Manohar Lall, J.:— This is a reference by the Appellate Tribunal under Section 66(1) of the Income-tax Act, asking for the opinion of this Court on the question

“whether the aggregate sum of Rs. 24,506 representing the value of goods destroyed by fire, in the circumstances of the case, is allowable as a deduction in computing the profits and gains of the assessee business under Section 10 of the Income-tax Act.”

2. The facts are these. The assessee is a dealer in grains, jute, groceries and cloth. In the accounting year of the assessee which is 1997 Sambat corresponding to 1940-1941, a fire broke out in the vicinity of the aasessee's shop which ultimately spread out and affected his godown with the result that his goods worth Rs. 17,552, jute worth Rs. 6954 and currency notes worth Rs. 3228 were destroyed. The assessee claimed 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-in-trade, 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 shortages of C.S lost in fire, is thus more a capital loss. These are, therefore, not incidental to business, and are added back.”

3. 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 capital not deductible from taxable profits.”

4. In second appeal, the Appellate Tribunal rejected the claim in these words:

“It must be conceded that the goods that were destroyed by fire formed part of the assessee's stock-in-trade But, in our view, such loss was not in the nature of a trading loss. It cannot be said to be anything arising out of, or connected with, the assessee's trade or business. The loss to be incidental, must be such as, in the ordinary course and having due regard to the peculiar risks attendant upon the conduct of the business, is likely from time to time to occur. The loss due to fire may be remotely connected with the trade, but in no sense can it be said to be incidental to the trade itself.”

5. In making the reference to this Court the Appellate Tribunal points out that the claim for deduction of Rs. 3228 representing the value of currency notes destroyed was not objected to before them in appeal. This question, therefore, does not arise for our consideration. The Appellate Tribunal further observed that it must be Conceded that the goods that were destroyed by fire formed part of the assessee's stock-in-trade, and therefore, the simple question for our determination is whether the loss of a part of the-stock-in-trade of the assessee due to accidental fire can be allowed as a trading loss. Mr. Mazumdar on behalf of the assessee and the learned standing counsel on behalf of the Income-tax Department drew our attention to a number of Indian decisions, but none of these have a direct bearing on the question for our decision. The matter, therefore, has to be decided on general principles and with the aid of some English decisions and the practice in England.

6. It is necessary to bear in mind that the thing to be taxed is the amount of profits or gains of the trade or business and that the word profit should be understood in its natural and proper sense—in a sense which no commercial man would misunderstand—per Lord Chancellor Halsbury in (1892) 3 Tax cas 1851 approved by the Privy Council in 5 I.T.C 363.2 Lord President Clyde in (1925) 12 Tax Cas. 8133 stated at page 823:

“In computing the balance of profits 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 over 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 fee 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 statutes.”

7. Lord Herschell observed in (1888) 2 Tax Cas. 3214 that

“the profit of the trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts…. Unless and until you have ascertained that there is such a balance, nothing exists to which the name ‘profits’ can properly be applied.”

8. In (1914) 6 Tax Cas. 394,5 Lord Parker observed that where a deduction is proper and necessary to be made in order to ascertain the balance of profits and gains, it ought to be allowed provided there is no prohibition against such an allowance.

9. It is now well settled that in England a trader is allowed to deduct the amount paid for insurance effected on his goods or stock-in-trade. It is true that in (1924) 8 Tax Cas. 7256 Rowlatt, J. refused to allow any deduction being made for fire insurance premium and this view was upheld in the Court of Appeal. The Master of the Bolls (Pollock M.R) observed at p. 741:

“It may have been prudent that as owners they should keep the premises insured, but what they secured by it is not a further market for their business, not an increased sale of their commodities, not an enlarged use of their services which they are prepared to render; what they have secured is an indirect result perhaps useful to, but not directly necessary to their own trade.”

10. But the better view is given in the House of Lords case in (1929) 14 Tax Cas. 364.7 Lord Hanworth M.R pointed out at p. 377 that insurance, whether against marine risks or fire risks, is a part of the ordinary duty of the trader in carrying on his business and that governed by ordinary business prudence, and mindful of the fact that untoward events take place both by land and by sea, the company take steps to insure an indemnity being paid to them whether they lose their stocks in transit to them by perils of the sea, or whether they lose it in situ on land by the perils and misfortune of fire. At the top of p. 378 he states that it was agreed that the premiums which were paid for insurance, whether for marine or for fire, were proper subjects for deduction in the ordinary trade account. Sargant L.J pointed out at p. 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.

11. This commercial view has now been adopted by the Indian Legislature in S. 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.

12. 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, Edn. 3, at p. 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.”

