HAYLEY & CO. LTD., Appellant, and COMMISSIONER OF INLAND REVENUE, Respondent

037-NLR-NLR-V-65-HAYLEY-CO.-LTD.-Appellant-and-COMMISSIONER-OF-INLAND-REVENUE-Respondent.pdf


174 BASNAYAKE. C.J.—-Hayley 4k Oo,, Ltd. v. Commissioner of Inland Revenue
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1961Present: Ba&nayafce, C.J., and Simseiamby, J.
HATLEY & CO., LTD., Appellant, and COMMISSIONER OFINLAND REVENUE, RespondentS. 0. 8/60—I'ncome Tax Case Stated SKA. 287
come tax—Loss suffered by burglary—Righi of assesses to deduct it from profile orincome—■“ Outgoings and expenses ”—Income Tax Ordinance {Gap. 188),se. 5, S (1) (a), 9 (1), 10 (c).
The aeeeseee -was a limited liability company which carried on a businessin the export of rubber and other produce which it purchased in open market.Large sums of money were kept each day in the office 6&fe for the purpose ofmaking purchases on the following day. One night the Company’s office wasburgled and its safe was removed with all it6 contents.
8 eld, that the nett loss suffered by the burglary ws6 an “ outgoing ” deducti-ble under section 9 (1) of the Income Tax Ordinance for the purpose ofascertaining the profits or income of the Company from its trade or business.
C ASF stated under section 74 of the Income Tax Ordinance (Cap. 1S8).
H. W. Jayewardene, Q.C., with S. Anibalavanar and N. R. M. Daluwatte,for the assessee-appeUant.
B. C. F. Jayaratne, Crown Counsel, with M. Kanagasunderam andH. L. de Silva, Crown Counsel, for the assessor-respondent.
Cur. adv. vult.
July 10, 1961. Basnayake, C.J.—
I have had the advantage of reading the Judgment prepared by mybrother Sinnetamby. I am in agreement with the opinion he has expressedand the order he has made as to costs but I wish to add a short noteof my own.
The only question for decision is whether the net amount of the losssustained by the assessee by the burglary of his office safe may be deductedunder section 9(1) of the Income Tax Ordinance for the purpose of ascer-taining the profits or income of the assessee from the source describedin section 6 (1) (a) as £t profits from any trade, business ”.
Briefly the material facts are as follows : The assessee is a limitedliability Company carrying on business in Galle. One of the Company’s busi-ness activities is the purchase of rubber for export. For the purpose ofpaying for the Company’s purchases of rubber it withdrew from its Bankon every day on which it was open sufficient money to pay for its pur-chases on each business day. On 17th April 1952 the Company drewRs. 96,075 for the purpose of paying for its purchases. On the nightof 19th April the Company’s Office was burgled and its safe was removedwith its contents. A sum of Rs. 23,775 was recovered by the Policethereby reducing the amount of the loss to Rs. 72,300. Although theassessee had insured against loss by theft, the Insurance Company forsome reason which is not disclosed, refused to meet the loss of Rs. 72,300but made an ex-gratia payment of half of it. The assessee’s loss wasthereby reduced to Rs. 36,150 which sum it claimed it was entitledto deduct for the purpose of ascertaining its profits from its trade or
BASNAYAKE, C.J.—Hayley & Co., Ltd. v. Commissioner oj Inland Revenue 175
business. The Assessor disallowed the claim and the Company appealed.The Authorised Adjudicator also disallowed its claim. The Companythereupon appealed to the Board of Review, which also disallowed theclaim. The Company expressed its dissatisfaction with that decision_and asked that a case be stated to this Court.
