Commissioner of Income-Tax, U.P. Vs.
Nainital Bank Ltd. [1964] INSC 202 (25 September 1964)
25/09/1964 SUBBARAO, K.
SUBBARAO, K.
SHAH, J.C.
SIKRI, S.M.
CITATION: 1965 AIR 1227 1965 SCR (1) 340
CITATOR INFO:
RF 1965 SC1272 (6) RF 1967 SC 453 (1) R 1973
SC1032 (5,6) R 1978 SC 278 (4,6,7,9)
ACT:
Income Tax-Deductible loss-Banking
Company-Loss by dacoity Whether incidental to business --Indian Income-tax Act,
1922 (11 of 1922), s. 10(1).
HEADNOTE:
Cash and ornaments worth Rs. 1,06,000 were
robbed by dacoits from the Ramnagar branch of the Nainital Bank Ltd., a public
limited company carrying on the business of banking. The loss was claimed by
the bank as a trading loss for the assessment year 1952-53. The claim was
disallowed by the Income-tax Officer on the ground that the loss was not
incidental to the business. The finding being confirmed by the Appellate
Assistant Commissioner and the Incom-tax Appellate Tribunal, a reference was
made to the High Court of Judicature at Allahabad which held that the loss by
dacoity was incidental to the banking business and was, therefore a trading
loss which the assessee could claim as a deduction under s. 10(1) of the Indian
Income-tax Act, 1922.
Appeal to this Court on behalf of the
Revenue, came by way of a certificate under Art. 133 of the Constitution of
India.
It was contended on behalf of the appellant
that the risk of burglary was not incidental to the business of banking, and
the loss in the present case fell on the assessee not as a person carrying on
the business of banking but as an owner of funds.
HELD : Cash is the stock-in-trade of a
banking company. and its loss is therefore a trading loss. But every loss is
not deductible in computing the income of a business unless it is incurred in
the carrying out of the operation of the business and is incidental to the
operation. Whether in a particular case an item of loss claimed as a deduction
under s. 10(1) of the Act is incidental to the operation of the assessee's
business or not is a question of fact to be decided on the facts of that 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 risk or its frequency is not
of much relevance but its nexus to the nature of the business is material. [344
A; 349 D-E].
It is an integral part of the business of
banking that sufficient moneys should be kept in the bank duly guarded to meet
the demands of the constituents. Retention of the money in the bank is part of
the operation of banking.
Retention of money in the bank carries with
it the ordinary risk of its being the 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 operation of the business of banking. Loss incurred
by dacoity in the present case is incidental to the carrying on of the business
of banking. [349 F-G].
Case law discussed.
Motipur Sugar Factory Ltd. v. Commissioner of
Income-tax, Bihar and Orissa, (1955) 28 I.T.R. 128 Charles Moore & Co.
(W.A.) Pvt. Ltd. v. Federal Commissioner of
Taxation, (1956) 95 C.L.R. 344 and Gold Band Services Ltd. v.
Commissioner of Inland Revenue, (1961)
N.Z.L.R. 467, relied on.
341 Badridas Daga v. Commissioner of
Income-tax [1959] S.C.R.
690 distinguished.
Ramaswamy Chettiar v. Commissioner of
Income-tax, Madras I.L.R. (1930)53 Mad. 904, disapproved.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 938 of 1963.
Appeal from the judgment and decree dated
December 19, 1960 of the Allahabad High Court in Income-tax Reference No. 1588
of 1956.
K. N. Rajagopala Sastri, R. H. Dhebar and R.
N. Sachthey, for the appellant.
A. V. Viswanatha Sastri and Naunit Lal, for
the respondent.
The Judgment of the Court was delivered by
Subba Rao J. This appeal by certificate raises the question whether loss of
cash by dacoity is an admissible deduction under S. 10(1) of the Indian
Income-tax Act, 1922, hereinafter called the Act, in computing the assessee's
income in a banking business.
The facts relevant to the question raised may
be briefly state . The assessee is the Nainital Bank Limited. It is a puplic
limited company which carries on the business of banking. It has various
branches and one of them is situated at Ramnagar. In the usual course of its
business large amounts were kept in various safes in the premises of the Bank.