13. I was unable to get this book in our library, and I am quoting this from the judgment of Ananthakrishna Aiyar, J. in 3 I.T.C 4388

14. In Gliksten's case, (1929) 14 Tax Cas. 364 referred to above, the trading account of the assessee is printed at pp. 373 and 374. This account is in the normal form. It starts with the stock-in-trade in hand at the beginning of the year on the left hand side, then the amount of the purchases and freight etc. then there is the item of £3000 for insurance and then the total is made up. On the right hand side, the amount of sales and the actual stock-in-trade which was left at the end of the year is shown, and then the stock-in-trade destroyed by fire is also valued at the cost price. In the year in question the assessee had recovered from the Insurance Company a larger sum than the value of the timber destroyed as stated by them on the right hand side but they did not bring it on the left hand side in the trading account as a receipt. It was argued on their behalf that as they did not deal in fires the sums received from the company should be treated not as having provided money to take the place of the goods destroyed by fire but as having prevented the fire. But this argument was overruled both by Rowlatt, J and by the-Master of the Bolls and by the House of Lords. But it is important to observe that no objection was taken that the assessee was not entitled to show on the right hand side the value of the timber destroyed by fire. The Master of the Rolls who examined the trading account observed at p. 377 that the expenses, whether the-freight for bringing fresh stock-in-trade to the premises of the company, the insurance for insuring the transit of the timber from overseas, are all items which must be found in the trading; account as part of the ordinary business of the trader and also observed at p. 378 that no deduction could be made where there has been a loss in respect of any sum recoverable under an insurance or contract of indemnity, and proceeds:

“It appears to me to mean this, that of you have got a loss of, say £100,000 and, let us say £75,000 is replaceable or recoverable under a contract of indemnity then-to the extent of that £75,000 you are not to make any deduct on as if it were a loss, because instead of its being a loss the sums replaceable or recoverable under a contract of indemnity.”

15. It Will be noted that the Master of the Rolls does not say that the balance of £25,000 will not be deducted. In the House of Lords their Lordships observed that the result of the fire was that they got rid of so 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 turn over 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 of had become irrecoverable, it cannot be seriously argued that such a loss would not have been a trading loss.

16. 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 turn over 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 turn over when the amount is received from the Insurance people but they do not treat this as a turn over when it comes to the deduction side. The only other case which I have been able to discover is the case in (1931) 16 Tax Cas. 5959 in which the assessee was held taxable for the amount which they received in respect of loss by fire and marine casualties in 1918 from the underwriters although the goods had not been insured. Rowlatt, J. refused to treat this as a mere charity or a gift and held that on the assessee's own accounts this must be treated as a trading receipt which was paid to them by the underwriters for the loss incurred by the assessee.

17. I have stated that there is a clear finding in this case that the goods that were destroyed by fire formed part of the assessee's stock-in-trade. Therefore, in my opinion, the assessee is entitled to claim a deduction for the price of these goods as a trading loss.

18. The Appellate Tribunal relied upon the observations of Lord Chancellor in the leading case in (1916) 5 Tax Cas. 21510 that the loss by the assessee was not sustained by him in his character as a trader nor was it in the course of the carrying on the business. I am wholly unable to agree with this view for the reasons stated above.

19. The cases relied upon by the learned Standing Counsel were cases where either a theft or dacoity occurred in the premises of the assessee or where a certain sum which the assessee was sending to the bank was stolen in the course of the transit or where a shortage of cash was found in the till or where certain embezzlements were made by a gomasta. The present case is entirely different and, therefore, I find it unnecessary to consider those cases.

20. The answer to the question submitted to us is in the affirmative. The assessee is entitled to the costs of this Court. I would assess the hearing fee at Rs. 250. The assessee is also entitled to a return of a sum of Rs. 100 which he deposited with the Appellate Tribunal as fees for the reference to this Court.

21. Meredith, J.:— I agree that the question must be answered in the affirmative. To my mind, whether fire is a risk incidental to a business must to some extent depend on the nature of the business; but I have no doubt that fire is a risk incidental to any business dealing in inflammable materials and I think, grain is sufficiently inflammable to justify the view that it is a risk incidental to a grain business. Cases are not unknown where grain heat 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 in 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 its being a capital loss in the case of stock in trade, though that might be so in the case of a building destroyed by fire. The Tribunal seems to have been obsessed by the fact which it emphasised, that the fire was “unexpected” and “accidental.” In one sense, no doubt, it is so, but in another sense it is not. From the long term view which a sensible businessman must take the risk of fire can be worked out year over year upon the average, so that from this point of view there is nothing unexpected about it. In determining the rates which they must charge for insurance an Insurance Company must work out very exactly the risk of fires upon the average. There is nothing unexpected or accidental from their point of view, and neither can there be from the point of view of the big business man in working out what he must allow on the average for loss by fire in his business. That, in my opinion, should also be the point of view of the Income-tax authorities in determining whether fire is an incidental risk in any business. On the long view certain losses by fire, to be properly covered by insurance, far from being unexpected or accidental are inevitable. The Tribunal, therefore, has applied the wrong criterion.

K.S

22. Answer in the affirmative.