Dacoits took cash out of my bank branch. Can I write the loss off against business profits, or is it a loss I suffer as an owner of money rather than as a banker?
You can write it off. The Supreme Court held that cash is the stock-in-trade of a banking company, and that keeping enough money in the branch, duly guarded, to meet the demands of constituents is an integral part of the operation of banking. Retaining money on the premises carries with it the ordinary risk of embezzlement, theft, dacoity or destruction by fire, so a loss by dacoity is incidental to carrying on the business and is deductible in computing profits. The Allahabad High Court's answer in favour of the bank was upheld and the Rs 1,06,000 lost in the Ramnagar branch was allowed.
Decided by the Supreme Court (Supreme Court of India; K. Subba Rao, J.C. Shah and S.M. Sikri JJ. Judgment by Subba Rao J) on 1964-09-25, reported as AIR 1965 SC 1227; (1965) 1 SCR 340. It bears on section 28 of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the decision that turned the general principle of Badridas Daga into a workable test for losses caused by outsiders. Two propositions in it are quoted constantly. The first is the test: a loss is deductible if it is incurred in carrying out the operation of the business and is incidental to that operation, which is a question of fact turning on the nature of the operations and the nature of the risk they carry. The second is the qualification that the degree of risk, or how often it materialises, does not matter; what matters is the nexus between the risk and the nature of the business. The Court also confined the well-known passage in Badridas Daga about a thief breaking into a money-lender's premises, holding it inapplicable to a banking company whose deposits are its circulating capital regardless of any intention to employ them, and it disapproved the Madras Full Bench view that a theft by someone not employed by the assessee can never give a deductible loss.
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The assessee was the Nainital Bank Limited, a public limited company carrying on banking business through several branches, one of them at Ramnagar. In the usual course of business large amounts were kept in safes on the branch premises. On 11 June 1951 at about 7 p.m. there was a dacoity at the branch and the dacoits carried away cash of Rs 1,06,000 together with some ornaments pledged with the bank. For assessment year 1952-53 the bank claimed the amount as a trading loss in computing its business income. The Income-tax Officer disallowed it on the ground that it was not incidental to the banking business, and the Appellate Assistant Commissioner and the Appellate Tribunal confirmed that view. On a reference, a Division Bench of the Allahabad High Court held that the loss by dacoity was incidental to the banking business and was a trading loss deductible under section 10(1) of the 1922 Act. The Commissioner appealed by certificate under Article 133. For the Revenue it was argued that the bank lost the money by burglary not in its capacity as a bank but as any other citizen might, and that the loss fell on it as owner of funds rather than as a person carrying on business.
The appeal was dismissed with costs and the High Court's order upheld. Cash is the stock-in-trade of a banking company and its loss is a trading loss. But not every loss of stock-in-trade is deductible: it must be incurred in carrying out the operation of the business and be incidental to that operation. Whether it is so is a question of fact in each case, to be decided by reference to the nature of the operations carried on and the nature of the risk involved in carrying them out. The degree of the risk and its frequency are of little relevance; its nexus to the nature of the business is what matters. Applying that, it is an integral part of the process of banking that sufficient money should be kept in the bank, duly guarded, to meet the demands of constituents; retention of the money in the bank premises is part of the operation of banking, and it carries the ordinary risk of embezzlement, theft, dacoity or destruction by fire. The loss by dacoity was therefore incidental to the carrying on of the banking business and deductible.
The Court started with what a banking business is, taking the definition in the Banking Companies Act: accepting deposits of money from the public for lending or investment, repayable on demand or otherwise. That is a continuous process of receiving deposits, making and realising advances and lending again, and it requires ready cash on the premises. A company incorporated to do only that has no separate private character to which its funds could be attributed. Cash being the banker's stock-in-trade was already settled, and loss of stock-in-trade has long been treated as a trading loss, whether by fire, by enemy invasion, or by white ants, with any insurance recovery taxed as a trading receipt. The real question was whether the loss was incidental to the operation. Badridas Daga supplies the test, that a deduction outside the specific allowances depends on whether, by accepted commercial practice and trading principles, the loss arises out of the carrying on of the business and is incidental to it. The Revenue relied on the illustration in that judgment of a thief breaking into a money-lender's premises overnight, said there to be a loss falling on the assessee as owner of funds. The Court confined that passage: a money-lender's profits may be indistinguishable from his private funds and become stock-in-trade only when he puts them into the business, whereas a bank's deposits are its circulating capital without more. It expressly refrained from deciding whether the illustration itself is right. It then relied on Motipur Sugar Factory, approved earlier, where cash robbed from an employee taking it to pay cane growers was allowed, and asked why a robbery from the bank's own premises should be treated differently, the money being lodged there for disbursement to constituents. Charles Moore in Australia and Gold Band Services in New Zealand were applied for the propositions that the occasion of the loss was the ordinary conduct of the business and that incidental and relevant refer to the character of the loss and its connection with income-producing operations, not to how likely it was. The narrow Madras Full Bench view in Ramaswami Chettiar, which turned on the thief not being an employee, was disapproved.
