1962 (3) TMI 97 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee is entitled to the deduction of Rs. 9,020-12-6 from the computation of its income under any provisions of the Income-tax Act.

Detailed Analysis:

Background and Facts:
The assessee, a limited concern called "The Anamalai Timber Trust Ltd.," claimed a deduction of Rs. 9,020-12-6 in the assessment year 1956-57. This amount represented part of the compensation by way of damages and costs decreed by the High Court in a suit filed by the State against the assessee. The suit was for compensation for the death of an elephant hired by the assessee, which allegedly resulted from injuries inflicted by its mahouts.

Issue 1: Nature of Liability
The primary issue was whether the assessee's liability arose from a breach of contract or from the tortious acts of its servants. The High Court of Travancore-Cochin concluded that the mahouts were the servants of the assessee company and caused the injuries in the course of their employment. The relationship between the plaintiff and the defendant was that of bailor and bailee, and the assessee was found negligent for failing to return the elephant in good condition.

Issue 2: Allowability of Deduction
The taxing authorities and the Tribunal disallowed the claim for deduction, concluding that the liability arose from a breach of contract. They relied on precedents such as Mask and Company v. Commissioner of Income-tax, Commissioner of Income-tax v. Himalaya Rosin-Turpentine Manufacturing Company, and Senthikumara Nadar & Sons v. Commissioner of Income-tax, which held that compensation for breach of contract is not deductible.

Argument by the Assessee:
The counsel for the assessee argued that the compensation was for the tortious acts of its servants, not for a breach of contract. They cited the High Court's remarks that the mahouts were the company's servants and caused the injuries in the course of their employment.

Court's Analysis:
The court noted that the liability also arose from the assessee's failure to take due care, which was a contractual obligation. The court examined whether damages paid for negligence, although arising from a breach of contract, could be an allowable deduction.

Precedents and Principles:
The court referred to several precedents, including:
- Strong and Company of Romsey Ltd. v. Woodifield, which stated that losses incidental to the trade itself could be deducted.
- Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, which emphasized that expenses must be for the purpose of earning profits.
- Badridas Daga v. Commissioner of Income-tax, which allowed deductions for losses arising out of the carrying on of the business and incidental to it.

The court also cited the Exchequer Court of Canada's decision in Imperial Oil Company Ltd. v. Minister of National Revenue, which allowed damages paid for negligence as a deduction.

Conclusion:
The court concluded that the compensation paid by the assessee arose from the carrying on of its business and was incidental thereto. The negligence of the assessee's servants, while acting in the course of their employment, was incidental to the business. Therefore, the consequential liability to pay damages was also incidental to the business.

Judgment:
The court held that the assessee is entitled to the deduction claimed. The question referred was answered in the affirmative and in favor of the assessee. No order as to costs was made, considering it a case of first impression.

Question answered in the affirmative.