On June 11, 1951, at about 7 P.m. there was a dacoity in the Bank and the
dacoits carried away the cash amounting to Rs. 1,06,000 and some ornaments etc.
pledged with the Bank. For the assessment year 1952-53 the Bank claimed the
said amount as a deduction in computing its income from the banking business on
the ground that it was a trading loss. The Income-tax Officer disallowed the
claim on the ground that it was not a loss incidental to the banking business.
On appeal, the Appellate Assistant Commissioner of Income tax, and on further
appeal, the Income-tax Appellate Tribunal, confirmed that finding. On a
reference to the High Court of Judicature at Allababad, a Division Bench of
that Court held that the loss by dacoity was incidental to the banking business
and was, therefore, a trading, loss and that the assessee was entitled to a
deduction of the same under s. 10 (1 ) of the Act. Hence the appeal.
Mr. Rajagopala Sastri, learned counsel for
the appellant, argued that the Bank lost the money by burglary not in its
capacity as a bank but only just like any other citizen, that the risk of
L2Sup./64-9 342 burglary was not incidental to the business of banking and
that, therefore, the amount burgled could not be deducted as a trading loss.
Mr. A. V. Viswanatha Sastri, on the other hand, contended that the money lost
by burglary was the stock in-trade of the banking business, that it was kept in
the Bank in the usual course of its business and that the risk of its loss was
incidental to the carrying on of the said business and, therefore, the amount
lost was a trading loss liable to be deducted under s. 10(1) of the Act.
Before we consider the law on the subject, it
would be convenient at the outset to notice briefly the scope of the activities
of banking business. Under S. 5 (1 ) (b) of the Banking Companies Act, 1949,
"banking" is defined to mean "the accepting, for the purpose of
lending or investment, of deposits of money from the public, repayable on
demand or otherwise, and withdrawable by cheque, draft, order or
Otherwise"; and under s. 5 (1) (c), "banking company" means any
company which transacts the business of banking in India; under S. 5(1) (cc),
" 'branch' or 'branch office in relation to a banking company, means any
branch or branch office, whether called a pay office or sub-pay office or by
any other name, at which deposits are received, cheques cashed or money lent,
and for the purposes of section 35 includes any place of business where any
other form of business referred to in subsection (1) of section 6 is
transacted," Therefore, a banking business consists mainly in receiving
deposits, making advances, realizing them and making fresh advances. It is a
continuous process which requires maintenance of ready cash in the bank
premises.
The Nainital Bank Ltd., is a public limited
company incorporated for carrying on such banking business and Ramnagar branch
is one of its branches doing such business.
Unlike an individual, a limited company like
a banking company comes into existence for the purpose of carrying on only the
banking business and ordinarily there cannot be any scope for attributing
different characters to that business.
We therefore, start with the fact that the
Ramnagar branch of the Bank had kept large amounts in the Bank premises in the
usual course of its business in order to meet the demands of its constituents.
It is settled law, and indeed it is not
disputed, that cash is the stock-in-trade of a banking company. In Arunachalam
Chettiar v. Commissioner of Income-tax Madras(1), the Judicial Committee was
considering the basis of the right of an assessee to ((1) (1936) 4 I.T.R. 173,
83 (P.C.).
343 deduct irrecoverable loans before
arriving at the profits of money lending, and in that context stated:
"The basis of the right to deduct
irrecoverable loans before arriving at the profit of money-lending is that to
the moneylender, as to the banker, money is his stockin-trade or circulating
capital; he is dealing in money." In Commissioner of Income-tax, Madras v.
Subramanya Pillai(1) a Division Bench of the Madras High Court, in explaining
the principle why in money-lending business allowances for bad debts were
given, observed:
"In the case of banking or money-lending
business .... allowance for bad and doubtful debts was given for the reason
that all the moneys embarked in the money lending business and lent out for
interest were in the nature of stock-in-trade of the banker or moneylender and
the bad and doubtful debts represented so much loss of the stock-intrade.
