1960 (11) TMI 16 - SC - Income Tax

Whether the assessee s claim is sustainable under section 10(2)(xv) of the Act? Whether the assesse s claim that the loss was a business loss and, therefore, allowable as a deduction in computing the profits of the assessee s business is sustainable under law ? Held that - Considering the finding that there is mutuality and custom of borrowing money on joint pronotes for the carrying on of business. In our opinion, in the circumstances proved in the present case, and on the facts established and on the findings given, the respondent was rightly held to be entitled to deduct the loss which was suffered by him in the transaction in dispute. Appeal dismissed.

Summary

Issues:
1. Interpretation of section 10(2)(xv) of the Income-tax Act.
2. Determination of whether the loss incurred qualifies as a business loss.

Analysis:
The Supreme Court heard an appeal against the High Court of Bombay's judgment in an Income-tax Reference case. The respondent, a commission agent firm, borrowed money jointly with another individual from a bank for business purposes. When the co-borrower defaulted, the respondent had to repay the entire amount. The respondent claimed a deduction for the unrecovered portion of the borrowed sum. The Income-tax Appellate Tribunal allowed this deduction under section 10(2)(xv) of the Income-tax Act and as a business loss. The Commissioner challenged this decision, arguing against the existence of a commercial practice in Bombay regarding joint borrowing. However, both the Tribunal and the High Court found in favor of the respondent, emphasizing the established commercial practice of borrowing jointly in Bombay.

The appellant cited a previous case, Madan Gopal Bagla v. Commissioner of Income-tax, where a similar situation was decided against the assessee. However, the court distinguished the present case from Bagla's case, highlighting the presence of mutuality and established custom in the current scenario. The court also referenced Commissioner of Income-tax v. S. A. S. Ramaswamy Chettiar, where a recognized custom of joint borrowing for business purposes was accepted. The judgment emphasized the importance of mutuality and commercial practices in determining the deductibility of losses in such cases.

Additionally, the court discussed Commissioner of Income-tax v. S. R. Subramanya Pillai, where a loss incurred due to joint borrowing was not allowed as a deduction because it was deemed too remote from the assessee's primary business. However, in the present case, the court found a direct connection between the loss and the business activities of the respondent, justifying the deduction. The judgment also addressed the argument that the loss should be considered a capital loss, referencing previous case law to distinguish the nature of the loss in the current scenario.

Ultimately, the Supreme Court upheld the High Court's judgment, affirming the deductibility of the loss incurred by the respondent. The court dismissed the appeal with costs, concluding that the respondent was entitled to claim the loss as a deduction under the Income-tax Act.