Kewal Ram Agarwal and Others vs Commissioner of Income Tax

Shiveshwar Prasad Sinha, J.—This is a reference u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), on the following two questions of law :

" (i) Whether the sum of Rs. 10,500 stolen from the shop of the assessee was a business loss and allowable in its hands ?

(ii) Whether the Income Tax Officer was justified in clubbing the share income of Sri Arjun Lall, Ratan Lal and Rambilash in the hands of their respective fathers ? "

The facts relevant for each of the two questions are distinct and separate and therefore for the purpose of giving opinion on them, I would like to mention the facts separately.

The facts relevant, as found by the Income Tax Appellate Tribunal (hereinafter referred to as " the Tribunal "), in respect of the first question are that the assessee carried on business in cotton piece goods as a wholesale dealer. It had filed a return showing a taxable profit of Rs. 54,152 after deducting amongst others a sum of Rs. 10,500 which was cash stolen from the business premises. The assessee stated, which statement has not been doubted, that the said sum of Rs. 10,500 represented the cash balance of the day and that the said amount was lost by reason of theft. The Income Tax Officer, the Appellate Assistant Commissioner and the Tribunal disallowed the claim to deduct the said loss on the ground that it was a capital loss. According to the Tribunal the loss did not arise out of carrying on of the business and it was not incidental to it. The Tribunal observed:

"... There is no specific provision under the law for allowing such like claims. The question about the admissibility of the claim depends on the factor whether having regard to the accepted commercial practice and trading principles it can be said that the loss arose to the assessee out of the carrying on of the business and is incidental to it. The loss for which a deduction is claimed must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee even if it has some connection with his business . . ."

The Tribunal felt that since the assessee was not carrying on business as a money-lender or banker, the money was not its stock-in-trade and if as a result of theft, cash was lost, it was not admissible as deduction in computing its profit.

Mr. Tarkeshwar Prasad, appearing for the assessee, submitted that the cash, which was lost, being the realisations of the day and kept at the business premises, the loss was incidental to the trade, to which risk every trader was open. On the principles enuciated by the Supreme Court in the case of Commissioner of Income Tax U.P. Vs. Nainital Bank Ltd., he submitted that the loss was clearly admissible as a deduction in computing the assessee''s profits from business.

Mr. Shambhu Sharan, appearing for the Commissioner of Income Tax, replied that although the cash which was lost was from the business premises yet that could not be a factor to indicate that it was a cash of the business. According to him there was no nexus, at least none had been established by the assessee, between the business and the loss of cash by theft. It was, therefore, urged that the loss neither" arose out of carrying on of the business nor was incidental to it and consequently it could not be taken note of in computing the assessee''s taxable profit.

The question with regard to the admissibility of loss by theft in computing the profits of business has to be determined on the facts and circumstances of each case. It cannot be predicated as a rule that all such losses were capital or non-business loss or that all such losses were deductible in computing the business profits. In the instant case the three undisputed facts are : (i) the assessee carried on business in cotton piece goods on wholesale basis; (ii) the sum of Rs. 10,500 represented the cash balance of the day; and (iii) as a result of theft in the shop premises that amount was lost.

The question of admissibility of loss of cash by theft in computing the profits of business nas been the subject-mafter of decisions of various High Courts. One of the essential tests which has, however, been consistently laid in all those cases is that the loss of cash by theft must be incidental to the operation of the business. This criteria has been confirmed by the Supreme Court in the cases of Badridas Daga Vs. The Commissioner of Income Tax, and Commissioner of Income Tax U.P. Vs. Nainital Bank Ltd.,

Now the argument on behalf of the petitioner-assessee is that the amount lost represented the sale value of its stock-in-trade and if such amount was lost by theft or other reasons it would in effect be a loss of stock-in-trade and consequently a business loss. The argument on behalf of the department, however, is that once the stock-in-trade is sold and converted into cash, the loss of such cash by theft could not be deducted in computing business profits unless it was established that the loss was incidental to the business.

I think it cannot be denied that if stock-in-trade is lost by whatsoever reason, the loss would be admissible as a deduction ( Pohoomal Bros. Vs. Commissioner of Income Tax, Bombay City, ), but where the stock-in-trade has been sold and the sale proceeds is lost by theft, possibly it would be difficult to admit that loss of the sale proceeds in the shape of cash was the same thing as loss of the stock-in-trade. The character of the loss no more remains the loss of the stock-in-trade but becomes a loss of the sale proceeds of such stock. If, therefore, the cash is lost the admissibility of such loss as a deduction in computing the business profits would depend on the fact as to whether the loss was incidental to the operation of the business.

