TMI Blog1956 (8) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the Department the assessee paid on behalf of this non-resident principal a sum of ₹ 3,78,491. The assessee failed to recover this amount from the non-resident principal, and in the year of account he contended that this debt was irrecoverable and claimed it as a bad debt. The Tribunal held that the assessee was entitled to this deduction and the Commissioner has come on this reference. It is admitted that if this was a debt which could be claimed under section 10(2)(xi) it became irrecoverable in the year of account and therefore a bad debt which could be claimed in that year. The only question in dispute is whether this is a debt to which section 10(2)(xi) applies. The contention of the Advocate-General is that the liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with the non-resident under section 42 and it was because he could not recover this liability which covered this debt from the non-resident in respect of the liability which he had discharged, that he claimed it as a bad debt under section 10(2)(xi). The argument put forward by the Advocate-General is that a debt is a business debt only when it is incurred in the course of a business, and the Advocate-General's contention is that in the course of the business means in the actual activity of carrying on a particular business. His submission is that the debt must be such as must appear in the profit and loss account of the business. It must be an amount spent for the purpose of enabling the business to earn profits. If the amount is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad any relation to the business which was carried on by the assessee. It is perfectly true that, even giving to the expression in respect of the widest connotation, the debt must be incidental to the business. If a liability is discharged. which gives rise to a debt, the business must require the discharging of that liability. If the businessman voluntarily undertakes to discharge the liability of some one, then clearly he cannot claim that if that person fails to discharge that liability, the debt becomes a bad debt which can be claimed as a deduction under section 10(2)(xi). Now, on the facts of this case, can it be said that the liability which the assessee discharged was not required by his business to be discharged? Could it be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the liability must be discharged by the assessee in his capacity as a businessman and not in any other capacity and he suggests that in this case the liability is discharged by the assessee not in his capacity as a businessman carrying on a particular business, but by reason of the obligation cast upon him by statute. But what the Advocate-General forgets is that the statute casts an obligation upon him because he is carrying on that particular business, because he has the business connection with the nonresident. If he had not been carrying on the business, the statute would not have cast an obligation upon him. Therefore, it is not in any other capacity that the liability arose and the liability was discharged, but strictly in his capac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in this very judgment reference is made to an earlier decision of that Court in Commissioner of Income-tax v. Ramaswamy Chettiar [1946] 14 I.T.R. 236, where it was found as a custom in the business of the Chettiars that they were in the habit of raising funds by execution of joint promissory notes in favour of bankers and when that custom was established, the Court held that where a Nattukottai Chetti money-lender paid off in their entirety the dues jointly due by him and another as a result of the latter's inability to pay, the loss sustained as a result of this transaction was a loss of the money- lending business itself and therefore a deductible item in computing profits . Reference has also been made to a recent decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the judgment that if the custom of mutual accommodation had been established, in all probability the Supreme Court, with respect, would have come to the conclusion that the loss was a loss due to discharging a financial liability which was required by the business. Reliance is also placed on a decision of the House of Lords reported in Smith's Potato Estates Ltd. v. Bolland [1949] 17 I.T.R. Suppl. 1. What the learned Law Lords were concerned with was to decide whether certain legal expenses incurred by the taxpayer with a view to reducing the assessment made upon him as a trader for excess profits tax was an admissible deduction under the income-tax law, and the House of Lords held that it was not. Now, one or two important conside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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