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TMI Blog1960 (12) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent. We, therefore, allow this appeal, set aside the judgment and order of the High Court and answer the question against the respondent - - - - - Dated:- 6-12-1960 - Judge(s) : J. L. KAPUR., M. HIDAYATULLAH., J. C. SHAH JUDGMENT The judgment of the court was delivered by KAPUR, J.--This is an appeal by special leave brought by the Commissioner of Income-tax against the judgment and order of the High Court of Bombay answering the question in favour of the assessee. The question referred by the Tribunal was : " Whether on the facts and in the circumstances of the case the amount of Rs. 3,20,162 is an allowable deduction under section 10(2)(xi) or 10(2)(xv) of the Income-tax Act ? " which was amended by the High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v) of the Act disallowed it. The Appellate Assistant Commissioner treated it as one under section 10(2)(xi) of the Act and he also disallowed it. On appeal to the Income-tax Appellate Tribunal it was held to be a bad debt and an allowable deduction as it was incurred as a result of the business activities which the respondent firm was carrying on with the non-resident principal. At the instance of the Commissioner of Income-tax, the case was stated to the High Court and the High Court modified the question and answered the same in the affirmative, i.e., against the appellant. The High Court held that as the law imposed an obligation upon the respondent firm to discharge the liability and it was incidental to the business of the respondent t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which may reasonably be deemed to have been derived therefrom, shall be chargeable to income-tax in the name of the resident person who shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax. " Relying on this provision it was argued that the nature of the respondent's business was foreign trade which was inter-connected with the business of the non-resident principal. Its nature was such as to attract the imposition of liability on the respondent firm under section 42(2) of the Act and, therefore, the loss so incurred must be taken to be incidental to and arising out of the business of the respondent. " The thing to be taxed ", said Lord Halsbury, L.C., " is the amount of profits and gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spring directly out of it and must really be incidental to the business itself. It is not sufficient that it falls on the trader in some other capacity or is merely connected with his business. Counsel for the respondent relied upon a judgment of this court in Badridas Daga v. Commissioner of Income-tax. In that case an agent of the assessee engaged for the purpose of carrying on the assessee's business had authority to operate a bank account. Acting under such authority the agent withdrew from the bank monies and put them to his personal use. The assessee was able to recover from the agent only a part of the amount misappropriated and the balance was written off as irrecoverable debt and it was held that it was not allowable under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it was not a trading loss and was, therefore, not an admissible deduction. In that case the contention of the Crown was that the sum was not an ordinary trading debt and, therefore, could not be a bad debt and that the loss was not connected with and did not arise out of the trade. Rowlatt, J., said at page 330 : " When the rule speaks of a bad debt it means a debt which is a debt that would have come into the balance-sheet as a trading debt in the trade that is in question and that it is bad. It does not really mean any bad debt which, when it was a good debt, would not have come in to swell the profits. " In the present case the liability was imposed upon the respondent firm because it was treated as an agent within the meanin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Co. Ltd. v. Commissioner of Income-tax. It was held in that case that the expression " profits and gains " has to be understood in its commercial sense and that there could be no computation of profits and gains until the expenditure necessary for earning those profits and gains is deducted therefrom and that when there is no specific provision in section 10(2) in regard to the claim made, its allowability will depend on accepted commercial practice and trading principles and it will be allowed if it can be said to arise out of the carrying on of the business and is incidental to it. As a principle it is unexceptionable but it does not carry the matter any further. It was next contended that the matter falls within section 10(2)(xi) of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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