1977 (11) TMI 2 - SC - Income Tax

Loss on account of theft by some strangers - loss was directly connected with the business operation and was incidental to the carrying on of the business of purchase of Government securities to earn profit - claim for deduction is justified - assessee s appeal allowed

Summary

Issues Involved:
1. Whether the loss of Rs. 30,000 due to theft was a trading loss deductible in computation of the assessee's net income.

Issue-wise Detailed Analysis:

1. Entitlement to Allowance of Loss of Rs. 30,000:

The core issue in this case is whether the loss of Rs. 30,000 due to theft can be considered a trading loss and thus deductible in the computation of the assessee's net income under the Income-tax Act, 1961. The facts of the case, as found by the Tribunal and accepted by the High Court, are straightforward. The assessee, a registered firm dealing in gold, silver, and gunnies, also derived income from Government securities. During the assessment year 1964-65, the assessee reported a loss of Rs. 5,008, which included a claimed loss of Rs. 30,000 due to theft. The theft occurred when an employee brought Rs. 50,000 in cash for purchasing Government securities, and a stranger stole Rs. 30,000 from the cashier. Despite lodging a police report, the stolen amount was not recovered.

The Income-tax Officer rejected the claim, treating the loss as either idle money or a capital loss, not incidental to the business. The assessee's appeal to the Income-tax Appellate Commissioner failed, but it succeeded before the Tribunal, which allowed the loss as incidental to the business. The Commissioner of Income-tax sought a reference to the High Court, which ruled against the assessee.

The Supreme Court reviewed precedents, including Badridas Daga v. Commissioner of Income-tax [1958] 34 ITR 10 (SC) and Commissioner of Income-tax v. Nainital Bank Ltd. [1965] 55 ITR 707 (SC), which established that a trading loss must arise directly from the business and be incidental to it. The Court noted that the Andhra Pradesh High Court had consistently taken a narrow view, not aligning with the principles set forth in these key cases.

The Supreme Court emphasized that a trading loss, even if not specifically provided for in the Income-tax Acts of 1922 or 1961, must be considered if it arises from the business operation and is incidental to it. The Court cited various High Court decisions supporting this view, including Motipur Sugar Factory Ltd. v. Commissioner of Income-tax [1955] 28 ITR 128 and others.

The Court found that the Andhra Pradesh High Court had erred in previous cases, such as Commissioner of Income-tax v. Chakka Narayana [1961] 43 ITR 249 (AP) and Maduri Rajeswar v. Commissioner of Income-tax [1964] 51 ITR 213 (AP), by not correctly applying the principles from Daga's case and Nainital Bank's case.

The Supreme Court concluded that the loss of Rs. 30,000 was directly connected with the business operation and incidental to the business of purchasing Government securities. Therefore, it was a trading loss deductible in computing the assessee's true profits.

Judgment:
The Supreme Court allowed the appeal, set aside the decision of the High Court, and ruled in favor of the assessee, declaring the loss of Rs. 30,000 as a deductible trading loss. The Commissioner of Income-tax was ordered to pay the costs of the appeal to the assessee.