25 September 1964
Supreme Court


Case number: Appeal (civil) 938 of 1963






DATE OF JUDGMENT: 25/09/1964


CITATION:  1965 AIR 1227            1965 SCR  (1) 340  CITATOR INFO :  RF         1965 SC1272  (6)  RF         1967 SC 453  (1)  R          1973 SC1032  (5,6)  R          1978 SC 278  (4,6,7,9)

ACT:    Income   Tax-Deductible  loss-Banking   Company-Loss   by dacoity  Whether incidental to business --Indian  Income-tax Act, 1922 (11 of 1922), s. 10(1).

HEADNOTE:    Cash  and  ornaments worth Rs. 1,06,000  were  robbed  by dacoits from the Ramnagar branch of the Nainital Bank  Ltd., a  public  limited  company  carrying  on  the  business  of banking.  The loss was claimed by the bank as a trading loss for  the assessment year 1952-53.  The claim was  disallowed by  the Income-tax Officer on the ground that the  loss  was not incidental to the business.  The finding being confirmed by  the Appellate Assistant Commissioner and  the  Incom-tax Appellate  Tribunal, a reference was made to the High  Court of  Judicature  at  Allahabad which held that  the  loss  by dacoity  was  incidental to the banking  business  and  was, therefore a trading loss which the assessee could claim as a deduction under s. 10(1) of the Indian Income-tax Act, 1922. Appeal  to this Court on behalf of the Revenue, came by  way of  a  certificate  under Art. 133 of  the  Constitution  of India. It was contended on behalf of the appellant that the risk of burglary was not incidental to the business of banking,  and the  loss in the present case fell on the assessee not as  a person  carrying on the business of banking but as an  owner of funds. HELD : Cash is the stock-in-trade of a banking company.  and its loss is therefore a trading loss.  But every loss is not deductible  in computing the income of a business unless  it is  incurred  in the carrying out of the  operation  of  the business  and is incidental to the operation.  Whether in  a particular case an item of loss claimed as a deduction under s.  10(1) of the Act is incidental to the operation  of  the assessee’s  business  or  not is a question of  fact  to  be decided  on  the facts of that case, having  regard  to  the



nature  of the operations carried on and the nature  of  the risk  involved in carrying them out.  The degree of risk  or its frequency is not of much relevance but its nexus to  the nature of the business is material. [344 A; 349 D-E]. It  is  an  integral part of the business  of  banking  that sufficient moneys should be kept in the bank duly guarded to meet  the  demands of the constituents.   Retention  of  the money  in  the  bank is part of the  operation  of  banking. Retention of money in the bank carries with it the  ordinary risk  of  its  being the  subject  of  embezzlement,  theft, dacoity or destruction by fire and such other things.   Such risk  of  loss  is  incidental to the  carrying  on  of  the operation  of  the business of banking.   Loss  incurred  by dacoity in the present case is incidental to the carrying on of the business of banking. [349 F-G]. Case law discussed. Motipur  Sugar Factory Ltd. v. Commissioner  of  Income-tax, Bihar  and Orissa, (1955) 28 I.T.R. 128 Charles Moore &  Co. (W.A.)  Pvt.   Ltd.  v. Federal  Commissioner  of  Taxation, (1956)  95  C.L.R.  344  and  Gold  Band  Services  Ltd.  v. Commissioner of Inland Revenue, (1961) N.Z.L.R. 467,  relied on.                             341 Badridas  Daga v. Commissioner of Income-tax  [1959]  S.C.R. 690 distinguished. Ramaswamy  Chettiar  v. Commissioner of  Income-tax,  Madras I.L.R. (1930)53 Mad. 904, disapproved.

