Trading loss on enemy action stock was deductible, with currency conversion fixed at the loss date.

Where stock-in-trade and book debts were permanently lost in the accounting year due to enemy action, the loss was treated as a revenue trading loss incurred in the course of business and not as a capital loss; later compensation did not change that character. The loss was therefore deductible in the year it accrued. For currency conversion, the relevant rate was the exchange rate prevailing at the time the loss arose, not the date of subsequent compensation. The assessee was accordingly entitled to compute the loss in Indian currency at the rate applicable when the loss was sustained.

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Issues: (i) whether the loss suffered on freezing and subsequent loss of stock-in-trade and book debts in Japanese action was a deductible trading loss or a capital loss; (ii) whether the loss was to be converted into Indian currency at the exchange rate prevailing at the time of loss.

Issue (i): whether the loss suffered on freezing and subsequent loss of stock-in-trade and book debts in Japanese action was a deductible trading loss or a capital loss.

Analysis: On the findings of fact, the stock-in-trade was frozen and ultimately lost in the previous year relevant to the assessment year 1942-43. The amount of compensation later received did not alter the character of the loss, and the question before the Court was limited to the nature and timing of the loss. The loss arose in the course of business and was not a loss of capital.

Conclusion: The loss was a deductible trading loss and not a capital loss, in favour of the assessee.

Issue (ii): whether the loss was to be converted into Indian currency at the exchange rate prevailing at the time of loss.

Analysis: The relevant point for valuation was the accounting year in which the loss accrued, not the later date when compensation may have been received. Since the loss was held to have occurred in the accounting year relevant to assessment year 1942-43, the conversion had to be made at the exchange rate then prevailing.

Conclusion: The assessee was entitled to compute the loss in Indian currency at the exchange rate prevailing at the time of loss, in favour of the assessee.

Ratio Decidendi: Where stock-in-trade is permanently lost in the accounting year as a result of enemy action, the loss is a revenue trading loss deductible in that year, and its Indian currency equivalent is to be determined by the exchange rate prevailing when the loss accrues.

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