1966 (1) TMI 15 - HC - Income Tax

Computation of business profits - bad debt - debt was incidental to the business of the assessee within the meaning of section 10(2)(xi) - hence allowable as a deduction

Summary

Issues Involved:
1. Whether there was any evidence in support of the Tribunal's finding that the assessee-company had stood guarantee for the loan given to Messrs. U. P. Sales Corporation Limited by the Gwalior Industrial Bank Limited.
2. Whether there was any evidence to show that the assessee-company stood such guarantee in the ordinary course of its business.
3. Whether the sum of Rs. 5,60,199 was allowable as a deduction in computing the profits of the assessee.

Issue-wise Detailed Analysis:

1. Evidence Supporting the Guarantee:
The Tribunal found that the assessee-company, Birla Brothers (Private) Limited, stood guarantee for a loan of Rs. 6,00,000 borrowed by Messrs. U. P. Sales Corporation Limited from Gwalior Industrial Bank Limited. The assessee paid Rs. 5,60,199 to the bank as a guarantor when the loan could not be repaid. The Income-tax Officer disallowed the claim citing lack of director's resolution, absence of stamp paper execution, non-production of original papers, and no mention of the guarantee in the balance-sheet. The Appellate Assistant Commissioner confirmed the guarantee was given but not in the ordinary course of business. The Tribunal reversed this, stating the guarantee was in the larger interest of the assessee's business. The court found sufficient evidence, including letters and balance sheets, supporting the Tribunal's finding that the guarantee was given.

2. Guarantee in the Ordinary Course of Business:
The Tribunal concluded the guarantee was given in the ordinary course of business, emphasizing commercial expediency. The Tribunal noted that if the guarantee was not provided, Messrs. Starch Products Limited, a managed company, would have had to extend credit to the selling agents, which would necessitate additional financing. The court agreed, stating the guarantee was incidental to the business and aimed at facilitating business operations. The Tribunal's reliance on the principle that expenses made on commercial expediency are allowable deductions was upheld.

3. Deductibility of the Sum:
The Tribunal allowed the deduction of Rs. 5,60,199, deeming it a bad debt under section 10(2)(xi) of the Indian Income-tax Act, 1922. The court confirmed this, stating the debt was incidental to the business and irrecoverable. The Tribunal's conclusion was based on evidence and commercial expediency, fulfilling the conditions of section 10(2)(xi). The court rejected the revenue's argument of an oblique purpose behind the payment, affirming the Tribunal's finding that the payment was made in the course of business.

Conclusion:
The court answered affirmatively to the questions of whether the guarantee was given and whether it was in the ordinary course of business. Consequently, the sum of Rs. 5,60,199 was allowable as a deduction in computing the profits of the assessee. The Tribunal's findings were based on sufficient evidence, and there was no ground for interference by the court. The applicant was ordered to pay costs to the respondents in both cases.