1967 (3) TMI 7 - SC - Income Tax

Claim for deduction u/s 10(2)(xi) - debt in question was incurred in the course of the business - hence claim for loss is justified

Summary

Issues:
Interpretation of section 10(2)(xi) of the Income-tax Act regarding deductibility of losses incurred in the course of business.

Detailed Analysis:
The case involved an appeal by a private limited company acting as managing agents for various concerns, including an agreement with Amer-Hind Manufacturers Limited. The company advanced funds to Amer-Hind Manufacturers Ltd., which later failed in its business, resulting in a substantial outstanding amount of Rs. 4,03,203 owed to the company. The company claimed a deduction for this amount as a business loss for the assessment year 1956-57. The Income-tax Officer initially considered the loss as a capital loss, not deductible as a business expenditure. However, the Appellate Tribunal found that the advances and payments made were in the course of the company's business as managing agents, as per the terms of the managing agency agreement and the memorandum of association.

The Appellate Tribunal referred a question of law to the High Court under section 66(1) of the Income-tax Act, seeking clarification on whether the debt incurred by the company was in the course of its business, making the loss deductible under section 10(2)(xi). The High Court, however, held that the loss arising from the advances was a capital loss related to the structure of the managing agency business. The High Court's decision was based on the premise that the company acquired the managing agency on the condition of providing loans and making advances, considering the loss as part of the capital framework rather than a business expenditure.

Upon appeal to the Supreme Court, it was argued that the High Court erred in its interpretation of the question referred to it. The Supreme Court agreed with the appellant-company, noting that the High Court had overstepped its jurisdiction by disregarding the findings of fact established by the Appellate Tribunal. The Supreme Court emphasized that the advances and guarantees made by the company were indeed in the course of its business as managing agents, as supported by the terms of the managing agency agreement and the memorandum of association. Therefore, the Supreme Court set aside the High Court's judgment and held that the loss incurred by the company was deductible under section 10(2)(xi) of the Income-tax Act.

In conclusion, the Supreme Court allowed the appeal, directing that the question referred to the High Court should be answered in favor of the assessee, confirming the deductibility of the loss incurred by the company in the course of its business activities.