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Judgment
The Income Tax Appellate Tribunal, Patna Bench, has referred u/s 66(1) of the Indian Income Tax Act, 1922, hereinafter to be referred to as "the Act", to the High Court the following question of law :
"Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the sum of Rs. 10,000, was not a loss from business deductible in computing the total income of the assessee ?"
The necessary facts which would appears stated in the statements of the case prepared by the Tribunal, as also in the orders of the Income Tax Officer, the Appellate Assistant Commissioner and the Tribunal are these. The assessee carried on business in kirana at Bhagalpur. One of its adathiyas (commission agent) was one Babulal Kharga of Asarganj. The assessee had dealings with Babulal. The account of Babulal in the books of the assessee showed that the assessee purchased grains from him and made payments in cash. On the 10th of January, 1955, during the accounting year in question, a sum of Rs. 10,000 was sent by the assessee from Bhagalpur to Asarganj, where Babulal resided and carried on his business, for payment to him through one of the old employees of the assessee, Sri Sachidanand. On the way he was robbed of the said amount on the point of a pistol b y some robbers. The assessee claimed the amount in the first instance, as it appears from the order of the Income Tax Officer, as a bad debt written off in the account of Babulal Kharga because the amount when it was sent on the 10th January, 1955, to Babulal was debited in his account in the hope that it would reach him at Asarganj. But since the amount was robbed on the way and did not reach Babulal, it had to be written off and was, therefore, apparently claimed as a bad debt due from Babulal but, in substance, the claim was that it was trading loss which should be taken into consideration while assessing the profits of the assessee u/s 10(1) of the Act. The Income Tax Officer disallowed the claim on the ground that the matter was not reported to the police on the same day but was reported two days after and that the money when debited to the account of the party, the loss was the loss of the party and not of the assessee. The Appellate Assistant Commissioner, while upholding the decision of the Income Tax Officer in the appeal filed by the assessee, held that the appellant had failed to produce the relevant papers or a copy of the police report in the matter and it was, therefore, not possible to ascertain the exact facts of the case and that the appellant, in the opinion of the Appellate Assistant Commissioner, had failed to establish the primary fact that the loss of cash arose as a result of his employee having been robbed on the way. On the further appeal by the assessee, the Appellate Tribunal, before which a copy of the first information report was produced, held as a question of fact that the money was in transit in the possession of Sachidanand and at that point of time the highway robbery took place. On considering the various amounts standing to the credit and debit of Babulal Kharga, the ultimate given by the Tribunal is :
"This is a simple case of money sent to pay of the adathiyas balance in the account for the purchases made or to be made from him. The assessee has chosen recklessly and carelessly to expose itself to the risk of highway robbery without proper protection. There is no business necessity proved for such exposure."
Mr. Brajeshwar Prasad Sinha, appearing for the assessee, has strenuously urged, on the authority of this court in Motipur Sugar Factory Ltd. v. Commissioner of Income Tax, and of the Supreme Court in Badridas Daga v. Commissioner of Income Tax, that on the findings recorded by the Appellate Tribunal it ought to have been held, as a matter of law, that the sum of Rs. 10,000 was a loss in business as it was directly connected with and incidental to the business. Hence, in computing the profits of the assessee, the said sum ought to have been taken into account as a trading loss and ought to have been deducted in computing the total income of the assessee. Mr. S. N. Datta, learned standing counsel for the department, submitted that the finding recorded by the Tribunal that the money had actually been lost by the alleged highway robbery is erroneous in low as it is based upon no material or evidence adduced by the assessee. Secondly, counsel submitted that even it that finding remains undistributed, there is no recording of any finding of other necessary facts which would entitle the assessee to claim the sum of Rs. 10,000 as a trading loss.
