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PETITIONER: COMMISSIONER OF INCOME TAX

       Vs.

RESPONDENT: S.   N. A. S. A. ANNAMALAI CHETTIAR

DATE OF JUDGMENT27/09/1972

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. REDDY, P. JAGANMOHAN DUA, I.D. KHANNA, HANS RAJ

CITATION:  1973 AIR 1032            1973 SCR  (2) 460  1973 SCC  (3) 339

ACT: Income  Tax  Act, 1922--S. 10  (1)--Business  loss--Business carried  on in war zone--Damage to property  during  war--If could be given deduction to as business loss.

HEADNOTE: 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. 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 assessee during the war.  If  the assessee  had earned any profits cut of his business  during the  war the department undoubtedly have to  consider  those profits  as  assessable income.  When loss had  occurred  in such  situation the department 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 considered as a trade loss. [461 F] Bombay  High  Court  in Pohoomal Bros.  v.  Commissioner  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.  J. Glikstan, 14 Tax Cases 364 and London Investment  and Mortgage  Co. Ltd, v. Inland Revenue Commissioners [1957]  1 All England Reports. 377, referred to.

JUDGMENT: 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

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respondent. The Judgment of the Court was delivered by Hegde,  J.  This  appeal  by special  leave  arises  from  a decision  of  the  Madras High Court in  a  reference  under section  66  (1)  of  the Indian Income  Tax,  1922  (to  be hereinafter  referred  to as the Act).  As demanded  by  the assessee the Tribunal submitted the statement of the case to the High Court seeking its opinion on the question  "whether on the facts and in the circumstances of the case, the  loss of  Rs. 1,93.750/- was an allowable deduction under  section 10 of the Income-tax Act?" 461 Material facts are these The  assessee respondent was a member of a  Hindu  undivided family which carried on money lending business in India  and abroad.   In  the  course of such  money  lending  business, properties  were  taken over in settlement of debts  as  and when occasion arose.  The family was disrupted on March  28, 1939.  The assessee received some shares in some  companies, properties  and gardens and certain other items  in  Malaya. Even  after the partition the assesses continued  the  money lending business in Malaya.  During the war, in general with others, the assessee suffered damages to these properties on account of Japanese bombing.  This loss occurred on  account of  bombing  in December, 1941, a date  falling  within  the accounting period ending on April 12, 1942, relevant for the assessment  year  1942-43.   This  loss  was  claimed  as  a business loss.  The Income Tax Officer rejected that  claim. The  Appellate Assistant Commissioner affirmed the order  of the  Income  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 department that the  loss in  question  cannot be given deduction to,  as  a  business loss,  in  computing the net income of  the  assessee  under section  10(1). According to the department that was  not  a loss incidental to the business carried on by the assessee. We   are  unable  to  appreciate  the  contention   of   the department.   It  is  established  that  the  assessee   was carrying  on business in Malaya when the war was  going  on. Malaya  was  within the war zone and, therefore,  there  was every  possibility  of  that  area  being  bombed.   If  the assessee  had earned any profits out of his business  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 consideration  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 Bombay  High  Court  in Pohoomal Bros.  v.  Commissioner  of Income-Tax,  Bombay  City(1).  The facts of  that  case  are some- (1)  34 I.T.R. 64. 462 what similar to the facts before us.  The assessee  therein, which had its head office in Bombay and branches in  various

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parts  of  the  world,  claimed  deduction  of  the   losses resulting  from  the destruction of its stock  in  trade  in three foreign branches, at Manila, Saigon and 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  question were  trading losses.  This decision of the High  Court  was cited with approval by this Court in Commissioner of  Income Tax,  U.P. v. Nainital Bank Ltd. (1), 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 fire occurred on the company’s premises in August, 1921, and destroyed timber the written down value of which in  the company’s  books was pound 160,824; the company’s  valuation of its stock based on cost or market value whichever was the lower,  had  been accepted for purposes  of  taxation.   The timber had ’been insured for many years and the company  had been  allowed to deduct the insurance premises in  computing its assessable profits.  In due course the company received from  the insurers a sum of pound 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 different character.  The company accordingly  credited  in its profit and loss account  as  a trading receipt only pound 160,824 of the insurance payment; the  balance did not appear in the profit and  loss  account but  was  entered as a reserve in the  balance  sheet.   The Special Commissioners held that no part of the sum of  pound 477,838  recovered from the insurers was a trading  receipt. But the House of Lords held that the whole sum recovered was trading  receipt to be taken into account in  computing  the profits assessable to Income Tax under case 1 of Schedule  D and  to  Corporation Profits Tax.  This  court  in  Nainital Bank’s  case  (supra) quoting that  decision  with  approval observed.   "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." Next  we shall refer to the decision of the Court of  Appeal in  London  Investment  and Mortgage  Co.,  Ltd.  v.  Inland Revenue  Commissioners.(3)  The facts of that case  were  as follows : The assessee were paying compulsory war damage contributions during  the war in respect of the properties in  which  they were  dealing.  They received payments under the War  Damage Act,  1943,  in respect of the properties damaged  by  enemy action. (1) 55 I.T.R. 707          (2) 14 Tax Cases 364. (3)  [1957] 1 All England Reports 377. 463 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 the  War  Damage Act,  1943, contributions made and indemnities  given  under Part I were to be treated for all purposes as outgoings of a capital nature and expenditure 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  their  assessments 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, since they  were  money  into which   their  stock-in-trade  had  been  converted.    This

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decision  is  an  authority for  the  proposition  that  the compensation received in lieu of loss, of stock-in-trade  as a  result of enemy action is a trading receipt conversely  a loss  of stock-in-trade occasioned by enemy action  must  be considered, as a trading loss. For  the reasons mentioned above we agree with  the  conclu- sions  reached  by the High Court and see no merit  in  this appeal.  It is accordingly dismissed with costs. K.B.N.              Appeal dismissed. 464