Law:

Section:

Section 37(1) of Income-tax Act, 1961 – Business expenditure – Allowability of – Assessee-firm besides doing business in mica mining, did business in manganese ore also – Business of manganese ore being taken over by State Trading Corporation (STC), assessee entered into an agreement with STC to import paper on its behalf against export of manganese ore – Assessee opened letter of credit with a Japanese bank – Paper imported by assessee was supplied to Government through STC – Since payment towards price of paper was not received in time assessee could not repay bank in time – Bank, thus, charged interest as well as letter of credit commission – Assessee's claim for deduction of said amount was disallowed by ITO on ground that it was not an expenditure incidental to business inasmuch as assessee's business was to export managanese ore and loss was suffered on import of paper which was not its business – On appeals, AAC as well as Tribunal allowed assessee's claim – Whether in view of established facts being (a) that paper import business and managanese ore export business were so inter-connected as to form one single business, (b) that expenditure was incidental to assessee's business in manganese ore, profit of which was being computed, (c) that amount in question was spent by assessee as a trader in manganese ore for purpose of that business, and (d) that expenditure was incurred during relevant previous year, it followed that expenditure in question was clearly admissible as business expenditure – Held, yes FACTS The assessee-firm, besides doing business in mica mining, did business in manganese ore also. During the relevant accounting year, the business of manganese ore being taken over by the State Trading Corporation (STC), the assessee entered into a contract with the STC to import paper on its behalf against which it would be entitled to export manganese ore. It was a barter system under which paper would be imported of the value of the manganese ore exported. In terms of the said agreement, the assessee opened a letter of credit with the Bank of Tokyo, Japan. The paper that was imported was supplied to the Government of India through the said…

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