COMMISSIONER OF INCOME TAX versus S. N. A. S. A. ANNAMALAI CHETTIAR

J

460

t

COMMISSIONER OF INCOME TAX v. S. N. A. S. A. ANNAMALAI CHETIIAR September 2 7, 1972 [K. S. HEGDE, P. JAGANMOHAN REDDY, I. D. DUA AND H. R. KHANNA, JJ.J

Jnco111e Tax Act, 1922-S. 10 f.l)-Bt1si11rss loss-H11siness carried on in H't1r. ::.one-Da1na,cre 10 proper()· during war-If could he giren deduc~ lion to as husines.f /o,\·s.

The assessee, who was carrying on business in Malaya which was within the war zone, suffered damages to property during the war on account of bombing. The loss in question was loss of stock-in-trade. On the question whether the loss could be given deduction to as a business loss in computing the net income of assessee under's. 10 ( 1) of the Income-tax Act, 1922.

A

B

C

HELD : On the facts and circumstance of the case the loss occurred must be taken to be a loss incidental to the business carried on by the If the assessee had earned any profits out of his assessee uuring the war. business during the \\'ar the department undoubtedly have to consider those profits as assessable income. When Joss had occurred in such situation the D depn.:-tment cannot contend that the loss in question must not be a business loss. A loss of stock-in-trade occasioned by enemy action must be con sidered as a trade loss. [461 FJ

Bombay High Court in Pohoo111al Bros. v. Con1missioner of Income-tax, Bombay City. 34 I.T.R. 64, Commissioner of Income-tax, U.P. v. Nainital Bank Ltd., 55 I.T.R. 707, Green v. !. G/ikstan, 14 Tax Cases 364 and London Investment and Mortgage Co. Ltd. v. Inland Revenue Commis- sioners [1957] 1 All England Reports. 377, referred to.

CIVIL APPELLATE JURISDICTION" Civil Appeal No. 2016 of

1969.

Appeal by Special Leave from the judgment and order dated April 27, 1967 of the Madras High Court in Tax Case No. 75 of 1963.

S. C. Manchanda, B. D Sharma and R. N. Sachthey, for the

appellant.

M. C. Chagla, Janendra Lal and B. R. Agarwala, for the res

pondent.

The Judgment of the Court was delivered by HEGDE, J. This appeal by special leave arises from a deci sion of the Madras High Court in a reference under section 66 (I) of the Indian Income Tax, 1922 (to be hereinafter referred to as the Act). As d"manded by the assessee the Tribunal submjtted the statement of the case to the High Court seeking its opinjon on the question "whether on the facts and in tl:je circumstances of the case. the loss of Rs. 1,93,750/- was an allowable deduction under section 10 of the Income-tax Act ?"

E

F

G

H

A

B

c

D

E

F

G

C.I.T. v. ANNAMALAI CHETTIAR (Hegde, 1.)

~61

Material facts are these :

the assesscc

The assessee respondent was a member of a Hindu undivided India and· family which carried on money lending business in abroad. In the course of such money lending business, proper ties were taken over in settlement of debts as and when occasion arose. The family was disrupted on March 28, I 939. The assessee received some shares in some companies, properties and gardens and certain other items in Malaya. Even after the parti tion the assessee continued the money lending business in Malaya. During the war, in general with others, suffered damages to these properties on account of Japanese bombing. This.loss occurred on account of bombing in December, 19..\ 1. a date falling within the accOU!J.ting period ending on April 12. 1942, relevant for the assessment year 1942-43. This loss wa~ claimed as a business loss. The Income Tax Officer rejected that claim. The Appellate Assistant Commissioner affinned the order of the Incop1e Tax Officer. The assessee did not succeed before the Tribunal as well. The Tribunal rejected the claim of the assessee on the sole ground that bombing. which caused the loss. was not incidental to the business of the assessee. The Tribunal held that the loss in question was a loss of stock-in-trade. That finding of the Tribunal has not been challenged. Hence we have to proceed on the basis that the loss caused to the assessee was a loss of stock-in-trade.

