Theft of business funds as deductible business loss where cash was in the business cycle and held for operating expenses.

A loss caused by theft of business funds was treated as an allowable deduction in computing business income because the money had been withdrawn for day-to-day business needs, kept in the factory safe-room for business disbursements, and not mixed with private funds. On those facts, the funds had entered the business stream, and their safekeeping formed part of the business operation; the risk of theft at that stage was incidental to carrying on the business. The loss was therefore deductible as a business loss under ordinary commercial principles, and the question was answered in favour of the assessee.

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Issues: Whether the loss of Rs. 53,121 caused by theft of business funds was an allowable deduction in computing business income under section 10(1) of the Indian Income-tax Act, 1922.

Analysis: The deduction was not claimable under section 10(2), so the question turned on section 10(1) and ordinary commercial principles. The money had been withdrawn from the bank for the business's day-to-day requirements, kept in the factory safe-room for disbursement towards cane purchases and other business expenses, and had not been mixed with private funds or profits. On that footing, the funds had entered the cycle of business movement and their retention in safekeeping was part of the business operation. The risk of theft at that stage was incidental to the carrying on of the business.

Conclusion: The loss was an allowable business deduction and the answer to the referred question was in the affirmative in favour of the assessee.

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