Business loss deduction for guarantee payment arising from ordinary money-lending operations and customary business practice.

A payment made under a guarantee given in the course of money-lending business was treated as a business loss, even though it did not comfortably fall within the deduction for expenditure laid out wholly and exclusively for business. The liability arose from the ordinary lending operations of the assessee and from the customary practice among Nattukottai Chettiars of guaranteeing one another's borrowings to continue the lending activity. On that basis, the amount had to be taken into account in computing the true profits of the business, notwithstanding the absence of a specific bad-debt provision before the 1939 amendment. The deduction was therefore allowed as a business loss.

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Issues: Whether the sum paid by the assessee under a guarantee given in the course of his money-lending business was deductible under Section 10(2)(xii) of the Income-tax Act, 1922.

Analysis: The amount claimed did not fit comfortably within Section 10(2)(xii) as expenditure laid out wholly and exclusively for the purpose of business. However, the liability arose from the assessee's ordinary money-lending operations and from a customary business practice among Nattukottai Chettiars of guaranteeing one another's borrowings so that they could carry on their lending business. In substance, the payment represented a loss incurred in the course of the business. Such a business loss had to be taken into account in arriving at the true profits, even though no specific provision for bad debts existed before the 1939 amendment.

Conclusion: The assessee was entitled to deduct the amount as a business loss, and the answer to the reference was in favour of the assessee.

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