TMI Blog1970 (4) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... als by certificate arise out of a common judgment of the Calcutta High Court in two income-tax references. The assessee is a private limited company. It carried on the business of banking and financing as also of managing agency. Starch Products Ltd. was one of the various companies which was being managed by the assessee. Starch Products had appointed the U.P. Sales Corporation Ltd. as its selling agent. The assessee claimed to have stood guarantee for a loan of Rs. 6 lakhs which was advanced to the U.P. Sales Corporation Ltd., by the Gwalior Industrial Bank Ltd. The borrower failed to pay the loan which on August 2, 1948, stood at Rs. 5,60,199. This amount was paid by the assessee pursuant to the guarantee. Thereafter, the assessee tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer had wrongly disallowed the claim for bad debt amounting to Rs. 5,60,199. The Appellate Assistant Commissioner considered the question of the aforesaid amount being an admissible deduction or allowance under section 10(2)(xi) of the Income-tax Act, 1922. In his opinion the guaranteeing of a loan, though made in the interest of the assessee's business and as a matter of commercial expediency, did not represent an advance made in the normal course of the assessee's business. Such an advance could have been made only if it had been made to the company managed by the assessee under a contractual obligation to guarantee the finances of the managed-company. According to him, the claim for irrecoverable loan would have been also admissible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Corporation Ltd., to fulfil its commitment that the assessee as a guarantor came into the picture. There was, therefore, no question of earning of any interest on any money advanced. It was in the larger interest of the assessee's business that the guarantee was given. The standing of surety for the sales organisation of the managed-company and the consequent loss arising therefrom was in our opinion germane to the assessee's business. It is now well established that a sum of money extended not of necessity and with a view to give a direct and immediate benefit to the trade but voluntarily and on the ground of commercial expediency and in order to indirectly facilitate the carrying on of the business, may yet be an allowable deduction in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 10 certain allowances have to be made under sub-section (2). The allowance covered by clause (xi) thereof has to be made when the assessee's accounts in respect of any part of his business, profession or vocation are not kept on the cash basis, of such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation, and in the case of an assessee carrying on a banking or money-lending business, of such sum in respect of loans made in the ordinary course of such business, as the Income-tax Officer may estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee. Now a bad debt means a debt which would have gone int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m is established it would be a business debt. If the assessee has made a payment not voluntarily but to discharge a legal obligation which arises from his business he would be entitled to have the amount deducted as a bad debt under section 10(2)(xi) : see Commissioner of Income-tax v. Abdullabhai Abdulkadar. In Essen Private Ltd. v. Commissioner of income-tax, the appellant carried on business as a managing agent of several concerns. Pursuant to the agreement with one of the companies managed by it, it advanced large sums of money to the managed company and also guaranteed a loan of Rs. 2 lakhs obtained by that company from a bank. The managed-company failed in its business and upon the bank pressing for payment the appellant in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an allowance could be claimed. There was no privity of contract or any legal relationship between the assessee and the selling agent. Neither under custom nor under any statutory provision or any contractual obligation was the assessee bound to guarantee the loan advanced by the bank to the selling agent. It is difficult to see how it was in the interest of the assessee's business that the guarantee was given. There was even no material to establish that the managed-company was under any legal obligation to finance the selling agent or to guarantee any loans advanced to the selling agent by a third party. It is incomprehensible in what manner the guaranteeing of the loan advanced to the selling agent indirectly facilitated the carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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