In Motipur Sugar Factory Ltd. v. Commissioner of Income Tax, the facts were that the assessee-company carrying on business in the manufacture of sugar and molasses out of the 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 Tribunal had found that the loss was incidental to the business of the assessee, but following the decision of this court in Mulchand Hiralal v. Commissioner of Income Tax had disallowed it. It was held by Ramaswami J. (as he then was) and Sahai J., with reference to the relevant rules of the Bihar Sugar Factories Control Rules, that the assessee-company had to despatch money to various purchasing centres for payment to sugarcane cultivators. That was an essential part of the business of the assessee for the sugarcane factory could not work unless there was supply of sugarcane. In that view of the matter, their Lordships held :
"..........the loss of money in this case is a loss which springs from the statutory necessity of sending money to various purchasing centres, and such a loss is, therefore, incidental to the business carried on by the assessee. To put it differently, the loss of money is a loss connected with or arising out of the business of the assessee, and should, therefore, be taken into account in calculating the `profits or gains u/s 10(1) of the Income Tax Act for the purpose of the computing the taxable income."
In Badridas Dagas case, Venkatarama Aiyar J., delivering the judgment of the court, approved the view expressed by this court in Motipur Sugar Factorys case that in such a situation the loss is admissible as a deduction u/s 10(1) of the Act, although it may not be deductible u/s 10(2) of the Act. But his Lordship further observed :
"At the same time, it should be emphasised that the loss for which a deduction could be made u/s 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 u/s 10(1) or not."
On the facts of that case, further it was held that :
"When once it is established that Chandratan was in charge of the business, that he had authority to operate on the bank accounts, and that he withdrew the moneys in the purported exercise of that authority, his action is referable to his character as agent, and any loss resulting from misappropriation of funds by him character as agent, and any loss resulting from misappropriation of funds by him would be a loss incidental to the carrying on of the business."
Mr. S. N. Datta placed reliance upon a recent decision of the Supreme Court in Commissioner of Income Tax v. Nainital Bank Limited, a public limited company which carried on the business of banking. It had various branches and one of them was situated at Ramnagar. In the usual course of its business, large amounts were kept in various sages 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 pledged with the bank. 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 claim was not accepted by the Income Tax Officer, the Appellate Assistant Commissioner or by the Income Tax Appellate Tribunal. But, on a reference, the High Court of Allahabad held that the loss by dacoity was incidental to the banking business and was, therefore, a trading loss. Subba Rao J., on a review of many authorities, upheld the decision of the High Court. In the regard to the passage which has been extracted by me above from the judgment of Venkatarama Aiyar J. in Badridas Dagas case, Subba Rao J. has said : "The correctness or otherwise of the said observation may fall to be considered when such a case directly arises for decision", but distinguished the case of Nainital Bank on the ground that 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. The case of Motipur Sugar Factory Ltd. was also referred to by his Lordship with approval but it was pointed out that although in the case of Motipur Factory case cash was entrusted to the employee under statutory rules, "there may be cases where such entrustment may be made by custom or practice. What is important to notice is," said his Lordship, "that robbery of cash from the hands of an employee is held to be incidental to the business of the assessee."
The principle which can be deducted from the decided cases, referred to above, is that the loss of the money must be one that springs directly from the carrying on of the business or its operations and is incidental to it. If the loss is incidental to the business and has occurred during the business operations, it has got to be taken into account while computing the net profits and gains of an assessee u/s 10(1) of the Act. Learned standing counsel for the department placed reliance upon a decision of the Punjab High Court in Ram Gopal Ram Sarup v. Commissioner of Income Tax. In that case the assessee firm used to transact business in food-grains and had several branches including one at Calcutta. One Prabhu Dayal was an employee of the assessees Calcutta branch and was sent with a sum of Rs. 9,300 in cash on the 13th of November, 1955, to the Punjab National Bank Limited, Bara Bazar Branch, Calcutta, for depositing the same in the account of the assessee-firm. A thief snatched from Prabhu Dayal the bundle containing the money. The Income Tax Officer held that the assessee had failed to prove that the amount involved was necessarily for business purposes. The Appellate Assistant Commissioner expressed the view that the assessee had lost the cash which was not the stock-in-trade and, therefore, was not a revenue loss suffered. The Appellate Tribunal did not accept the assessees contention that the loss suffered arose in the course of the assessees business or was incidental thereto. It was observed by Tek Chand J. :
"A duty is cast upon the assessee to prove necessary facts entitling him to claim deduction. It has to furnish proof as to how the deduction claimed is a connected with its business or its profits."
