1968 (12) TMI 21 - HC - Income Tax

Financing of another s business by giving loans and bank guarantee to protect assessee s business - loss claimed by the assessee on the loan transaction - allowability

Summary

Issues Involved:
1. Justification of the Tribunal's finding on the nature of advances.
2. Entitlement to claim a deduction of Rs. 1,90,000 under various sections of the Indian Income-tax Act.
3. Entitlement to a deduction for proportionate legal expenses.

Detailed Analysis:

Issue 1: Justification of the Tribunal's Finding on the Nature of Advances
The primary question was whether there was any evidence to justify the Tribunal's finding that the advances made by the assessee were not in the course of his business. The Tribunal held that the loan of Rs. 6 lakhs was not advanced in the ordinary course of the assessee's business but was an independent transaction arising from a scheme contemplated under three agreements dated 17th June 1950. The Tribunal concluded that the loan benefited the debtor's other business or personal activities and not the import business, which was the primary trading activity of the assessee. The High Court disagreed, stating that the Tribunal's conclusion was based on erroneous assumptions and lacked sufficient evidence. The Court noted that the assessee's financing activities with Lookmanji were integral to his business, and the loan was advanced to further these activities, thus connecting it directly with the business.

Issue 2: Entitlement to Claim a Deduction of Rs. 1,90,000
The assessee claimed a deduction of Rs. 1,90,000 under sections 10(1), 10(2)(xi), and 10(2)(xv) of the Indian Income-tax Act, arguing that the loss was a trading loss or a bad debt incurred in the course of his business. The Tribunal had rejected this claim, stating that the loan was not part of the assessee's regular business activities. The High Court, however, found that the loan was indeed connected with the assessee's business activities, as it was advanced to maintain and further the trading relationship with Lookmanji. The Court held that the loss was incidental to the business and thus deductible under section 10(1) as a trading loss or under section 10(2)(xi) as a bad debt.

Issue 3: Entitlement to a Deduction for Proportionate Legal Expenses
The assessee also claimed a deduction for legal expenses incurred in recovering the outstanding amounts. The Tribunal had allowed only a proportionate part of these expenses, disallowing the portion related to the loan account. Given the High Court's finding that the loan was advanced in the course of the assessee's business, it followed that the legal expenses incurred in recovering the loan were also deductible. The Court allowed the full deduction of the legal expenses.

Conclusion:
The High Court answered the first question in the negative, indicating that there was no evidence to justify the Tribunal's finding. The second and third questions were answered in the affirmative, granting the assessee the claimed deductions for the loss and legal expenses. The assessee was awarded costs from the Commissioner.