1967 (4) TMI 26 - HC - Income Tax

Properties of the assessee in Malaya, were destroyed by enemy bombing - these were part of his stock-in-trade - therefore the loss was allowable u/s 10

Issues Involved:
1. Whether the loss of Rs. 1,93,750 due to enemy bombing is an allowable deduction under section 10 of the Indian Income-tax Act.
2. The distinction between business losses of stock-in-trade and capital assets.
3. The applicability of ordinary commercial principles in computing business profits and losses.
4. The relevance of prior judicial decisions in determining the nature of business losses.

Issue-Wise Detailed Analysis:

1. Allowable Deduction Under Section 10 of the Indian Income-tax Act:
The court examined whether the loss of Rs. 1,93,750 due to enemy bombing could be deducted under section 10 of the Indian Income-tax Act. The assessee argued that the loss should be deductible as it was part of the stock-in-trade of his money-lending business. The department contended that the loss represented capital assets and thus was not allowable. The Tribunal had initially upheld the department's view, stating that such loss was not incidental to the business as per the Supreme Court's decision in Badridas Daga v. Commissioner of Income-tax.

2. Distinction Between Business Losses of Stock-in-Trade and Capital Assets:
The court emphasized that the authorities below misdirected themselves by treating the destruction of stock-in-trade as a business loss requiring specific tests for deduction. Instead, the court noted that the destruction of stock-in-trade should be reflected in the accounting procedure, not as a loss incidental to the trade, but as part of the computation of profits and gains. The court cited the English decision in Green v. Gliksten & Son Ltd., which dealt with the destruction of stock-in-trade and how it should be accounted for in business profits.

3. Applicability of Ordinary Commercial Principles in Computing Business Profits and Losses:
The court highlighted that ordinary commercial principles should be applied in computing business profits and losses. Losses that are non-capital in nature and incidental to the trade should be allowable deductions. The court referred to prior decisions, including the Bombay High Court's decision in Pohoomal Bros. v. Commissioner of Income-tax, which applied the principles from Green v. Gliksten & Son Ltd. to a similar case of loss due to enemy action.

4. Relevance of Prior Judicial Decisions in Determining the Nature of Business Losses:
The court discussed the relevance of prior judicial decisions, including Badridas Daga v. Commissioner of Income-tax and Commissioner of Income-tax v. Nainital Bank Ltd. The court distinguished these cases by noting that they involved loss of money, which does not require further computation for accounting purposes. In contrast, the loss of stock-in-trade, such as goods destroyed by enemy action, should be accounted for in the computation of business profits and gains. The court upheld the principles stated in Pohoomal Bros. v. Commissioner of Income-tax and Motamal v. Commissioner of Income-tax, which allowed deductions for the loss of stock-in-trade on ordinary commercial principles.

Conclusion:
The court concluded that the loss of Rs. 1,93,750 due to enemy bombing was an allowable deduction under section 10 of the Indian Income-tax Act. The decision of the Bombay High Court in Pohoomal Bros. v. Commissioner of Income-tax, following the Patna High Court's decision in Motamal Jethumal v. Commissioner of Income-tax, set out the correct principles to be applied. The question was answered in favor of the assessee, allowing the deduction for the loss of stock-in-trade. The assessee was awarded costs, with an advocate's fee of Rs. 250.

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