1964 (10) TMI 20 - SC - Income Tax

Supreme Court rules trading loss deductible under Indore Industrial Tax Rules, emphasizing commercial practices

The Supreme Court allowed the appeal, ruling in favor of the appellant company, and held that the trading loss amounting to Rs. 42,63,090-14-7 was ... Whether the loss claimed in the present case was a trading loss which is deductible in computing the profits of the company? Held that:- Find no difficulty in holding that the said debt which had become irrecoverable was a trading loss deductible in computing the profit of the appellant-company in the assessment year. It was a loss incidental to the appellant's business and is certainly sanctioned by commercial practice and trading principles. We, therefore, hold that the High Court went wrong in holding that the said amount represented loss incurred by the appellant dehors its business. Appeal allowed. Issues:1. Deductibility of a trading loss in computing profits under the Indore Industrial Tax Rules, 1927.Analysis:The judgment delivered by the Supreme Court in this case revolves around the issue of whether a specific trading loss amounting to Rs. 42,63,090-14-7 should be allowed as a deduction in computing the profits of the appellant-company under the Indore Industrial Tax Rules, 1927. The appellant, a public limited company engaged in the textile business, had appointed managing agents who borrowed large sums of money and invested them in the company's accounts for their own purposes. The assessing authority disallowed the amount due from the managing agents as a trading loss, stating that the borrowings were not made for the company's business. The appellate authority and the High Court upheld this decision, considering the losses incurred as outside the scope of the company's business, despite potential fraudulent conduct by the managing agents.The primary contention raised by the appellant's counsel was that the loss caused by the managing agents' investments should be considered incidental to the company's business activities, making it deductible as a trading loss. On the other hand, the respondents' counsel argued that the loss could not be subject to tax or deduction under the Indore Industrial Tax Rules as it pertained to the money-lending activity of the company and was not a trading debt necessary for the business. The distinction between the tax provisions under the Indore Industrial Tax Rules and the Indian Income-tax Act was also discussed, emphasizing the need for the loss to be in line with accepted commercial practice and trading principles to be deductible.The Supreme Court, in its judgment, referred to established legal principles and precedents to determine the deductibility of the trading loss. Citing the Badridas Daga case, the court highlighted that a deduction must be allowed if the loss arises from the carrying on of the business and is incidental to it, provided there is no prohibition in the relevant legislation. The court emphasized that the loss incurred by the company due to the managing agents' actions was indeed incidental to the business, as the borrowings and investments were part of the sanctioned business operations, creating legal obligations and proper accounting items.The court rejected the argument that the loss was dehors the company's business, emphasizing that the managing agents' actions did not constitute fraud as the company was aware of and approved the transactions. The court held that the debt, which had become irrecoverable, was a trading loss deductible in computing the company's profits for the assessment year. The judgment concluded by allowing the appeal, granting the appellant its costs, and overturning the High Court's decision on the deductibility of the trading loss.In conclusion, the Supreme Court's judgment clarified the criteria for deducting trading losses under the Indore Industrial Tax Rules, emphasizing the need for losses to be incidental to the business and in accordance with commercial practices. The court's decision in this case highlights the importance of legal obligations and proper accounting practices in determining the deductibility of trading losses in computing a company's profits.