Ramachander Shiv Narayan Vs.
Commissioner of Income Tax, Andhra Pradesh, Hyderabad  INSC 209 (4
CITATION: 1978 AIR 278
Allowable loss-Loss of property or money by
theft or dacoity, whether a trading loss and if permissible deduction in
computation of his net income-Income-Tax Act, 1922, sec.
10(2)(xv)=s. 37 of Income Tax Act, 1961.
The appellant, assessee is a registered firm
carrying on business in gold, silver and gunnies at Rajahmundry. It also
derives income from investment in Government securities. The assessee, during
the assessment year 196465 corresponding to accounting year ended on October
16, 1963 returned. a loss of Rs. 5008/from the business. The said figure was
arrived at after claiming a loss of Rs.
30,000/` on account of theft. The assessee
had borrowed a sum of Rs. 50,0001from some creditor The money was brought in
cash by its employee. Out of the said sum of Rs.
50,0001which was meant for purchase of
Government securities, a sum of Rs. 30,000/was lost by theft committed by a
stranger. The assessee, therefore, claimed the sum of Rs. 30,000/lost by theft
as a permissible deduction in computation of his net income on the ground that
it was a trading loss. The Income Tax Officer rejected the claim treating, the
loss as being either of idle money or a capital loss and holding that it was
not incidental to the business of the assessee. An appeal before the Income Tax
Appellate Commissioner failed; but in further appeal the Tribunal held that the
loss was allowable being incidental to the carrying on the business of the
assessee. On a reference made at the instance of the Commissioner of Income
Tax, the High Court of Andhra Pradesh answered it in favour of Revenue and
against the assessee.
Allowing the appeal by special leave. the
HELD : (1) The line of distinction as to
whether a particular loss is a trading loss or a capital loss is very subtle
and thin. In terms no specific. Provision is to be found in either of the two
Acts (Income Tax Act of 1922 or 1961) for allowing deduction of a trading loss
of cash by theft. A trading loss not being a capital loss has got to be taken
into account while arriving at the true figures of the assessee's income in the
commercial sense. [803 in 804 C] (2)The list of permissible deduction in either
of the two Acts is not exhaustive. The relevant words, in s. 10(2)(xv) of the
1922 Act corresponding to s. 37 of the 1961 Act namely, "any
expenditure.......... not being in the nature of capital expenditure, or
personal expenses of the assessee laid out or expended wholly and exclusively
for the purpose of such business...... has not been able to take within its
ambit loss of property or money by theft or dacoity as it is not an expenditure
which has an element of volition, but the forced loss. Such a loss is a trading
loss in the commercial sense and has got to be takeninto account for
ascertainment of true taxable profit,,,,. [804 C-E] BadridasDaga v.
Commissioner of Income-Tax, 34 I.T.R. 10 and Commissioner ofIncome-tax U.P. v.
Nainital Bank Ltd. 55 I.T.R. 707, followed.
Motipur Sugar Factory Ltd. v. Commissioner of
Income-Tax, Bihar & Orrissa 28 I.T.R. 128, approved.
Charles Moore & Co. (W.A.) Ply. Ltd. v.
Federal Commissioner of Taxation (1956-57) Commonwealth Law Reports 344 and
Gold Bank Services Ltd. v. Commissioner of Inland Revenue (1961) New Zealand
Law Reports, 467, quoted with approval.
802 (3)If there is a direct and proximate
nexus between the business operation, and the loss or it is incidental to it,
then the loss is deductible, as without the business operation and doing all
that is incidental to it, no profit can be earned. It is in that sense that
from a commercial standard such a loss is considered to be a trading one and
becomes deductible from the total income although, in terms neither in the 1922
Act nor in the 1961 Act there is a provision like section 51(1) of the
Australian Act. [806 GH] Basantlal Sanwar Prasad v. Commissioner of Income-Tax
67 I.T.R. 380 (Patna); U.P. Vanaspati Agency v. Commissioner of Income-tax 68
I.T.R. 120; Commissioner of Income Tax U.P.
v. Sarya Sugar Mills (P) Ltd. 70 I.T.R. 109;
Commissioner of Income-Tax, Madras v. K. T. M. S. Mahmood 74 I.T.R. 100;
Commr. of Income-Tax, M.P. v. Ganesh Rice
Mill 77 I.T.R. 889 and Chhotulal Ajitsingh v. Commissioner of Income-Tax,
Rajasthan 89, I.T.R. 178, referred to, Bansidhar Onkarmal v. Commissioner of
Income-Tax, Bihar and Orissa 17 I.T.R. 247 '(Orissa ); M/s. Ram Gopal Ram Sarup
v. Commissioner of Income-tax, Punjab 47 1.T.R. 611;
Commissioner of Income Tax, Andhra Pradesh v.
