Bad debt deduction requires a trading debt or legal business obligation; mere commercial expediency is not enough.

A voluntary guarantee of a bank loan was not deductible as a bad debt because it was not a trading debt arising in the course of the assessee's business. There was no privity of contract, contractual obligation, statutory duty, or established trade custom binding the assessee to stand surety for the selling agent's borrowing. The Court treated the claim as a loss too remote from business and held that mere commercial expediency does not convert such a payment into an admissible deduction under section 10(2)(xi). The deduction was therefore disallowed.

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Issues: Whether the sum of Rs. 5,60,199 written off by the assessee as a bad debt was an admissible deduction in computing business profits under section 10(2)(xi).

Analysis: The allowance under section 10(2)(xi) applies only to a debt that is properly a trading debt, arising in the course of and as a result of the assessee's business, and not to a loss too remote from that business. A payment made to discharge a legal obligation arising from business may qualify, but here there was no privity of contract, no contractual obligation, no statutory duty, and no established custom binding the assessee to guarantee the bank loan advanced to the selling agent. The guarantee was not shown to be part of the assessee's business structure or incident to its managing agency business, and the claim rested only on commercial expediency.

Conclusion: The amount was not an admissible deduction under section 10(2)(xi), and the answer to the reference was in the negative and against the assessee.

Ratio Decidendi: A loss arising from a voluntary guarantee is deductible as a bad debt only if it is a trading debt incurred in the course of business or pursuant to a legal or customary business obligation; mere commercial expediency is insufficient.

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