TMI Blog1962 (3) TMI 97X X X X Extracts X X X X X X X X Extracts X X X X ..... y to refer to the facts of that case. The Tripunithura Devaswom owned an elephant named Narayanankutty , Before the Devaswom Board, Cochin, was formed, the said Devaswom was under the control of the Government of Cochin. An agreement dated 15-5-1917 M.E. (December 30, 1941, A.D.), was entered into by the assessee with the Government of Cochin by which the said elephant was hired by the assessee and the services of its two mahouts taken over. Two of the terms of that agreement are that the elephant should be used only for haunting timber which did not exceed a specified volume and that the two mahouts attached to the elephant must be engaged by the assessee. The State of Cochin instituted the suit against the assessee for compensation for the death of elephant, which, it was alleged in the plaint, resulted from the injuries that were inflicted by its mahouts on the animal when it refused to drag the over-sized logs of timber. One of the defences that was raised by the assessee to the suit was that the mahouts concerned were not its servants but were the servants of the Government and therefore no liability could be imposed on the assessee for the tortious acts, if any, committed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the mahouts the dependent company is certainly liable. We are unable to accept this contention. It is clear from paragraph 36 of the judgment of the High Court, which we have extracted above, that the liability for compensation has been imposed on the assessee also on the basis that the assessee had failed to establish that it had taken due care that was expected of it. This liability arose out of the contract of bailment which imposed an obligation on the assessee to take due and proper care and the omission to take such care amounted to negligence. The question that arises for determination in this case, therefore, is whether the damages that the assessee company had to pay, because of its negligence, though arising from a breach of contract, is an allowable deduction in computing its income. It was admitted before us that if the decision of the High Court had been rested solely on the principle of vicarious liability of the assessee for the tortious acts of its servants, while acting in the course of their employment, the compensation paid by the assessee would be an allowable deduction. But it was urged that if the liability was one arising from a breach of contract, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .B. 553. 572: I do not wish to decide until I have heard the matter further argued, whether damages paid in civil proceedings in respect of carrying on business in a negligent manner can or cannot be deducted from the profits, for I quite see that on the language that I have used questions may arise as to such damages. The real test to be applied in these types of cases appears to be what has been laid down by the House of Lords in Strong and Company of Romsey Ltd. v. Woodifield*. The Lord Chancellor said: I think only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself. They cannot be deducted if they are 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 accident in travelling might be deducted. On the other hand, if a man kept a grocer's shop, for keeping which a house is necessary, and one of the window shutters fell upon and injured a man walking in the street, the loss arising thereby to the grocer oug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... steamer at a time when import of dates by steamer was prohibited could be deducted in computing the assessee's income. The English decisions in the above three cases among others were reviewed by the Supreme Court and it came to the conclusion: .........that expenses which are permitted as deductions are such as are made for the purpose of carrying on the business, i.e., to enable a person to carry on and earn profit in that business. It is not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business..........It must be a commercial loss and in its nature must be contemplable as such............They cannot be deducted if they fall on the assessee in some character other than that of a trader.......the test being that the expenses which are for the purpose of enabling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business. The same principle has been enunciated by the Supreme Court in Badridas Daga v. Commissioner of Income-tax [1958] 34 I.T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of their infliction. It is also doubtful whether they could have interfered with the mahouts regarding the manner in which they controlled the elephant. There is no finding by the High Court in the civil suit that the elephant as been used for dragging logs of timber of a volume higher than that specified in the agreement. From the above, it is clear that the compensation that the a assessee had to pay arose from the carrying on of its business and is incidental thereto though, according to the finding of the High Court, the assessee has been negligent in that its servants had not taken due and proper care. The question, therefore, is whether compensation paid as damages for negligence is allowable as an item of deduction. The rule laid down by Lord Loreburn in Strong and Company of Romsey Ltd. v. Woodifield [1906] 5 Tax Cas. 215 has been applied by some of the Dominion Courts to allow such damages as a proper cost of earning profits . Some of the cases have been collected by Hannan and Farnsworth in their book The Principles of Income Taxation, at page 520. In one of those cases, Imperial Oil Company Ltd. v. Minister of National Revenue [1948] 1 D.L.R. 305, decided by the E ..... X X X X Extracts X X X X X X X X Extracts X X X X
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