Chakka Narayana 43 I.T.R. 249; Madurai Rajeshwar v. Commissioner of Income-tax,
Andhra Pradesh, 51 I.T.R. 213 and S. P. S.
Ramaswami Chettiar & Or.s. v. The
Commissioner of IncomeTax, Madras I.L.R. 53, Madras 904, disapproved.
A direct and proximate connection and nexus
must be between the business operation and the loss. A businessman has to keep
money either when he gets it as sale proceeds of the stock-in-trade or for
disbursement to meet the business expenses or for purchasing stock-in-trade and
if he loses such money in the ordinary course of business such is a deductible
trading loss. It is immaterial whether the money is a part of the stock-in-trade
such as a banking company or a money lender or is directly connected with the
other business. The risk is inherent in the carrying on of the business and is
either directly connected with it or incidental to it.
In the instant case, the High Court took an
erroneous view in giving an answer against the assessee. The loss was, however,
directly connected with business operation and was incidental to the carrying
on of the business of purchase of Government securities to earn profits. In
such a situation it was a part of the trading loss and deductible as such in
arriving at the true profit-, of the assessee. [808 B-C, EG]
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 1611 of 1972, Appeal by Special Leave from the Judgment and Order dated 43
1974 of the Andhra Pradesh High Court in Case Reference No. 28 of 1969.
Jitendra Sharma for the Appellant.
K. C. Dua and R. N. Sachthey for the
The Judgment of the Court was delivered by
UNTWALIA J.--This is an assesee's appeal by special leave from the decision of
the Andhra Pradesh High Court in a reference made by the Income Tax Appellate
Tribunal, Hyderabad Bench under section 256(1) of the Income Tax Act,
1961-hereinafter referred to as the 1961 Act. The question referred for the
opinion of the High Court at the instance of the Revenue was in the following
terms "Whether, on the facts and in the circumstances of the case, the
assessee was entitled to the allowance of the loss of Rs.
30,000 ?" 803 The facts of the case as
found by the Tribunal are in a very narrow (,compass. Their correctness was
neither challenged nor could it be ,challenged in the High Court on any legal
grounds, such as, that the findings were vitiated as being perverse, wholly
unreasonable or unsupported by any evidence. No reference to challenge the
correctness of the facts was either asked for or made. The High Court has.
therefore, rightly proceeded to answer the
question on the facts found, by the Tribunal.
The assessee is a registered firm carrying on
business in gold, silver, and gunnies at Rajahmundry. It also derives income
from investment in Government securities. The assessment year in question is
1964-65. The corresponding accounting year ended on October 16, 1963. The
assessee had sold some Government securities and bonds in the years both
preceding and succeeding the accounting year concerned in the present appeal.
Income-tax was levied on such income also. For the assessment year 1964-65 it
returned a loss of Rs. 5,008/from the business. The said figure was arrived at
after claiming a loss of Rs. 30,000/on account of theft committed by some
stranger during the corresponding accounting period. A sum of Rs. 50,0001for
the purpose of purchasing Government securities was brought in cash to
Rajahmundry by its employee. The money was handed over to its cashier. When the
cashier turned his back to take out some books, a stranger suddenly arrived at
the place of assessee's business and committed the theft of 30,000/-. In spite
of the lodging of a report with the police, no amount could be, recovered. The
assessee claimed the sum of Rs. 30,000/lost by theft as a permissible deduction
in computation of his net income on the ground that it was a trading loss. The
Income Tax Officer rejected the claim treating the loss as being either of idle
money or a capital loss. According to him it was not incidental to the business
of the assessee. Its appeal before the Income Tax Appellate Commissioner failed
butthe assessee succeeded in the further appeal taken to the Tribunal. The loss
was allowed on the ground that it was incidental to the carrying on of the
business of the assessee. The Commissioner of Income Tax asked for a reference
which was made on the question ,of law above mentioned.
Many cases of this kind involving almost
identical questions on facts somewhat similar or varying have come up for
consideration before the Courts in England and varying other countries and the
various High Courts in India. The line of distinction as to whether a
particular loss is a trading loss or a capital loss has sometimes been very
subtle and thin resulting in expression of different opinions by the different
High Courts almost on identical or similar facts.
