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Messrs. Ram Gopal Ram Sarup v. Commissioner Of Income Tax, Punjab.
Court Opinion Summary — Tek Chand, J. (with concurring opinion of Inder Dev Dua, J.)
Factual and Procedural Background
The assessee is a registered two‑partner firm trading in foodgrains and agricultural products on a commission agency basis, with a head office at Beri and a Calcutta branch. For the accounting year ending 13 November 1955 (assessment year 1956‑57), the Calcutta branch earned net commission of Rs. 58,246. On 13 November 1955, the branch employee Prabhu Dayal was sent with Rs. 9,300 in cash to deposit that sum into the firm’s bank account at Punjab National Bank, Bara Bazar branch, Calcutta. A thief snatched the bundle containing the money from Prabhu Dayal, and the culprit could not be traced despite a police report. The firm wrote off Rs. 9,300 as stolen in its books and claimed it as a trading loss in its income‑tax return.
The Income‑tax Officer disallowed the deduction, treating the amount as a capital loss because, in his view, the assessee had not proved the sum was necessarily for business purposes. The Appellate Assistant Commissioner and thereafter the Income‑tax Appellate Tribunal (ITAT), Delhi Bench, upheld the disallowance. The ITAT held that section 10(1) of the Income‑tax Act did not apply and relied on the principle in Mulchand Hiralal v. Commissioner of Income‑tax. The assessee applied for a reference to the High Court, and the Tribunal referred the following question of law to the High Court: whether the Rs. 9,300 loss arose in the ordinary course of and incidental to the assessee’s business and was therefore a trading loss under section 10(1) of the Income‑tax Act.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the loss of Rs. 9,300 arose in the ordinary course of, and incidental to, the assessee's business and was, as such, a trading loss under section 10(1) of the Income‑tax Act allowable in computing the business income?
Arguments of the Parties
Assessee's Arguments
- The assessee claimed the Rs. 9,300 as a trading loss and contended that the theft occurred in the course of business or was incidental to it.
- The assessee relied on the decision in Lord's Dairy Farm Ltd. v. Commissioner of Income‑tax ([1955] 27 I.T.R. 700) in support of its claim.
- Both sides (including the assessee) relied upon observations in Badridas Daga v. Commissioner of Income‑tax concerning losses by misappropriation by employees being incidental to business, as distinguished in appropriate factual circumstances.
Department's Arguments
- The department contended that the assessee had failed to produce evidence showing the connection of the Rs. 9,300 with the assessee’s business; it was the assessee's burden to prove facts entitling it to a deduction.
- In the alternative, the department argued that even if the amount were a business loss, loss by reason of theft could not be allowed under section 10(1) (or sub‑section (2) of section 10) in the circumstances of this case.
- The Income‑tax Officer and the Appellate Assistant Commissioner both held there was no evidence that the money was necessarily for business purposes or that the loss was of a nature incidental to the business.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Lord's Dairy Farm Ltd. v. Commissioner of Income‑tax [1955] 27 I.T.R. 700 | Cited by the assessee as supportive authority for treating certain losses as business‑connected. | The Tribunal considered this authority cited for the assessee but held it inapplicable to the facts of the present case. |
| Mulchand Hiralal v. Commissioner of Income‑tax [1938] 6 I.T.R. 151 | Contains the observation (Courtney‑Terrell C.J.) that when money is stolen the person is parting with it unwillingly and cannot be said to lose the money for the purpose of earning profits or gains. | The Tribunal relied on this principle; the High Court noted that the Tribunal thought Mulchand Hiralal was "fully applicable." |
| Badridas Daga v. Commissioner of Income‑tax (Supreme Court) | Holds that misappropriation by an employee, proved on facts, may be incidental to carrying on business and deductible under section 10(1); but emphasises that deductible loss must spring directly from carrying on the business (distinguishing robberies by strangers). | The Court reviewed the Supreme Court’s observations and applied the distinction: embezzlement by an employee can be deductible in some cases, but theft by a stranger may fall on the assessee as owner rather than as trader, depending on facts. |