The degree of the risk or its frequency is not of much relevance but its nexus to the nature of the business is material.
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Handle my notice → Ask a CA on WhatsAppYou can write it off. The Supreme Court held that cash is the stock-in-trade of a banking company, and that keeping enough money in the branch, duly guarded, to meet the demands of constituents is an integral part of the operation of banking. Retaining money on the premises carries with it the ordinary risk of embezzlement, theft, dacoity or destruction by fire, so a loss by dacoity is incidental to carrying on the business and is deductible in computing profits. The Allahabad High Court's answer in favour of the bank was upheld and the Rs 1,06,000 lost in the Ramnagar branch was allowed. This was decided by the Supreme Court (Supreme Court of India; K. Subba Rao, J.C. Shah and S.M. Sikri JJ. Judgment by Subba Rao J) and bears on section 28 of the Income Tax Act 1961. It is reported as AIR 1965 SC 1227; (1965) 1 SCR 340. This is the decision that turned the general principle of Badridas Daga into a workable test for losses caused by outsiders. Two propositions in it are quoted constantly. The first is the test: a loss is deductible if it is incurred in carrying out the operation of the business and is incidental to that operation, which is a question of fact turning on the nature of the operations and the nature of the risk they carry. The second is the qualification that the degree of risk, or how often it materialises, does not matter; what matters is the nexus between the risk and the nature of the business. The Court also confined the well-known passage in Badridas Daga about a thief breaking into a money-lender's premises, holding it inapplicable to a banking company whose deposits are its circulating capital regardless of any intention to employ them, and it disapproved the Madras Full Bench view that a theft by someone not employed by the assessee can never give a deductible loss. If it applies to you, the first step is this: Frame the claim as a trading loss in computing business profits, not as expenditure; the loss is deducted in arriving at profits and does not need to fit a specific allowance clause.
The assessee was the Nainital Bank Limited, a public limited company carrying on banking business through several branches, one of them at Ramnagar. In the usual course of business large amounts were kept in safes on the branch premises. On 11 June 1951 at about 7 p.m. there was a dacoity at the branch and the dacoits carried away cash of Rs 1,06,000 together with some ornaments pledged with the bank. For assessment year 1952-53 the bank claimed the amount as a trading loss in computing its business income. The Income-tax Officer disallowed it on the ground that it was not incidental to the banking business, and the Appellate Assistant Commissioner and the Appellate Tribunal confirmed that view. On a reference, a Division Bench of the Allahabad High Court held that the loss by dacoity was incidental to the banking business and was a trading loss deductible under section 10(1) of the 1922 Act. The Commissioner appealed by certificate under Article 133. For the Revenue it was argued that the bank lost the money by burglary not in its capacity as a bank but as any other citizen might, and that the loss fell on it as owner of funds rather than as a person carrying on business. The matter was decided on 1964-09-25 by the Supreme Court (Supreme Court of India; K. Subba Rao, J.C. Shah and S.M. Sikri JJ. Judgment by Subba Rao J). On those facts the Supreme Court held as follows. The appeal was dismissed with costs and the High Court's order upheld. Cash is the stock-in-trade of a banking company and its loss is a trading loss. But not every loss of stock-in-trade is deductible: it must be incurred in carrying out the operation of the business and be incidental to that operation. Whether it is so is a question of fact in each case, to be decided by reference to the nature of the operations carried on and the nature of the risk involved in carrying them out. The degree of the risk and its frequency are of little relevance; its nexus to the nature of the business is what matters. Applying that, it is an integral part of the process of banking that sufficient money should be kept in the bank, duly guarded, to meet the demands of constituents; retention of the money in the bank premises is part of the operation of banking, and it carries the ordinary risk of embezzlement, theft, dacoity or destruction by fire. The loss by dacoity was therefore incidental to the carrying on of the banking business and deductible.