Losses in respect of the stock-intrade have always been regarded as trade
losses and allowed to be set off against the receipts." The same view was
expressed by the Full Bench of the Madras High Court in Ramaswami Chettiar v.
Commissioner of Incometax, Madras (2 ) and by the Patna High Court in Motipur
Sugar Factory, Ltd. v. Commissioner of Income-tax, Bihar & Orissa(3).
Under s. 10(1) of the Act loss of
stock-in-trade is certainly an admissible deduction in computing the profits.
Payment received from an insurance company
for stock destroyed by fire was taken into account as a trading receipt in
computing the profits assessable to income-tax;
see Green (H. M. Inspector of Taxes) v. J.
Gliksten and Son, Ltd. (4) ; and Raghuvanshi Mills Ltd. v. Commissioner of
Income-tax, Bombay City(5). If receipt from an insurance company towards loss
of stock was a trading receipt, conversely to the extent of the loss not so
recouped it should be trading loss. Loss sustained by an assessee owing to
destruction of the stock-in-trade by enemy invasion was held to be a trading
loss which the assessee was entitled to claim as a deduction: see Pohoomal
Bros. v. Commissioner of Income-tax, Bombay City(6). Loss incurred in
stock-in-trade by ravages of white-ants was allowed as trading loss in
computing the profit of a business; see Hira Lal Phoolchand v. Commissioner of
Income(1) (1950) 18 I.T.R. 85, 92.
(3) (1955) 28 I.T.R. 128.
(5) [1953] S.C.R. 177.
(2) I.L.R. (1930) 53 Mad. 904.
(4) (1928-29) 14 T.C. 364.
(6) (1958) 34 T.T.R. 64.
344 tax, C.P., U.P. and Berar(1). We,
therefore, reach the position that cash is a stock-in-trade of a banking
business and its loss in the course of its business under varying circumstances
is deductible as a trading loss in computing the total income of the business.
But it is said that every loss of a
stock-in-trade in whatsoever way it is caused is not a trading loss, but the
said loss should have been caused not only in the course of the business but
also should have been incidental to it.
The leading case on the subject is that of
this Court in Badridas Daga v. Commissioner of Income-tax(2). There, the
appellant was the sole proprietor of a firm which carried on the business of money-lending.
The agent of the firm withdrew large amounts from the firm's bank account and
applied them in satisfaction of his personal debts. In the firm's account the
balance of the amount not recovered from the agent was written off at the end
of the accounting year as irrecoverable. This Court held that the loss
sustained by the appellant therein as a result of I misappropriation by the
agent was one which was incidental to the carrying on of the business and
should therefore, be deducted in computing the profits under s. 10 (1) of the
Act.
Venkatarama Ayyar J., speaking for the Court,
observed:
,,The result is that when a claim is made for
a deduction for which there is no specific provision in section 10(2), 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 to be incidental to it. If that is established,
then the deduction must be allowed, provided of course there is no prohibition
against it, express or implied, in the Act." Applying the principle to the
facts of the case before the Court, the learned Judge proceeded to state:
"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." The principle was clearly laid down and was, if we may say so,
correctly applied to the facts before the Court.
But there is a (1) (1947) 15 I.T.R. 205.
(2) [1959] S.C.R. 690.
345 passage in the judgment on which strong
reliance was placed by the learned counsel for the appellant and it was
contended that the instant case clearly fell under the illustration contained
in the passage. It reads:
"At the same time, it should be
empbasised that the loss for which a deduction could be made under section
10(1) must be one that springs directly from the carrying on of the business
and is incidental to it and not, any loss sustained by the assessee, even if it
has some connection with his business. If, for example, a 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 funds. This distinction, though fine, is very material as on it will
depend whether deduction could be made under section 10(1) or not." It was
said that the loss in the present case fell on the assessee not as a person
carrying on the business of banking but as owner of funds.