Relying upon the decision of the Supreme Court in Badridas Daga v. Commissioner of Income Tax, which in its turn had approved the observations of the learned Chief Justice in Ramaswami Chettiar v. Commissioner of Income Tax, Tek Chand J. held :
"Whether the loss incurred was incidental to the carrying on of the trade and therefore admissible would depend upon the facts of a particular case and in this case evidence has not been adduced to show that the loss incurred by the assessee in the manner alleged was in fact incidental to the conduct of his business."
We would, however, at this stage like to point out, with reference to the later decision of the Supreme Court in Nainital Banks case, that Mr. Justice Subba Rao has referred with approval to the decision of the High Court of Australia in Charges Moore & Co. (W.A.) Pty. Ltd. v. Federal Commissioner of Taxation. In that case it was pointed out that :
"Banking the taking 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 his, or some equivalent financial procedure, hitherto undervised, the replenishment of stock-in-trade and the payment of the wages and other essential outgoing would stop and that would mean that the gaining or producing of the assessable income would be suspended.... The `occasion of the loss in the present case was the course pursued in banking the money."
After further quoting from the said decision, his Lordship Mr. Justice Subba Rao had said :
"This decision laid down the following principles : (i) banking the takings was a necessary part of the operations to the business with which the court was dealing in that case; (ii) the loss to the business caused by the 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 expression `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 it to say, the loss must be connected with the operation to produce income."
In regard to the Full Bench decision of the Madras High Court, it has been said by the Supreme Court in Nainital Banks case :
"This judgment, if we may so with respect, takes a narrow view of the problem. Indeed in the Motipur Sugar Factory case, 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."
Coming to the facts of the instant case, however, in the light of the principles of law enunciated by the Supreme Court, we feel difficulty in disposing of this reference finally on the findings recorded by the Tribunal in its appellate order or in the statement of the case. Relying upon the only material, the copy of the first information report, the Tribunal seems to have accepted the fact that the money was in transit in the possession of Sachidanand when the highway robbery took place, and, therefore, in the opinion of the Tribunal, this was a simple case of money sent to pay off the adathiyas balance in the account for purchases made or to be made from him. That is to say, on these findings one may draw the conclusion that in the opinion of the Tribunal the money was sent through the employee of the assessee for the purpose of the business and during the course of its operations : hence one may say that it was incidental to the business. The only ground for rejecting the claim of the assessee given by the Tribunal is that the assessee had chosen recklessly and carelessly to expose itself to the risk of highway robbery without proper protection and that there was no business necessary proved for such exposure. In the earlier portion of the order, the Tribunal has observed at one place :
"It is seen from this ledger account that moneys had been remitted to the adathiya by the same means on former occasions too."
The findings of facts have been recorded by the Tribunal in a manner which do not enable us to satisfactorily answer the question of law formulated for the opinion. The findings have got to be recorded in the light of the principles discussed above on the following points :
(1) Whether the assessee has satisfactorily proved in this case that the loss ccurred in the manner alleged, that is to say, whether the money was in transit form Bhagalpur to Asarganj when it was being taken by the Sachidanand and then it was robbed on the way,
(2) Whether it was being taken there during the course of the operation of the business and for its purpose,
(3) Whether it was the custom or practice to send money in the manner it is claimed to have been sent by the assessee.
If the findings on the questions aforesaid could be properly and clearly arrived at in favour of the assessee, then as pointed out by the High court of Australia in Charles Moore & Co. (W.A.) Pty. Ltd. v. Federal Commissioner of Taxation, the expressions "incidental" and "relevant" in relation to the losses did not relate to the frequency of the happening of the risk or necessarily to its exposure to such risk but to their nature and character, that it to say, the loss must be connected with the operation to produce income.
We are, therefore, not satisfied with the statement of the case and the findings recorded by the Tribunal are not sufficient to enable us to determine the question referred to us for our opinion. We, therefore, refer the case back to the Appellate Tribunal to record their clear findings on the questions formulated above and state a further case thereafter to enable this court to determine the question of law involved in it.