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Judgment
Horace Owen Compton Beasley, C.J.—The facts in this case have been sufficiently set out in the answers to the question referred to us of
my learned brothers Anantakrishna Aiyar and Curgenven, JJ., which I have had the advantage of seeing and I therefore do not propose to state
them. The question seems to me to resolve itself into one as to whether the loss sustained by the assessee in this case was one which can be
described as incidental to his business. If it was, then he is entitled to have his profits upon which he is liable to pay Income Tax reduced by the
amount of that loss. It was argued for the assessee (1) that the robbery of the assessee''s money was one which was incidental to his business of a
money-lender,, and (2) that the money stolen was his ""stock-in-trade,"" because it was money which, had it not been stolen, was available to him
for the purpose of lending to borrowers and making a profit thereby. There is no evidence in this case that this sum was ""stock-in-trade'' '' at all
and the money would seem to me to be capital plus the profits collected by the assessee. If this money was capital, then the assessee would not be
entitled to a deduction on account of its loss. So far as the money stolen was the profit of the assessee, unless it can be shown that its loss was
incidental to the business he carried on, he cannot claim a deduction in respect of it. If any one 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 those profits in a strong room or some other place regarded by him to be a place of safety. I can well
understand that in cases where the collection of profits or payment of debts due 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. He has to employ servants for the purpose of collecting sums of money due to him and there is the risk that such servant,
may prove to be dishonest and instead of paying the profits over to him convert them to his own use. But I cannot distinguish the present case from
the case of any professional man or trader who, having collected his profits, is subsequently robbed of them by a stranger to his business. In this
case none of the thieves were the then servants of the assessee although one of them had formerly been his cook. This is no doubt a very hard case
and, whilst I have every sympathy with the assessee, I am unable to answer the question except in the negative. The question referred to us is
rather too general but upon the facts of this case which, in my opinion, are not at all adequately set out, that must be my answer.
The result is that the answer of this Full Bench is in the negative and the assessee is directed to pay the costs of the Income Tax Commissioner
which we fix at Rs. 250.
Anantakrishna Aiyar, J.
I have the misfortune in this case to differ from the opinion of my Lord the learned Chief Justice, and of my learned brother Curgenven, J.
The question referred for our decision u/s 66 of the Indian Income Tax Act is ""Whether the loss incurred by theft of money used in the money-
lending business, and.in the business premises should be allowed for in computing the Income Tax.
The question raised is one of very great importance, and the case is one of first impression, no case directly deciding the point having been
brought to our attention.
One should have liked that more facts were available; the facts, as they appear in the records before us, are the following:
The petitioners are a registered firm of Nattukottai Chetties carrying on money-lending business at Karaikudi and other places in British India, and
at Kuala Lampur in Federated Malay States, the headquarters being at Karaikudi in the Ramnad District. On the night of the 21st October, 1926,
certain persons broke into the strong room of the house at Moulmein-gyun (Burma) occupied by the petitioners and by two other firms, and stole
cash and currency notes of the value of Rs. 9,335 besides certain jewels which had been pledged with the firm, as security, by certain customers.
On 5th August, 1927, four persons were convicted of the said offence by the Magistrate. One of these persons had been employed as a cook at
the above-mentioned premises. Though he was not so employed at the time of the offence, he was convicted, in addition, u/s 328, Indian Penal
Code, of administering drugs to the inmates of the house to facilitate the commission of the theft. The Commissioner of Income Tax stated that he
had since the decision of the Income Tax Officer ascertained that the loss of the cash and the jewels was genuine. He, however, was of opinion
that there was no provision of law under which the assessees would be entitled to deduction claimed in respect of the cash and currency notes, that
the loss could neither be said to be a business loss nor expenditure incurred for earning profits; and that the loss in question is loss of capital. The
decision in Jagarnath Therani v. Commissioner of Income Tax, Bihar,and Orissa (1925) 2 I.T.C. 4 was distinguished on the ground that the loss in
the present case could not be said to have been incurred in the business at all, and that such a loss could not be said to have been incurred solely
for the purpose of earning the profits and gains of the business. He, therefore, held that the loss due to theft committed by persons unconnected
with the business is not allowable as a deduction.
