P L D 1966 Supreme Court 540 (PLP)

S. A. RAHMAN, J.‑At the instance of the respondent‑assessee, the following question was referred under section 66 of the Income‑tax Act, by the Income‑tax Appellate Tribunal, to the West Pakistan High Court, Karachi Bench:‑ "Whether in the facts and circumstances of this case the total loss of Rs. 16,645.00 sustained by the assessee as a result of the robbery committed by the driver on the assessee's accountant was an admissible deduction?" The High Court answered the reference by saying that out of the total loss of Rs. 16,645 a sum of Rs. 15,221 could be allowed, as a deduction from the profits of the assessee. The Commissioner of Income‑tax obtained leave to appeal, from the order of the High Court, as the question raised was one of first impression, so far as this Court was concerned. The background of facts which necessitated the reference may first be described. The respondent‑assessee is a proprietary concern, carrying on the business of sanitary goods, marble pieces and allied articles. On the 15th of July 1954, Ghulam Hussain, Accountant of the assessee‑concern was sent to the Custom House, Karachi, with a sum of Rs. 15,221, in order that the sale‑tax duty might be paid to the Custom authorities, in respect of certain goods which had to be cleared from the customs. He was driven by Asghar Ali, another employee of the firm, who, on the way, robbed the Accountant of the money, at the point of knife and absconded. The respondent spent a sum of Rs. 1,424 in attempts to trace out the driver. Thus, in all Rs. 16,645 was claimed as a deduction under section 10 of the Income‑tax Act, hereinafter referred to as the Act. The claim was disallowed by the Income‑tax Officer. On appeal, the Appellate Assistant Commissioner, reversed the decision and directed that the deduction be allowed, on the view that the loss bad been incurred in the normal course of business, and therefore, constituted a trading loss. This decision was challenged, on behalf of the Income‑tax Commissioner, before the Income‑tax Appellate Tribunal. The appeal succeeded on the ground that the loss by robbery in the circumstances of the case was not incidental to the business of the assessee. The High Court have pointed out in their order that there is no express provision contained in section 10 of the Act, providing for deduction of money embezzled by an agent, or loss incidental to the business of an assessee. Subsection (2) of section 10 of the Act enumerates several items, which are admissible deductions, but a deduction, on account of misappropriation or robbery finds no mention therein. After reviewing the case‑law on the subject, the High Court came to the conclusion that, if the loss in question could be said to arise, in the course of business and was incidental to it, deduction should be allowed, provided there is no provision in the Act, either express or implied, forbidding such a course. In the instant case, it was found that it was necessary for the assessee‑firm to send the money that was lost by the robbery, to pay the sales‑tax and other dues, through some employee and therefore, the act of the Accountant, in taking the money as he did, was wholly connected with the trade functions of the assessee. The sum of Rs. 15,221 consequently, was held to have been lost, in the course of a transaction which was incidental to the assessee's business, but the sum of Rs. 1,424, alleged to have been spent on tracing out the driver, was disallowed. In the opinion of the learned Judges, the duty of searching for the culprit lay on the police and not on the assessee. Subsection (1) of section 10 of the Act declares that 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. As was pointed out by Lord Russel of Killowen, in Commissioner of Income‑tax v. Sir S. M. Chitnavis (1), "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. But the losses must be losses incurred in that year". For this computation, ordinarily commercial methods have to be kept in view, in order to arrive at the balance of profits and loss for the year. Even though, therefore, there may be no specific provision in the law, providing for the deduction claimed in this case, such a deduction would be permissible under subsection (1932) 59 1 A 291) of section 10 of the Act, provided that the loss in question is found to be incidental to the business of the assessee and therefore, a trading loss. On behalf of the Commissioner of Income‑tax, reliance was placed by Mr. Muhammad Akram, on one English authority and some decisions from the Indian jurisdiction, both pre‑Partition and post‑Partition. The first case, to which our attention was invited, is Curtis v. Old-field (9 T C 319). The facts of that case were that the Managing Director of a Company of wine and spirit merchants was, for many years up to his death on the 8th February 1919, in sole control of the Company's business. An investigation after his death showed that many payments and some receipts, not relating to the Company's business but to his private affairs, had been passed through the Company's books, and that a sum of 14,000 odd was due from his estate to the Company, as to the 8th February 1919. This sum was written off as a bad debt in the Company's accounts, covering sixteen months, ending on the 30th June 1920. The General Commissioners, on appeal, allowed the Company's claim to deduct the amount in question in computing its profits for the relevant period, for assessment of income‑tax, holding that the loss was a bad debt that had arisen in the course of the Company's