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Issues Involved:
1. Whether the watches constituted the stock-in-trade of the assessee. 2. Whether the loss of watches by theft was a business loss deductible under Section 10(1) of the Income-tax Act, 1922. Issue-wise Detailed Analysis: 1. Whether the watches constituted the stock-in-trade of the assessee: The assessee, primarily a dealer in semi-precious stones, purchased 750 Feutura and Romer watches for Rs. 33,125. The Income-tax Officer initially declined to recognize these watches as stock-in-trade, arguing that they were not part of the assessee's primary business and were not in his business premises during business hours. However, the Appellate Assistant Commissioner and the Tribunal disagreed, noting that the quantity of watches indicated they were for trading purposes. They also pointed out that the profit from the sale of recovered watches in the subsequent year was treated as business income by the revenue. The court concurred, stating, "The very quantity of the watches which he purchased by two instalments itself shows that it should have been for trading purposes." The court concluded that the watches indeed constituted the stock-in-trade of the assessee. 2. Whether the loss of watches by theft was a business loss deductible under Section 10(1) of the Income-tax Act, 1922: The court examined whether the loss by theft was incidental to the trade and hence deductible as a business loss under Section 10(1). The revenue argued that the loss occurred outside business hours and premises, suggesting it was not connected to the business. The court, however, referred to established principles, stating, "The loss must be connected with or related to the business carried on by the assessee and the profits or gains made thereout." It cited Strong and Company of Romsey Ltd. v. Woodifield, emphasizing that losses incidental to the trade itself are deductible. The court also referenced Pohoomal Bros. v. Commissioner of Income-tax, which allowed deduction for loss of stock-in-trade due to enemy invasion, and S. N. A. S. A. Annamalai Chettiar v. Commissioner of Income-tax, which supported the principle that loss of stock-in-trade is a business loss. The court further referred to Commissioner of Income-tax v. Nainital Bank Ltd., which summarized the legal position: "Under section 10(1) of the Act, the trading loss of a business is deductible for computing the profit earned by the business. But every loss is not so deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation." Applying these principles, the court found that the assessee carried the watches for safe-keeping, a business operation, and the theft was incidental to this operation. It concluded, "The transit of the watches by the assessee from his business premises to his residence was a business operation and the loss of the watches in the course of the transit by theft was in that sense incidental to the carrying on of the business in watches." Conclusion: The court answered the question in favor of the assessee, confirming that the loss of Rs. 13,271 was an allowable business loss. The judgment emphasized the connection between the loss and the business operations, adhering to established legal principles. The revenue was ordered to bear the costs, with counsel's fee set at Rs. 250.
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