The learned Counsel who appeared in support of the assessment argued that the allowance now claimed could not be brought under any one of
the clauses of Section 10 of the Act, which, he argued, exhausted the headings under which allowances could be claimed by assessees. I am
unable to accede to that contention. Section 10, no doubt, directs that the allowances mentioned in the section should be made in favour of the
assessee; but in my view it does not necessarily follow that the assessee is not entitled to the allowance now in question simply because it is not
specifically mentioned in Section 10. Under Clause 1 of Section 10, tax is payable only in respect of the profits or gains of any business carried on
by the assessee. The Court has to find out what the profits or gains of the business '' amounted to. In the absence of any specific provisions in the
Act, the profits or gains of a business have to be ascertained by the ordinary commercial methods. If the argument advanced on behalf of the
Crown be accepted, it would follow that no allowance could be claimed for instance for bad debts actually written off during the year, since there
is no specific provision in Section 10 for allowing such deduction. But it could not be, and in fact was not, contended that allowance should not be
made for such bad debts. The practice of making allowance for such bad debts has become firmly established. As the Court has to find out the
amount of profits or gains of the business during the period, the question arises whether the loss by theft in question should be deducted when the
profits are ascertained.
As pointed out in Konstam''s book,
The net profits of the trade or business should be computed by reasonable business methods, subject to any specific directions contained in the
Income Tax Act.
Lord Herschell observed in Russell v. Town and County Bank (1888) 13 A.C. 418 as follows:
The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose
of earning those receipts. . . . Unless and until you have ascertained that there is such a balance, nothing exists to which the name ''profits'' can
properly be applied.
Similar observations were made by Lord Parker in Usher''s Wiltshire Brewery, Ltd. v. Bruce (1915) A.C. 433:
Where a deduction is proper and necessary to be made in order to ascertain the balance of profits and gains, it ought to be allowed. . . provided
there is no prohibition against such an allowance.
It was argued for the assessee that the allowance claimed would come u/s 10(2)(ix) :
Any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains.
It was also argued that in the case of money-lending business of Nattukottai Chetties, the loss in question must be taken to be loss of stock-in-
trade. On the other side, it was argued for the Crown that the loss in question could not be said to be an expenditure incurred, much less, solely,
for the purpose of earning such profits or gains, and that in any event it should be taken to be expenditure in the nature of ""capital"" expenditure. It
was also argued that the monies in question could not be said to be ""stock-in-trade"" in the ordinary sense of the expression. Having regard to the
way in which such people carry on their money-lending business, it would seem to be essential for the successful carrying on of their business to
have cash with them even after ""the usual banking hours"". They carry on their business operations, as is well known, even after the offices of the
European Banks are closed for business for the day. Keeping monies with them for purposes of their trade after such office hours could not,
therefore, in my view, be said to be anything else than keeping monies in the usual course of their business. The profits made by them by doing
business after the usual office banking hours are surely liable to Income Tax. The finding, as I understand it, is that in the usual course of business
the remaining cash, etc., on hand and the jewels received on pledge from the customers were kept in the ""strong room"" of the business premises,
and that thieves broke into the strong room and stole the cash and currency notes and the jewels. The fact of theft having been found, I think that
the loss in question should be taken to be a loss connected with or arising out of the money-lending trade or business of the assessees. With
reference to the jewels thus lost, the Income Tax authorities have, and, in my opinion, rightly, made allowance; but I think that allowance should be
made also for the cash and currency notes amounting to Rs. 9,335 thus lost. I am unable to agree with the contention of the Crown that the loss in
question, should, if at all, be taken to be loss of ""capital"". It is true, as pointed out on behalf of the assessees, that the profits of the Moulmeingyun
business for the period in question was computed by the Income Tax authorities to be over Rs. 20,000. But that circumstance by itself is no
ground for holding that the item in question should be taken as loss of profits, and not loss of capital. Whether a particular item is really capital
expenditure or not has to be decided having regard to various considerations. Of course it is well established that when once profits have been
earned during the period, it does not matter how the same is dealt with subsequently.
