1930 (5) TMI 9 - HC - Income Tax

Deductibility of Theft Loss for Income Tax

Ramaswami Chettiar And Ors. Versus Commissioner Of Income-Tax

Ramaswami Chettiar And Ors. Versus Commissioner Of Income-Tax - TMI Issues Involved:1. Whether the loss sustained by the assessee due to theft of money used in the money-lending business can be described as incidental to his business and thus deductible for income tax purposes.Issue-Wise Detailed Analysis:1. Loss Sustained by Assessee Due to Theft:Beasley, C.J.:The primary question is whether the loss sustained by the assessee due to theft is incidental to his business. If it is, the assessee is entitled to reduce his taxable profits by the amount of the loss. The assessee argued that the stolen money was part of his 'stock-in-trade' and was available for lending to borrowers. However, there is no evidence to support this claim. The money appears to be capital, and if it is capital, the assessee is not entitled to a deduction. Even if the stolen money were profits, unless the loss is shown to be incidental to the business, no deduction can be claimed. The theft in question did not involve any of the assessee's current employees, making it difficult to argue that the loss was incidental to the business. Therefore, the question must be answered in the negative, and the assessee is directed to pay the costs of the Income-tax Commissioner, fixed at Rs. 250.Anantakrishna Ayyar, J.:Disagreeing with the majority, the question is whether the loss incurred by theft of money used in the money-lending business should be allowed in computing income tax. The petitioners, a registered firm of Nattukottai Chettis, suffered a theft of Rs. 9,335 in cash and currency notes, as well as certain pledged jewels. The Commissioner of Income-tax acknowledged the genuineness of the loss but opined that there was no legal provision for such a deduction as it was considered a capital loss. However, under Section 10 of the Income-tax Act, profits or gains must be computed using ordinary commercial methods. The loss by theft should be considered a business loss and deductible. The cash and currency notes lost should be considered 'stock-in-trade' of the money-lending business, essential for its operation even after banking hours. Therefore, the loss should be deducted when computing profits.Curgenven, J.:The question is whether the loss incurred by theft of money used in the money-lending business should be allowed in computing income tax. While Section 10 (2) does not explicitly include such a loss, profits must be computed by considering both gains and losses. The money lost was part of the money-lender's stock-in-trade. However, not all losses of stock-in-trade are incidental to the business. A loss must be likely to occur in the ordinary course of business. Theft by an external party, as opposed to embezzlement by an employee, is not typically incidental to the business. The comparative likelihood of such an occurrence must be considered. Given the lack of detailed facts, the question is answered in the negative.Summary:The majority opinion (Beasley, C.J., and Curgenven, J.) holds that the loss due to theft is not incidental to the assessee's business and thus not deductible for income tax purposes. The dissenting opinion (Anantakrishna Ayyar, J.) argues that the loss should be considered a business loss and deductible, as the cash and currency notes were essential for the money-lending business and should be treated as 'stock-in-trade.'