In the case of Nainital Bank Ltd., referred to above, one of the judgments which was referred to by their Lordships with approval was the judgment of the Supreme Court of New Zealand in Gold Band Services Ltd. v. Commissioner of Inland Revenue (N. Z.) [1961] N.ZLR 467; AIR 193 SC 8 . In that case the assessee owned and operated a petrol service station which was kept open continuously. There was an armed hold-up by robbers and a substantial sum of money was stolen. It was held that the sum lost was a loss exclusively incurred in gaining or producing the assessable income and was deducted from its gross income. One of the observations of Haslam J. of the said Supreme Court was as under :

"I can see no valid distinction to be drawn in principle between the robbery of trade receipts on the appellant''s premises at an hour before banking was possible (but intended to be banked at a time when banks were open), and a robbery of the same money when in the custody of the employee on the way to the bank. In my opinion, the occasion for the loss of the present appellant was the operation of its business in the normal way, with the result that the cash stolen was on the premises at that particular time, and that the possibility of such plunder constituted an attraction to a certain type of criminal, including both the safe-blower and the armed burglar. "

Apparently, on the basis of the aforesaid observation, I felt inclined to think that the loss of Rs. 10,500 being loss of the sale proceeds of the business stock was an admissible deduction, but then looking to the aforesaid observation a little closely, here also I find that the admissibility of the loss has been linked with the business operation of the assessee. In fact, while summarising the legal position, after quoting from the said judgment of the Supreme Court of New Zealand, the Supreme Court observed :

" u/s 10(1) of the Indian Income Tax Act, 1922, the trading loss of a business is deductible in computing the profit earned by the business. But, every loss is not so deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. Whether loss is incidental to the operation of a business is a question to be decided on the facts of each case, having regard to the nature of the operations carried on and the nature of the risk involved in carrying them out."

Reverting to the facts found in this case, the three facts enumerated above do not give any indication as to whether the cash which was lost was kept at the business premises for carrying out operation of the business. Those facts merely indicate that sale proceeds of the business which might or might not be required for carrying out the operation of the business was kept at the business premises and while so kept was lost by theft. May be that the said cash was required for carrying out the operation of the business or may be that it was not. In the absence, therefore, of the vital fact as to whether the cash stolen was required for carrying out the operation of the business it is not possible to express any opinion on question No. 1. I, therefore, felt inclined to call for a supplementary statement of the case, but possibly I cannot do so because this will require asking the Tribunal to make a supplementary statement on fresh facts after taking additional evidence. Such a course is not open to the High Courts even in terms of Section 258 of the Income Tax Act, 1961 : vide COMMISSIONER OF Income Tax, WEST BENGAL I Vs. INDIAN MOLASSES CO. P. LTD., , Commissioner of Income Tax v. Premji Bhimji [1967] 661 TR 441 (SC) and Commissioner of Income Tax, Madras Vs. M. Ganapathi Mudaliar, .

I, therefore, decline to answer question No. 1. I would, however, like to observe that it will be in the interest of justice that if the Tribunal finds on looking into the accounts of the assessee that the said sum of Rs. 10,500 was normally required for business either for its day-to-day running or for any special business necessity arising during that period which might show that such sum was kept in the business premises for carrying out the operation of the business, it may reconsider the question of admissibility of the said amount in computing the assessee''s profits.

Coming to the second question, the facts relevant are that the assessee-firm was originally constituted of three partners, Sri Kamal Ram Agarwal, Shri Gopi Ram Agarwal and Sri Kewal Ram Agarwal, the share of the first two being five annas in a rupee and the share of the last one being six annas in a rupee. This firm continued as a firm registered under the Income Tax Act up to and including the assessment year 1961-62. For the assessment year in question, which is the year 1962-63, the firm claimed registration of a reconstituted partnership under a deed dated November 11, 1960. By this deed the constitution was as under :

Sri Kamal Ram Agarwal ... 4 annas in a rupee.

