1965 (7) TMI 61 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to deduction under Section 10 of the Indian Income-tax Act, 1922.
2. Nature and circumstances of the loss claimed.
3. Incidental nature of the loss to the business.
4. Actions taken by the assessee to recover the loss.
5. Necessity of referring back to the Appellate Tribunal for further findings.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction under Section 10 of the Indian Income-tax Act, 1922:
The primary question referred is whether the assessee was entitled to a deduction of lb12,611 under Section 10 of the Indian Income-tax Act, 1922. Sub-section (2) of Section 10 provides for certain allowances, but it is not contended that the deduction claimed falls within this ambit. However, business losses can be deducted on ordinary commercial principles if they are of a non-capital nature and incidental to the trade.

2. Nature and Circumstances of the Loss Claimed:
The assessee's business involves processing and exporting mineral sand. The loss claimed represents the value of 59,632 truck loads of sand that were found to be of poor mineral content and uneconomic for processing. The authorities (Income-tax Officer, Appellate Assistant Commissioner, and Appellate Tribunal) did not accept the assessee's version. According to the authorities, the sand was never delivered due to fraudulent collusion between the assessee's employees and contractor.

3. Incidental Nature of the Loss to the Business:
The Supreme Court in Badridas Daga v. Commissioner of Income-tax established that losses incidental to the business are deductible. The loss must spring directly from the business and be incidental to it. The Tribunal found that the sand was delivered but removed before processing due to fraud or negligence by the assessee's employees and contractor. If the loss occurred in this manner, it would be incidental to the business and thus deductible.

4. Actions Taken by the Assessee to Recover the Loss:
The authorities emphasized that the assessee did not take steps to recover the loss from the responsible persons, making the claim premature. The Appellate Tribunal did not address this aspect, stating that "any discussion about the necessity for action would appear to be unnecessary." The court opined that the deduction is admissible if the assessee made necessary attempts to recover the loss and failed or if such attempts were futile due to the financial position of the persons responsible.

5. Necessity of Referring Back to the Appellate Tribunal for Further Findings:
Given the lack of clarity on whether the assessee attempted to recover the loss, the court referred the case back to the Appellate Tribunal under Section 66(4) of the Act for additional findings. The Tribunal is directed to make necessary additions to enable the court to answer the question definitively. The Tribunal should not admit fresh evidence and must confine itself to the existing record.

Conclusion:
The court concluded that the deduction claimed is admissible under Section 10(1) of the Indian Income-tax Act, 1922, provided the assessee's attempts to recover the loss were unsuccessful or deemed futile. The case is referred back to the Appellate Tribunal for further findings on this aspect, with instructions to confine the review to the existing record.