Refundable security deposit loss treated as trading loss where it was incidental to carrying on the business.

A refundable security deposit furnished under a business arrangement for carrying on an agency, and not for acquiring the agency or any capital asset, was incidental to the assessee's trade. Because the deposit was part of the commercial terms for earning profits and was not an irretrievable outlay, its loss when it became unrecoverable had to be treated on commercial principles as a business loss. The amount was therefore not a capital loss but an allowable trading loss.

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Issues: Whether Rs. 89,241, being part of the amount written off in the account of the manufacturer, was a capital loss or an admissible trading loss.

Analysis: The security deposit was not made to acquire the selling agency itself but was furnished under the agreement as part of the business arrangement for carrying on the agency and earning profits. It was refundable on termination and was not an irretrievable outlay. The deposit was therefore incidental to the business and not capital expenditure. Loss of the deposit, when it became irrecoverable, had to be regarded on commercial principles as a business loss connected with the carrying on of the assessee's agency business.

Conclusion: The amount of Rs. 89,241 was not a capital loss; it was an allowable trading loss in favour of the assessee.

Ratio Decidendi: A refundable security deposit furnished in the course of carrying on a business, and not for acquiring a capital asset or the business itself, is a business outgoing whose loss on becoming irrecoverable is deductible as a trading loss.

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