1967 (12) TMI 14 - HC - Income Tax

Lodging of the money in the factory safe-room - it is kept to meet business expenses - Whether the loss due to theft was an allowable deduction - Held, yes

Summary

Issues:
- Whether the loss due to theft was an allowable deduction in computing income from business?

Analysis:
The High Court of Allahabad was presented with the issue of determining the deductibility of a loss due to theft amounting to Rs. 53,121 during the assessment year 1959-60 for a private limited company engaged in sugar manufacturing and sales. The Tribunal established that the theft occurred on the factory premises, involving a stolen sum of Rs. 75,031, with only Rs. 53,121 remaining untraced. The Tribunal acknowledged the necessity of substantial cash at the factory for daily operations, particularly during the sugarcane crushing season, as the bank was located far from the factory. The Tribunal concluded that the loss was incurred for meeting incidental expenses essential for business operations, thus qualifying for deduction in computing income from business.

The central question revolved around whether the loss could be considered incidental to the carrying on of the assessee's business, as per commercial principles and trading practices. The court referred to established legal precedents, including the Supreme Court's ruling in Badridas Daga v. Commissioner of Income-tax, emphasizing that deductions not explicitly provided for in the statute could be allowed if they arose from business operations and were incidental to it. The court analyzed the movement of the stolen money from the bank to the factory safe-room, highlighting that the funds were earmarked for business expenses and not mixed with profits. Drawing parallels with similar cases, the court concluded that the theft loss was indeed incidental to the business and thus deductible.

The revenue contended that previous cases allowing deductions for losses during business hours might not apply in this scenario, as the theft occurred outside of business hours. However, the court rejected this argument, emphasizing that the money was part of the business's operational cycle, akin to the banking company's circulating capital. Drawing on the Nainital Bank Ltd. case, the court underscored that the money retained for business purposes, even if stolen outside business hours, was integral to the business operation and subject to inherent risks like theft. The court determined that the theft loss in the present case was a direct consequence of conducting the business and therefore qualified for deduction under section 10(1) of the Income-tax Act.

In conclusion, the High Court of Allahabad answered the question in the affirmative, allowing the deduction for the theft loss of Rs. 53,121. The court awarded costs and counsel fees to the assessee, affirming the entitlement to the deduction based on the loss's incidental nature to the business operations.