Ramachander Shiv Narayan versus Commissioner of Income Tax, Andhra Pradesh, Hyderabad

Allowable ldss-Loss of property or nioney by theft or dacoity, whether a trading loss and if pern1issible deduction in computation of his n>et incomeJnconz'e-Tax Act, 1922, sec. 10(2) (xv)=::s. 37 of I11co1ne Tax Act, 1961.

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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 1964-65 corresponding to accounting year ended on October 16, 1963 returned; a.. loss of Rs. 5008/- from the business. The said figure \vas arrived at after claiming a loss of Rs. 30,000/- on ac·count of theft. The assessee had borrowed a sum of Rs. 50,000 /- from some creditor. The money was brought in cash by its employee. Out of the said sum of Rs. 50,000/ ~ which 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 incom~ on the ground that it \Vas a trading loss. The Income Tax Officer rejected the claim treating the Joss as being either of idle money -Or a capital loss and holding that it \Vas not incidental to the business of the assessee. An appeal before the Income Tax Appellate ·Commissioner failed; but in furth~r 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.

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Allowing the appeal by special Jef\ve. the. Court.

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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 Joss has got to be taken into account while arriving at the true figures of the assessee's income in the commercial sense. [803 F. ~q .

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(2) The list of permissible deduction in either of the two Acts is not exhaustive. The relevant words, ins. l0(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 \Vholly 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 a forced loss. Such a loss is a trading loss in the commercial sense and has got to be taken into account for ascei:tainment of true taxable profits. [804 C~EJ

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Badridas Daga v. Conunissioner of Income·Tax, 34 I.T.R. 10 and Co1nmissioner of Income-tax U.P. v. Nainital Bank Ltd. 55 I.T.R. 707, followed.

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Motipur Sugar Factory Ltd. v. Con1n1i.Jsioner of Income-Tax, Bihar & Orisso 28 I.T.R. 128, approved,.

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Charles Moore & Co. (W.A.) Pty. Ltd. v. Federal Conunissio11er 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. '

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SUPREME COURT REPORTS

[1978] 1 S.C.R-

802

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A (3) If there is a direct and proximate nexus between the business operation and the Joss or it is incidental to it, then the loss is deductible, as without the business opertion 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 (I) of the Australian Act. [806 G-H] Basantlal Sanwar Prasad v. Co,n1nisio11er of lncon1e-Tax 67 l.T.R. 380 B (Patna); U.P. Vanaspati Age11cy v. Con1n1issio11er of Income-tax 68 I.T.R. 120 Com1nissioncr of !11con1e Tax U.P. v. Sarya Sugar Milh· (P) Ltd. 70 l.T.R. 109; Comn1issioner of Income-Tax, Madras v. K. T. M. S. Mal11nood 74 I.T.R. 100; Commr. of Income-Tax, M.P. v. Ganesh Rice Miff 77 J.T.R. 889 and Chhotulal Ajitsingh v. Comniissioner of /11come-Tax, Rajasthan 89, I.T.R. 178. referred to, Bansidhar Onkannal v. Co1nmis.1io11er of /11co111e-Tax, Bihar and Orissa 17 I.T.R. 247 (Orissa ); Mis. Rain Gopal Rani Sarup v. Co1n111issio11er of fncome- c ta.i:, Punjab 47 I.T.R. 611; Com1nissiont'r of /ncon1e Tax, Andhra Pradesh v. Chakka Narayana 43 J.T.R. 249; Madurai Rajeshwa." v. Contn1issioner of lncouze'-tax, Andhra Pradesh, 51 1.T.R. 213 and S. P. S. Ra1naswa1ni Chettiar & Or's. v. The Con1missioner of l11con1e-Tox, Madras 1.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 D 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 bankin~ 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.

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In the instant case, the High Court took an errorieous vie\v in giving an E answer against the assessee. The loss \Vas, however, directly connected with business operation and was inc;dental to the carrying on of the business of purchase of Government securities to earn profits. Jn such a situation it wac; a part of the trading loss and deductible as such in arriving at the true profitc; of the assessee. [808 B-C, E-Gl

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CIVIL APPELLATE JURISDICTION'. Civil Appeal No. 1611of1972. Appeal by Special Leave from the Judgment and Order dated 4-3-1974 of the Andhra Pradesh High Court in Case Reference No. 2R of 1969.

