P L D 1962 (W (PLP)

S. A. MAHMOOD, J.-In this reference under section 66 (1) of the Income-tax Act the following question has been referred to us for opinion "Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the claimed loss was not incidental to the assessee's business so as to be admitted as a deduction fn determining the assessable income under section 10 (1) of the Act." 2. The Australasia Bank Limited, Lahore, the assessee, is a banking concern. The year of assessment is 1950-51, and the account year 1949-50. On the 20th of April 1949, a consider able sum of money was sent from the Kashmiri Bazar Branch of the bank to the State Bank of Pakistan, Lahore, for being deposited there through Hamid-ur-Rahman, Chaukidar, who was accompanied by a peon. They brought the money back after sometime and told the manager that the State Bank could not accept the money, owing to rush of work. The money was then locked in the safe of the bank, of which the Manager and the Cashier had the keys. The Chaukidar was on duty at the premises during the night. On the following day, namely, the 21st of April 1949, when the Manager went to the Bank to supervise some repairs, which were being carried on, the Chaukidar was not found at the premises. After waiting for him for some time, he had the door of the bank opened, and found on entry that the safe was unlocked. The inside drawers of the safe were open, and its contents missing. A sum of Rs. 2,87,924-2-0 in cash and some ornaments pledged with the bank had been removed. The total loss amounted to Rs. 2,99,872. The Manager reported the matter to the police on the same day. 3. The Chaukidar could not be found, but one Rahmat ullah, an employee of the bank at the material time, was prosecuted on charges under sections 302 and 411 etc. of the Pakistan Penal Code, but was acquitted by the learned Sessions Judge on the ground that the charges had not been brought home to him. On account of this theft, the assessee claimed to deduct the amount from its income and profits under subsection (1) of section 10, though the theft was admitted and it was also conceded that the money and ornaments that were lying in its branch, were the assessee's stock-in-trade, and their theft was a trade loss, but it was not allowed by the Income-tax Officer, the Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal on the ground that it was not incidental to the conduct of the assessee's business. (The Appellate Tribunal observed that the loss could be allowed as a trade loss in determining the asses see's taxable property under section 10 (1), provided, however, that the claimed loss is incidental to the conduct of the assessee's business). In coming to this conclusion the Tribunal relied on Bansidhar Onkarmal v. Commissioner of Income-tax. Bihar and Orissa (17 I T R 247), S. P. S. Ramaswami Chettiar and others v. The Commis sioner of Income-tax, Madras (4 I T C 438), Mulehand Hiralal v. Commissioner of Income-tax, Bihar and Orissa (6 I T R 151) and L N. Gadodie & Company In re: ((1934) I T R 322). 4. On behalf of the assessee on the other hand, reliance before us is placed on Pohoomal Bros. v. Commissioner of Income -tax, Bombay City (34 I T R 64). 5. Before dealing with the above cited authorities, from which no uniform principle as to what is loss incidental to business, can be derived, it is convenient to set out subsection (1) of section 10 of the Act which 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." We are concerned in this case with a business carried on by a bank. Subsection (2) provides for the several allowances to be made for computing the profits and gains of a business, but with them we are not concerned and it is not necessary to mention them. The basic principle underlying subsection (1) of section 10 is that tax is payable by an assessee under the head "Profits and gains of business, profession or vocation" in respect of its profits and gains. It should, therefore, be obvious that in computing `profits and gains' of business, the stock-in-trade plays a very important role, as it constitutes the nucleus of the business. 6. The stock-in-trade of a trader constitutes the very basis for his carrying on his business for earning profits. If he makes profits out of that stock-in-trade, he must pay tax ; if he makes losses, he is entitled to deduction. The accounts, which a trader maintains of the stock-in-trade, is ordinarily maintained in the following manner. He shows the opening balance at the beginning of the year and the stock-in-hand ; he debits various purchases made ; and he credits various sales effected. At the end of the year, he shows the stock-in-hand either at the market value or at cost price, according to the system which he maintains. It is from the accounts so maintained that it is possible to determine whether at the end of the year, the trader made profit or loss. Whatever stock-in-trade may be sold out is brought into the account as the cash equivalent of the stock-in-trade ; but the stock-in-trade goes out of that account. If the cash equivalent is higher than the book value, the trader profits and so does the Taxing Department. If the cash equivalent is less than the book value, the trader loses, and so does the Taxing Department. If that be the true principle then what difference does it make, if instead of realising a particular value, be does not realise anything at all? To that extent the trader's loss is greater 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. It was forcefully pointed out by Chagla, C. J. in Pohoomal Bros. v. Commissioner of Income-tax, Bombay City ((1958) 34 I T R 64) that it is illogical that if the stock-in-trade has realised a certain sum, we could have assessed the loss, but if the stock-in-trade realised nothing, the trader is not entitled to that deduction. Any loss caused to the stock-in-trade must in its very nature be a loss incidental to the trade, and, therefore, when the authorities speak of a loss being incidental to the trade, they never contemplate a case in which the stock-in-trade itself is destroyed. 