I am inclined to the view that in the case before us, the cash and currency notes, etc., lost, should be taken to be ""stock-in-trade"" of the
assessee''s business. What should be considered as stock-in-trade of a business should be decided after having regard to the nature of the
particular business, its requirements, and other circumstances essentially connected with the successful carrying out of the particular business.
In Punjab National Bank v. Commissioner of Income Tax ILR (1926) L. 227 : 2 I.T.C. 184 the question was raised whether allowance should
be made for depreciation in the case of certain Government securities held by a firm. The answer would depend on the question whether those
securities were held by the firm (Bank) with the object of dealing with them from day to day in the ordinary course of its business including that of
buying and sellings Government securities in the usual course, or whether such Government securities were purchased by the firm (Bank) with the
object of constituting the same as a sort of reserve in lieu of cash. In the case of the former, allowance should be made for depreciation (the reason
being that the Government securities, should, in such a case, be treated as ""stock-in-trade"" of the Bank) ; but not in the case of the latter.
In the case of money-lending business such as the one before us, I think that the reasonable view to take as regards stock-in-trade is the one
indicated by me before.
The decision in Jagarnath Therani v. Commissioner of Income Tax, Bihar and Orissa (1925) 2 I.T.C. 4, so far as it goes, also supports this
view. There, some money was entrusted to a gumastha of a firm in the usual course of business with instructions to pay the same to a creditor of
the firm. The gumastha embezzled the monies. He : was criminally prosecuted, but was acquitted, his defence being that he was robbed of the
money. The case in Jagamath Therani v. Commissioner of Income Tax, Bihar and Orissa (1925) 2 I.T.C. 4, however, was comparatively a plainer
case than the one before us, and the Court, if one may say so with respect, very properly held that the loss was connected with and arose out of
the business, and was not prima facie a loss in the nature of capital expenditure.
On behalf of the assessees, the decision of Rowlatt, J., in Curtis v. J. & Y. Oldfield, Ltd. 9 T.C. 319, was referred to before us. At page 330
the learned Judge observed as follows :
I quite think, with Mr. Latter, that if you have a business, 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.
Stress was laid on the words ""something of that sort"" occurring in that judgment. But the words are too wide and one cannot be certain that the
learned Judge had a case like the present in his view. Too much importance should not, I think, be attached to the above observation in the
circumstances. It was argued on behalf of the Crown that theft should not be taken to be anything connected with or arising out of the assessee''s
money-lending business. In my view that is stating the position rather too broadly. In the case of Railway Administrations and other common
carriers, the practice seems to be to make allowance for losses sustained by them in compensating passengers for accidents in travelling over the
railway, etc. That the practice is to make such allowance in favour of common carriers is taken for granted in the judgment of Lord Loreburn,
L.C., in Strong and Company, Lid. v. Woodifield (1906) A.C. 448 : 5 T.C. 215 the Lord Chancellor observed as follows:
In my opinion, however, it does not follow that if a loss is in any sense connected with the trade, it must always be allowed as a deduction; for it
may be only remotely connected with the trade, or it may be connected with something else quite as much as or even more than with the trade. I
think only such losses can be deducted as are connected with in the sense that they are really incidental to the trade itself. They cannot be deducted
if they arc mainly incidental to some other vocation or fall on the trader in some character other than. that of trader. The nature of the trade is to be
considered. To give an illustration,losses sustained by a railway company in compensating passengers for accidents in travelling might be deducted.
If losses sustained by a railway company in compensating passengers for accidents in travelling over its line could be deducted, it would seem
to follow that losses similarly sustained by a railway company in compensating owners and consignees of goods entrusted to them for carriage, but
which were lost during transit by theft, could also be deducted in proper cases. That could seem to resemble the present case, and the
observations by the Lord Chancellor, I think prima facie, support the contention of the assessee before us.
No doubt the further observations made by the Lord Chancellor should, also be kept in view. It was remarked later on at page 452:
Many cases might be put near the line, and no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the
cases that may arise.
