Trading loss recognition when payment of joint liability becomes irrecoverable; interest and recovery litigation costs denied.

Payment made to discharge a joint and several liability incurred in the course of business constitutes a trading loss when, on the facts, there is no reasonable prospect of recovery; the loss is deductible in the assessment year in which bona fide recovery efforts cease and the debt is written off. Bookkeeping entries treating the payment as due from a co-borrower do not alter the loss character. Interest on the payment is not deductible. Legal expenses incurred to recover a debt that is not a trading debt of the assessee fail the "wholly and exclusively" test and are not deductible.

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Issues: (i) Whether the sum of Rs. 54,989 is deductible as a trading loss on the ground of commercial expediency under section 10(1) of the Income-tax Act, and if so, whether interest and litigation expenses are also deductible.

Analysis: The amount paid on behalf of a co-borrower to discharge a joint and several liability arose in the course of the assessee's business and, when paid, constituted a trading loss. An entry in the books showing the amount as due from the co-borrower does not alter the intrinsic character of that loss. Following the principle that a trading loss in the commercial sense arises only when there is no reasonable prospect of recovery, the timing for claiming deduction depends on when reasonable prospects of restitution ceased. Factual findings established that the assessee continued bona fide recovery efforts and wrote off the debt only after it became clear that recovery was impossible; thus the loss crystallised in the later assessment year. Expenditure qualifies under section 10(2)(xv) only if it is laid out wholly and exclusively for the purposes of the assessee's business; legal expenses incurred to recover a debt that is not a trading debt of the assessee do not meet that test.

Conclusion: The sum of Rs. 50,369-13-6 (the half-share paid by the assessee) is allowable as a trading loss under section 10(1) of the Income-tax Act in the assessment year when the assessee legitimately wrote off the debt. The claim for interest is not allowable. The claim for litigation expenses for recovery of the non-trading debt is not allowable under section 10(2)(xv).

Ratio Decidendi: A loss occasioned by payment of a joint and several liability incurred in the course of business remains a trading loss notwithstanding bookkeeping entries showing the amount as due from a co-debtor; such a trading loss is deductible in the year in which reasonable prospects of recovery from the co-debtor cease to exist, but legal expenses are deductible under the "wholly and exclusively" test only if they are incurred for the purposes of the assessee's own business.

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