Section 9 (1) deals with three classes of deductions. One is “ out-goings ”, the second is “ expenses incurred by the assesses in the produc-tion of the profits or income ”, and the third is the specific deductionsallowed by paragraphs (a)-(i) thereof. The word “ outgoings ” meanswhat goes out and is a word of wide import. It is the opposite of theequally wide expression “ income ”, which means what comes in. Inthe context the word “ expenses ” is limited by the words ” incurredby such person in the production thereof” while the word “ outgoings ”is not so limited. The two words are designed to express two differentconcepts one of wider import than the other. All outgoings are notexpenses incurred in the production of the profits or income; but allexpenses incurred in the production of the profits or income are outgoings.Apart from expenses incurred in the production of the profits or incomethe section specifically mentions other outgoings. The word “ outgoings ’ ’in this context must be construed as outgoings other than those speci-fically mentioned. Whether a particular “ outgoing ” is deductiblefor the purpose of ascertaining the profits or income of a business woulddepend on the circumstances of each case subject to the provision ofsection 10 (c) which forbids the duduction of any expenditure of a capitalnature or any loss of capital. Where an outgoing is not of a capitalnature or a loss of capital or where its deduction is not expressly forbid-den by the statute, it is deductible under section 9(1) and it is not forthe taxing authorities to say that the payment should not have beenmade.
The appellant’s loss in the instant case is not a loss of capital and doesnot therefore come within the prohibition in section 10 (c). Littleassistance can be gained by examining the decisions on the taxing lawsof other countries as they are rarely the same; but in this instance theAustralian case of Alliance Assurance Go. Ltd. v. Federal Commissionerof Taxation1 affords some assistance. In that case the Court was calledupon to construe sub-clause (a) of Section 18 (1) of the Income TaxAssessment Acts 1915 (34 and 47 of 1915) which reads—“ in calculatingthe taxable income of a taxpayer the total income derived by the tax-payer from all sources in Australia shall be taken as a basis, and fromit there shall be deducted (a) all losses and outgoings, not being in thenature of losses and outgoings of capital, including commission, discount,travelling expenses, interest, and expenses actually incurred in Australiain gaining or producing the gross income.” Knox C.J., Gavan Duffy,Rich and Starke J.J., with whose judgment Higgins J. expressed hisagreement in a separate judgment, stated—
“ In our opinion the words * all losses and outgoings ’ which occur
at the beginning of sub-clause (a), extend to all losses and outgoings1 29 Commonwealth L. R. 424 at 430.
176 SINHBTAKBY, J.—Eayley db Oo.,Ltd.v. Oommieeumer of Inland Bwemtt '
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◦f the business not being in the nature of Losses and outgoings of capitaland are not qualified by the words ‘ incurred in Australia, in gainingor producing the gross income We think these latter words refereither to the word ‘ expenses ’ only, or at most to the words ‘commis-sion, discount, travelling expenses, interest, and expenses Inour opinion this is the natural grammatical construction of thewords used.. Moreover, the construction contended for by theCommissioner would lead, to the result that the cost of goods purchasedand paid for in England and afterwards sold in the carrying on ofa business in Australia could not be allowed as a deduction from theprooeeds of sal© in arriving at the taxable income of the taxpayer.”
In the instant case the sum of Es. 36,150 cannot be described as expensesincurred in producing the profits of the business but it is an outgoingdeductible under section 9 (1) in ascertaining the profits or income.
Sbsnetamby, J.—
The assessee, Messrs Chas, P. Hayley & Co., Ltd. is a firm carryingon a business in the export of rubber and other produce which it purchasesin the open market. The facts stated by the Board of Review showthat the firm’s business involves work outside the normal working hornsof the banks, that it was necessary for it to keep large sums of moneyin the office safe for the purpose of making purchases of rubber andother commodities in which it deals, and that money sufficient for it3needs is withdrawn from the bank each day and kept in the office safetill it is utilised on the following day for the purpose of making pur-chases.In this way, on 17tb April, 1952, the company withdrew from the banka sum of Rs. 96,075 in order to make the purchases it intended to makeon the 21st, the 18th and 19th of April being bank holidays and the 20thbeing a Sunday.