| Ramaswami Chettiar v. Commissioner of Income‑tax | Explains limits of deduction for loss due to embezzlement by an employee and contrasts theft by strangers with losses incidental to employing servants for collection. | The High Court cited and quoted these observations to show the boundary between deductible employee misappropriation losses and non‑deductible robberies by strangers; used to assess whether the instant loss was incidental to business. |
| Commissioner of Income‑tax v. Chakka Narayana (Division Bench decision) | Holds that losing cash by theft (e.g., lost at a railway station after encashing securities) was not incidental to the assessee's business unless it was part of the assessee's business to carry cash; mere connection is insufficient — loss must spring directly from the carrying on of business. | The Court relied on this decision as supporting the proposition that not every loss with some connection to business qualifies as a loss incidental to business; applied the same test to the present facts and found them not to satisfy the test. |
Court's Reasoning and Analysis
The Court proceeded through a fact‑based analytical framework and emphasised the evidentiary burden on the assessee. The key strands of reasoning were:
- Burden of proof: The Court reiterated that the assessee must prove the necessary facts entitling it to claim a deduction, including how the claimed deduction is connected with its business or profits. The Income‑tax Officer had pointed out absence of evidence showing the sum was necessarily concerned with business purposes.
- Distinction between employee misappropriation and theft by strangers: The Court examined authorities (notably Badridas Daga and Ramaswami Chettiar) that accept misappropriation by an employee may, on proper facts, be incidental to the carrying on of business and thus deductible under section 10(1). However, these authorities also draw a careful distinction: a thief breaking in and stealing funds is a loss suffered by the owner as owner, rather than a loss incurred in the running of the business; that makes the loss non‑deductible under section 10(1) unless facts show it springs directly from the business.
- Application of precedent and factual test: The Court highlighted the test from Chakka Narayana and other authorities that a loss must "spring directly from the carrying on of the business" and be "inseparable from the business" to be considered incidental to it. Mere remote or collateral connection is insufficient.
- Application to the present facts: Applying these principles, the Court found that the assessee had not adduced evidence to show that the Rs. 9,300 stolen from its employee was connected with or incidental to the conduct of its business. Because the evidentiary requirement was not met, the Court concluded it was unnecessary to decide whether theft in these circumstances equated to employee embezzlement for section 10(1) purposes.
- Conclusion on costs: The Court awarded costs of Rs. 100 in favour of the Commissioner of Income‑tax.
Holding and Implications
Core Ruling: The question referred was answered in the negative: the loss of Rs. 9,300 did not arise in the ordinary course of, and incidental to, the assessee's business and therefore was not allowable as a trading loss under section 10(1) of the Income‑tax Act.
Implications:
- The assessee's claim for deduction of Rs. 9,300 as a trading loss was disallowed; the earlier treatment of the amount as not deductible stands.
- The Commissioner of Income‑tax was awarded Rs. 100 as costs.
- The Court did not establish a new general rule beyond applying existing authorities; the decision turns on the particular evidential facts of this case (in particular the absence of proof that the loss sprang directly from the carrying on of the business). The opinion therefore resolves the reference on the facts before the Court rather than creating a broad new precedent.
Judge Tek Chand delivered the principal opinion; Inder Dev Dua, J. agreed. Question answered in the negative.
Tek Chand, J.:— The question of law referred to the High Court by the Income-tax Appellate Tribunal, Delhi Bench, in this case is:
“Whether, on the facts and in the circumstances of the case, the loss of Rs. 9,300 arose in the ordinary course of, and incidental to, the assessee's business and was, as such, a trading loss under section 10(1) of the Income-tax Act allowable in computing the business income?”