JUDGMENT:   CIVIL  APPELLATE  JURISDICTION: Civil Appeal  No.  938  of 1963. Appeal from the judgment and decree dated December 19,  1960 of the Allahabad High Court in Income-tax Reference No. 1588 of 1956. K.   N. Rajagopala Sastri, R. H. Dhebar and R. N.  Sachthey, for the appellant. A. V. Viswanatha Sastri and Naunit Lal, for the respondent. The Judgment of the Court was delivered by Subba Rao J. This appeal by certificate raises the  question whether  loss of cash by dacoity is an admissible  deduction under   S.  10(1)  of  the  Indian  Income-tax  Act,   1922, hereinafter  called  the Act, in  computing  the  assessee’s income in a banking business. The  facts  relevant to the question raised may  be  briefly state . The assessee is the Nainital Bank Limited.  It is  a puplic  limited  company which carries on  the  business  of banking.   It  has  various  branches and  one  of  them  is situated  at Ramnagar.  In the usual course of its  business large amounts were kept in various safes in the premises  of the  Bank.   On June 11, 1951, at about 7 P.m. there  was  a dacoity  in the Bank and the dacoits carried away  the  cash amounting  to Rs. 1,06,000 and some ornaments  etc.  pledged with  the  Bank.  For the assessment year 1952-53  the  Bank claimed  the  said amount as a deduction  in  computing  its income from the banking business on the ground that it was a trading  loss.  The Income-tax Officer disallowed the  claim on  the  ground  that it was not a loss  incidental  to  the banking  business.   On  appeal,  the  Appellate   Assistant Commissioner  of  Income  tax, and on  further  appeal,  the Income-tax Appellate Tribunal, confirmed that finding.  On a reference  to the High Court of Judicature at  Allababad,  a Division  Bench of that Court held that the loss by  dacoity was incidental to the banking business and was, therefore, a



trading,  loss  and  that the assessee  was  entitled  to  a deduction  of the same under s. 10 (1 ) of the  Act.   Hence the appeal. Mr.  Rajagopala Sastri, learned counsel for  the  appellant, argued  that the Bank lost the money by burglary not in  its capacity  as  a bank but only just like any  other  citizen, that the risk of L2Sup./64-9 342 burglary  was not incidental to the business of banking  and that, therefore, the amount burgled could not be deducted as a  trading loss.  Mr. A. V. Viswanatha Sastri, on the  other hand,  contended  that the money lost by  burglary  was  the stock in-trade of the banking business, that it was kept  in the  Bank in the usual course of its business and  that  the risk  of its loss was incidental to the carrying on  of  the said business and, therefore, the amount lost was a  trading loss liable to be deducted under s. 10(1) of the Act. Before we consider the law on the subject, it would be  con- venient  at  the outset to notice briefly the scope  of  the activities of banking business.  Under S. 5 (1 ) (b) of  the Banking  Companies Act, 1949, "banking" is defined  to  mean "the accepting, for the purpose of lending or investment, of deposits  of money from the public, repayable on  demand  or otherwise,  and  withdrawable  by cheque,  draft,  order  or Otherwise"; and under s. 5 (1) (c), "banking company"  means any  company  which  transacts the business  of  banking  in India;  under S. 5(1) (cc), " ’branch’ or ’branch office  in relation  to a banking company, means any branch  or  branch office, whether called a pay office or sub-pay office or  by any  other  name, at which deposits  are  received,  cheques cashed  or  money lent, and for the purposes of  section  35 includes  any  place  of business where any  other  form  of business  referred  to  in subsection (1) of  section  6  is transacted,"  Therefore, a banking business consists  mainly in  receiving deposits, making advances, realizing them  and making  fresh  advances.  It is a continuous  process  which requires  maintenance  of ready cash in the  bank  premises. The  Nainital  Bank  Ltd.,  is  a  public  limited   company incorporated  for  carrying  on such  banking  business  and Ramnagar branch is one of its branches doing such  business. Unlike  an  individual,  a limited company  like  a  banking company comes into existence for the purpose of carrying  on only the banking business and ordinarily there cannot be any scope for attributing different characters to that business. We  therefore, start with the fact that the Ramnagar  branch of  the Bank had kept large amounts in the Bank premises  in the  usual  course  of its business in  order  to  meet  the demands of its constituents. It is settled law, and indeed it is not disputed, that  cash is the stock-in-trade of a banking company.  In  Arunachalam Chettiar  v.  Commissioner  of  Income-tax  Madras(1),   the Judicial Committee was considering the basis of the right of an assessee to ((1)  (1936) 4 I.T.R. 173, 83 (P.C.).                             343 deduct irrecoverable loans before arriving at the profits of moneylending, and in that context stated:               "The   basis   of   the   right   to    deduct               irrecoverable  loans  before arriving  at  the               profit of money-lending is that to the  money-               lender, as to the banker, money is his  stock-               in-trade or circulating capital; he is dealing               in money." In   Commissioner  of  Income-tax,  Madras   v.   Subramanya