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Jitendra Sharma for the Appellant.

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K. C. Dua and R. N. Sachthey for the Respondent.

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The Judgment of the Court was delivered by

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UNTW AL(A J .-This is an assessee's appeal by special leave from the decision of the Andhra Pradesh High Court in a reference made bv the IncomeTax 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 :

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"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 ?"

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RAMACHANDER. v. C.I.T. ( Untwalia, J.)

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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 find• ings 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.

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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 assossment year in question is 1964-65. The corresponding accounting year ended on October 16, 1963. The assessec 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. 50,000/- for the purpose of purchasing Government securities was brought in cash to Rajahmundry hy 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 asscssec'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/Jost 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 rcjec•cd the claim treating the loss as boing eifher ·of idle money or a capital loss. According to him it was not incidental to the business of the assessce. lts appeal before the Income Tax Appellate Commissioner failed but the assessee succeeded in the further appeal taken to the Tribunal. The Joss was ·allowed on the ground that it was incidental to the carrying on of the bnsiness of the assessee. The Commissioner of Income Tax asked for a reference which was made on the question of law above men1ioncd.

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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 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 upinions 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('). The principle decided in that case was reiterated with greater force, if we may say so with resoect, in another decision of this Court in Commissioner of Income-Tax, U.P. v. Nainital Bank Ltd(') After the said two decisions most of the High Courts have applied, .as they were bound to, the principles enunciated in them in favour of the assessees under similar cirrnmstanccs and facts. But we shall presently show that the Andhra

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(2) 55 I.T.R. 707

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341.T.R. to.

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[1978] 1 S.C.R.

SUPREME COURT REPORTS

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804

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A Pradesh Hi!Jh Court persisted and has done so even in the judgment under appeal in taking ,~ather, a narrow view of the matter and not eorrectly applying the ratio decidendi of Badridas Daga's and Nainital Bank's cases.

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Under section 10(1) of the Income Tax Act, 1922-hereinafter called

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B the 1922 Act, the assessee was required to pay tax in respect of the profits or gains of any business carried on by him. The corresponding provi.Sion 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

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c 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 bas been uniforrnally 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 commerc.ial sense. The list of permissible deductions in either of the Acts is not exhaustive. We may just refer to section 10(12)(xv) of the 1922 bet corresponding to

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D isection 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 busines_s ........ " 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 expenditme which has an element of volition, but a forced loss. The cases have

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E 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.

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Now we proceed to refer to some decisions of the High Courts and

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this Court. We may start with a Patna decision reported in Motipur

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F Sugar Factory, Ltd. v. Commissioner of Income-Tax, Bihar and Orissa('I). The assessce 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 vfow !hat the loss was one arising out of the business of the assessec and sprang from the statutory necessity ot

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G sending money to various purchaing centres for distribution and hence was deductible from the asscssee's taxable income. The stress by the High Court that sending of money to valious purchasing centres sprang from the statutory necessity was not of much consequence. The method of business operation springing from custom, trade usuage or practice or otherwise may make the assessee send cash to or bring cash from other places. The Patna decision has been approved in the decision

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II of this Court in Badridas Daga's and Nainital Bank's cases.

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(I) 281.T.R. 128.

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RAMACHANDER v. c.I.T. (U11twalia, J.)

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805

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In Badridas Dag a' s case an agent of the asses see withdrew from tbe firm's 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 assessee's profits. Venkatarama Tiyar J. delivering the pudgmcnt of the Court has said at page 15 of 34 I.T.R. :-

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"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 prohipition against it, express or implied ...... "

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The learned Judge emphasised at page 16 : " .... that the loss for whlch 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 money-lender and running with the funds was given to show in Dagcts case that it would not be .. an allowable loss. But the example was not considered to be quite apP<"'ite in · the case of Nainital Ba11k 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 Income-Tax, Madras,(') were merely refered in Badridas Daga's case but was disapproved in Nai11ital Bank's case. The facts of the latter case were that the Bank in the usual course of its business 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 Joss to be an admissible deduction chiefly on the ground that it fanned part of the stock-in-trade of a banking company. A large number of authorities were considered including the one in Badridas Daga's 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 col1Sequence. 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 olf the High Court of Australia iii Charles Moore & Co. (W.A.) Pty Ltd. v. Federal Commissioner of Taxation(•.) was heavily relied upon. (I) I.L.R. 53, Mad. 904. (2) (19Si·57) 95 Commonwealth Law Reports, 344.

