Business expenditure and trading loss principles support deduction of payments made under joint and several borrowing

Amounts paid by an assessee to discharge a joint and several borrowing, to the extent attributable to a co-borrower's default, were treated as deductible where the borrowing was undertaken for the assessee's business and reflected established commercial practice. The payment was regarded as incurred on grounds of commercial expediency in the ordinary course of business, and as a loss arising from the business transaction by which the funds were procured. It was not treated as a mere loss of borrowed capital used in the assessee's own business. The amount was therefore considered deductible as business expenditure, or alternatively as a trading loss.

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Issues: Whether the amount paid by the assessee in discharging the joint and several borrowing, to the extent attributable to the default of the co-borrower, was allowable as a deduction under section 10(2)(xv) of the Income-tax Act, 1922, or as a business loss.

Analysis: The borrowing was found to be undertaken for the assessee's business and in accordance with an established commercial practice of borrowing on joint and several liability. The Tribunal's findings showed that the assessee could obtain the necessary funds for his business only by adopting that course, and that the transaction was part of the ordinary conduct of the business and incidental to it. Amounts incurred on grounds of commercial expediency, and losses caused in the course of and incidental to the business, are deductible in computing true profits. The payment in question was not treated as a loss of borrowed capital used in the assessee's own business, but as a loss arising from the business transaction by which the funds were procured.

Conclusion: The amount was deductible as a business expenditure or, at any rate, as a trading loss, and the answer to the reference was in the affirmative in favour of the assessee.

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