Pillai(1)  a  Division Bench of the Madras  High  Court,  in explaining  the  principle  why  in  money-lending  business allowances for bad debts were given, observed:               "In  the  case  of  banking  or  money-lending               business  .... allowance for bad and  doubtful               debts  was given for the reason that  all  the               moneys  embarked in the moneylending  business               and  lent out for interest were in the  nature               of  stock-in-trade  of the  banker  or  money-               lender   and  the  bad  and   doubtful   debts               represented  so  much loss  of  the  stock-in-               trade.  Losses in respect of the stock-intrade               have always been regarded as trade losses  and               allowed to be set off against the receipts." The same view was expressed by the Full Bench of the  Madras High Court in Ramaswami Chettiar v. Commissioner of  Income- tax,  Madras  (2 ) and by the Patna High  Court  in  Motipur Sugar  Factory, Ltd. v. Commissioner of Income-tax, Bihar  & Orissa(3). Under  s.  10(1)  of  the  Act  loss  of  stock-in-trade  is certainly an admissible deduction in computing the  profits. Payment  received  from  an  insurance  company  for   stock destroyed  by  fire  was taken into  account  as  a  trading receipt  in computing the profits assessable to  income-tax; see  Green  (H.  M. Inspector of Taxes) v. J.  Gliksten  and Son,  Ltd. (4) ; and Raghuvanshi Mills Ltd. v.  Commissioner of Income-tax, Bombay City(5).  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.  Loss sustained by an assessee owing to  destruction of the stock-in-trade by enemy invasion  was held to be a trading loss which the assessee was entitled to claim as a deduction: see Pohoomal Bros. v. Commissioner  of Income-tax, Bombay City(6).  Loss incurred in stock-in-trade by  ravages  of white-ants was allowed as  trading  loss  in computing the profit of a business; see Hira Lal  Phoolchand v. Commissioner of Income- (1)  (1950) 18 I.T.R. 85, 92. (3)  (1955) 28 I.T.R. 128. (5)  [1953] S.C.R. 177. (2)  I.L.R. (1930) 53 Mad. 904. (4)  (1928-29) 14 T.C. 364. (6)  (1958) 34 T.T.R. 64. 344 tax,  C.P.,  U.P. and Berar(1).  We,  therefore,  reach  the position that cash is a stock-in-trade of a banking business and  its  loss in the course of its business  under  varying circumstances  is deductible as a trading loss in  computing the total income of the business. But  it  is  said that every loss  of  a  stock-in-trade  in whatsoever  way it is caused is not a trading loss, but  the said loss should have been caused not only in the course  of the  business  but also should have been incidental  to  it. The  leading  case on the subject is that of this  Court  in Badridas Daga v. Commissioner of Income-tax(2).  There,  the appellant was the sole proprietor of a firm which carried on the  business  of  money-lending.  The  agent  of  the  firm withdrew  large  amounts from the firm’s  bank  account  and applied them in satisfaction of his personal debts.  In  the firm’s account the balance of the amount not recovered  from the agent was written off at the end of the accounting  year as  irrecoverable.  This Court held that the loss  sustained by  the appellant therein as a result of I  misappropriation by the agent was one which was incidental to the carrying on of  the  business  and  should  therefore,  be  deducted  in