" Gopi Ram Agarwal ... 2 " "

" Rambilashi Agarwal ... 2 " "

" Arjun Lall Agarwal ... 3 " "

" Ratan Lall Agarwal ... 2 " "

" Kewal Ram Agarwal ... 3 " "

Rambilash Agarwal is the son of Gopi Ram Agarwal, partner No. 2. Arjun Lall Agarwal and Ratau Lall Agarwal are sons of Kewal Ram Agarwal, partner No. 6. The firm, as reconstituted, applied for registration and the Income Tax Officer allowed it. In his order u/s 185 of the Act (wrongly captioned as order u/s " 182 " in the printed paper book), he, however, observed:

" In view of the facts stated above the registration of the firm is allowed subject to the condition that Sri Kewal Ram and Gopi Ram will be deemed to be the partners representing their old Hindu undivided family as before and the other alleged new-comers, Sri Arjun Lall and Ratan Lall, will be deemed to be the nominees of their father, Kewal Ram, and Rambilash Agarwal as nominee of his father, Gopi Ram. "

On computation of the total income of the firm he allocated the shares in the manner as observed above in the said order u/s 185 of the Act, namely, that he included the share income of Arjun Lall Agarwal and Ratan Lall Agarwal in the hands of Kewal Ram Agarwal and the share income of Rambilash Agarwal in the hands of Gopi Ram Agarwal. Such action of the Income Tax Officer was confirmed both by the Appellate Assistant Commissioner as also by the Tribunal. The Tribunal observed that "......the transferees were mere benamidars and the funds still belonged to the Hindu undivided families headed by Kewal Ram and Gopi Ram......"

Mr. Tarkeshwar Prasad, appearing for the assessee-petitioner, submitted that having accorded registration to the firm, as constituted under the instrument of partnership dated November 11, 1960, the allocation of the income of the firm between the partners must necessarily be in accordance with the shares of the partners who constituted the firm. As to whether any of the partners constituting the firm held beneficial interest in the share of another partner, was a question which was not germane as far as the assessment and the allocation of the income of the firm was concerned. It was, therefore, urged that the clubbing of the incomes of Arjun Lall Agarwal, Ratan Lall Agarwal and Rambilash Agarwal in the hands of their respective fathers in the firm''s assessment was illegal.

In my opinion, the contention is valid and must be accepted. After a firm has been accorded registration in terms of Section 185(1)(a) of the Act, the assessment of the firm has to be made in terms of Section 182(1) of the Act. Section 182(1) of the Act reads as under:

"Notwithstanding anything contained in Sections 143 and 144 and subject to the provisions of Sub-section (3), in the case of a registered firm, after assessing the total income of the firm,--

(i) the Income Tax payable by the firm itself shall be determined; and

(ii) the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly."

In accordance with this section the firm has to be treated as an unit by itself for the purpose of assessment and the first step is to determine the income of the firm, treating the firm as an entity by itself. The next step is to determine the tax payable by it. If the total income assessed, treating the firm as an entity exceeds a certain limit (in this case the maximum amount not chargeable to tax in the hands of the firm being Rs. 25,000 for the relevant assessment year), the Income Tax payable on the amount in excess of the exempted limit has to be paid by the firm. The next step then is to include the share of income of each individual partner in the total income of that partner and to assess him to tax. So far as the assessment of the firm is concerned, it ends with the second step, namely, by determining the firm''s income treating the firm as an entity and by charging tax on the firm on the amount in excess of the exempted limit. The third step, namely, the clubbing of the share income of one partner in the hands of the other is to be done not while computing the income of the firm or while allocating the shares of the partners of the firm in the firm''s assessment, but while assessing the total income of the partners individually. It is an accepted principle of law that the relationship inter se the partners qua the partnership cannot be affected by the accountability of the partners to another partner or to some one else : See Commissioner of Income Tax, Madras Vs. Bagyalakshmi and Co., Udamalpet, In all cases, where a partner represents his joint Hindu family or some other person or persons, the partner occupies a dual position; qua the partnership, he functions in his personal capacity; qua the third party, in his representative capacity. The share of the partner depends on the terms of the partnership deed and the share of the persons whom that partner might be representing depends on a separate contract altogether. Therefore, while computing the income of the firm and allocating such income in the hands of the partners thereof, the share which has to be allocated to the partners in the firm''s assessment must be in accordance with the terms of the partnership, if the partnership has been registered as a genuine and valid partnership.

The assessment of the income of a registered firm must not be confused with the assessment of income of the individual partners thereof. The share, of an income of individual partner may be held by him for the benefit of another person, but qua the firm, it. is irrelevant. While assessing the firm and allocating its income amongst its partners the only relevant fact is : who are the partners qua the firm. The same view Ras been expressed earlier in the cases of Varjivandas Hirji and Co. Vs. Commissioner of Income Tax, Bombay City-II, and PT. DEO SHARMA Vs. COMMISSIONER OF Income Tax, U. P. AND V. P., .

