Commercially expedient corporate guarantee payment allowed as business deduction when incurred to protect business interests.

Expenditure incurred to discharge a corporate guarantee given for a subsidiary can qualify as a business deduction where it is commercially expedient and incurred to protect the assessee's business interests. Here, the guarantees were issued in the course of business, the subsidiary supplied materials essential to the assessee's operations, and the memorandum authorised such support. The payment was held allowable as business expenditure or business loss, and the absence of direct income generation did not make it non-deductible. The accounting treatment in the books was not determinative of tax character, so the disallowance was deleted.

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Issues: Whether the amount paid towards discharge of corporate guarantee obligation for a subsidiary company was allowable as business expenditure or business loss.

Analysis: The assessee had furnished corporate guarantees to lenders of its subsidiary and had also advanced funds in the course of business. The subsidiary supplied materials essential to the assessee's business, and the guarantees were issued to protect commercial interests. The Objects clause of the memorandum authorised giving of guarantees, and the payment was made in a commercially expedient manner. The fact that the expenditure did not directly result in income did not make it non-deductible, since the test is whether the expenditure was incurred for business purposes from the viewpoint of a prudent businessman. The accounting treatment in the books was not ative of the tax character of the payment.

Conclusion: The amount paid to discharge the corporate guarantees was deductible as a business expenditure or business loss, and the disallowance was rightly deleted.

Ratio Decidendi: Expenditure incurred to discharge a corporate guarantee given for commercial expediency in the course of business, and in furtherance of the assessee's business interests, is allowable as a business deduction even if it does not directly produce taxable income.

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