Trading loss on forfeited promissory notes under export contracts was treated as deductible business expenditure.

Amounts paid on forfeiture of promissory notes executed to secure performance of modified export contracts were treated as a trading loss deductible in computing business income. The contracts were genuine and entered into in the ordinary course of export business, and the breach arose because the assessee could not supply the required quality and quantity of ore. The forfeiture payment was a liability incidental to carrying on the business, satisfying the commercial test of profits. It was therefore characterised as a revenue loss incurred in the course of business rather than capital expenditure, and deduction under section 10(1) of the Indian Income-tax Act, 1922 was allowed.

---

---

Issues: Whether the amount paid on forfeiture of promissory notes executed under modified export contracts was a trading loss deductible in computing business income under section 10(1) of the Indian Income-tax Act, 1922.

Analysis: The contracts were found to be genuine and entered into in the ordinary course of the assessee's export business. The promissory notes were executed to secure due performance of the modified contracts, and the breach was bona fide because the assessee could not supply the required quality and quantity of ore. The payment made on forfeiture represented a liability arising from the business arrangement and was incidental to carrying on the business. Applying the commercial test of profits, the loss was a revenue loss incurred in the course of business and not capital expenditure.

Conclusion: The amount was deductible as a trading loss under section 10(1) of the Indian Income-tax Act, 1922, and the answer was in the affirmative against the Revenue.

---