It would appear that on the night of the 19th of April, the place ofbusiness of the assessee was burgled, and the safe removed with allits contents. The police recovered a sum of Rs. 23,77o£rom some of theburglars, one of whom happened to be an employee of the assessee :presumably, he was not a high official in the company. The company,apparently, had insured itself agaisfc losses of this land; but, for somereason not disclosed, the Insurance company denied liability to indemnifythem for the loss : nevertheless, the insurance company made an exgratia payment of Rs. 36,150. The balance of Rs. 36,150 was a completeloss which the assessee had to bear.
The assessee, in making its income tax return for the year of assessmentin question, claimed originally a deduction of Rs. 72,300, which is theamount of the loss unxecoverad by the police ; but, subsequently, limitedthe claim to the nett loss sustained, namely Rs. 36,150. Both the Autho-rised Adjudicator and the Board of Review held against the assessee, onthe basis that this loss was a loss of capital and not a loss which, in termsof section 9 (1) of the Income Tax Ordinance, was an outgoing orexpense “ incurred by such person in the production of profits or income
SCTNETAMBY, J.—Hayley & Co., Ltd. v. Commissioner of Inalnd Revenue177
The question referred to this court for its opinion is whether, in thecircumstances of this case, the loss of Rs. 36,150 is a loss of capital oran outgoing incurred in the production of profits.
On the facts, the Board of Review held that the money was broughtfrom the bank to the business premises of the assessee for the purposeof the business in which the assessee was dealing. Nevertheless, theytook the view that, inasmuch as our Ordinance limits the amount deduc-tible to “ outgoings or expenses ” incurred in the production of profits,a “ loss ” would not come within the term and was, therefore, not asum which could properly be deducted to ascertain the nett profits ofthe business. In this way, they chose not to follow the decision in thecase of Charles Moore & Co. v. Federal Commissioner of Taxation 1 towhich they referred. The wording of the Tax Act which was inter-preted in that case provided for “ losses and outgoings and expenses ”•to be legitimate deductions. Inasmuch as our section does not includethe word “ losses ”, the Board of Review seemed to think that the lossin question could not be deducted. It is, therefore, necessary to considerthe meaning to be attached to the term t! outgoings and expenses ".
The imposition of income tax by section 5 of our Ordinance is based•upon the profits or income as calculated in accordance with the provisions•of the Ordinance. In, therefore, interpreting the expression “ outgoings-and expenses ”, one must permit such deductions as may reasonablyand in a commercial sense be made, in order to ascertain nett profits.'The word " outgoings ” must not be limited to voluntary payments.It would also include involuntary outgoings such as petty thefts by-.subordinate officers in the employ of the assessee as well as by outsiders..It was conceded that losses incurred in this way are permissible deduc-tions ; for instance, thefts in a grocery store or in a shop by customers•as well as minor employees are well recognised as being deductiblein ascertaining the nett profits. They are losses in much the same wayas the Rs. 36,150 involved in this case, was a loss. If the Board ofReview is correct in the construction they have placed on the words
outgoings and expenses ”, even such losses would not be deductiblein view of the distinction they seem to have drawn. It seems to me thatthe word tc outgoings ” is wide enough to cover losses, for a loss,after all, is an involuntary outgoing. I may add that learnedGrown Counsel did not seek to support the decision of the Board of'Review on this ground. The “ outgoings ”, however, must be outgoingsof such a nature as would come within the meaning of the expression“ incurred in the production of profits ”.
The question that must be decided is whether a loss of the kind in-question is a loss which is incidental bo or inevitable in the conduct ofthe business which produces the income. If so, it is deductible. CrownCounsel contended that it is only where stock in trade is lost that a de-duction is permissible, and once goods are sold in a business which in-volves the sale and purchase of goods, the money which is brought “ into•the till ” if lost, would be a loss of capital and, therefore, not deductible.