The loss must be something in the nature of a commercial loss. Whether a particular loss is of that nature or not would have to be decided with
reference to all the circumstances of a case. In Royal Insurance Co. v. Watson (1896) A.C. 1 Lord Shand expressed the opinion that damages
awarded to an employee for wrongful dismissal would be allowable as a deduction. Damages for libel against a newspaper proprietor would
appear to be loss in the ordinary course of business of proprietors of newspapers. See Pratt and Redman''s Income Tax Law, 10th Edition, page
112.
To the argument urged on behalf of the Crown that it is no part of the assessee''s business to deal with thefts, the following observations of
Lord Buckmaster in Gliksten & Son, Ltd. v. Green (1929) A.C. 381 : 14 T.C. 365 may be referred to. There, the question was whether the
amount received by a firm of timber merchants from fire insurance companies in respect of stock of timber destroyed by fire could be assessed to
Income Tax. At page 384 Lord Buckmaster observed as follows:
If this results in a gain, as it has done, it appears to me to be an ordinary gain-a gain which has taken place in the course of their trade- none the
less because, as Mr. Macmillan put it, and as I think Sir John Simen before him appears to have put it, it is no part of a timber merchant''s business
to trade in fires.
If, in the present case the stock-in-trade of the assessees before us including balance on hand each day and the jewels, etc., received on
pledge from customers, had been insured at a particular figure against fire or theft, and the amount was accordingly received from the insurers on
the occurrence of fire or theft, then the amount so received would, according to the decision in Gliksten & Son, Ltd. v. Green (1929) A.C. 381 :
14 T.C 365 be prima facie taxable. The premia paid in respect of such insurance is allowed to the assessee [see Section 10(2)(iv)], and in return,
the amount received by the assessee from the insurers would seem liable to be assessed to Income Tax. If no insurance had been effected by the
assessees, no premium is paid and no allowance is made on account of premium; and in case of loss, the assessee receives no amount from
insurers, and therefore no such amount could be included in the assessment. The reasoning would seem to lead to the conclusion that the loss even
if uninsured should be deducted, as I have come to the conclusion that the loss is connected with the business and is really incidental to the trade
itself, having regard to the nature of the trade or business of the assessee.
Turning to the English Text-Books on Income Tax Law, I find the following statements in Sanders'' Income Tax, 3rd, edition. At page 310 it is
stated that ""a deduction is allowed in respect of employees'' theft."" At page 196, it is stated, that ""loss from embezzlement is deductible."" Similarly
at page 163, ""deduction is allowed in practice for the loss arising from defalcations of employees."" At page 203, there are two passages which are
rather important: ""a deduction is permitted in practice for fire insurance premiums""; also, ""loss of stock through fire is deductible in so far as it is not
recovered by insurance, but loss of building does not form an admissible deduction."" I also note that, ""loss by flood or tempest"" is allowed in case
of assessments under Sch. A. The above statements, so far as they go, would seem to lend support to the assessees'' contention in the present
case.
Each case has to be decided with reference to the facts and circumstances relating thereto, and having regard to the nature and methods of
trade or business in question. Having regard to the circumstances of the present case, and the findings of fact arrived at by the Income tax
Commissioner, I think that the assessees are entitled to the deduction of Rs. 9,335 claimed by them, and I would answer the question in the
affirmative.
Curgenven, J.
The question which the Commissioner refers is:
Whether the loss incurred by theft of money used in the monev-lending business and in the business premises should be allowed for in computing
the Income Tax.
The Commissioner rightly observes that a loss of this character is not included within any of the deductions permissible u/s 10(2) of the Act.
But that does not conclude the matter, because Section 10 provides for the taxation of the profits of a business, and we have therefore to consider
whether, in computing profits, the amount of such a loss may be deducted from them. It is settled, for instance, that a bad debt incurred by a
money-lender may be so deducted, on the ground that it is a loss incidental to his business, so that it is fair, in assessing his net profits, to take
account of losses as well as gains. Such a loss, it appears to me, must satisfy two conditions: (1) it must be a loss of part of the stock-in-trade of
the business, and (2) it must be a loss of such a kind as is incidental to the business.