That passage in terms refers to a
money-lender and does not deal with a public company carrying on banking
business. In the case of a money-lender the profits he made may form part of
the private funds kept in his house which he may or may not invest in his
business. It is indistinguishable from his other moneys. But in the case of a
bank the deposits received by it form part of its circulating capital and at
the time of the theft formed part of its stock-in-trade. In one case it cannot
be posited that the amount robbed is part of the stock-in-trade of the trader
till he invests it in his business; in the other it forms part of the stock-intrade
without depending on the intention of the banking company. There lies the
distinction between the instant case and the illustration visualized by this
Court. We have only suggested a distinction, but we are not expressing any
definite opinion on the question whether the loss incurred in the case
illustrated is or is not a trading loss. The correctness or otherwise of the
said observation may fall to be considered when such a case directly arises for
decision.
346 Before parting with this decision, it may
be noticed that this Court agreed with the decisions in Venkatachalapathy lyer
v. Commissioner of Income-tax(1), Lord's Dairy Farm Ltd. v. Commissioner of
Income-tax(2) , and Motipur Sugar Factory Ltd. v. Commissioner of Income-tax( 3
). The decision in Motipur Sugar Factory case(3), which was accepted by this
Court to be correct, takes us a step further in the development of law. There,
the assessee company was carrying on business in the manufacture of sugar and
molasses out of sugarcane. It deputed an employee,in compliance with the
statutory rules, with cash for disburse ment to sugarcane cultivators at the
spot of purchase. The cash was robbed on the way. The Division Bench of the
Patna High Court held that the loss of money was loss arising out of the
business of the assessee and sprang from the statutory necessity of sending
money to various purchasing centres for disbursement and, therefore, the
assessee was entitled to deduct the loss in computing its taxable income under
S. 10(1) of the Act. It will be noticed that this is not a case of
misappropriation by a servant of the company, but a case of loss to the company
by reason of its cash being robbed from its servant. In that case, cash was
entrusted to the employee under statutory rules. But there may be cases where
such entrustment may be made by custom or practice. What is important to notice
is that robbery of cash from the hands of an employee is held to be incidental
to the business of the assessee. If that be so, why should a different
principle be adopted if the loss was not caused by robbery from the hands of
the employee on his way to a particular place in discharge of his duty, but it
was a loss caused by dacoity from the premises of the bank itself. In one case,
the employee carried cash for disbursement to sugarcane cultivators, and in the
other, funds were lodged in the Bank with reasonable safeguards for
disbursement of the same to its constituents. If the loss was incidental to the
business in one case, it should equally be so in the other case. The judgment of
the Special Bench of the Madras High Court in Ramaswami Chettiar v. The
Commissioner of Income-tax, Madras(4) supports the case of the Revenue.
There, the loss was incurred by theft of
money used in moneylending business and kept in the business premises.
The Full Bench by majority held that the loss
incurred thereby should not be allowed in computing the income-tax, as the
theft was committed by persons who were not at the time of commission employed
as clerks or servants by the assessee. This judgment, (1) (1951) 20 I.T.R. 363.
(3) (1955) 28 I.T.R. 128.
(2) (1955) 27 I.T.R. 700.
(4) (1930) I.L.R. 53 Mad. 904.
347 if we may say so with respect, takes a
narrow view of the problem. Indeed in Motipur Sugar Factory case(1), which was
approved by this Court, the theft was committed not by the employee of the
company but by robbers. To that extent the correctness of the Madras decision
is shaken. That apart the judgment of Anantakrishna Ayyar J., who recorded a
dissent, contains a constructive criticism of the majority view. We prefer the
view of Anantakrishna Ayyar J., to that of the majority.
The decision of the High Court of Australia
in Charles Moore and Co. (W. A.) Pvt. Ltd. v. Federal Commissioner of Taxation(2)
throws considerable light on the subject. In that case the assessee was
carrying on business of a departmental store and he banked the takings thereof
daily. It was the practice every business morning for the cashier accompanied
by another employee to take the previous day's takings to the bank some two
hundred yards away and pay them to the credit of the assessee. One day, while
on their way to the bank the two employees were held up at gun point and robbed
of a large amount which formed part of the receipts of the assessee for the
previous day. The Court held that the loss was incurred in gaining or producing
the assessable income of the year in question within the meaning of s. 5 1 (I)
of the Income Tax and Social Services Contribution Assessment Act, 1936-52 and
was not a loss or outgoing of capital or of a capital nature, and was
consequently a deduction from assessable income in such year. It was pointed
out therein:
"Banking the takings is a necessary part
of the operations that are directed to the gaining or producing day by day of
what will form at the end of the accounting period the assessable income.