computing   the  profits  under  s.  10  (1)  of  the   Act. Venkatarama Ayyar J., speaking for the Court, observed:               ,,The result is that when a claim is made  for               a  deduction  for which there is  no  specific               provision  in  section 10(2),  whether  it  is               admissible  or  not will  depend  on  whether,               having regard to accepted commercial  practice               and  trading  principles, it can  be  said  to               arise  out of the carrying on of the  business               and  to  be  incidental  to  it.  If  that  is               established,   then  the  deduction  must   be               allowed,  provided  of  course  there  is   no               prohibition against it, express or implied, in               the Act." Applying  the principle to the facts of the case before  the Court, the learned Judge proceeded to state:               "If employment of agents is incidental to  the               carrying  on  of business, it  must  logically               follow  that  losses which are  incidental  to               such  employment  are also incidental  to  the               carrying on of the business." The  principle was clearly laid down and was, if we may  say so,  correctly  applied  to  the  facts  before  the  Court. But there is a (1) (1947) 15 I.T.R. 205. (2) [1959] S.C.R. 690.                             345 passage in the judgment on which strong reliance was  placed by  the  learned  counsel  for  the  appellant  and  it  was contended  that  the  instant case clearly  fell  under  the illustration contained in the passage.  It reads:               "At  the  same time, it should  be  empbasised               that  the loss for which a deduction could  be               made  under  section 10(1) must  be  one  that               springs  directly from the carrying on of  the               business and is incidental to it and not,  any               loss sustained by the assessee, even if it has               some  connection with his business.   If,  for               example, a thief were to break overnight  into               the  premises of a money-lender and  run  away               with  funds secured therein, that must  result               in  the depletion of the resources;  available               to him for lending and the loss must, in  that               sense,  be a business loss, but it is not  one               incurred  in the running of the business,  but               is  one to which all owners of properties  are               exposed whether they do business or not.   The               loss in such a case may be said to fall on the               assessee not as a person carrying on  business               but  as  owner of  funds.   This  distinction,               though  fine, is very material as on  it  will               depend  whether deduction could be made  under               section 10(1) or not." It  was said that the loss in the present case fell  on  the assessee not as a person carrying on the business of banking but as owner of funds. That passage in terms refers to a money-lender and does  not deal with a public company carrying on banking business.  In the case of a money-lender the profits he made may form part of  the private funds kept in his house which he may or  may not  invest in his business.  It is  indistinguishable  from his  other moneys.  But in the case of a bank  the  deposits received  by it form part of its circulating capital and  at the time of the theft formed part of its stock-in-trade.  In one case it cannot be posited that the amount robbed is part