7. With regard to the loss, which can be allowed, Lord Loreburn, Lord Chancellor in Strong & Company of Romsey Ltd. v. Woodfield ((1906) A C 448) at page 452 states as follows: - "In my opinion, however, it does not follow that if a loss is in any sense connected with the trade, it must always be allowed as a deduction ; for it may be only remotely connected with something else quite as much as or even more than with the trade. 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 of the trader. The nature of the trade is to be considered. To give an illustration : losses sustained by a railway company in compensating passengers for accidents in traveling might be deducted." Thus the principle laid down by the Lord Chancellor was that such losses as are connected with the business in the sense that they are really incidental to the trade itself and are not remotely connected with it can be deducted, and the illustration that he has given clearly brings out what losses are connected with and are incidental to the trade and have to be deducted. The loss of stock-in-trade falls within this category whatever may be the reason for the loss, namely theft, robbery or embezzlement. As pointed out by the Lord Chancellor many cases might be near the line and no decree of ingenuity can frame a formula so precise and com prehensive as to solve at sight all the cases that might arise. The loss must no doubt be in the nature of a commercial loss. Whether that loss is incidental to the business must be decided with reference to the circumstances of a particular case. Butt ordinarily, a trading loss or a loss of stock-in-trade is connected with business and is incidental thereto. If premium paid for insuring goods and stocks is allowed in case of a business, and any sum received from the insurer in case of a loss of the stock-in-trade is to be brought to the books and treated as income, if embezzle ment by an employee or servant of sums entrusted to him in the ordinary course of business and thefts of stocks incidentally to the trade, and bad debts which have become unrealisable are to be deducted, then there is no reason why the loss of stock-in-trade whether by theft, robbery or dacoity should not be allowed. It may be that the stock-in-trade is lying at the premises and there is a robbery or theft or it may be that it is lying in a godown or even at the house of an assessee but so long as it remains its stock-in-trade and has been lost to the trader, it must be adjusted in computing profits and gains. The cases in which the stock in trade has been converted into cash or capital or the: cash has been appropriated by the assessee to his private use stand on a different footing. There the loss is not of the stock- in-trade. Capital loss is not loss of stock-in-trade and money appropriated to private use no longer remains the stock-in-trade. If this principle is borne in mind, there is no difficulty in computing profits and gains of a business under subsection (1) of section 10. 8. In the present case, a large amount of money and jewellery was kept by the bank in the bank's safe which it has to do in the ordinary course of business. It has been held by the Income-tax authorities that the cash and the ornaments constituted the assessee's stock-in-trade and were a trade loss. They were stolen from the premises of the bank by means of theft or robbery at night and 9n the circumstances of the case it must be held that the loss was connected with and incidental to banking business. The conduct of banking business involves a risk that its cash which it handles daily, and pledged ornaments may be robbed, stolen or embezzled and it is a risk which every bank runs in the ordinary course of business. The bank takes precau tion against it but nonetheless the risk is there. The question whether the thefts and robberies are very common or uncommon is hardly material. In the circumstances of the case, there is no doubt that the loss of stock-in-trade was Incidental to the business and the assessee was entitled to its deduction in calculating the profits and gains of the business under subsection (1) of section 10 of the Act. 9. We may now notice the authorities relied upon by the Income-tax Appellate Tribunal. In the first case Bansidhar Onkarmal v. Commissioner of Income-tax, Bihar and Orissa (17 I T R 247), the assessee carried on business of selling yarn, speculating in cotton and money-lending. He claimed a deduction of a certain sum, which was stolen from an iron safe inside his shop by one of his relations, who was working as accountant of the firm. After the closing of the