Law:

Section:

Section 37(1) of the Income-tax Act, 1961 [Corresponding to Section 10(2)(xv) of the Indian Income-Tax Act, 1922] - Business expenditure - Allowability of - Assessment year 1951-52 - As per practice prevailing in Bombay at relevant time, assessee-firm used to borrow money from banks on joint promissory notes executed by it and by others on joint and several liability - In relevant accounting year, assessee borrowed money jointly with 'K' and executed promissory note in favour of bank - Owing to K's bankruptcy, assessee had to pay bank whole amount with interest - Assessee claimed deduction in respect of amount paid for 'K' - Whether since assessee had, in accordance with commercial practice, borrowed money, whole of which he had to return because joint promissor had become bankrupt; and mutuality was also held proved, it was entitled to deduct loss which was suffered by it in transaction in dispute - Held, yes FACTS The assessee-firm was carrying on business as commission agents in Bombay. For purposes of its business, the assessee was borrowing money from time to time from banks on joint promissory notes executed by it and by others with joint and several liability. In the relevant accounting year, the assessee borrowed Rs. 1,00,000 from the bank on a pronote executed jointly with one 'K'. Out of this amount a sum of Rs. 50,000 was taken by the assessee for purposes of its business and the rest by 'K'. 'K', however, become bankrupt and failed to meet his liability. The assessee had, therefore, to pay the bank the whole amount, with interest. Out of the amount taken by 'K', the assessee received from the Official Assignee, a sum of Rs. 18,805 and claimed the balance as deduction. This claim was disallowed both by the ITO as well as the AAC. The Tribunal, however, allowed this sum as an allowable deduction under section 10(2)(xv). On reference, the High Court upheld the of the Tribunal. On appeal to the Supreme Court: HELD In the instant case it had been found that there was a well recognised commercial practice in Bombay of carrying on business by borrowing money from banks on joint and several liability. It was also found that by so doing the borrower could…

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