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Issues:
Interpretation of section 10(2)(xi) of the Income-tax Act regarding the deduction of a debt as a bad debt in the case of a commission agent firm acting on behalf of a non-resident principal. Analysis: The judgment by the Bombay High Court, delivered by Chagla (CJ), and Tendolkar, JJ., revolves around the assessment of a commission agent firm as the agent of a non-resident principal under section 42(1) of the Income-tax Act. The firm paid a substantial sum on behalf of the non-resident principal, which later became irrecoverable, leading to a claim for deduction as a bad debt under section 10(2)(xi). The central dispute was whether the debt in question was connected to the business of the assessee firm. The Advocate-General argued that the liability discharged was statutory and not related to the business, thus not qualifying as a bad debt. However, the court emphasized that the debt must have a connection with the business, and in this case, the liability arose directly due to the business dealings with the non-resident. The court rejected the narrow interpretation proposed by the Advocate-General, highlighting the wider connotation of "in respect of the business" used in the statute. The court further delved into the necessity of the liability discharge in the course of business, emphasizing that if the businessman voluntarily undertakes a liability, it cannot be claimed as a bad debt. In this case, the liability was found to be incidental to the business, as it arose solely due to the business connection with the non-resident. The court rejected the argument that the liability was discharged in a capacity other than as a businessman, asserting that the statutory obligation stemmed from the business relationship. Even if the amount claimed was not strictly a debt, it was deemed a business or trading loss incurred due to the specific business operations, thus eligible for deduction. The judgment referenced previous decisions to support its interpretation, distinguishing cases where liabilities were not business-related from those where the loss was directly linked to the business activities. Notably, the court highlighted the importance of the business connection in determining the deductibility of the amount claimed. Ultimately, the court answered the reference in the affirmative, allowing the deduction of the claimed amount as an admissible deduction under the Income-tax Act, either under section 10(2)(xi) or as a trading or business loss. The Commissioner was directed to pay the costs, concluding the judgment in favor of the assessee firm.
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