Commercial expediency supports business deduction for payments made to preserve customer confidence and goodwill in lending operations.

A banking company's voluntary remission of constituent debts arising from a dacoity was not deductible as a business loss because the loss from the pledged ornaments did not arise directly and incidentally from the conduct of the money-lending business. The same payment was deductible as business expenditure because the bank's accounting treatment reflected a commercial outlay made to preserve customer confidence and goodwill, and to maintain the business. The governing test was commercial expediency: even without legal compulsion, an amount laid out wholly and exclusively for business purposes is deductible, whereas a business loss must arise from the business itself.

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Issues: (i) Whether the amounts remitted by the banking company to its constituents in settlement of claims arising out of the dacoity were allowable as a business loss under section 10(1) of the Income-tax Act, 1922. (ii) Whether the same amounts were deductible as expenditure laid out wholly and exclusively for the purposes of business under section 10(2)(xv) of the Income-tax Act, 1922.

Issue (i): Whether the amounts remitted by the banking company to its constituents in settlement of claims arising out of the dacoity were allowable as a business loss under section 10(1) of the Income-tax Act, 1922.

Analysis: The deduction could not be sustained as a business loss under section 10(1). A loss deductible under that provision must spring directly from the carrying on of the business and be incidental to it. The loss in question arose from the dacoity and the consequent loss of pledged ornaments, which was a loss suffered by the bank as owner or holder of property and not as a consequence of the conduct of its money-lending business. The remission of the debts was also a voluntary act of the assessee, and the amounts were otherwise legally recoverable from the debtors.

Conclusion: The claim was not allowable under section 10(1).

Issue (ii): Whether the same amounts were deductible as expenditure laid out wholly and exclusively for the purposes of business under section 10(2)(xv) of the Income-tax Act, 1922.

Analysis: The adjustment made by the bank was not a mere forbearance to recover debts. By its accounting entries, the bank notionally received the loans and paid to the constituents the value of the ornaments lost in the dacoity. That constituted expenditure for the purposes of section 10(2)(xv). The payment was made to preserve the confidence and goodwill of the clientele and to maintain the business of money-lending. Business expediency, not legal compulsion, was the governing consideration, and the outlay was wholly and exclusively for business purposes.

Conclusion: The claim was allowable under section 10(2)(xv).

Final Conclusion: The reference was answered in favour of the assessee, and the two amounts were held deductible as business expenditure.

Ratio Decidendi: A payment made on grounds of commercial expediency to preserve business goodwill and customer confidence, even if not legally obligatory, is deductible if it is laid out wholly and exclusively for the purposes of the business; but a loss is not deductible as a business loss unless it arises directly and incidentally from the carrying on of that business.

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