of  the stock-in-trade of the trader till he invests  it  in his  business; in the other it forms part of  the  stock-in- trade  without  depending on the intention  of  the  banking company.   There  lies the distinction between  the  instant case and the illustration visualized by this Court.  We have only suggested a distinction, but we are not expressing  any definite  opinion on the question whether the loss  incurred in  the case illustrated is or is not a trading  loss.   The correctness or otherwise of the said observation may fall to be considered when such a case directly arises for decision. 346 Before  parting with this decision, it may be  noticed  that this  Court agreed with the decisions  in  Venkatachalapathy lyer  v.  Commissioner of Income-tax(1), Lord’s  Dairy  Farm Ltd.  v. Commissioner of Income-tax(2) , and  Motipur  Sugar Factory  Ltd.  v.  Commissioner  of  Income-tax(  3  ).  The decision  in  Motipur  Sugar  Factory  case(3),  which   was accepted  by  this  Court to be correct,  takes  us  a  step further  in  the development of law.   There,  the  assessee company was carrying on business in the manufacture of sugar and  molasses out of sugarcane.  It deputed  an  employee,in compliance with the statutory rules, with cash for  disburse ment to sugarcane cultivators at the spot of purchase.   The cash was robbed on the way.  The Division Bench of the Patna High Court held that the loss of money was loss arising  out of  the  business  of  the  assessee  and  sprang  from  the statutory  necessity of sending money to various  purchasing centres  for disbursement and, therefore, the  assessee  was entitled to deduct the loss in computing its taxable  income under S. 10(1) of the Act.  It will be noticed that this  is not a case of misappropriation by a servant of the  company, but  a  case of loss to the company by reason  of  its  cash being  robbed  from  its servant.  In that  case,  cash  was entrusted to the employee under statutory rules.  But  there may be cases where such entrustment may be made by custom or practice.   What is important to notice is that  robbery  of cash from the hands of an employee is held to be  incidental to the business of the assessee.  If that be so, why  should a different principle be adopted if the loss was not  caused by  robbery from the hands of the employee on his way  to  a particular place in discharge of his duty, but it was a loss caused by dacoity from the premises of the bank itself.   In one  case,  the employee carried cash  for  disbursement  to sugarcane  cultivators, and in the other, funds were  lodged in  the Bank with reasonable safeguards for disbursement  of the same to its constituents.  If the loss was incidental to the  business  in one case, it should equally be so  in  the other case.  The judgment of the Special Bench of the Madras High  Court  in Ramaswami Chettiar v.  The  Commissioner  of Income-tax,  Madras(4)  supports the case  of  the  Revenue. There,  the  loss  was incurred by theft of  money  used  in moneylending  business  and kept in the  business  premises. The  Full  Bench  by majority held that  the  loss  incurred thereby  should not be allowed in computing the  income-tax, as  the theft was committed by persons who were not  at  the time  of  commission employed as clerks or servants  by  the assessee.  This judgment, (1)  (1951) 20 I.T.R. 363. (3)  (1955) 28 I.T.R. 128. (2)  (1955) 27 I.T.R. 700. (4)  (1930) I.L.R. 53 Mad. 904.                             347 if  we may say so with respect, takes a narrow view  of  the problem.  Indeed in Motipur Sugar Factory case(1), which was approved  by this Court, the theft was committed not by  the



employee of the company but by robbers.  To that extent  the correctness  of the Madras decision is shaken.   That  apart the  judgment  of  Anantakrishna Ayyar J.,  who  recorded  a dissent,  contains a constructive criticism of the  majority view.  We prefer the view of Anantakrishna Ayyar J., to that of the majority. The decision of the High Court of Australia in Charles Moore and Co. (W.  A.) Pvt.  Ltd. v. Federal Commissioner of Taxa- tion(2)  throws considerable light on the subject.  In  that case the assessee was carrying on business of a departmental store  and he banked the takings thereof daily.  It was  the practice every business morning for the cashier  accompanied by  another employee to take the previous day’s  takings  to the  bank  some two hundred yards away and pay them  to  the credit of the assessee.  One day, while on their way to  the bank the two employees were held up at gun point and  robbed of  a large amount which formed part of the receipts of  the assessee for the previous day.  The Court held that the loss was  incurred in gaining or producing the assessable  income of the year in question within the meaning of s. 5 1 (I)  of the  Income Tax and Social Services Contribution  Assessment Act, 1936-52 and was not a loss or outgoing of capital or of a  capital  nature, and was consequently  a  deduction  from assessable income in such year.  It was pointed out therein:               "Banking  the takings is a necessary  part  of               the  operations  that  are  directed  to   the               gaining  or producing day by day of what  will               form  at the end of the accounting period  the               assessable  income.   Without  this,  or  some               equivalent   financial   procedure,   hitherto               undevised, the replenishment of stock-in-trade               and  the payment of wages and other  essential               outgoings would stop and that would mean  that               the  gaining  or producing of  the  assessable               income would be suspended." Then the Court proceeded to state               "The  ’occasion  of the loss’ in  the  present               case   was   the  pursued   in   banking   the               money  .  .  . . There  Is  no  difficulty  in               understanding   the  view   that   involuntary               outgoings and unforeseen or unavoidable losses               should  be  allowed as  deductions  when  they               represent that kind of casualty, mischance  or               misfortune  which is a natural  or  recognized               incident of a particular trade or (1) (1955) 28 I.T.R. 128. (2) (1956-57) 95 C.L.R. 344, 350. 348               business the profits of which are in question.               These  are  characteristic  incidents  of  the               systematic exercise of a trade or the  pursuit               of  a  vocation.(1) Even if armed  robbery  of               employees  carrying money through the  streets               had  become an anachronism which we no  longer               knew,  these words would apply.  For it  would               remain a risk to which of its very nature  the               procedure gives rise.  But unfortunately it is               still  a  familiar and recognized  hazard  and               there  could  be little doubt that if  it  had               been  insured against the premium  would  have               formed  an allowable deduction.  Phrases  like               the  foregoing or the phrase  ’incidental  and               relevant’   when  used  in  relation  to   the               allowability  of losses as deductions  do  not               refer   to  the  frequency,  expectedness   or



