Y.S.TAMBE, J. - (1.) BY an order under Sub -S. (2) of S. 66 of the Indian INCOME TAX ACT, 1922 (11 of 1922), this Court directed the Tribunal to refer to us the following two questions of law which arose out of the order made in appeal by the Tribunal: "(1) Whether, on the facts and under the circumstances of the case, the petitioner -firm was entitled to deduct from their taxable income, the loss suffered by them due to their stock -in - trade and book debts amounting to Rs. 1,94,495 being lost by the action of Japanese authorities in July, 1941, by way of trading loss or loss of revenue nature ? (2) Whether the petitioner -firm was entitled in law to claim the amount of the said loss suffered by them converted into Indian currency at the rate of exchange prevailing at the time of such loss ?"
(2.) THE facts of this case in brief are that the assessee, a partnership firm, is doing business in silk in different parts of the world, its head office being at Bombay. In the year of assessment 1942 -43, the relevant previous year being one commencing on 6th of April, 1941, and ending with 31st of March, 1942, it had its branches at Yokohama and Kobe. In July, 1941, the property of the assessee -firm as well as the property of the other Indian nationals was frozen by the Japanese Government. The properties so frozen consisted of cash in the bank account of the assessee -firm both at Yokohama and Kobe, cash in hand, amounts which were due to the assessee -firm from the persons to whom the goods had been supplied, stock -in -trade at both the aforesaid branches, immovable properties, furniture and household articles. Japan declared war on the 8th of December, 1941. In the asst. year 1942 -43, the assessee -firm claimed that in the relevant previous year it suffered loss on account of the aforesaid action of the Japanese authorities -loss both in respect of the book debts which were due to the assessee -firm and the stock -in -trade. The total loss claimed amounted to 2,38,644 Yens which at the rate of the currency then prevailing in the assessment year came to Rs. 1,94,495. In the aforesaid amount the loss claimed by way of loss in stock -in -trade amounted to 2,17,061 Yens. In support of its claim, the assessee placed reliance on the inventory which is stated to have been submitted to the British Consul showing the value of the property so lost to it on account of the enemy action. The IT Department on the other hand claimed that the Japanese Government had admitted the claim of the assessee as a result of which bonds to the value of 5,22,855 Yens were issued by the Japanese Government to the assessee. The position however was not accepted by the assessee. In the alternative, the assessee claimed loss on account of the depreciation in the value of Yen resulting from the change in the exchange rates from 1941 to 1945. The assessee's contentions were rejected. In the appeal before the Tribunal, the Tribunal held that the case throughout had been that the loss to the assessee in respect of the stock -in -trade occurred in the previous year relevant to the asst. year 1942 -43 at the time the Japanese Government froze the properties of the assessee, including the stock -in -trade, as enemy property. On considering the evidence, it held that the loss accrued to the assessee as a result of the enemy action. But, according to the Tribunal, the loss was not a business loss but it was of a capital nature. On the same line of reasoning, the Tribunal took the view that whatever compensation the assessee had received from the Japanese Government could not be of a revenue nature. It appears that on this reasoning the Tribunal held that the loss resulting on account of the change in the exchange rates was not relevant. In this view of the matter, the Tribunal rejected the assessee's claim for deductions on the ground of loss in stock -in -trade and book debts. The application made by the assessee under Sub -S. (1) of S. 66 of the Indian INCOME TAX ACT, 1922, was rejected by the Tribunal. On an application made by the assessee to this Court under Sub -S. (2) of S. 66 of the Indian IT Act, this Court directed the Tribunal to refer to this Court the aforesaid two questions of law. The reference first came for hearing on the 25th of Sept., 1957. On that day this Court remanded the case to the Tribunal giving the following directions to the Tribunal: "We, therefore, remand the matter back to the Tribunal to submit a supplementary statement of the case indicating therein the facts on which the Tribunal came to the conclusion that the loss occurred to the assessees as a result of enemy action, and also the facts as a result of which the assessees claimed that the goods which were frozen were ultimately lost to them and the point of time at which the book debts and the stock -in -trade were lost to the assessees".
(3.) IN the supplementary statement submitted by the Tribunal on 13th Nov., 1959, the Tribunal found as a fact that the goods which were originally frozen in July, 1941, were, at the end of 1941, declared to be the enemy property and were lost to the assessee before the end of the year 1941 on declaration of war. These goods were, therefore, lost to the assessee in the year of account. The Tribunal further held that the assessee received some compensation in Yens in respect of loss of goods in the year 1945. The value of the Yen had at that time considerably gone down and the equivalent amount in Indian money would be only about Rs. 2,000 in 1945. It appears that before the Tribunal drew up the supplementary statement of the case but after the report had been made by the AAC, the Department filed an affidavit of the ITO in which it was alleged that the assessee had received about Rs. 3 lakhs as compensation from the Govt. of India and the said amount included also compensation for loss of stock - in - trade in Japan. The Tribunal considered that it was surprising that the Department did not bring this fact forward at an earlier stage and it therefore refused to go into the matter and rejected even to include the relevant affidavit and the document as parts of the statement of the case. Dealing with the Department's contention that the loss did not occur in the year of account, the Tribunal held that the assessee did suffer the loss in respect of the stock -in -trade and book debts in the year of account. Notice of motion was taken out by the Department for inclusion of the aforesaid affidavit and the relevant documents which went to show that the Government had paid compensation to the assessee to the tune of Rs. 3 lakhs which amount included the compensation for the loss of stock -in -trade also. On the said notice of motion, this Court, after hearing the parties at considerable length, made an order on 19th April, 1960, directing the Tribunal to submit a further supplementary statement of case. The operative part of this order is in the following terms: "That the said Tribunal do re -submit the said supplementary statement of case after including therein the affidavit of the ITO affirmed on the first day of July, one thousand nine hundred and fifty -nine and the counter -affidavit of Kishanchand Lekhraj affirmed on the twenty -eighth day of September, 1959, being exhibits 'H' and 'I' respectively to the said supplementary statement of case and for making necessary changes in the said supplementary statement of case on the footing that the said two affidavits form part of the said supplementary statement of case". ;