As regards (1), the question describes the money lost as ""money used in the money-lending business,"" and taking this to mean money actually
in use in the carrying on of the business, I feel no difficulty in holding that it was part of the moneylender''s stock-in-trade. It may have included
profits earned in previous transactions, but if those profits were themselves to be applied to the business, and were kept in hand for that purpose,
they would not, I think, be any the less part of the stock-in-trade.
Requirement No. (2) presents greater difficulties, because I think it is clear that not all kinds of losses of stock-in-trade can be said to be
incidental to the business. A loss, to be incidental, must be such as in the ordinary course, and having due regard to the peculiar risks attendant
upon the conduct of the business, is likely from time to time to occur. Cases of embez-zlement by subordinates, such as formed the subject of
Jagar-nath Therani v. Commissioner of Income Tax, Bihar and Orissd (1925) 2 I.T.C. 4 would be losses of this nature, because the employment
of clerks and servants is unavoidable, and the employer is likely, sooner or later, to be the victim of their dishonesty or negligence. That such a loss
might be classed as a form of expense arising out of trade was recognised in Curtis v. J. & Y. Old field, Ltd. 9 T.C. 319 although in the particular
circumstances of that case, as I read it, the money lost no longer formed part of the stock-in-trade. The test whether the loss was, in the language
of the English rule, ""connected with or arising out of trade,"" was applied in two other English cases, Strong & Co., Ltd. v. Woodifield (1906) A.C.
448 : 5 T.C. 215 and Inland Revenue Commissioners v. Warnes & Co. (1919) 2 K.B. 444 : 12 T.C. 227 The former related to damages claimed
from an inn-keeper in respect of injuries caused to a customer by the falling of a chimney; the latter to a penalty incurred by a trading firm for
negligently failing to observe certain conditions imposed during Wartime on the export of goods to neutral countries. The loss was held, in the
language of the English rule, to be a loss ""not connected with or arising out of trade."" These cases do not help us further than to show what manner
of test should be applied. Now in the present case it may be conceded that a money-lender''s business requires that he should keep a considerable
sum in cash on his premises. Even if a bank is accessible to him, it would unduly restrict his activities to transact his affairs only within banking
hours. The practice is certainly otherwise, and it is only fair to have regard to custom in deciding what the exigencies of a business require. That
means that cash must be kept in a safe or strong room. The receptacle in the present case is described as a strong room and the question resolves
itself into whether theft from a strong room may form the foundation of a claim to remission of tax. I exclude cases of theft by a clerk or servant
employed in the business and having access to the strong room, because that is not in question here and special considerations might apply. In
general, I am not prepared to say that theft by some external operator, with or without the complicity of domestic servants, ought to be recognised
as the basis of a claim. To recognise it we must, I think, find not only that the cash had to be kept on the premises, but that its loss by theft was a
circumstance which was so far probable as to be an occurrence incidental to, if not inseparable from, the manner in which it had to be kept. In my
experience, the abstraction of money by theft from properly constructed safes or strong rooms is not within the competence of the ordinary thief or
house-breaker, and we have not yet in this country to reckon with gangs of safe-breakers, such as may be found elsewhere. Perhaps the
circumstance that no decision upon a case of this nature is to be found suggests the infrequency of such claims. '' The only test to apply, in order to
see whether a loss of this kind is one incidental to the business, is, I think, the comparative likelihood of its occurrence, the requirements of the
business being what they are. For example, injury to life and limb, and probably theft too, must occur sooner or later in the running of a railway.
Bad debts and embezzlement have already been adverted to. Very likely the theft of stock-in-trade which have to be kept exposed to the public
would fall into the same category. But I doubt whether cash kept in a safe should, if it should happen to be stolen, be allowed for.
We have not been furnished with any adequate narration of the facts of the present case, so that the question has had to be answered, as
indeed it is put, in general terms. So considering it, I agree with my Lord in returning a reply in the negative.