss was incidental to the carrying on of the business. In the Supreme Court case of Badridas Daga cited above a passage is reproduced from Snelling's Dictionary of Income-tax and Super Tax Practice which runs a; under :- "If a loss of embezzlement can be said to be necessarily incurred by carrying on the trade it is allowable as deduction from profits. In an ordinary case it springs directly from the necessity of deputing certain duties to an employee, and should therefore be allowed." It is almost impossible to give an all comprehensive definition as to when a loss can be said to be incidental to the business. It would depend upon the circumstances of each case whether the loss that the assessee suffered was so connected with the business as to entitle him to a deduction while computing his profits and gains. In the present case in order to clear the goods, in which the assessee was dealing from the customs it was necessary to pay the sales tax and other dues. The accountant took a sum of Rs. 15,221 and proceeded towards the Customs House for payment of Custom dues. The act of the accountant in taking the money for payment of customs dues was wholly connected with the functioning of the trade of the assessee. The assessee could not carry on his business unless he was able to clear the goods from the customs which was the stock-in-trade. We are of the view that the loss of Rs. 15,221 that the assessee sustained was in the course of the performance of the duty by the accountant who was proceeding to pay the custom dues in order to clear the stock-in- trade. We are however of the view that the sum of Rs 1,424 which the assessee spent on tracing the driver who had committed the robbery cannot be said to be incidental to the business. It was not the duty of the assessee to trace the driver. It was for the police to search for the accused.

11. We would, for the reasons given above, answer he reference as under :- In the facts and circumstances of this case the sum of Rs. 15,221 only and not the total loss of Rs. 16,645 sustained by the assessee as a result of the robbery committed by the driver on the assessee's accountant was an admissible deduction. Reference answered accordingly.