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Issues Involved:
1. Whether the aggregate sum of Rs. 24,506 representing the value of goods destroyed by fire is allowable as a deduction in computing the profits and gains of the assessee's business under Section 10 of the Indian Income-tax Act. Issue-wise Detailed Analysis: 1. Allowability of Deduction for Goods Destroyed by Fire: The primary issue was whether the sum of Rs. 24,506, representing the value of goods destroyed by fire, could be deducted in computing the profits and gains of the assessee's business under Section 10 of the Indian Income-tax Act. The assessee, a dealer in grains, jute, groceries, and cloth, suffered losses due to a fire that destroyed goods worth Rs. 17,552, jute worth Rs. 6,954, and currency notes worth Rs. 3,228. The Income-tax Officer disallowed the claim, categorizing it as a capital loss, stating: "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." On appeal, the claim was again rejected with the reasoning: "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 Appellate Tribunal also rejected the claim, stating: "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." However, the Tribunal pointed out that the claim for the deduction of Rs. 3,228 representing the value of currency notes destroyed was not objected to before them in appeal, and thus, this question did not arise for consideration. Legal Principles and Precedents: The Court referred to several legal principles and precedents to determine the issue. It was emphasized that the amount of profits or gains of the trade or business should be understood in its natural and proper sense. The Court cited Lord Chancellor Halsbury in Gresham Life Assurance Society v. Styles [1892] 3 Tax Cas. 185, and Lord President Clyde in Whimster & Co. v. Commissioners of Inland Revenue [1925] 12 Tax Cas. 813, who stated that profits must be computed by deducting the expenditure laid out to earn those receipts. The Court also referred to English cases, such as Green v. Gliksten & Son, Limited [1929] 14 Tax Cas. 364, where it was held that insurance against risks is a part of the ordinary duty of the trader, and the premiums paid for insurance are proper subjects for deduction in the ordinary trade account. Conclusion: The Court concluded that the loss of stock-in-trade due to fire is allowable as a trading loss on ordinary principles of commercial accountancy, irrespective of whether any part of it is insured or any sum is received from the insurance company. It was noted that the Income-tax Department cannot treat the sum recovered from the insurance people as turnover while not allowing the deduction for the value of the goods destroyed by fire. The Court held: "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." Separate Judgment by Meredith, J.: Meredith, J., concurred with the judgment, adding that whether fire is a risk incidental to a business depends on the nature of the business. He opined that fire is a risk incidental to any business dealing in inflammable materials like grain. He emphasized that the Income-tax Act allows deduction for insurance premiums, which implies that loss of stock by fire can also be deducted. He criticized the Tribunal for emphasizing that the fire was "unexpected" and "accidental," stating that from a long-term business perspective, such risks are inevitable and should be accounted for. Final Decision: The reference was answered in the affirmative, allowing the deduction for the value of goods destroyed by fire. The assessee was entitled to costs and a return of the sum deposited with the Appellate Tribunal as fees for the reference to the Court.
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