Law: Income Tax Act, 1922

Section: 10(2)(x1)

Income-tax-Bad debt-Bank guarantee for a loan borrowed by a company which was financed by the bank-Bank paying amount of guarantee-Amount irrecoverable--Whether debt incidental to the business of the bank within the meaning of S. 10(2)(x1), Indian Income-tax Act, 1922. The assessee-bank carried on, inter alia, banking and financing business and was also the managing agents of S. P. Ltd. U. P. S. C. Ltd., the entire finance for which was provided by the assessee, who were the selling agents of S. P. Ltd. The assessee stood guarantee for a loan of Rs. 6 lakhs borrowed by U. P. S. C. Ltd. from G. I. Bank Ltd., which was one of the concerns of the assessee. G. I. Bank Ltd. went into liquidation, and as U. P. S. C. Ltd. had not repaid the loan to G.I. Bank Ltd., the assessee paid it. U. P. S. C. Ltd. went into liquidation on March 23, 1952, and, as there was no chance of realising the amount, the assessee wrote off the debt at the end of the accounting year ending on October 18, 1952, and, in the assessment for the assessment year 1953-54, claimed the sum of Rs. 5,60,199 paid by it as a deduction in computing the profits. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer disallowing the claim on the ground that the assessee did not advance the loan in the course of its money-lending business. The Appellate Tribunal, on appeal, allowed the claim holding that a sum of money expended not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business would be allowable deduction. On a reference to the High Court: Held, that (i) the Appellate Tribunal came to the conclusion that the assessee stood guarantee on materials before it; and (ii) as the assessee was interested in both the concerns, S. P. Ltd. and U. P. S. C. Ltd., it was in the larger interest of the assessee's business that the guarantee was given and the debt was incidental to the business of the assessee within the meaning of section 10(2)(xi) of the Act and was allowable as a deduction. Atherton v. British Insulated and Helsby…