Commercial expediency supports deduction of irrecoverable guarantee payment where the liability is business-related and evidence-based.

A guarantee undertaken by an assessee on grounds of commercial expediency, in connection with its business relationship, can give rise to an allowable deduction where the resulting payment or debt is shown to be irrecoverable and incidental to the business. The court accepted the Tribunal's factual finding that the assessee had in fact stood guarantee on the evidence, and held that the payment made under that guarantee was connected with the assessee's business rather than being outside the ordinary course of business. The claimed amount was therefore deductible in computing business profits.

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Issues: (i) Whether the assessee stood guarantee for the loan advanced by the bank to the selling agent of a concern connected with the assessee. (ii) Whether the sum paid under the guarantee, being irrecoverable, was an admissible deduction as a business loss or bad debt under the relevant provision.

Issue (i): Whether the assessee stood guarantee for the loan advanced by the bank to the selling agent of a concern connected with the assessee.

Analysis: The material on record, including the correspondence and the surrounding business relationship between the assessee, the managed company and the selling agent, supported the finding that the assessee had undertaken the guarantee. The factual finding was not shown to be without evidence, and the conclusion drawn by the Tribunal was based on the record rather than on conjecture.

Conclusion: The issue was answered in the affirmative, in favour of the assessee.

Issue (ii): Whether the sum paid under the guarantee, being irrecoverable, was an admissible deduction as a business loss or bad debt under the relevant provision.

Analysis: The payment was held to be connected with the assessee's business and justified by commercial expediency. The guarantee was found to be given in the larger interest of the assessee's business, and the resulting debt was treated as incidental to that business and irrecoverable in the relevant accounting year. The court rejected the contention that the transaction was outside the ordinary course of business or motivated by an oblique purpose.

Conclusion: The issue was answered in the affirmative, in favour of the assessee.

Final Conclusion: The reference was answered for the assessee, and the claimed amount was held allowable as a deduction in computing business profits.

Ratio Decidendi: A debt or payment arising from a guarantee undertaken on grounds of commercial expediency and incidental to the assessee's business, and found to be irrecoverable, is deductible in computing business profits if the finding is supported by evidence.

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