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TMI Blog1949 (11) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... his business needs and the balance of ₹ 5,750 was taken by Lakshmana Ayyar. The joint borrowing of the assessee and Lakshmana Ayyar was necessitated by the business needs of both the borrowers and by the insistence of money-lenders who required the joint security of two persons for simple loans advanced by them. Lakshmana Ayyar failed in his business and the assessee had to repay the creditors the whole of the joint borrowings. He had also to spend a sum of ₹ 658 in an unsuccessful attempt to recover the amount due from Lakshmana Ayyar in respect of his share of the joint borrowing. He had also to pay ₹ 5,049 to the creditors on account of Lakshmana Ayyar's share of the joint loans. The Appellate Tribunal, differing from the Income-tax Officer and the Appellate Assistant Commissioner, allowed the assessee to deduct these two sums in the computation of his business profits for the year of account 1942-43. Mr. Rama Rao Sahib, the learned advocate for the Commissioner of Income-tax, contends that this decision of the Tribunal is erroneous in law. The Tribunal does not say whether the deduction was allowed as a bad debt whose deduction is authorised by Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was allowed, though the Act nowhere expressly sanctioned it, on the ground that the deductions enumerated in section 10 where not exhaustive and that a deduction of bad debts was necessarily implicit in the very conception or idea of profits and gains. Except in the case of a banking or money-lending business, there could be no allowance for bad debts where the accounts of the business were kept on a cash basis. Under the mercantile accountancy system referred to in Section 10(2)(xi), an entry is made on the receipt side of the account when a sale is concluded although the money on account of such sales has not been paid in. In making up the account at the end of the year such entire are treated as receipts and the tax is levied on what has sometimes been called as book profits. It may later on be found that some of these book profits are in fact irrecoverable. They are then written off as bad debts and since such book profits have been included in the income assessed to tax, the bad debts have been allowed to be written off against the book profits in the year in which they are found to be irrecoverable. This commercial practice has taken a statutory form in the first part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connected with and did not arise out of the trading operation of the assessee. When Section 10(2)(xi) speaks of a bad debt, it means a debt which would have come into the balance-sheet as a trading debt in the business or trade that is in question in this case-the bookseller's trade--and which has become a bad debt. It does not refer to any debt due to the trader which, when it was good, would not have come to swell the profits of the bookselling trade. Debts or losses not connected with a trade or business and not arising out of the operations of the trade or business are really losses of capital and are not admissible deduction under section 10(2)(xi) of the Act. Another way in which the matter has been presented in this Court is that the loss is one incurred by the assessee in the carrying of his business and therefore liable to be set off against the receipt of the business. The profits of a trade or business for the purposes of income-tax have always been considered, both in England and here, to be the profits computed by ordinary methods of commercial trading or accountancy, subject, of course, to the specific directions contained in the Income-tax Act. The expenses i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide the range of those items which can properly be brought into a profit and loss account of the business. Though Section 10 of the Income-tax Act allows interest paid on borrowed capital as a deduction in computing the profits of a trade or business, it does not allow a deduction in respect of the capital itself, or in respect of the loss of capital either belonging to the assessee or borrowed by him except in the case of a banking or money-lending business. Indeed, there is no reason why a man who invests his own capital in a business should be in a worse position than a person who is obliged to borrow money in order to find the capita for the business. Reliance has been placed by the learned advocate for the assessee on the decision of this Court in Commissioner of Income-tax v. Ramaswamy Chettiar [1946] 14 I.T.R. 236. Apparently this is the case that is referred to as having been followed by the Appellate Tribunal in another case to which reference is given in the order of the Appellate Tribunal. But there the business was one of money-lending and the Court found that according to the well-know and well-recognised mercantile custom of Nattukottai bankers, they were in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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