Statutory liability for failure to deduct tax at source was not deductible as business expense or bad debt.

A payment made to discharge a statutory liability arising from failure to deduct tax at source from a non-resident was held not to be deductible as business expenditure, because it did not arise directly from carrying on the business and was not laid out wholly and exclusively for business purposes. It was also not a trading debt incurred in the ordinary course of business, so it could not be allowed as a bad debt. The reference was answered in the negative and the revenue's view was upheld.

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Issues: Whether the sum of Rs. 1,24,199 paid by the assessee as tax liability arising from failure to deduct tax at source from payments to a non-resident was deductible as business expenditure under section 10(1) or section 10(2)(xv), or as a bad debt under section 10(2)(xi) of the Indian Income-tax Act, 1922.

Analysis: The liability arose directly from section 18(3B) and section 18(7) of the Indian Income-tax Act, 1922, which required deduction of tax at source from payments to a non-resident and treated failure to do so as default. The assessee was not paying its own business liability, but was discharging a statutory burden imposed because of non-compliance with that mandate. Such payment had at most a connection with the business, but it did not spring directly from the carrying on of the business and was not an expense laid out wholly and exclusively for business purposes. The amount was also not a trading debt arising in the ordinary course of business, and therefore could not be treated as a bad debt.

Conclusion: The sum was not deductible under section 10(1) or section 10(2)(xv), and it was not allowable as a bad debt under section 10(2)(xi); the finding was against the assessee.

Final Conclusion: The reference was answered in the negative, and the revenue's view was upheld.

Ratio Decidendi: A payment made in discharge of a statutory liability imposed for failure to deduct tax at source is penal in character and is not an expenditure incurred wholly and exclusively for the purpose of the assessee's business, nor a trading debt deductible as bad debt.

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