             likelihood   of   their  occurrence   or   the               antecedent  risk of their being incurred,  but               to their nature or character.  What matters is               their  connection  with the  operations  which               more  directly gain or produce the  assessable               income." This  decision  laid  down  the  following  principles:  (i) banking  the takings was a necessary part of the  operations of  the  business with which the court was dealing  in  that case;  (ii) the loss to the business caused by  robbery  was incidental  and relevant to that business as  the  procedure involved in carrying on of the business carried with it  the risk  of  the  cash  being robbed  on  the  way;  (iii)  the expressions  "incidental"  and  "relevant"  in  relation  to losses  did not relate to the frequency of the happening  of the risk but to their nature and character, that is to  say, the  loss  must be connected with the operation  to  produce income.  The judgment of the Supreme Court of Newzealand  in Gold Band Services Limited v. Commissioner of Inland Revenue (  2  ) applied the decision of the  Australian  High  Court cited  above  to a situation which comes very  near  to  our case.   The  appellant therein owned and operated  a  petrol service  station which was kept open continuously.   It  was held  up by an armed robber and a substantial sum  of  money was stolen.  The Court held that the sum lost as a result of the  robbery was a loss exclusively incurred in  gaining  or producing  the  assessable income of the appellant  and  was deductible  from its’ gross income.  Adverting to the  argu- ment  very often advanced in courts based upon  the  robbery being  committed in the premises and that committed  on  the way to a bank, Haslain J. observed (1)  Rich  J.  in Commissioner of Taxation (N.S.W.)  v.  Ash (1938) 61 C.L.R. 263 at 277. (2)  [1961] N.Z.L.R. 467,470.                             349 .lm15 I  can  see no valid distinction to be  drawn  in  principle between  the  robbery of trade receipts on  the  appellant’s premises  at  an  hour  before  banking  was  possible  (but intended  to be banked at a time when the banks  were  open) and the robbery of the same money when in the custody of the employee  on  the  way  to the bank.   In  my  opinion,  the occasion  for  the  loss of the present  appellant  was  the operation of its business in the normal way, with the result that the cash stolen was on the premises at that  particular time and that the possibility of such plunder constituted an attraction to a certain type of criminal, including both the safe-blower and the armed burglar." The  present case is a stronger one, for the money was  kept in  the Bank as it was absolutely necessary to carry on  the operation of   the banking business. We may now summarize the legal position thus.  Under   s. 1O (I ) 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.  Whether loss is incidental to the operation of a business is a question of fact to be decided on the facts of each  case,  having regard to the nature of  the  operations carried  on and the nature of the risk involved in  carrying them out.  The degree of the risk or its frequency is not of much  relevance but its nexus to the nature of the  business is material. In the present case the respondent was carrying on the busi- ness  of banking.  It is an integral part of the process  of



banking  that sufficient moneys should be kept in  the  bank duly  guarded to meet the demands of the constituents.   The retention  of  the  money  in the bank  is  a  part  of  the operation  of banking.  The retention of money in  the  bank premises  carries  with it the ordinary risk  of  its  being subject  of embezzlement, theft, dacoity or  destruction  by fire and such other things.  Such risk of loss is incidental to  the  carrying on of the operations of  the  business  of banking.   In this view, we are clearly of the opinion  that the  loss  incurred  by  dacoity  in  the  present  case  is incidental to the carrying on of the business of banking. In  the result, the order of the High Court is  correct  and the appeal fails and is dismissed with costs. Appeal dismissed. 350