MOTAMAL JETHUMAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference by the Appellate Tribunal under Section 66(1) of the Indian Income-tax Act asking for the opinion of this Court on the question whether the aggregate sum of Rs. 24,506 representing the value of goods destroyed by fire, in the circumstances of the case, is allowable as a deduction in computing the profits and gains of the assessees business under Section 10 of the Income-tax Act

(2.) THE facts are these. THE assessee is a dealer in grains, jute, groceries and cloth. In the accounting year of the assessee which is 1997 Sambat corresponding to 1940-41, a fire broke out in the vicinity of the assessees shop which ultimately spread out and affected his godown with the result that his goods worth Rs. 17,552, jute worth Rs. 6,954 and currency notes worth Rs. 3,228 were destroyed. THE assessee claimed a set-off against his income in the accounting year for these three sums as his business loss. THE claim was disallowed by the Income-tax Officer on the ground that this was a capital loss in these words : During the accounting year there was an accidental fire in assessees shop in which a good portion of his stock-in-trade, fixed assets and cash was burnt. Item (3) above (that is to say currency notes) is clearly a capital loss and is added back...... THE assessee lost his stock-in-trade due to an accidental fire. This loss which is due to the shortage of closing stock lost in fire, is thus more a capital loss. THEse are, therefore, not incidental to business, and are added back.

(3.) IT is necessary to bear in mind that the thing to be taxed is the amount of profits or gains of the trade or business and that the word profit should be understood in its natural and proper sense - in a sense which no commercial man would misunderstand : per Lord Chancellor Halsbury in Gresham Life Assurance Society v. Styles approved by the Privy Council in Pondicherry Railway Company Limited v. Commissioner of Income-tax, Madras. Lord President Clyde in Whimster & Co. v. Commissioners of Inland Revenue stated at page 823 : In computing the balance of profits and gains for the purposes of Income-tax, or for the purposes of Excess Profits Duty, two general and fundamental commonplaces have always to be kept in mind. In the first place, the profits of any particular year or accounting period must be taken to consist of the difference between the receipts from the trade or business during such year or accounting period and the expenditure laid out to earn those receipts. In the second place, the account of profit and loss to be made up for the purpose of ascertaining that difference must be framed consistently with the ordinary principles of commercial accounting, so far as applicable, and in conformity with the rules of the Income-tax Act, or of that Act as modified by the provisions and schedules of the Acts regulating Excess Profits Duty, as the case may be. For example, the ordinary principles of commercial accounting require that in the profit and loss account of a merchants or manufacturers business the values of the stock-in-trade at the beginning and at the end of the period covered by the account should be entered at cost or market price, whichever is the lower, although there is nothing about this in the taxing statutes. Lord Herschell observed in Russell v. Aberdeen Town and County Bank that the profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts....... Unless and until you have ascertained that there is such a balance, nothing exists to which the name profits can properly be applied. In Ushers Wiltshire Brewery, Limited v. Bruce Lord Parker observed that where a deduction is proper and necessary to be made in order to ascertain the balance of profits and gains, it ought to be allowed provided there is no prohibition against such an allowance.