2. The assessee is a registered firm of two partners with its head-office at Beri in Rohtak district and with branches in several places including the one at Calcutta. This firm used to transact business in foodgrains and other agricultural products on commission agency basis. The Calcutta branch earned a net commission amounting to Rs. 58,246 in the assessment year 1956-57 for which the accounting year ended on 13th November, 1955. Prabhu Dayal was an employee of the assessee's Calcutta branch and was sent with a sum of Rs. 9,300 in cash on 13th November, 1955, to the Punjab National Bank Limited, Bara Bazar branch, Calcutta, for depositing the sum in the account of the assessee firm. A thief snatched from Prabhu Dayal the bundle containing the money and consequently a report was lodged with the police authorities. The culprit could not be traced and in the assessee's books of account the amount of Rs. 9,300 was written off for the reason that the sum had been stolen. In the income-tax return the assessee firm claimed the amount as a trade loss. The Income-tax Officer in his order dated 23rd February, 1957, said that the assessee had failed to prove that the amount involved was necessarily for business purposes. Therefore, in the absence of any evidence produced by the assessee, he treated the amount as capital loss and added back Rs. 9,300. The assessee was unsuccessful in his appeal before the Appellate Assistant Commissioner and again before the Income-tax Tribunal. The Appellate Assistant Commissioner expressed the view that the assessee had lost the cash which was not the stock-in-trade and, therefore, was not a revenue loss suffered. He did not disagree with the Income-tax Officer that the loss was not accidental and in the ordinary course of the business affairs, but even if it was so the Appellate Assistant Commissioner did not consider it to be a revenue loss and expressed the view that it partook of the nature of capital loss in the hands of the assessee. On these grounds he agreed with the Income-tax Officer that the assessee could not be allowed to set off this loss.
3. The Appellate Tribunal did not accept the assessee's contention that the loss suffered arose in the course of the assessee's business or was incidental thereto. The provisions of section 10(1) could not be attracted. The case of Lord's Dairy Farm Ltd. v. Commissioner of Income-tax [1955] 27 I.T.R 700., which was cited on behalf of the assessee, was held inapplicable and the Tribunal thought that the principle set down in Mulchand Hiralal v. Commissioner of Income-tax [1938] 6 I.T.R 151. was fully applicable. Reliance was placed upon the observations of Courtney-Terrell C.J, who said:
“When money is stolen, the person from whom such money is stolen is parting with the money unwillingly or unknowingly and he cannot be said to lose the money for the purpose of earning such profits or gains.”
4. Thus the contention, which is the subject-matter of this reference, did not prevail before the Tribunal. The assessee then submitted his application requiring the Tribunal to refer the question of law reproduced above to this court.
5. Learned counsel at the Bar for the assessee and also for the department have cited a number of authorities, but they, do not call for discussion in any great detail. A duty is cast upon the assessee to prove necessary facts entitling him to claim deduction. It has to furnish proof as to how the deduction claimed is connected with its business or its profits. It was contended by the learned counsel for the department that no evidence has been furnished showing the connection of the sum of Rs. 9,300 with the assessee's business and that no facts had been brought out justifying how the assessee is entitled to the exemption claimed by it. He maintained that it was for the assessee to establish by evidence that the alleged loss was a trading loss or connected directly with the business or was incidental to it. He drew, our attention to the observations of the Income-tax Officer referred to above to the effect that no evidence had been produced by the assessee that the amount in question was necessarily concerned with the assessee's business purposes. In the alternative, it was argued that assuming that the amount was in the nature of a business loss, even then the loss by reason of theft could not be taken into consideration either under subsection (1) or under sub-section (2) of section 10 of the Income-tax Act. Both sides relied upon the observations of the Supreme Court in Badridas Daga v. Commissioner of Income-tax. In that case, an employee of the assessee which carried on business of money-lending and also dealt in shares in bullion was empowered by the power of attorney to operate on the assessee's bank accounts. He withdrew from the firm's, bank account large sums and applied them for the satisfaction of his personal debts, which he had incurred in speculative transactions. The misappropriation was proved. The assessee firm had written off the amount due from their employee in the accounting year in question. The dispute before the income-tax authorities was whether the amount embezzled was an admissible deduction. It was held, on the facts of that case, that the loss which had been sustained by the assessee as a result of misappropriation by its employee was incidental to the carrying on of its business and it should, therefore, be deducted in computing the profits under section 10(1) of the Act. It was held that the employment of agents was incidental to the carrying on of business and losses which were incidental to such employment were also incidental to the carrying on of the business. The Supreme Court then observed:
“At the same time, it should be emphasised that the loss for which 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. If, for example, a thief were to break overnight into the premises of a money-lender and run away with funds secured therein, that must result in the depletion of the resources available to him for lending and the loss must, in that sense, be a business loss, but it is not one incurred in the running of the business, but is one to which all owners of properties are exposed whether they do business or not. The loss in such a case may be said to fall on the assessee not as a person carrying on business but as owner of funds. This distinction, though fine, is very material as on it will depend whether deduction could be made under section 10(1) or not.”
