1960 (12) TMI 5 - SC - Income Tax

Whether on the facts and in the circumstances of the case the amount of ₹ 3,20,162 is an allowable deduction ? Held that - condition has not been fulfilled and the loss which the appellant has incurred is not in its own business but the liability arose because of the business of another person and that is not a permissible deduction within section 10(1) of the Act. It is not a loss which has to be deducted in respect of the business of the respondent from the profits and gains of the respondent s business. High Court was in error in answering the question in favour of the respondent. We, therefore, allow this appeal, set aside the judgment and order of the High Court and answer the question against the respondent

Issues:
- Allowability of deduction under section 10(2)(xi) or 10(2)(xv) of the Income-tax Act
- Nature of liability imposed on the respondent firm

Analysis:
The Supreme Court heard an appeal regarding the allowability of a deduction under section 10(2)(xi) or 10(2)(xv) of the Income-tax Act. The case involved a registered firm acting as a commission agent for a non-resident principal in foreign trade. The firm incurred a liability of Rs. 3,20,162, treated as a bad debt for the assessment year 1953-54. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the deduction, while the Income-tax Appellate Tribunal allowed it, considering it a bad debt arising from business activities with the non-resident principal. The High Court modified the question and ruled in favor of the respondent, holding that the liability was incidental to the business and deductible under section 10(1) of the Act. The Supreme Court analyzed the nature of the liability imposed on the respondent firm under section 42(2) of the Act, which deems a resident person liable for profits derived from business with a non-resident. The Court emphasized that for a loss to be deductible, it must be a business loss directly arising from and incidental to the business itself. The Court referred to precedents emphasizing that losses must be commercial in nature and spring directly from the business to be deductible.

The respondent's counsel argued that the liability arose due to the close connection between the respondent's foreign trade business and the non-resident principal, making it incidental to the business. However, the Court held that the loss claimed was not a business loss of the respondent firm, as it did not directly arise from the business itself. The Court distinguished cases where losses were incidental to the carrying on of the business from the present case, where the liability stemmed from dealings with another party. The Court rejected the respondent's reliance on precedents involving embezzlement losses and emphasized that for a deduction to be allowed, the loss must be a debt in law and directly connected to the business. The Court concluded that the High Court erred in ruling in favor of the respondent and allowed the appeal, setting aside the judgment and ordering the question to be answered against the respondent. The appellant was awarded costs in both the Supreme Court and the High Court.

In summary, the Supreme Court's judgment clarified that for a loss to be deductible under the Income-tax Act, it must be a business loss directly arising from and incidental to the business itself. The Court emphasized the commercial nature of losses and the need for a direct connection to the business to qualify for deduction. The Court ruled against the respondent, overturning the High Court's decision and disallowing the deduction claimed by the respondent firm.

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