Without this, or some equivalent financial procedure, hitherto undevised, the
replenishment of stock-in-trade and the payment of wages and other essential
outgoings would stop and that would mean that the gaining or producing of the
assessable income would be suspended." Then the Court proceeded to state
"The 'occasion of the loss' in the present case was the pursued in banking
the money . . . . There Is no difficulty in understanding the view that
involuntary outgoings and unforeseen or unavoidable losses should be allowed as
deductions when they represent that kind of casualty, mischance or misfortune
which is a natural or recognized incident of a particular trade or (1) (1955)
28 I.T.R. 128.
(2) (1956-57) 95 C.L.R. 344, 350.
348 business the profits of which are in
question.
These are characteristic incidents of the
systematic exercise of a trade or the pursuit of a vocation.(1) Even if armed
robbery of employees carrying money through the streets had become an
anachronism which we no longer knew, these words would apply. For it would
remain a risk to which of its very nature the procedure gives rise. But
unfortunately it is still a familiar and recognized hazard and there could be little
doubt that if it had been insured against the premium would have formed an
allowable deduction. Phrases like the foregoing or the phrase 'incidental and
relevant' when used in relation to the allowability of losses as deductions do
not refer to the frequency, expectedness or likelihood of their occurrence or
the antecedent risk of their being incurred, but to their nature or character.
What matters is their connection with the operations which more directly gain
or produce the assessable income." This decision laid down the following
principles: (i) banking the takings was a necessary part of the operations of
the business with which the court was dealing in that case; (ii) the loss to
the business caused by robbery was incidental and relevant to that business as
the procedure involved in carrying on of the business carried with it the risk
of the cash being robbed on the way; (iii) the expressions
"incidental" and "relevant" in relation to losses did not
relate to the frequency of the happening of the risk but to their nature and
character, that is to say, the loss must be connected with the operation to
produce income. The judgment of the Supreme Court of Newzealand in Gold Band
Services Limited v. Commissioner of Inland Revenue ( 2 ) applied the decision
of the Australian High Court cited above to a situation which comes very near
to our case. The appellant therein owned and operated a petrol service station
which was kept open continuously. It was held up by an armed robber and a
substantial sum of money was stolen. The Court held that the sum lost as a
result of the robbery was a loss exclusively incurred in gaining or producing
the assessable income of the appellant and was deductible from its' gross
income. Adverting to the argument very often advanced in courts based upon the
robbery being committed in the premises and that committed on the way to a
bank, Haslain J. observed (1) Rich J. in Commissioner of Taxation (N.S.W.) v.
Ash (1938) 61 C.L.R. 263 at 277.
(2) [1961] N.Z.L.R. 467,470.
349 .lm15 I can see no valid distinction to
be drawn in principle between the robbery of trade receipts on the appellant's
premises at an hour before banking was possible (but intended to be banked at a
time when the banks were open) and the robbery of the same money when in the
custody of the employee on the way to the bank. In my opinion, the occasion for
the loss of the present appellant was the operation of its business in the
normal way, with the result that the cash stolen was on the premises at that
particular time and that the possibility of such plunder constituted an
attraction to a certain type of criminal, including both the safe-blower and
the armed burglar." The present case is a stronger one, for the money was
kept in the Bank as it was absolutely necessary to carry on the operation of
the banking business.
We may now summarize the legal position thus.
Under s. 1O (I ) 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.
In the present case the respondent was carrying
on the business of banking. It is an integral part of the process of banking
that sufficient moneys should be kept in the bank duly guarded to meet the
demands of the constituents. 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. In
this view, we are clearly of the opinion that the loss incurred by dacoity in
the present case is incidental to the carrying on of the business of banking.
In the result, the order of the High Court is
correct and the appeal fails and is dismissed with costs.
Appeal dismissed.
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