4.      INCOME-TAX ACT AND ALLIED ISSUES

4.1       Query

Interpretation of Section 10 (2) * of the Income tax Act.

Whether loss caused by flood water in stores, raw materials, finished stocks is allowable under Section 10(2)* of the Indian Income-tax Act? Is there any case law on the point, and how the same should be treated in the financial books?

The facts of the case are that a factory is situated at a distance of about 300 yards from the bank of a river  (it is economical for this type of factory to be near the river for the discharge of effluents). There was a flood in the river and water entered in the premises of the factory. The water was 16 feet deep inside the factory and receded after a week. This caused a huge damage to the stores, raw materials, finished stocks, plant and machinery etc.

                                                          Opinion                                                   January 18, 1961

1.The loss of stores, raw materials and finished stocks caused by flooding is allowable under Section 10(2)*of the Indian Income-Tax Act.

2.In the opinion of the Committee, the case is similar to stocks destroyed by fire. Although there is no reported case of loss by floods, the principle governing the allowance for tax purposes is laid down in Motamal Jethumal Vs. C.I.T., Bihar and Orissa (15 I.T.R.1947 page 155), where the loss took place on account of fire. In delivering the Judgement, Manohar Lall J.inter alia stated:

“In my opinion, therefore, the loss of stock-in-trade due to fire is allowable as a trading loss on ordinary principles of commercial accountancy irrespective of the fact whether any part of it is insured or any sum is received from the insurance company, if it is insured. The Income-tax department cannot be allowed to treat the sum recovered from the insurance people as if it were a turnover of the equivalent amount of the goods destroyed by fire and not allow the deduction for the value of the goods destroyed by fire. Otherwise the position is that on the one hand they treat the goods destroyed by fire as a turnover when the amount is received from the insurance people but they do not treat this as turnover when it comes to the deduction side."

3.It must be pointed out that the burden of proof will be on the assessee as to the nature and the extent of the loss.

(a)        the closing stock  which is in a saleable condition should be valued and shown at its correct figure in the Trading Account.

(b)        The Trading Account should be credited with the extent of the loss, with a suitable description as to how the loss has occurred.

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*         Corresponding to Section 37 of the Income-tax Act, 1961