6. Their Lordships of the Supreme Court cited with approval the under-noted observations of the Chief Justice in Ramaswami Chettiar v. Commissioner of Income-tax, as laying down the scope of the assessee's right to deduction of loss resulting from embezzlement by an employee and also as showing the extent and limits of that right:
“If any one is paid a sum due to him as profits and he puts that in his pocket and on his way home is robbed of it, it would be, I think, difficult to contend that such a loss was incidental to his business. Still more so when he has reached his home and put these profits in a strong room or some other place regarded by him to be a place of safety. I can well understand that in cases where the collection of profits or payment of debts due by, is entrusted to a gumastha or servant for collection and that person runs away with the money or otherwise improperly deals with it, the assessee should be allowed a deduction because such a loss as that would be incidental to his business. He has to employ servants for the purpose of collecting sums of money due to him and there is the risk that such servant may prove to be dishonest and instead of paying the profits over to him convert them to his own use. But I cannot distinguish the present case from the case of any professional man or trader who, having collected his profits, is subsequently robbed of them by a stranger to his business. In this case, none of the thieves were the then servants of the assessee although one of them had formerly been his cook.”
7. Whether the loss incurred was incidental to the carrying on of the trade and therefore admissible would depend upon the facts of a particular case and in this case evidence has not been adduced to show that the loss incurred by the assessee in the manner alleged was in fact incidental to the conduct of his business. A decision of a Division Bench in Commissioner of Income-tax v. Chakka Narayana was cited at the Bar. In that case an assessee who was a dealer in cloth and Government securities encashed them for Rs. 20,790, but lost the cash by theft at a railway station. It was held lhat the loss was not incidental to the assessee's business and, therefore, was not an allowable deduction and that it was only when it could be pointed out that it was part of the assessee's business to take cash with him that it could be said that the loss was incidental to the business. It was observed:
“In our opinion, every loss sustained by an assessee having some connection with his business would not amount to a Joss incidental to his business. It must be directly connecting the business or it must arise out of the business. The mere fact that there is some remote connection between the loss and the business would not bring the loss within the expression ‘loss incidental to the business’. It should spring directly from the carrying on of the business and be incidental to it. The loss should be inseparable from the business.”
8. Applying the above test to the facts of that case, it was held that the loss was not incidental to or one arising out of the business.
9. In the circumstances, we have not considered it necessary.to examine the other aspect of the case whether loss resultant on theft in the circumstances of this case is on the same footing as loss resulting from embezzlement by an assessee's employee. This reference can be disposed of on the ground that the assessee had failed to prove that the sum of Rs. 9,300, which was snatched away from its employee, Prabhu Dayal.on 3rd November, 1955, was connected with or incidental to the assessee's business.
10. For reasons stated above, I would answer the question under reference in the negative. The Commissioner of Income-tax shall be entitled to Rs. 100 as costs.
Inder Dev Dua, J.:— I agree.
12. Question answered in the negative.
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