shop the employee secured its keys, entered it, opened the safe and removed the sum. The sum was disal lowed on the ground that there was no evidence that the money kept in the safe was stock-in-trade of the money-lending business and was not his capital. In dealing with this, the learned Judges held that the theft having been committed after the closing of the shop was not in the course of employment, and was not incidental to the conduct of the business. Since it was held that the loss was not of the stock-in-trade, the case is distinguishable from the present case. It may be mentioned that it was observed by the learned Judges that the position might have been different if the theft had occurred during office hours prior to crediting the sum to the account of the employer. If one may say so with respect the distinction drawn by the learned Judges is quite subtle. 10. In the second case S. P. S. Ramaswami Chettiar and others v. The Commissioner of Income-tax, Madras (4 I T C 438), the facts were that certain persons broke into the strong room of a house occupied by the assessee and two other firms and stole cash and currency notes and some jewellery. The house was used partly for business of the firm and partly as residence. The assessee claimed the amount of the loss as expenditure of the business for computing the profits of the particular branch. The claim was disallowed on the ground that the loss was of a capital nature, there being no evidence that the sum lost was stock-in- trade of the business. It was observed that the money lost appeared to be capital plus profits collected by the assessee and that if the money was capital, then the assessee would not be entitled to a deduction on account of the loss. This case Is also, therefore, distinguishable from the present case. The learned Chief Justice, however, observed that if the collection of profits or payments of debts due to the assessee was entrusted to a gumashtah or servant and that person ran away with the money or dealt with it improperly, the assessee could be allowed a deduction, because such a loss would be Incidental to his business, as he had to employ servants and there is the risk that such servant may prove to be dishonest and may convert the amount to his own use. Curgenven, J. agreeing with the learned Chief Justice held that the money lost no longer formed part of the stock-in-trade. He also observed that in order to recognise a loss as being incidental to the trade it must be found not only that the cash had to be kept on the premises, but that its loss by theft was a circumstance which was so far probable as to be an occurrence incidental to, if not inseparable from, the manner in which it had to be kept and that comparative likelihood of the occurrence of thefts had to be considered in relation to the business before it could be said to be connected with the trade. With all respect to the learned Judge, we find it difficult to agree with him. Ananthakrishna Aiyar, J. differed from the other two learned Judges, and having discussed a number of English authorities held that each case bad to be decided with reference to the facts and' circumstances relating thereto having regard to the nature and methods of the trade or business in question. He held the assessee entitled to deduction if the loss be something In the nature of a commercial loss. 11. In the third case Mulchand Hiralal v. Commissioner of Income-tax, Bihar and Orissa (6 I T R 151) the assessee sent a sum of money through one of his employees to a bank, and on the way it was stolen by a collie from the employee. It was held that the assessee was not entitled to have this amount deducted from his profits for the purposes of assessment to income-tax for the reason that the loss did not take place in the accounting year. This fact clearly distinguishes the case from the present case. 12. In the fourth case L. N. Gadodie & Company In re : (1934 I T R 322) decided by Addison and Sale, JJ. the assessee carried on business in piece-goods and had accepted deposits from various people using the money in his business and paid interest thereon, but the money was not used for purposes of money-lending. A sum of Rs. 14,440 in cash was lost as a result of a dacoity from the premises of the firm by an employee with the aid and assistance of others. The assessee claimed deduction of this amount under subsection (1) of section 10 and not under subsection (2) of section 10. The loss was disallowed on the ground that it was a loss of capital. This conclusion was arrived at on the ground that the money used for piece-goods business could not be treated as stock-in-trade of the business, nor was expenditure necessary for carrying on the business, or for purposes of earning receipts. It will be seen that none of the cases relied upon by the Tribunal for disallowing the loss are cases of loss of stock-in-trade, as is the case before us. 13. In view of what we have stated above we hold that the assessee was entitled to claim the loss as being incidental to the assessee's business, so as to be admitted as a deduction in determining the assessee's profits and gains under section 10 (1) of the Act. Our answer, therefore, to the question referred to us for opinion is in the negative. The Department shall pay the costs of the assessee. Reference answered to negative.