Corporate guarantee payments are not deductible as bad debt or business loss without a clear business nexus.

A payment made under a solitary corporate guarantee was held not deductible as a bad debt under section 36(1)(vii) read with section 36(2), nor as a business loss. The claim failed because the guarantee was not established as part of the assessee's ordinary business or any regular guarantee-financing activity, the amount had not been taken into account in computing income, and the transaction did not fall within the banking or money-lending exception. In the absence of commission, consideration, or a sufficiently close business nexus, the sum paid under the guarantee was treated as outside deductible business expenditure.

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Issues: Whether the assessee was entitled to deduction of Rs. 130 lakhs as a bad debt under section 36(1)(vii) read with section 36(2) of the Income-tax Act, 1961, or alternatively as a business loss incidental to its business on account of payment under a corporate guarantee.

Analysis: The claim was rejected because the guarantee was not shown to have been given in the ordinary course of the assessee's business or as part of any established guarantee-financing activity. The amount had not been taken into account in computing the assessee's income and the case did not fall within the exception for money lent in the ordinary course of banking or money-lending business. The transaction was found to be a solitary guarantee, without commission or consideration, and not sufficiently connected with the assessee's business so as to constitute a deductible business loss. The authorities relied on the principle that, unless a guarantee is given under legal obligation or as part of or incidental to the assessee's business, the sum paid under it cannot be claimed as bad debt or business loss.

Conclusion: The deduction was not allowable as either a bad debt or a business loss and the disallowance was sustained.

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