In the instant case, the partnership, as constituted under the instrument of partnership dated November 11, 1960, having been glinted registration under the Act, the allocation of the shares of the partners in the income of the firm could not be different than the shares of the partners as specified in the said instrument of partnership. There can be no clubbing of income of one partner with the other in so far as the assessment of the firm is concerned; qua the partnership, each partner is a separate entity by himself functioning in his personal capacity only. It follows, therefore, that in the assessment of registered firms, the share of each partner must be in accordance with the shares as described on the instrument of partnership. The Tribunal, therefore, erred while allocating the shares of the partners in the assessment of the firm to club the income of some of the partners with another. Such a step was wholly illegal in so far as the assessment of the firm was concerned. In my opinion, therefore, the second question has to be answered in favour of the assessee. In other words, the Income Tax Officer was not justified in clubbing the share income of Sarvashri Ratan Lall Agarwal, Arjun Lall Agarwal and Rambilash Agarwal in the hands of the respective fathers while assessing the firm.

In the result, I decline to answer question No. 1, but question No. 2 is answered in the negative and in favour of the assessee. The success being divided, I make no order as to costs.

Shambhu Prasad Singh, J.

I agree and would like to make few observations of my own. As to question No. 2 I find that Section 182(1)(ii)of the Act provides in unambiguous terms that it is the share of each partner which has to be determined separately and then to be clubbed with his other income for the purposes of assessment to tax. Once the partnership is registered u/s 185 of the Act, who the partners are can be decided only with reference to the deed of partnership. It is not open to the taxing authority to go into the question whether a person mentioned as partner in the deed is a partner in reality or mere benamidar of another partner or someone else. Learned standing counsel for the department was not oblivious of this difficulty and, therefore, he contended that the order dated 30th of November, 1962, relevant portion of which has already been quoted in the judgment of my learned brother, is not an order allowing the registration of the firm, but an order refusing the registration of the partnership as evidenced by the deed dated 11th of November, I960. It is not possible to accept his contention. u/s 185 of the Act, it is not open to the Income Tax Officer to pass a conditional order. If he is satisfied as to the existence of a genuine firm during the previous year, he must register the firm. If he is not so satisfied, he should refuse to register the firm. It has been held by the Supreme Court in Agarwal and Co. Vs. Commissioner of Income Tax, Uttar Pradesh, that for the purposes of finding out who are the partners of a firm, one has only to look to the partnership deed and not to go behind it. The order dated 30th of November, 1962, cannot but be read as an order registering the firm as evidenced by the deed of partnership dated 11th of November, 1960.

With reference to question No. 1, it was submitted by learned counsel for the assessee that, in view of the decisions in Commissioner of Income Tax U.P. Vs. Nainital Bank Ltd., and Basantlal Sanwar Prasad Vs. The Commissioner of Income Tax, it has to be answered in favour of the assessee. In Badridas Daga''s case, Venkatarama Aiyar J. of the Supreme Court, while holding that the amount embezzled by one of the employees of the assessee-firm was an admissible deduction as it arose out of carrying on of the business and thus a loss incidental to it, made the following observation :

" At the same time, it should be emphasised that the loss for which a deduction could be made u/s 10(1) must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business. If, for example, a thief were to break overnight into the premises of a money-lender and run away with funds secured therein, that must result in the depletion of the resources available to him for lending and the loss must, in that sense, be a business loss, but it is not one incurred in the running of the business, but is one to which all owners of properties are exposed whether they do business or not. The loss in such a case may be said to fall on the assessee not as a person carrying on business but as owner of funds. This distinction, though fine, is very material as on it will depend whether deduction could be made u/s 10(1) or not."

The learned judge considered various decisions of different High Courts including one in 15 (2009) CLT 94 (Orissa) of the Orissa High Court. He did not say anything doubting the correctness of this decision of the Orissa High Court; rather, emphasised on the observation of Narasimhan J. that had the theft been during the office hours, that might have made a difference. True it is that Narasimhan J. relied on the Full Bench decision in Ramaswami Chettiar and Others Vs. Commissioner of Income Tax, and the majority view of that decision was overruled by the Supreme Court in Nainital Bank Ltd.''s case. The ratio decidendi of the Supreme Court in this case is that cash is a stock-in-trade of a banking business and its loss in the course of its business under varying circumstances is deductible as a trade loss in computing the total income of the business. With reference to the observations of Venkatarama Aiyar J. in Badridas Daga''s case, Subba Rao J., who spoke for the court in Nainital Bank Ltd.''s case, observed as follows:

" That passage in terms refers to a money-lender and does not deal with a public company carrying on banking business. In the case of a money-lender the profits he made may form part of the private funds kept in his house which he may or may not invest in his business. It is indistinguishable from his other moneys. But, in the case of a bank the deposits received by it form part of its circulating capital and at the time of the theft formed part of its stock-in-trade. In one case it cannot be posited that the amount robbed is part of the stock-in-trade of the trader till he invests it in his business; in the other it forms part of the stock-in-trade without depending on the intention of the banking company. There lies the distinction between the instant case and the illustration visualized by this court. We have only suggested a distinction, but we are not expressing any definite opinion on the question whether the loss incurred in the case illustrated is or is not a trading loss. The correctness or otherwise of the said observation may fall to be considered when such a case directly arises for decision."