The leading decision of this Court is. in the
case of Badridas Daga v. Commissioner of Income Tax(1). The principle decided
in that case was reiterated with greater force, if we may say so with respect,
in another decision of this Court in Commissioner of income-Tax, U.P. v.
Nainital Bank Ltd(2) After the said two decisions most of theHigh Courts have
applied, as they were bound to, the principles enunciated in them in favour of
the assessees under similar circumstances and facts. But we shall presently
show that the Andhra (1) 34 I.T.R. 10 (2) 55 I.T.R. 707 804 Pradesh High Court
persisted and has done so even in the judgment under appeal in taking ,rather,
a narrow view of the matter and not correctly applying the ratio decidendi of
Badridas Daga's and Nainit al Bank's cases, Under section 10(1) of the Income
Tax Act, 1922-hereinafter called the 1922 Act, the assesses was required to pay
tax in respect of the profits or gains of any business carried on by him-. The
corresponding provision in the 1961 Act is to be found in section 28.
Sub-section (2) of section 10 of the 1922 Act prescribed the method for
computation of profits or gains after making the allowances enumerated in the
various clauses of that sub-section. The corresponding section 29 of the 1961
Act says : "The income referred to in section 28 shall be computed in accordance
with the provisions contained in sections 30 to 43-A." In terms no
specific provision is to be found in either of the two Acts for allowing
deduction of a trading loss of the kind we are concerned with in this case. But
it has been un-informally laid down that a trading loss not being a capital
loss has got to be taken into account while arriving at the true figures of the
assessee's income in the commercial sense. The list of permissible deductions
in either of the Acts is not exhaustive. We may just refer to section 10(2)
(xv) of the 1922 Act corresponding to section 37 of the 1961 Act. The relevant
words of the said provision namely "any expenditure not being in the
nature of capital expenditure or personal expenses of the assessee laid out or
expended wholly and exclusively for the purpose of such business......... I
occurring in either of the two provisions has not been able to take within its
ambit loss of property or money by theft or dacoity as it is not an expenditure
which has an element of volition, but a forced loss. The cases have laid down
that such a loss is a trading loss in the commercial sense and has got to be
taken into account for ascertainment of true taxable profits.
Now we proceed to refer to some decisions of
the High Courts and this Court. We may start with a Patna decision reported in
Motipur Sugar Factory, Ltd. v. Commissioner of IncomeTax, Bihar and Orissa(1).
The assesses company carrying on business in the manufacture of sugar and
molasses out of sugarcane deputed an employee, in compliance with the statutory
rules, with cash for distribution to sugarcane cultivators at the spot of
purchase. The cash was robbed on the way. The High Court took the view that the
loss was one arising out of the business of the assessee and sprang from the
statutory necessity of ,sending money to various purchasing centres for
distribution and hence was deductible from the assessee's taxable income. The
stress by the High Court that sending of money to various purchasing centres
sprang from the statutory necessity was not of much consequence. The method of
business operation springing from custom, trade usage or practice or
otherwisemay make the assessee send cash to or bring cash from other places.
The Patna, decision has been approved in the decisions of this Courtin Badridas
Daga's and Nainital Banks cases.
(1)28 I.T.R. 128.
805 In Badridas Daga's case an agent of the
assessee withdrew from the firms bank account large sums of money and applied
them in satisfaction of his personal debts incurred in speculative
transactions. A part of it was recovered from him but the balance of Rs.
2,00,000/and odd was written off at the end of the accounting year as
irrecoverable. The question for consideration was whether the amount embezzled
by the assessee's agent was to be deducted in computation of the assessees
profits. Venkatarama Tiyar J. delivering the judgment of the Court has said at
page 15 of 34 I.T.R.
"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........
The learned Judge emphasised at page 1 6 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." An example of theft committed by a thief by breaking
overnight the premises of the moneylender and running with the funds was given
to show in Daga's case that it would not be an allowable loss. But the example
was not considered to be quite appellate in the case of Nainital Bank for
taking the opposite view. The majority opinion of a special Bench of the Madras
High Court in S. P. S. Ramaswami Chettiar & Ors. v. The Commissioner of
IncomeTax, Madras,(1) were merely referred in Badridas Daga's case but was
disapproved in Nainital Bank's case. The facts of the latter case were that the
Bank in the usual course of itsbusiness had to keep cash money in various safes
in its various branches. At one of its branches the cash amount of Rs.
