Trading loss deduction allowed where irrecoverable debt arose from business transactions and remained incidental to business operations.

A loss is deductible as a trading loss if, under accepted commercial practice and trading principles, it arises out of the carrying on of the business and is incidental to it. Here, the managing agents acted under the company's authority, and the relevant resolutions and memorandum permitted the use of funds and lending transactions, so the resulting obligations were incurred in the course of business. Their later failure to repay, including any impropriety or dishonest conduct, did not alter the business character of the loss. The irrecoverable debt was therefore a proper item in commercial accounts and deductible in computing profits.

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Issues: Whether the amount irrecoverable from the managing agents was a trading loss deductible in computing the appellant-company's profits under section 3 of the Indore Industrial Tax Rules, 1927.

Analysis: The governing test is whether, having regard to accepted commercial practice and trading principles, the loss arose out of the carrying on of the business and was incidental to it. The managing agents acted under the company's authority and the relevant resolutions and memorandum permitted the use of funds and investments in loans. The borrowing and lending transactions therefore created legal obligations in the course of the business. The fact that the managing agents later failed to repay, and that their conduct involved impropriety, did not make the resulting loss any the less incidental to the business. An irrecoverable debt arising in such circumstances is a proper item in commercial accounts and is deductible as a trading loss.

Conclusion: The amount was a trading loss deductible in computing the appellant-company's profits, and the disallowance was wrong.

Ratio Decidendi: A loss is deductible if it arises out of the carrying on of the business and is incidental to it according to accepted commercial practice and trading principles, even where the loss results from an agent's unauthorized or dishonest conduct in the course of business operations.

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