1958 (3) TMI 55 - HC - Income Tax

Court allows deduction for stock-in-trade losses but disallows wartime expenses in enemy-occupied territories.

Pohoomal Bros. Versus Commissioner of Income-tax

Pohoomal Bros. Versus Commissioner of Income-tax - [1958] 34 ITR 64 (Bombay) Issues Involved:1. Whether the losses from the destruction of stock-in-trade due to enemy action are deductible as trading losses.2. Whether the assessee is entitled to claim various expenses incurred during the years 1943-44 to 1946-47 for branches in enemy-occupied territories.Detailed Analysis:Issue 1: Deductibility of Losses from Destruction of Stock-in-TradeAssessment Years and Context:The case concerns the assessment of a well-known firm for the assessment years 1942-43 to 1946-47. The firm had branches in Manila, Saigon, and Kualalumpur, which were occupied by the Japanese in December 1941. The assessee claimed losses due to the destruction of stock-in-trade by the invading Japanese.Tribunal's View:The Tribunal disallowed these losses, arguing that the losses were due to enemy action, which is not incidental to the trade. They also viewed these losses as capital losses, not revenue deductions.Court's Analysis:The court disagreed with the Tribunal's view, emphasizing that the destruction of stock-in-trade, regardless of the cause, should be considered a trading loss. The court highlighted that the stock-in-trade is fundamental to a trader's business, and its loss should be deductible. The court referenced the English case of Green v. J. Gliksten & Sons Ltd., where insurance money received for destroyed stock-in-trade was considered a trading receipt. The principle derived is that the cause of the loss is irrelevant; what matters is the loss of stock-in-trade, which is inherently a trading loss.Conclusion:The court concluded that the assessee is entitled to claim the losses estimated by the Appellate Assistant Commissioner, amounting to Rs. 1,42,500 for Manila and Rs. 40,000 for Kualalumpur, totaling Rs. 1,82,500.Issue 2: Entitlement to Claim Various ExpensesExpenses Claimed:The assessee claimed expenses for salaries, payments to dependents in India, and rent for premises in enemy-occupied territories for the years 1943-44 to 1946-47. The Appellate Assistant Commissioner allowed these expenses, but the Tribunal did not.Tribunal's View:The Tribunal found that the businesses at these branches had come to an end, not merely suspended. This finding was not challenged by the assessee, making it binding.Court's Analysis:The court noted that the distinction between business suspension and termination is crucial. Since the Tribunal found that the business had come to an end, the expenses could not be justified as deductions. The court referenced cases like Falkirk Iron Co. Ltd. and Hyett v. Lennard, which dealt with long-term liabilities and the necessity of expenses for earning profits. However, the court found no evidence that the liabilities (rent and salaries) were long-term or could not be terminated when the business ended.Conclusion:The court concluded that the assessee failed to establish that the liabilities were necessary and could not be terminated. Therefore, the Tribunal's decision to disallow these expenses was upheld.Final Judgment:1. The first question is answered in the negative, allowing the assessee to claim the loss of Rs. 1,82,500.2. The second question is answered in the affirmative, disallowing the expenses claimed for the years 1943-44 to 1946-47. No order as to costs.