1 Australian and New Zealand Reports p. 739.
178 S!OSiKETAMBY, —Hayley & Oo., Ltd. v. Ctmvmtitticmar of Iniand Smmme
V
It seems to me that the fallacy in that argument lies in the fact that themoney “ in the till ” represents and replaces the stock in trade and, solong as it is in the till in that capacity , the loss of a portion of it wouldbe equivalent to a loss of stock in trad®. In Green v. Commissioner ofInland Revenue1 the question that arose was whether the money paidby an insurance company as replacement or market "value of timber whichhad been destroyed by fire, or the book value of the timber in the com-pany’s books, should be the permissible deduction ; and Lord Hanworth,in dealing with, the question, made the following observations :—
<c They had a certain amount of fixed capital in their business, andthey had a certain amount of circulating capital employed in the pur-chase of stock, which is enhanced again when the stock is sold. Apart of that circulating capital was invested in timber. That timbermight have been sold in the ordinary course of market—as a matterof fact, instead of being actually sold it was burnt. Under a contractof indemnity, properly entered into for the purpose of safeguardingthe possibilities of business in relation to it, a sum has been receivedin respect of the timber. That is once more a restoration to the actualcirculating capital of a sum which had previously been invested inspecie in timber. We have got to take the actual sum received, whichhas been received in the ordinary course of business, plus the ordinarysafeguards of business in the events which have happened. AsMr. Justice Rowlatt says : ‘ It seems to me that the Pvespondentsmust account for this timber that has been destroyed by fire ; they havereceived the money from the Insurance company in place of it …
the fact is that the Respondent’s business is to buy, hold and sell timber,and it is part of their business to insure timber while they have it, inorder that if the timber is destroyed they may have the insurancemoney instead of the timber and, in my judgment, they must treatthat money in the same way as they would have treated the timber,namely, as an item in their trading account Those are the wordsof Mr. Justice Rowlatt. It appears to me that they are right. ”
In the present case, on the facts stated, the money that was broughtfrom the bank by the assessee was, bo use the words of Lord Hanworth,“. circulating capital ” and probably represented the proceeds of previoussales of the company’s stock in trade. Although “ in the till ”, themoney represented stock in trade and was definitely intended to be uti-lised to replenish stocks. The Boad of Review, quite rightly, rejected theAuthorised Adjudicator’s opinion that “ what the cash lost representsand why it was brought and kept in the safe are not matters germaneto the issue ”, and found that the “ money was brought for the purpose ofthe purchase of rubber and other commodities that they were dealingin ”. It clearly was “ circulating capital ” and not “ fixed capital ”,and if its loss was occasioned in the exercise of some step that had to betaken for the conduct of the company’s business, it must surely be re-garded as a casuality or a misfortune incidental to that business. It was
* Income Tax Report*. 14 Tax Com*. 1928129. p. 377.
^ SINHETAMBY, J.—Say ley dk.Go., Ltd. v. Commissioner oj Inland Revenue 179
an involuntary outgoing over which the assessee had no control, andinvolved a risk which had to be taken in the ordinary course of businessin order to produce profits.
The two cases of Bansidhar Onkarmai v. Commissioner of Income Tax1and Ramaswami Chettiar v. Commissioner of Income Tax (Madras)2 on"which the Board of Review relied are distinguishable od the followinggrounds :—
In the former case, the court took the view on the facts that the theftdid not occur in the course of business while the business was beingconducted and, therefore, the loss was not a loss incidental to theconduct of the business. Narasingham, J. observed that the loss cannotbe regarded as one that was likely to occur having regard to the peculiarrisks attendant upon the conduct of the business of the assessee : further-more, the learned Judge stated that on the facts found by the tribunalfrom which the appeal was taken, there was no evidence that the moneystolen was the stock in trade of the money lending business which theassessee in that case was carrying on. As a matter of fact, the theft inthat case was committed by the accountant of the firm : and it is now awell established principle that where theft or embezzlement is committedby a high officer of a business, such as a Director or a Manager, the losscannot be regarded as a trading loss, the principle being that the personin such a position having control of the company’s money, when he takesit, is in the same position as the owner of the business. This principleappears to have been first laid down in the case of Curtis v. Oldfield Ltd. 3As was observed by Chief Justice Letham, in Commissioner of IncomeTax v. Ash 4 referring to thefts by employees :—
“ the case is different when income is actually received and thenmisapplied by the proprietor of a business or a person in the positionof a proprietor as for example the Manager of the Company.”
