Commissioner of Income Tax Vs. S. N.
A. S. A. Annamalai Chettiar  INSC 234 (27 September 1972)
REDDY, P. JAGANMOHAN DUA, I.D.
KHANNA, HANS RAJ
CITATION: 1973 AIR 1032 1973 SCR (2) 460 1973
SCC (3) 339
Income Tax Act, 1922--S. 10 (1)--Business
loss--Business carried on in war zone--Damage to property during war--If could
be given deduction to as business loss.
The assessee, who was carrying on business in
Malaya which was within the war zone, suffered damages to property during the
war on account of bombing. The loss in question was loss of stock-in-trade. On
the question whether the loss could be given deduction to as a business loss in
computing the net income of assessee under s. 10 (1) of the Income-tax Act, 1922.
HELD : On the facts and circumstance of the
case the loss occurred must be taken to be a loss incidental to the business
carried on by the assessee during the war. If the assessee had earned any
profits cut of his business during the war the department undoubtedly have to
consider those profits as assessable income. When loss had occurred in such
situation the department cannot contend that the loss in question must not be a
business loss. A loss of stock-in-trade occasioned by enemy action must be considered
as a trade loss. [461 F] Bombay High Court in Pohoomal Bros. v. Commissioner of
Income-tax, Bombay City, 34 I.T.R. 64, Commissioner of Income-tax, U.P. v.
Nainital Bank Ltd., 55 I.T.R. 707, Green v. J. Glikstan, 14 Tax Cases 364 and
London Investment and Mortgage Co. Ltd, v. Inland Revenue Commissioners 
1 All England Reports. 377, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 2016 of 1969.
Appeal by Special Leave from the judgment and
order dated April 27, 1967 of the Madras High Court in Tax Case No. 75 of 1963.
S. C. Manchanda, B. D. Sharma and R. N.
Sachthey, for the appellant.
M. C. Chagla, Janendra Lal and B. R.
Agarwala, for the respondent.
The Judgment of the Court was delivered by
Hegde, J. This appeal by special leave arises from a decision of the Madras
High Court in a reference under section 66 (1) of the Indian Income Tax, 1922
(to be hereinafter referred to as the Act). As demanded by the assessee the
Tribunal submitted the statement of the case to the High Court seeking its
opinion on the question "whether on the facts and in the circumstances of
the case, the loss of Rs. 1,93.750/was an allowable deduction under section 10
of the Income-tax Act?" 461 Material facts are these The assessee
respondent was a member of a Hindu undivided family which carried on money
lending business in India and abroad. In the course of such money lending
business, properties were taken over in settlement of debts as and when
occasion arose. The family was disrupted on March 28, 1939. The assessee
received some shares in some companies, properties and gardens and certain
other items in Malaya.
Even after the partition the assesses
continued the money lending business in Malaya. During the war, in general with
others, the assessee suffered damages to these properties on account of
Japanese bombing. This loss occurred on account of bombing in December, 1941, a
date falling within the accounting period ending on April 12, 1942, relevant
for the assessment year 1942-43. This loss was claimed as a business loss. The
Income Tax Officer rejected that claim.
The Appellate Assistant Commissioner affirmed
the order of the Income Tax Officer-. The assessee did not succeed before the
Tribunal as well. The Tribunal rejected the claim of the assessee on the sole
ground that bombing, which caused the loss, was not incidental to the business
of the assessee. The Tribunal held that the loss in question was a loss of
stock-in-trade. That finding of the Tribunal has not been challenged. Hence we
have to proceed on the basis that the loss caused to the assessee was a loss of
It was contended on behalf of the department
that the loss in question cannot be given deduction to, as a business loss, in
computing the net income of the assessee under section 10(1). According to the
department that was not a loss incidental to the business carried on by the
We are unable to appreciate the contention of
the department. It is established that the assessee was carrying on business in
Malaya when the war was going on.
Malaya was within the war zone and,
therefore, there was every possibility of that area being bombed. If the
assessee had earned any profits out of his business during the war, the
department undoubtedly would have considered those profits as assessable
income. It is strange that when loss had occurred in such a situation the
department should contend that the loss in question was not a business loss.
In our opinion, taking into consideration the
facts and circumstances of the case, the loss occurred must be held to be a
loss incidental to the business carried in by the assessee in Malaya during the
We are fortified in our conclusion by the
decision of the Bombay High Court in Pohoomal Bros. v. Commissioner of
Income-Tax, Bombay City(1). The facts of that case are some(1) 34 I.T.R. 64.
462 what similar to the facts before us. The
assessee therein, which had its head office in Bombay and branches in various
parts of the world, claimed deduction of the losses resulting from the destruction
of its stock in trade in three foreign branches, at Manila, Saigon and Kuala
Lumpur, by enemy invasion, in computing its profits and gains for the purpose
of income-tax. The department resisted that claim but the High Court held that
the losses in question were trading losses. This decision of the High Court was
cited with approval by this Court in Commissioner of Income Tax, U.P. v.
Nainital Bank Ltd. (1), In this connection we may also refer to two English
decisions. The first case is Green v. J. Gliksten(2). The facts of that case
were as follows :
A fire occurred on the company's premises in
August, 1921, and destroyed timber the written down value of which in the
company's books was pound 160,824; the company's valuation of its stock based
on cost or market value whichever was the lower, had been accepted for purposes
of taxation. The timber had 'been insured for many years and the company had
been allowed to deduct the insurance premises in computing its assessable
profits. In due course the company received from the insurers a sum of pound
477,838 representing the replacement value of the destroyed timber, but only a
small part of this timber was in fact replaced because the current demand was
for timber of a different character. The company accordingly credited in its
profit and loss account as a trading receipt only pound 160,824 of the
the balance did not appear in the profit and
loss account but was entered as a reserve in the balance sheet. The Special
Commissioners held that no part of the sum of pound 477,838 recovered from the
insurers was a trading receipt.
But the House of Lords held that the whole
sum recovered was trading receipt to be taken into account in computing the
profits assessable to Income Tax under case 1 of Schedule D and to Corporation
Profits Tax. This court in Nainital Bank's case (supra) quoting that decision
with approval observed. "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." Next we shall refer to the decision
of the Court of Appeal in London Investment and Mortgage Co., Ltd. v. Inland
Revenue Commissioners.(3) The facts of that case were as follows :
The assessee were paying compulsory war
damage contributions during the war in respect of the properties in which they
were dealing. They received payments under the War Damage Act, 1943, in respect
of the properties damaged by enemy action.
(1) 55 I.T.R. 707 (2) 14 Tax Cases 364.
(3)  1 All England Reports 377.
463 They disposed of some of the properties
but retained others as part of their stock-in-trade and either were having them
rebuilt or would have them rebuilt. Under the War Damage Act, 1943,
contributions made and indemnities given under Part I were to be treated for
all purposes as outgoings of a capital nature and expenditure on making good
war damage was not deductible in computing profits for income tax purposes.
On the question whether the value payments
should be included in the receipts of the taxpayers' trade for the purpose of
their assessments to income under Case 1 of Schedule D and to profit tax, the
Court of Appeal held that the value payments should properly be treated as part
of the taxpayers' trading receipts, since they were money into which their
stock-in-trade had been converted. This decision is an authority for the
proposition that the compensation received in lieu of loss, of stock-in-trade
as a result of enemy action is a trading receipt conversely a loss of
stock-in-trade occasioned by enemy action must be considered, as a trading
For the reasons mentioned above we agree with
the conclusions reached by the High Court and see no merit in this appeal. It
is accordingly dismissed with costs.
K.B.N. Appeal dismissed.