The Court started with what a banking business is, taking the definition in the Banking Companies Act: accepting deposits of money from the public for lending or investment, repayable on demand or otherwise. That is a continuous process of receiving deposits, making and realising advances and lending again, and it requires ready cash on the premises. A company incorporated to do only that has no separate private character to which its funds could be attributed. Cash being the banker's stock-in-trade was already settled, and loss of stock-in-trade has long been treated as a trading loss, whether by fire, by enemy invasion, or by white ants, with any insurance recovery taxed as a trading receipt. The real question was whether the loss was incidental to the operation. Badridas Daga supplies the test, that a deduction outside the specific allowances depends on whether, by accepted commercial practice and trading principles, the loss arises out of the carrying on of the business and is incidental to it. The Revenue relied on the illustration in that judgment of a thief breaking into a money-lender's premises overnight, said there to be a loss falling on the assessee as owner of funds. The Court confined that passage: a money-lender's profits may be indistinguishable from his private funds and become stock-in-trade only when he puts them into the business, whereas a bank's deposits are its circulating capital without more. It expressly refrained from deciding whether the illustration itself is right. It then relied on Motipur Sugar Factory, approved earlier, where cash robbed from an employee taking it to pay cane growers was allowed, and asked why a robbery from the bank's own premises should be treated differently, the money being lodged there for disbursement to constituents. Charles Moore in Australia and Gold Band Services in New Zealand were applied for the propositions that the occasion of the loss was the ordinary conduct of the business and that incidental and relevant refer to the character of the loss and its connection with income-producing operations, not to how likely it was. The narrow Madras Full Bench view in Ramaswami Chettiar, which turned on the thief not being an employee, was disapproved. In the words reproduced by the source cited on this page: "The degree of the risk or its frequency is not of much relevance but its nexus to the nature of the business is material."
It was decided by the Supreme Court on 1964-09-25 and is reported as AIR 1965 SC 1227; (1965) 1 SCR 340. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 28, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed with costs and the High Court's order upheld. Cash is the stock-in-trade of a banking company and its loss is a trading loss. But not every loss of stock-in-trade is deductible: it must be incurred in carrying out the operation of the business and be incidental to that operation. Whether it is so is a question of fact in each case, to be decided by reference to the nature of the operations carried on and the nature of the risk involved in carrying them out. The degree of the risk and its frequency are of little relevance; its nexus to the nature of the business is what matters. Applying that, it is an integral part of the process of banking that sufficient money should be kept in the bank, duly guarded, to meet the demands of constituents; retention of the money in the bank premises is part of the operation of banking, and it carries the ordinary risk of embezzlement, theft, dacoity or destruction by fire. The loss by dacoity was therefore incidental to the carrying on of the banking business and deductible. It arises in Deductions & Disallowances matters, on section 28 of the Income Tax Act 1961, and was decided by Supreme Court of India; K. Subba Rao, J.C. Shah and S.M. Sikri JJ. Judgment by Subba Rao J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show the connection between the risk and the way the business is necessarily carried on: why the cash or stock had to be where it was, under what practice, custom or statutory requirement. Do not let the Department argue that the loss is not deductible because such events are rare or unforeseeable; frequency and likelihood are irrelevant, character and nexus are not. Prove the loss and its quantum with the police record, the branch cash book and the insurance claim, and bring any insurance recovery to tax as a trading receipt, deducting only the unrecouped part.
Still good law. The source page records the decision as cited in well over one hundred and eighty later cases and its citator shows it relied on by the Supreme Court itself in 1965, 1967, 1973 and 1978. It remains the standard authority on losses incidental to the operation of a business. It construes section 10(1) of the 1922 Act, whose successor is section 28 of the 1961 Act, under which a trading loss is likewise deducted in arriving at business profits without needing a specific allowance clause. Its later history was not otherwise traced in this session. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line gave the sections as 28 and 37(1) and the year as 1965. The judgment was delivered on 25 September 1964, the 1965 date being that of the AIR report, and it decides section 10(1) of the Indian Income-tax Act, 1922, whose 1961 Act equivalent is section 28. Section 37(1) is not in issue: the claim was for a trading loss in computing profits, not for expenditure. The harvested page carries a reporter's headnote above the judgment, which has been disregarded, and its opening line names only two judges while the bench block and the judgment show three. The Court expressly left open whether the illustration in Badridas Daga about a thief breaking into a money-lender's premises states the law correctly. The judgment does not say whether the bank recovered anything under insurance or from the dacoits, or how the pledged ornaments were dealt with as between the bank and the pledgors. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed with costs and the High Court's order upheld. Cash is the stock-in-trade of a banking company and its loss is a trading loss. But not every loss of stock-in-trade is deductible: it must be incurred in carrying out the operation of the business and be incidental to that operation. Whether it is so is a question of fact in each case, to be decided by reference to the nature of the operations carried on and the nature of the risk involved in carrying them out. The degree of the risk and its frequency are of little relevance; its nexus to the nature of the business is what matters. Applying that, it is an integral part of the process of banking that sufficient money should be kept in the bank, duly guarded, to meet the demands of constituents; retention of the money in the bank premises is part of the operation of banking, and it carries the ordinary risk of embezzlement, theft, dacoity or destruction by fire. The loss by dacoity was therefore incidental to the carrying on of the banking business and deductible.
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