In that case, monies misappropriated by a partner was not regarded asa permissible deduction. Ordinarily, an expenditure which is closelyassociated with the requirements of a business is a permissible deductionbut as Chief Justice Letbam states, such a statement cannot be regardedas exhaustive. Each case must be decided on the facts and circumstancesin which the loss occurred.
In the case of Ramaswami Chettiar v. Commissioner of Income Tax[Madras) (supra) the appellant was doing business in money lending,and one night certain persons broke into the premises and removed cashand jewllery to the value of Rs. 9,335. The court held that there wasno evidence that the money which was stolen was stock in trade andthat the loss was not incidental to the business of money lending. Thiswas the view of the majority constituting the bench, but Justice Ananta-krishna Ayyar wrote a strong dissenting judgment. The learned ChiefJustice took the view that the loss was not incidental to the businessand gave as an illustration the case of a man who having collected his
1 (1949) I.TJR. p. 247.3 (1925) 9 Tax Case p. 319.
8 A.I.R. (1930) (Madras) p. 8084 Commonwealth Law Reports, 1938/39.
Vol. 61. p. 263.
ISO SESTN3BTAMBY, J.—Eagley db do., Ltd. v. Oemnviuionor of hiiand Revenue
profits was subsequently robbed of them by a stranger to the business.Such a loss was not incidental to his business. With all respect, I believethe learned Chief Justice took too narrow a view of the meaning thatshould be attached to the word “ incidental to the business AsChief Justice Ash, in the case I have already referred to, observed,
an expenditure which is directly associated with the daily require-ments or exigencies of the business will be an allowable deductionbut such a statement as this cannot be regarded as exhaustive. Theline is sometimes difficult to draw. ”
The Board of Review also referred to the case of MvXchand Harilal1.In that case, money had been stolen while it was being taken to thebank. The court took the view that this was not a permissible deduc-tion under section 10 (9) of the Indian Income Tax Act of 1922 whichpermitted the deduction of “any expenditure… .incurred solely forthe purpose of gaining such profits or gain That opinion, however,has subsequently been declared to be obiter, as in that case the appealwas dismissed on the ground that the loss in question was sustained notin the year of assessment which was under review, but in respect ofanother year of assessment, vide Bansidhar Onkarmai v. Commissioner ofIncome Tax (supra). In Motipur Sugar Factory Ltd. v. Income TaxCommissioner 2 the High Court expressed the opinion that the provisionsof section 10 (2) of the Indian Income Tax Act which permits the deductionof expenditure incurred solely for the purpose of producing profits orgain did not cover a case of theft while money was being taken for thepurchase of goods ; but, nevertheless, having regard to the provisions ofsection 10 (1) which imposes a tax on profits and gain, the words “ profitsand gains ”, it held, must be understood in a commercial sense, and adeduction was therefore permitted. The learned Judges quoted, withapproval the observations of Lord Parker, in Usher's Wiltshire BreweryLtd. v. Bruce 8, to the following effect:—
" where a deduction is proper and necessary to be made in order toascertain the balance of profits and gains, it ought to be allowed, not-withstanding anything in the first rule or in s.159, provided there isno prohibition against such an allowance. ”
The Judges expressed the view that section 10 (1) of the Indian IncomeTax Act must be considered in the light of this general principle.
In my opinion, the loss incurred by the assessee in this case is somethingwhich must be regarded as incidental to the assessee’s business, andwhich any commercial undertaking would deduct from its income inorder to ascertain its nett profits. In other words, I would hold thatit must be deducted from the gross income to ascertain the nett profits.The question referred to us is, accordingly, answered in favour of theassessee and against the taxing department. The Commissioner ofInland Revenue will pay costs of this reference to the assessee.
Appeal allowed.
1 A. I. B. (1938) (Patna) p, 189»* 28 Income Torn Report*. (1966) p. 188,
* (1915) Appeal Oates <L33.