1956 (3) TMI 41 - HC - Income Tax

Deductibility of Joint Liability Expenses under Income-tax Act: Business Loss Allowance

Commissioner of Income-Tax, Bombay City I, Bombay Versus Jagannath Kisonlal

Commissioner of Income-Tax, Bombay City I, Bombay Versus Jagannath Kisonlal - [1956] 30 ITR 654 Issues Involved:1. Whether a certain amount is an allowable deduction under section 10(2)(xv) of the Income-tax Act.2. Whether the amount is a business loss that can be deducted for the purpose of ascertaining the true profits of the assessee.Issue-Wise Detailed Analysis:1. Allowable Deduction Under Section 10(2)(xv):The primary issue was whether the amount paid by the assessee under joint and several liability could be considered an allowable deduction under section 10(2)(xv) of the Income-tax Act. The assessee, a commission agent, borrowed Rs. 1,00,000 jointly with Kishorilal, of which Rs. 50,000 was used for his business. Kishorilal defaulted, leading the assessee to pay the entire amount to the bank. The Tribunal found that borrowing on joint and several liability was a commercial practice in the assessee's business and that the bank would not have advanced the loan on individual security. The court held that the amount spent by a businessman for commercial expediency is a permissible deduction, emphasizing that it is not for the Department to dictate how a businessman should conduct his business. The expenditure must be for the furtherance of the business, and any money spent in the interest of or incidental to the business is a permissible deduction. The court concluded that the borrowing was necessary for the business and resulted in a loss due to the surety's liability, making it an allowable deduction under section 10(2)(xv).2. Business Loss for Ascertaining True Profits:The court also considered whether the amount could be treated as a business loss. It was consistently held that even if an expenditure does not fall strictly within section 10(2)(xv), certain business losses must be deducted to ascertain the true profits from a commercial point of view. The Advocate-General argued that it was not absolutely necessary for the assessee to borrow Rs. 1,00,000 jointly with Kishorilal. However, the court reiterated that it is for the businessman to decide the best way to conduct his business. The Tribunal's finding that borrowing on joint and several liability was a commercial practice was crucial. The court noted that the loss incurred was in the course of and incidental to the business, thus qualifying as a business loss. The court also distinguished this case from other judgments where the losses were not considered business losses due to different factual circumstances, such as the absence of a commercial practice or the loan not being used for the assessee's business.Analysis of Precedents:The court analyzed various precedents to support its decision. In Commissioner of Income-tax Madras v. S.A.S. Ramaswamy Chettiar, the Madras High Court allowed a deduction for a loss incurred in a money-lending business due to a commercial practice of standing surety. However, in Commissioner of Income-tax v. S.R. Subramanya Pillai, the same court disallowed a similar deduction for a bookseller, as there was no evidence of a commercial practice. The Calcutta High Court in Commissioner of Income-tax West Bengal v. Madan Gopal Bagla disallowed a deduction where the loan was not used for the assessee's business. The court distinguished these cases based on the facts and the established commercial practice in the assessee's business.Consideration of Capital vs. Revenue Expenditure:The Advocate-General contended that the expenditure was capital in nature. The court rejected this argument, clarifying that the assessee did not lose part of his borrowed capital but incurred a loss due to the joint and several liability, which was necessary to obtain the loan for his business. The court emphasized that the loss was not related to the loss of borrowed capital but to the business transaction itself.Conclusion:The court answered both questions in the affirmative, confirming that the amount was an allowable deduction under section 10(2)(xv) and a business loss deductible for ascertaining the true profits of the assessee. The Commissioner was ordered to pay the costs. The reference was answered in the affirmative.