trading. The King's Bench Division of the High Court, however, ruled per Rowlatt, J., that there was no evidence to support the Commissioners' findings and that the loss was not a trading loss. Rowlatt, J., pointed out that the Commissioners had allowed themselves to act under the impression that they were taxing the Company on what the Company in a loose way had made and secured. He observed that what had happened was that the Managing Director had made away with the receipts of the Company dehors the trade altogether, in virtue of his position as Managing Director in the office and being in a position to do exactly what he liked. The learned Judge drew a distinction between assessment of the Company and of the profits of the Company's trade and arrived at the conclusion that there was not the least ground for supposing that the losses of the sums involved were losses in the trade. Referring, however, to the contention raised on behalf of the assessee, the learned Judge observed as follows:‑ "I quite think, with Mr. Latter, that if you have a business (which for the purposes of today at any rate I will assume) in the course of which you have to employ subordinates, and owing to the negligence or the dishonesty of the subordinates some of the receipts of the business do not find their way into the till, or some of the bills are not collected at all, or something of that sort, that may be an expense connected with and arising out of the trade in the most complete sense of the word." The general principle thus laid down may not perhaps be exhaustive of all cases of this kind, but may be accepted as a working guide for the purposes of the present case. The next case on which reliance was placed on behalf of the Commissioner of Income‑tax is reported as Ramaswami Chettiar v. Commissioner of Income‑tax (A I R 1930 Mad. 808). In that case, a loss, incurred by theft of money used in the money‑lending business of the assessee, from the strong‑hold in the business premises (none of the thieves being then servant of the assessee), was held to be not incidental to the business of the assessee and was, therefore, not allowed as a deduction, while computing the income of the assessee for the purposes of income‑tax. Two of the learned Judges, who constituted the Bench delivered this opinion, but the third learned Judge, Anantakrishna Ayyar, J., took the contrary view. Beasely C. J., referred to a hypothetical case in order to elucidate the principle involved. He remarked that: "If anyone is paid a sum due to him as profits 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." The learned Chief Justice, however, proceeded to observe: "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." Reference was next made to a judgment of the Lahore High Court In re: L. N. Gadodia & Co. (1934) 2 1 T R 322). In that case, the assessee's sources of income were import and sale of piece‑goods, commission agency, interest on securities, dividends and property. During the year of account, certain dacoits armed with pistols, with the assistance of an employee of the assessee, had entered the assessee's office where the cashier and the munim were counting and totalling the realisations of the day and carried away Rs. 14,440 by force. There was no evidence to show that the assessee carried on money‑lending business, or banking though he used to receive moneys from others on interest and to use the same in his business. It was held that in view of the nature of the assessee's business, the money carried away could not be regarded as his stock‑in‑trade, nor was it expenditure necessary for carrying on the assessee's business or for the purpose of earning the receipts. The loss, it was held, was a loss of capital and no allowance could be made for it, in the computation of the assessee's income. Reliance was placed by the learned Judges who decided that case, on the Madras decision, cited above. In Bansidhar Onkarmal v. Commissioner of Income‑tax (1949) 17 I T R 247), the assessee claimed deduction of a certain sum, stolen from an iron safe, inside his shop, by one of his relations who was also working as an accountant of the firm. After the shop had been closed, the employee secured the keys of the shop, entered it, opened the safe and removed the sum. It was found that there was no evidence that the money kept in the safe was the stock‑in -trade of the money‑lending business and not his capital. It was held that the sum was not allowable either as a trading loss or as an expenditure laid out or expended wholly and exclusively for the purposes of the business, within the meaning of section 10(2)(xv) of the Act. One of the learned Judges, however, pointed out 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. Attention was also invited by the learned counsel for the Commissioner to a Patna decision, reported as Messrs Mulchand Hiralal v. Commissioner of Income‑tax (A I R 1938 Pat. 159). In that case, some of the money of the assessee was stolen from an employee, while it was being sent to the bank. The loss did not occur in the year of accounting, and consequently, it was unnecessary to consider whether the loss was deductible from the total profits of the relevant year or not. On behalf of the assessee, Mr. Kazi relied on the decisions in Jagarnath Thera ni v. Commissioner of Income‑tax (A I R 1925 Pat. 408), Lord's Dairy Farm Ltd. v. Commissioner of Income‑tax (1955) 27 1 T R 700) and Badridas Daga v. Commissioner of Income‑tax (1958) 34 1 T R 10). In the first case, the sum embezzled by an employee, in the course of the business, was