Business expenditure deductibility upheld where advances and guarantees were made in ordinary course of managing-agency business.

Whether advances and guarantee payments were deductible under Section 10(2)(xi) turns on whether the debts were incurred in the course of the managing-agency business. The Tribunal found the appellant operated as managing agent, advanced substantial sums on current account, provided guarantees, and had corporate power and contractual option to lend; material showed selection as managing agent was due to its ability to fund. The High Court substituted its view treating the advances as capital, but on the material the advances and guarantee payments were made in the ordinary course of the managing-agency business and therefore deductible as business losses.

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Issues: Whether there were materials for the Tribunal to hold that the debt in question was incurred in the course of the appellant company's business so as to make its loss deductible under Section 10(2)(xi) of the Income-tax Act, 1961.

Analysis: The Tribunal found that the appellant carried on the managing agency business throughout the relevant year, had advanced substantial sums on current account to the managed company, and had given guarantees in respect of the managed company's borrowings; the memorandum of association empowered the appellant to lend money and guarantee contracts; clause 14 of the managing agreement provided an option to lend and advance funds; and factual material showed the appellant was selected as managing agent because it could provide funds. The High Court substituted its own view, treating the advances as relating to the capital structure or framework of the managing agency and therefore as capital expenditure, despite the Tribunal's factual findings. On the material before the Tribunal, the advances and payments under the guarantee were made in the course of the managing-agency business and were part of its ordinary business operations rather than investments in capital structure.

Conclusion: The question is answered in the affirmative; there was material for the Tribunal to hold that the debt was incurred in the course of business and the loss is deductible under Section 10(2)(xi) of the Income-tax Act, 1961; decision in favour of the assessee.

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