Business loss from a guarantee in ordinary lending is deductible in computing business profits for the year of account.

Payment arising from a guarantee given in the ordinary course of a money lending business is characterised as an ordinary business loss and deductible in computing business profits for the relevant year of account, even where the literal language of Section 10(2)(xii) does not expressly contemplate such payments; the legal effect is that guarantees paid on default by principal debtors under a customary mutual guarantee practice of a lending community fall within deductible business outgoings and reduce taxable business income for the year in which the loss is incurred.

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Issues: Whether the respondent is entitled in law to the deduction of Rs. 19,670 in his assessment for 1940-41 under Section 10(2)(xii) of the Income-tax Act.

Analysis: The sum of Rs. 19,670 arose from the respondent's guarantee of a loan given in the ordinary course of his money-lending business and was payable when the principal debtor defaulted. The practice among the Nattukottai Chettiars, whereby members mutually guarantee bank borrowings to facilitate their lending operations, situates the payment as an ordinary business loss rather than a personal or capital expenditure. Although the language of Section 10(2)(xii) is not readily stretched to cover this payment, the amount represents a loss incurred in carrying on the money-lending business and therefore falls to be deducted in computing business profits for the year of account.

Conclusion: The respondent is entitled to the deduction of Rs. 19,670 as a loss in computing his business profits for 1940-41; answer to the question referred is in favour of the respondent.

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