1,00,000/ and odd was stolen in a dacoity committed at about 7.00 p.m. Subba
Rao J., as he then was, dismissing the department's appeal held the loss to be
an admissible deduction chiefly on the ground that it formed part of the
stock-in-trade of a banking company. A large number of authorities were
considered including the one in Badridas Dagds case. A distinction drawn in
some of the cases between misappropriation of the assessee's money by a'
servant or loss to him by reason of cash being robbed from its servant was held
to be of no consequence. In that regard referring to the decision of the Madras
High Court in Ramaswami Chettiar's case it was held that the correctness of the
said decision was shaken when this Court in Badridas Daga's Case approved the
Patna view in Motipur Sugar Factory's case. The minority view expressed by
Anantakrishna Ayyar J. was preferred. The decision of the High Court of
Australia in Charles Moore & Co. (W.A.) Pty Ltd. v. Federal Commissioner of
Taxation(2) was heavily relied upon.
(1) I.L.R. 53, Mad. 904.
(2) (1955-57) 95 Commonwealth Law Reports,
806 Reference was also made to the decision
of a learned single Judge of the New Zealand Supreme Court in the case of Gold
Bank Services Limited v. Commissioner of Inland Revenu (1) which had followed
the Australian decision in Charles Moore's case. The case of Nainital Bank was
held to be stronger than the two foreign decisions aforesaid. We may however,
point out the slight distinction between the Income-tax law of Australia and
New Zealand and that of India, although basically in principle there is hardly
any difference. In the Australian case the v. Commissioner of Inland Revenue()
which had followed the Austra v. Commissioner of Inland Revenue() which had
followed the Austra v. Commissioner of Inland Revenue() which had followed the
Austra statutory language ofsection 51(1) of the Income Tax and Social Services
Contribution assessment Act 1936-1952 fell for consideration. The relevant
words of the,said provision were : "losses necessarily incurred in gaining
or producing the assessable income." In our Acts there is no such express
provision because the corresponding provision used the term 'expenditure' and
not losses. But the principle decided by the full Court of the, High Court of
Australia (the highest Court in the land) is aptly applicable in India. The
argument for the Commissioner that before the money was stolen it had come home
to the tax-payer so as to form part of the capital resources was rejected at
page 351 on the ground "...... we are here dealing with a loss incurred in
an operation of business concerned with the regular inflow of revenue, not with
a loss of or concerning part of the "profit yielding subject," the
phrase in which Lord Blackburn in United Collieries Ltd. v. Inland Revenue
Commissioners-(1930) S.C. 215. at p.
220; (1929) 12 Tax as. 1248, at p. 1254
summarised the characteristics of a business undertaking or enterprise
considered as an affair of a capital nature." The language of the New
Zealand statute was more or less the same except that it contained the adverb
Haslam J., therefore, stated at page 470 of
(1961) New Zealand Law Reports :"While our section contains the adverb
" exclusively", which is absent from its Austrailan counterpart, I do
not think that on the instant facts this difference in wording can affect the
conclusion. In my opinion, the loss was exclusively incurred in the manner
described, since the risk of precisely such an event was inherent in the course
of the production of assessable income." The principle applicable in India
is more or less the same.
If there is a direct and proximate nexus
between the business operation and the loss or it is incidental to it, then the
loss is deductible, as, without the business operation and doing all that is
incidental to it, no profit can be earned. It is in that sense that from a commercial
standard such a loss is considered to be a trading one and becomes deductible
from the total income, although, in terms neither in the 1922 Act nor in the
1961 Act there is a provision like section 51 (1) of the Australian Act.
There is a veritable roll-call of cases of
the various High Courts in India, mostly under similar circumstances, taking
the view on the lines of Daga's and Nainital Bank's cases.
We may just refer to some of (1) (1961) New
Zealand Law Reports, 467.
807 them In Basentlal Sanwar Prasad v.
Commissioner of IncomeTax(1) the loss of cash in a burglary committed at night
in a wholesale cloth shop was held to be allowable. In U.P.
Vanaspati Agency v. Commissioner of
Income-Tax(2) (Allahabad) money entrusted to an employee for being deposited in
the Bank but lost in the way by robbery was held to be, deductible. To the same
effect is the view expressed by Allahabad High Court in the case of
Commissioner of Income-Tax, U.P. v. Sarya Sugar Mills (P) Ltd.(3); by the
Madras High Court in Commissioner of IncomeTax, Madras v. K. T. M. S.
Mahmood(4); by the Madhya Pradesh High Court in Commissioner of Income-Tax M.P.
v. Ganesh Rice Mills(5) and the Rajasthan High Court in Chottulal Ajitsing v.
