TMI Blog1946 (12) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... imed a set-off against his income in the accounting year for these three sums as his business loss. The claim was disallowed by the Income-tax Officer on the ground that this was a capital loss in these words: During the accounting year there was an accidental fire in assessee's shop in which a good portion of his stock-intrade, fixed assets and cash was burnt. Item (3) above (that is to say currency notes) is clearly a capital loss and is added back......The assessee lost his stock-in-trade due to an accidental fire. This loss which is due to the shortage of closing stock lost in fire, is thus more a capital loss. These are, therefore, not incidental to business, and are added back. In appeal, the assessee's claim was rejected in these words: The loss of stock-in-trade is a revenue loss only when it occurs by a cause usual in the course of business and is by its nature incidental to the carrying on of the business. The break out of the fire was an unfortunate accident not attributable to any operations carried on during trade. The destruction of currency notes and goods was thus purely by reason of an unexpected accident, and therefore the loss was a loss of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and gains for the purposes of Income-tax, or for the purposes of Excess Profits Duty, two general and fundamental commonplaces have always to be kept in mind. In the first place, the profits of any particular year or accounting period must be taken to consist of the difference between the receipts from the trade or business during such year or accounting period and the expenditure laid out to earn those receipts. In the second place, the account of profit and loss to be made up for the purpose of ascertaining that difference must be framed consistently with the ordinary principles of commercial accounting, so far as applicable, and in conformity with the rules of the Income Tax Act, or of that Act as modified by the provisions and schedules of the Acts regulating Excess Profits Duty, as the case may be. For example, the ordinary principles of commercial accounting require that in the profit and loss account of a merchant's or manufacturer's business the values of the stock-in-trade at the beginning and at the end of the period covered by the account should be entered at cost or market price, whichever is the lower; although there is nothing about this in the taxing statut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut at page 380 that fire is an event which has to be taken into account as an ordinary risk of a company which was doing large business in timber. This commercial view has now been adopted by the Indian Legislature in Section 10(2)(iv) which directs that the profits and gains of the business shall be computed after making a deduction in respect of insurance against risk of damage or destruction of buildings, machinery, plant, stocks or stores used for the purposes of the business. What then is the practice with regard to the deduction of the value of that portion of the stock-in-trade of a trader which has been destroyed by fire? The English practice is stated in Sander's Income Tax, third edition, at page 203: 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 was unable to get this book in our library, and I am quoting this from the judgment of Ananthakrishna Aiyar, J., in the case of Ramaswami Chettiar v. Commissioner of Income-tax, Madras [1930] 53 Mad. 904: 4 I.T.C. 438, at p. 445. In Gliksten's case [1929] 14 Tax Cas. 364 referred to above the tradi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... much timber and got the insurance money at that figure and the assessee was precisely in the same position as if they got rid of it by giving it to a customer and it was treated as a turnover in the ordinary course of their business. Supposing the timber had been sold to a customer and he had failed to make any payment at all and the amount due from the customer had been lost or had become irrecoverable, it cannot be seriously argued that such a loss would not have been a trading loss. In my opinion, therefore, the loss of a stock-in-trade due to fire is allowable as a trading loss on ordinary principles of commercial accountancy irrespective of the fact whether any part of it is insured or any sum is received from the insurance company, if it is insured. The Income- tax Department cannot be allowed to treat the sum recovered from the insurance people as if it were a turnover of the equivalent amount of the goods destroyed by fire and not to allow the deduction for the value of the goods destroyed by fire, otherwise the position is that on the one hand they treat the goods destroyed by fire as a turnover when the amount is received from the insurance people but they do not trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is sufficiently inflammable to justify the view that it is a risk incidental to a grain business. Cases are not unknown where grain heats up especially in the holds of ships, and catches fire by spontaneous combustion. Insurance against fire would, therefore, be an entirely reasonable and wise act on the part of the keeper of a grain godown. The Income-tax Act allows deduction in the profit and loss account of a sum spent as insurance premium. This can only be on the view that insurance is a justifiable expenditure, and the expenditure can only be justifiable, if it is to guard against a risk incidental to the business. The fact, therefore, that the law allows the insurance premia to be deducted, to my mind, carries the inevitable consequence that loss of stock by fire can also be deducted, and this view is confirmed by the fact that if the insurance company pays the claim the sum received must be shown on the profit side. It would be against all principle to force a man in his profit and loss account to show the compensation paid on the one side as a profit, without showing the value of the stock destroyed on the other side as a loss. There is no question of being a capital loss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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