Business expediency supported treatment of an advance as a business loan, making the resulting loss allowable as business loss.

A loan advanced as part of business expediency, rather than as an investment, was treated as a business transaction, so the loss on sale or non-recovery of the actionable claim was allowable as a business loss in computing profits. The court accepted that the advance was made to protect the assessee from enforcement of its bank guarantee, and the treatment of interest on the advance as business income supported that character. The fact that the assessee was not ordinarily in the business of lending did not prevent the advance from being classified as a business loan. The separate issue of the year of allowance was treated as academic and not decided.

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Issues: Whether the loss on sale of an actionable claim arising from advances made to a company was a business loss allowable in computing business profits for the relevant assessment year.

Analysis: The advance of Rs. 103 lakhs was held to be a loan made as part of business activity and not an investment. Mere absence of a lending business did not prevent the transaction from being treated as a business transaction. The surrounding circumstances showed business expediency, since the advance was made to avoid enforcement of the assessee's guarantee by the bank. The treatment of interest on the advance as business income also supported the character of the advance as a business loan. On that basis, non-recovery of the amount, or the reduced recovery reflected in the assignment arrangement, constituted a business loss. The separate question of the year of allowance was treated as academic and was not answered.

Conclusion: The loss was correctly held to be a business loss allowable for the accounting year ending 31 December 1977, corresponding to Assessment Year 1978-79.

Ratio Decidendi: A loan advanced as part of business expediency, and not as an investment, gives rise to a business loss on non-recovery, even if the assessee is not ordinarily in the business of lending.

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