Commissioner of Income_Tax, Rajasthan.(6) The contrary view expressed in the
case of Bansidhar Onkermal v. Commissioner of Income-Tax, Bihar and Orissa(7)
and in the Madras full Bench ,case of Chettiar's is no longer good law.
The ratio of Daga's case does not seem to
have been correctly applied by the Punjab High Court in Mesars. Ram Gopal Ram
Sarup v. Commissioner of Income-Tax, Punjab(8).
Now we proceed to point out the persistently
wrong application of the law laid down by this Court by the Andhra Pradesh High
Court in two earlier decisions followed in the decision under appeal also. They
are : Commissioner of Income-Tax, Andhra Pradesh v. Chakka Narayana(9) and
Maduri Rajeshwar v. Commissioner of Income-Tax, Andhra Pradesh (10). In Chakka
Narayana's case (supra) the assessee who was a dealer in cloth and government
securities encashed government securities worth about Rs. 20,000. He went to
the Madras Railway Station for taking the cash to his place of business but
lost the money on account of theft committed. The High Court referred to Badridas
Daga's case but yet distinguished it and preferred to follow the majority
decision of the Full Bench of the Madras High Court in Ramaswami Chettiar's
case which, as we have already pointed out, was not approved by this Court in
Nainital Bank's case. the High Court enunciated the law correctly, but
committed an error in applying the same to the facts of that case when it said
: "It could not be posted that it was absolutely necessary for the
assessee to cash the cheque issued and to carry the money on his person. It is
only when it could be posited that it was part of his business to take money
with him that it could be said that the loss was incidental to his
business."We do not approve of this distinction. Similarly the Andhra
PradeshHigh Court took a narrow view in Maduri Rajeshwar's case also.
There a stranger came to the assessee's shop
during business hours and, when the assessee had gone into another room to talk
on the telephone, the stranger removed the cash box and disappeared. Chandra
Reddy C.J. who had delivered the leading judgment in the earlier case as also
in this case, if we may point out with respect, committed the same mistake when
he said at page 216 :
(1) 67 I.T. R 380 (Patna). (6) 89 I.T.R. 178
(2) 68. I.T.R, 120. (7) 17 I.T.R. 247 (Orissa).
(3) 70 I.T R. 109. (8) 47 I.T.R. 61 1.
(4) 74 T.T R. 100. (9) 43 I.T.R. 249.
(5) 77 I.T.R. 889. (10) 51 I.T.R. 213.
808 "It cannot be postulated that the
loss sustained by the assesee resulting from the theft committed by the
stranger springs directly from his business or is incidental to the carrying on
of it. The only connection that could be established in this case is that at
the time theft was committed money was in the business premises and it was
during business hours. There is no other connection between the theft of the
money and the business of the assessee." It is to be remembered that the
direct and proximate connection and nexus must be between the business
operation and the loss. It goes without saying that a businessman has to keep
money either when he gets it as sale-proceeds of the stock-in-trade, or for
disbursement to meet the business expenses or for purchasing stock-in-trade and
if he loses such money in the ordinary course of business, the loss is a
deductible trading loss. It is immaterial whether the money is a part of the
stock-in trade, such as,, of a banking company or a money-lender, or is
directly connected with the other business operations. The risk is inherent in
the carrying on of the business and is either directly connected with it or
incidental to it.
In the judgment under appeal the High Court,
to our mind, has taken the same erroneous view and given the answer against the
assessee in spite of the, fact that it has noticed a catena of cases of the
various High Courts already alluded to by us also. Distinguishing the
preponderance of the view expressed in the various decisions in favour of the
assessee, the High Court, in our opinion, wrongly chose to stick to its earlier
In the light of the conspectus of the law, as
discussed above, let us see whether on the facts found by the Tribunal: the
loss of Rs. 30,000/was allowable as a trading loss. The assessee had borrowed a
sum of, Rs. 50,000/from some creditor. The money was brought in cash to Rajahmundry
by its employee. Such a mode of business operation is very common and
well-known. Out of the said sum of Rs. 50,0001which was meant for purchase of
Government securities a sum of Rs. 30,000/was lost by theft. It is immaterial
whether Government securities were purchased by the remaining sum of Rs.
20,000/or not. The loss was, however, directly connected with the business
operation and was incidental to the carrying on of the business of purchase of
Government securities to earn profit. In such a situation it was a part of the
trading loss and deductible as such in arriving at the true profits of the
In the result we allow the appeal,, set aside
the, decision of the High Court and answer the question in favour of the
assessee and against the Commissioner of Income-Tax. The latter must pay to the
appellant the costs in this appeal.
S.R. Appeal allowed.