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f 1978] 1 S.C.R.

SUPREME COURT REPORTS

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A Reference was also made to the decision of a learned single Jndge of the .New Zealand Supreme Court in the case of Gold Bank Services Limited v. Commissioner of Inland Revenue(!) 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 ihowever, point out the slight distinction between the Income-tax law of Australia and New Zealand and that of India, although basically in

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n principle there is hardly any difference. In the Australian case the ~tatutory language of section 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

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c 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 :-

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" .... we arc here dealing with a Joss incurred in an ope-

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D ration 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. !nland Revenue Commissioners-(1930) S.C. 215. at p. 220; ( l 929) 1.2 Tax Cas. 1248, at p. 1254

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summarised the characteristics of a business undertaking or enterprise considered as an affair of a capital nature."

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The language of the New Zealand statute was more or less the same except that it contained the adverb "exclusively". Haslam J., therefore. stated at page 470 of (1961) New Zealand Law Reports :-

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**"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 F the conclusion. In my opinion, the Joss was exclusively in· curred in the manner described, since the risk of precisely such an event was inherent in the course of the production of asses- sable income."

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The principle applicable in India is more or Jess 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 buisG ness 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 (l) of the Australian Act.

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There is a veritable roll-call of cases of the various High Courts in

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H 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

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(I) (1961) New Zealand Law Reports, 467.

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RAMACIIANDER v. C.J.T. ( Untwalia, J.) 8Q7

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them. In Baselltlal Sanwar Prasad v. Commissioner of Income-Tax(') 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 liu:ome-Tax, Madras v. K. T. M. S. Mahmood('); by the Madhya Pradesh Hi!lh Ccurt in Commissioner of Income-Tax M.P. v. Ganesh Rice Mills(') and the Rajasthan High Court in Choltulal 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(') and in the Madras full Bench case of Chettlar'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(').

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Now we proceed to point out the persistant!y wrong appliaction 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-Tl!l.x, Andhra Pradesh v. Chakka Narayana(') and Maduri Rajeshwar v. Commissioner of Income-Tax, And- . izra Pradesh ( '"). ln Chakka Narayana's case (supra) the assessee who was a dealer in cloth and government securitie> '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 Ccurt in Ramaswami Chettiar's case which, as we have already pointed out, was not approved by this Court in Naini.tal Bank's case. The High Court enu.nciated 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 wa~ 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 dis¹ inction. Similarly the Andhra Pradesh High Court took a narrow view in Maduri Rajeshwar' s case also. There a stranter 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 whel} .he said at page 216 : ·

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(t) 67 l.T.R. 380 (Patna ). (6) 89 T.T.R. 178 {2) 68, I.T.R. 120. (7) 17 J.T.R. 247 (Orissa). (3) 70 l.T R. 109. (8) 47 l.T.R .. 611. (4) 74 LT R. 100. (9) 43 l.T.R. 249. <S) 77 l.T.R .. 889. (JO) 51 T.T.R. 213.

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[1978] 1 S.C.R.

SUPREME COURT REPORTS

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"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 cue is that at the time theft was committed money was in the busi· ness premises and it was during business hours. There is no other connection between the theft of the money and the business of the assessee."

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It is to be remembered that the direct and proximate connection ancl 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-intrade, 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.

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In the judgment under appeal the High Court, to our mind, has taken the same erroneous view and given the answer against the assessee inspite of the fact that it has noticed a catena of cases of the various High Courts already alluded to by us also. . Distinguishing the pre..ponderance of the view expressed in the various decisions in favour of the assessee, the Hi!Jh Court, in our opinion, wrongly chose to stick to its earlier narrow view.

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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 F very common and well-known. Out of the said sun1 of Rs. 50,000/which 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 sucb a situation it was a part of the trading loss and deductible as such in arriving at the true profits of the G assessee.

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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.

App~al allowed.

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Ramachander Shiv Narayan v. Commissioner of Income Tax, Andhra Pradesh, Hyderabad

Case brief

What is this about?

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Ramachander Shiv Narayan v. Commissioner of Income Tax, Andhra Pradesh, Hyderabad

Case brief

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