TMI Blog1965 (12) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... ions with Sungo Limited from1942 and was financing the latter from time to time with various sums oninterest. The interest which the assessee was entitled to receive on thefinancing transactions was assessed to tax under the head "businessincome", except for the year 1956-57, when a sum of Rs. 5,000 represent-ing interest was added as income under the head "other sources". Buteven this was later changed by an order under section 35 and this amountwas treated as income under the head "business income". Up to March 31,1950, interest due from Sungo Limited was found at Rs. 30,172. As bya resolution the assessee waived interest from Sungo Limited for 1951-52,1953-54 and 1956-57, during the relevant assessment years, the total sumof Rs. 14,500 was estimated to be the interest which the assessee wasentitled to and this was added to the chargeable income of the assessee inthose years. As on April 1, 1956, the amount due to the assessee fromSungo Limited came to Rs. 56,300. In the year of account ended March 31,1957, the assets of Sungo Limited were sold away and adjusted against thedebts due, and the balance, namely, Rs. 55,040, was written off by the asses-see as on March 31, 1957, as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal would the applicabilityof section 10(2)(xv) appear to have been taken, argued or considered.Even before us, no attempt has been made on behalf of the assessee to relyon that provision. In the circumstances, therefore, we have to concentrateonly on section 10(2)(xi). The argument before us for the revenue is that while we may take thefinding of the Tribunal as correct, namely, that the advances to SungoLimited were made by the assessee in the course of carrying on its busi-ness, a further requisite should be satisfied in order that the assessee maybe entitled to the benefit of the first part of clause (xi) of section 10(2), thatis, the bad debt should be such as when it is realised it must go to swell theprofits of the assessee. In other words, it is said that not only should the (1) See Appendix infra. bad debt be one incurred in the course of carrying on of the business, but itshould be such that if it were not a bad debt, it should have come in as arevenue receipt which would go to swell the profits. This, according to thecontention for the revenue, is in contra-distinction with a money-lendingbusiness, where what is laid out in lending is itself part of the stock-i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, we think that a bad debt, within the meaning of clause(xi)of section 10(2), should be essentially of a revenue nature which, ifrealised, would have gone to increase the profits. It is no doubt true thatthe amount lent as principal will not by itself swell the profits and what is meant is that it is taken into account in the context of computation ofincome. To illustrate our meaning, take, for example, the sale by an assesseeof machinery, which he used in his business for making profits or gains, but fails to realise the proceeds which, as a result, have to be written off.This is clearly a case of capital loss which can in no sense be regarded as abad debt for the purpose of clause (xi), because it does not go to produce orswell the profits. We are of the view that it is only a debt, as we said,which, when realised, will bear on the profits of the assessee in his business,that can be permitted to be deducted under clause (xi). This view of ours, as to the effect of the first part of clause (xi), seemsto be supported by authority. Commissioner of Income-tax v. S. R. Subra-manya Pillai (1) though not directly in point, contains observations whichreflect the view we have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debt was recovered from the assessee. The assesseeclaimed to deduct from his income a sum equivalent to what he had paidon account of the other borrower. The court held that the assessee was not entitled to the deduction on the view that the debt to that extent wasnot incurred by him as incidental to the carrying on of his business.Commissioner of Income-tax v. Abdullabhai Abdulkadar (1) was concerned withthe question whether the tax paid by an assessee on behalf of his non-resident principal was deductible as trading loss or as a bad debt. The Supreme Court, while considering the scope of clause (xi) of section 10(2),observed: "That under clause (xi) of section 10(2) of the Income-tax Act also adebt was only allowable when it was a debt and arose out of and as anincident to the trade. Except in money-lending trade, debts could only beso described if they were due from customers for goods supplied or loans toconstituents or transactions of a similar kind. In every case the test was:was the debt due as an incident to the business? If it was not of that character, it would be a capital loss. The amount was, therefore, also notallowable under section 10(2)(xi) as a bad debt as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 10(2)(xi), was something more thana mere advance and meant something which was related to the business orresulted from it. It was an outstanding which, if recovered, would haveswelled the profits, and not merely money handed over to some one forpurchasing a thing which that person failed to return even though no pur-chase was made... Since this was not a loan by a banker or money-lender,the debt to be a debt proper had to be one which if good would haveswelled the taxable profits." This principle was applied in Commissioner of Income-tax v. EssenPrivate Ltd. (5) Learned counsel for the assessee contends that the principle could beapplied only to the extent of the profits produced by a fund and not the principal fund itself covered by a debt. In other words, he says that moneywhich has been given out by a financier by itself cannot swell the profits.Nevertheless, according to his argument, the entire debt should be takeninto account, provided it has been incurred in the course of the business.He relies on the following observation of the Supreme Court in IndoreMalwa United Mills Ltd. v. State of Madhya Pradesh (6): "Under the memorandum of association as well as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. When the assessee made advancesto Sungo Limited, which was dealing in shares, it was within the power of the assessee-company and it could well be described as in the course of carry-ing on its business. When monies are so advanced as incidental to and inthe course of its business, often the advances would constitute a debt which,when realised, would go to swell the profits of the business. Actually, inthis case the advances did go to swell the business profits of the assessee. On behalf of the revenue it was stated that the question whether thedebt, if realised, would have gone to swell the business profits of the assesseewas not specifically mooted before the Tribunal. But it is clear from the 's order that this aspect was present to its mind and in fact it has given a finding that the interest charged in the past and the interest which the department had held to have accrued to the assessee have all gone toswell the profits of the assessee. Further, it is only one aspect of the ques-tion whether deduction of the amount in question could or could not beallowed under section 10(2)(xi). The question under reference is answered against the department withcosts. Counsel's fe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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