It was contended on behalf of the departJ\lent that the loss in question cannot be given deduction to, as a business in computing the net income of the assessee under section 10 (1). According :o the department that was not a loss incidental to the business carried on by the assessee.

loss,

We are unable to appreciate the contention of the department. in It is established that the asses~ee was carrying on business Malaya when the war was going on. Malaya was within the war zone and, therefore, there was every possibility of that area being If the assessee had earned any profits out of his busi bombed. ness during the war, the department undoubtedly would have considered those profits as assessable income. It is strange that when loss had occurred in such a situation the department should contend that the loss in question was not a business loss. In our opinion, taking into conideration the facts and circumstances of the case, the loss occurred must be held to be a loss incidental to the business carried in by the assessee in Malaya during the war. We are fortified in our conclusion by the decision of the Bqmbay High Court in Pohoomal Bros. v. Commissioner of Tncome-Tax, Bombay City('). The facts of that case are some

(!) 34 l.T.R. 64.

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462

SUPREME COURT REPORTS

(1973] 2 S.C.R.

in

what similar to the facts before us. The assessee therein, which had its head office in Bombay and branches in various parts of the world, claimed deduction of the losses resulting from the des truction of its stock in trade in three foreign branches, at Manila, Saigon dnd Kuala Lumpur, by enemy invasion, in computing its profits and gains for the purpose of income-tax. The department resisted that claim but the High Court held that the losses in ques tion were trading losses. This decision of the High Court was cited with approval by this Court in Commissioner of lncome Tax, U.P. v. Nainital Bank Ltd.('), In this connection we may also refer to two English decisions. The first case is Green v. J. Gliksten( 2

). The facts of that case were as follows: A Jire occurred on the company's premises in August, J 921, and destroyed timber the written down value of which the company's books was £ 160,824; •the company's valuation of its lower, stock based on cost or market value whichever was the had been accepted for purposes of taxation. The timber hac been insured for many years and the company had been allowed 10 deduct the insurance premises in computing its assessable In due course the company received from the insurers profits. a sum of £477,838 representing the replacement value of the destroyed timber, but only a small part of this timber was in fact replaced because the current demand was for timber of a its different character. The company accordingly credited profit and loss account as a trading receipt only £ 160,824 of the insurance payment; 1he balance did not appear in the profit and loss account but was entered as a reserve the balanr.e sheet. The Special Commissioners held that no p<!l't of the sum of £,477,838 recovered from the insurers was a trading receipt. But the House of Lords held tha1 the whole sum recovered was trading receipt to be taken into account in computing the profits assessable to Income Tax under case I of Schedule D and to Corporation Profits Tax. This court in Nainital Bank's case (supra) quoting that decis1on with approval abserved. "If receipt from an insurance company towards loss of stock was a trading receipt, conversely to the extent of the loss not so recouped it should be trading loss."

in

in

Next we shall re.fer to the decision of the Court of Appeal in London Invsetment and Mortgage Co., Ltd. v. Inland Revenue Commissioners.(') The facts of that case were as follows :

The assessee were paying compulsory war damage contribu tions during the war in respeC't of the properties in which they were dealing. They received payments under the War Damage Act, 1943, in r~ipect of the properties damged by enemy action.

(I) 55 1.T.R. 707

121

l-1 Ta., Cases J64.

(31

[1957] I All England Reports 177.

A

B

c

D

E

F

G

H

C.I.T. v. ANNAMALAI CHETTIAR (Hegde, J.)

463

A

B

c

D

They disposed of some of the properties but retained others as part of their stock-in-trade and either were having them rebuilt or would have them rebuilt. Under 1he War Damage Act, 1943, contributions made and indemnities given under Part 1 were to be treated for all purposes as oll'tgoings of a capital nature and expendiure on making good war damage was not deductible in computing profits for income tax purposes. On the question whether the value payments should be included in the receipts of the taxpayers' trade for the purpose of to income under Case 1 of Schedule D and to profit tax, the Court of Appeal held that the value payments should properly be treated as part of the taxpayers' trading receipts, sine~ they were money into which their stock-in-trade had been converted. This decision is an authority for the proposition that the compensation received in lieu of Joss of stock-in-trade as a result of enemy action is a trading receipt conversely a stock-in-trade occasioned by enemy action must be considered as a trading Joss. For the reasons mentioned above we agree with the conclu sions reached by the High Court and see no merit in this appeal. lt is accordingly dismissed with costs.

their assessments

loss of.

K.B.N.

Appeal dismissed.