The decision of the Supreme Court in Nainital Bank Ltd.''s case, therefore, cannot be held as an authority that money lost by theft during non-office hours of persons carrying on business other than that of money-lending is a trading loss and as such an admissible deduction. Subba Rao J. merely held that the observations of Venkatarama Aiyar J. in Badridas Daga''s case were not applicable to public companies carrying on banking business and doubted to some extent its correctness even to the cases of private money-lenders. For an individual or a firm or a company carrying on money-lending business, undoubtedly, money is stock-in-trade, but it cannot be said to be stock-in-trade in business other than that of money-lending.

In the Bench decision of this court in Basanilal Sanwar Prasad''s case, an amount which was lost by burglary in the shop premises during non-office hours was held to be an admissible deduction. The assessee, a registered firm, was having wholesale business in cloth. In that case the Appellate Assistant Commissioner had found that it was necessary for the assessee to keep sufficient amount of cash in the shop premises during the night so that the transaction on the next day may be started without any inconvenience. It was on account of this finding that this court held that the loss due to theft must necessarily be considered to Have been directly arisen from the carrying on of the business and incidental to it. With reference to the decision in Bansidhar Gnkarmal''s case , of the Orissa High Court, Mahapatra J., who delivered the judgment, distinguished it on the ground that in that case the money was stolen by a relation of the owner after it had already been credited in "the books of accounts to the personal account of the assessee and it no longer represented the money belonging to the business. Tn the instant case, there is no finding that it was necessary for the assessee tc keep the amount which was lost by theft in the shop premises for the transactions of the next day. True it is that the case of the assessee has always been that the amount which was lost by theft was not credited to the personal account of any of the partners, but that fact by itself, in my opinion, would not make the amount an admissible deduction. Whether the amount was credited to individual partners or not is not very material. What is material is whether the amount had gone home to the firm or not. The decision in Basantlal Sanwar Prasad''s case, therefore, is not applicable to the facts of the case before us.

Reliance was also placed on the decision in Pohoomal Bros. v. Commissioner of Income Tax, a report of the proposition that stock-in-trade, if lost, is an admissible function. In my opinion, that decision is not an authority for the proposition that sale proceeds of the stock-in-trade in the hands of the assessee continued to be values of the stock-in-trade and, therefore, are admissible deductions. Ordinarily, sale proceeds include some profit and the profit part of it cannot be said to be the equivalent of stock-in-trade. In the decision of the Supreme Court of New Zealand in Gold Band Services Ltd. v. Commissioners of, Inland Revenue (N.Z.) , substantial sum of money was stolen as a result of an armed hold-up by robbers from a petrol service station of the assessee. The petrol service station was kept open continuously day and night. The loss, therefore, was during working hours. The decision is distinguishable.

It is not for this court on a reference u/s 256(1) of the Act to give its own finding of fact and in the instant case, my learned brother, S. P. Sinha J., has rightly declined to answer question No. 1. In my opinion, question No. 1 cannot be properly answered in the absence of a finding whether it was necessary for the assessee to keep the amount which was stolen from the shop premises during the night for carrying on the transaction on the following day. In the circumstances, as laid down in Commissioner of Income Tax v. Indian Molasses Co. (P.) Ltd., two courses are open to this court, to call for a supplementary statement of the case from the Tribunal or to decline to answer the question raised by the Tribunal and to leave the Tribunal to take appropriate steps to adjust its decision in the light of the observations of this court. If a supplementary statement is called for, now it is well-settled that the Tribunal will be restricted to the evidence on the record and it is not open to it to take additional evidence. Calling for supplementary statement, therefore, may result in injustice in the circumstances of this case. It is, therefore, just and proper to adopt the other course as was done by the Supreme Court in the case referred to above and to decline to answer question No. 1 on the ground that the Tribunal has failed to consider and decide the question whether it was necessary for the assessee to keep the amount which was stolen from the shop premises during the night for carrying on the transaction on the following day.