The loss of ornaments held as security in money-lending business is not allowable as a deduction under Section 28 of the Income-tax Act, 1961, unless the assessee can prove that he has actually incurred a loss by paying to his constituents for security loss in terms of the ornaments/jewellery.

1. This is an income-tax reference under Section 256 of the Income-tax Act, 1961, at the instance of the Revenue and the following two questions of law have been referred by the Tribunal to this court for answer, which read as under :

" (i) Whether, on the facts and circumstances, the loss of Rs. 1,32,558 on account of theft of ornaments pawned with the assessee, a moneylender, as security for the loans, claimed in loss return for the Diwali year 1979 filed on December 2, 1982, revising original return filed belatedly on July 28, 1980, could be considered and allowed. ?

(ii) Whether loss of ornaments held as security and not as stock-in-trade in money-lending business be allowed as deduction under Section 28 ?"

2. The assessee is a registered firm and it deals in money-lending business. A theft took place at the house of the assessee in the intervening night of November 2 and 3, 1978, and pawned silver ornaments of the value of Rs. 1,32,559 and cash of Rs. 2,000 were taken away. It is submitted that in order to redeem the ornaments, a sum of Rs. 27,120 was paid. The issue relates to the assessment year 1980-81, at the accounting period ending Diwali, 1979. The Income-tax Officer did not entertain the claim since the revised return of loss was beyond the period prescribed by Section 139(3) of the Income-tax Act. Therefore, he held that the revised return is not valid. He also held that the ornaments were kept by the assessee as security and there was no responsibility on the assessee of returning their ornaments. Therefore, he disallowed the claim of loss of ornaments to the tune of Rs. 1,32,559. He, however, allowed the loss of Rs. 2,000 and so also the deduction of Rs. 27,120.

3. The assessee aggrieved against the order of the Income-tax Officer, preferred an appeal before the Commissioner of Income-tax (Appeals), who endorsed the order of the Income-tax Officer as to disallowance of Rs. 1,32,559 in respect of loss of ornaments.

4. Aggrieved against the order of the Commissioner of Income-tax (Appeals), the assessee then preferred an appeal before the Tribunal and the Tribunal held that the ornaments came into the possession of the assessee in the course of business of pawning, income of which is taxed. The Tribunal further held that the ornaments did not belong to the assessee and, therefore, they could not be said to be the capital of the assessee. The Tribunal, vide order (annexure "C"), allowed the claim of the assessee. Hence, an application was moved before the Tribunal on behalf of the Revenue to refer the matter to this court and for that reason, the Tribunal referred the aforesaid two questions for answer of this court.

5. We have heard learned counsel for both the parties and perused the records.

6. Certain expenditure is allowed under Section 37 of the Act. Section 37 deals with the general provisions of any expenditure not being expenditure of the nature described in Sections 30 to 36. Therefore, it is a residuary clause and it says that the expenditure not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". In the present case, the assessee had actually incurred a loss of Rs. 27,120 which he had to pay to his customers, who had pawned the articles in lieu of the loan advanced to them as a security. That expenditure has been allowed by the Income-tax Officer. However, the assessee also claimed the value of total ornaments stolen away, i.e., Rs. 1,32,559. This amount has been disallowed. Therefore, the question is that whether the assessee is entitled to allowance of the value of the stolen property which was a security of other pawnees with him. A similar question came up before the Supreme Court in the case of CIT v. Nainital Bank Ltd. [1965] 55 ITR 707, wherein a dacoity took place