allowed to be deducted from the income of the assessee, as a loss incidental to the conduct of the business, by the Patna High Court. In the second case, the Bombay High Court expressed the view that, if it was necessary for the assessee to appoint employees and delegate to them certain duties, and if loss arose directly from the necessity of doing so e.g., by embezzlement on the part of an employee, then the loss would be a trading loss, and the assessee would be entitled to claim that amount as a proper deduction. In that case, it was found that it was one of the duties of the cashier of the assessee‑Company to withdraw moneys from their bank, and bring them to the office of the assessee for making payments from time to time, in cash. It was discovered that, between May 1946 and April 1947, the cashier had defalcated various amounts, aggregating to Rs. 53,000. The assessee took a promissory note from the cashier for Rs. 21,000, on the 28th April 1947. After spending some amount in the prosecution of the cashier, the assessee wrote off Rs. 32,000, as a trading loss, and claimed the whole amount as a deduction in the assessment year, 1947‑48. The whole of this sum was allowed as a deduction by the learned Judges. Curtis v. Old-field, was also referred to in that case, and it was remarked that there may be cases where the rather artificial line drawn by Mr. Justice Rowlatt, may not do justice to the assessee. For instance, in a case where a businessman asks his employee to go and collect the bills of his customers and he embezzles the money, he would satisfy the definition laid down by Rowlatt, J., but in the converse case, where the assessee were to ask his employee to go and pay his creditors and the employee were to embezzle that money, the case may not come within the ratio of Rowlatt J. decision. The better test, according to Chagla, C. J., therefore, was the one which was expressed in Snelling's Dictionary of Income‑tax and Super‑tax Practice, in the following terms:‑ "If a loss by embezzlement can be said to be necessarily incurred in carrying on the trade, it is allowable as a deduction from profits. In the ordinary case, it springs directly from the necessity of deputising certain duties to an employee, and should therefore be allowed." The Supreme Court of India in Badriday Daga's case also laid down, that when a claim is made for a deduction, for which there is no specific provision in section 10(2) of the Act, the decision of the question, 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. If this is established, then the deduction must be allowed, provided, of course, there is no prohibition against it, express or implied, in the Act. In that particular case, the agent of the assessee‑firm who carried on the business of money‑lending, commission agency and dealing in shares and bullion, had withdrawn from the bank large sums of money and had applied them in satisfaction of his personal debts, incurred in speculative transactions. The agent held a power of attorney, which conferred on him large powers of management, including authority to operate on bank accounts. 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 recovery of the amount involved, but could recover only a sum of Rs. 28,000 and wrote off the balance of Rs. 2,02,442 as irrecoverable. It was held that the loss was incidental to the carrying on of the business as the agent had withdrawn the moneys from the bank, in the purported exercise of the authority vested in him on behalf of the assessee, in the regular course of business. It was observed that the theory that once moneys were put into the bank they had "got home" and their subsequent withdrawal from the bank would be dehors the business, was inapplicable to a business such as banking or money‑lending. The principle, therefore, seems to have been recognised in all these decisions that the loss, incurred by an assessee, should be allowed as a deduction under section 10(1) of the Act, if it is incidental to the carrying on of the normal business of the assessee, and if the Act, expressly or by implication, does not forbid such a deduction. Applying this test to the circumstances of the present case, it is clear that the respondent‑assessee was under a necessity, for the purposes of its business, to send money through its Accountant, to the Custom House, for the clearing of its goods, and that an employee, namely, the driver of the car, who took the Accountant to the Custom House, robbed him of this money. Mr. Muhammad Akram was constrained to agree .B that, if the business was carried on necessarily through employees, and one of these employees embezzled the money of the employer in the conduct of the business, the loss would be an allowable deduction. He attempted to suggest, however, that a case of robbery would not fall within the same category. We are unable to see why a stealing or misappropriation should help the assessee to claim a deduction, but that, if stealing is accompanied by violence, it should disentitle the assessee. The circumstances of the present case clearly establish that the loss was incurred by the dishonest conduct of an employee, in the course of the regular functioning of the assessee firm, and this was a necessary risk, which had to be incurred, in the conduct of that business. We are, therefore, in agreement with the High Court that a deduction under section 10(1) of the Act of the amount lost by robbery, was eminently justifiable, in the circumstances of the instant case. The appeal fails and is hereby dismissed with costs. A. H. Appeal dismissed.