Case: Commissioner Of Income-Tax, Bombay Vs. M/S. Abdullabhai Abdulkadar

made for a deduction for which there is no specific provision in S. 10 (2), whether it is admissible or not will depend on whether having regard to accepted commercial parctice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. That passage has to be read in the cirmumstances of that case whether the employment of agents was incidental to the carrying on of the business and it was observed that it logically followed that the losses which were incidental to such employment were also incidental to the carrying on of the business. At p. 696 (of SCR) : (at p. 786 of AIR), it was observed :- At the same time it should be emphasised that the loss for which a deduction could be made under S. 10 (1) must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business. 6. Reference may also be made to an English decision in Curtis v. J. and G. Oldfield Ltd., (1925) 9 Tax Cas 319. In that case the managing director of a company of wine and spirit merchants embezzled monies of the company and that was claimed as a loss as a bad debt and it was held that it was not a trading loss and was therefore not an admisible deduction. In that case the contention of the Crown was that the sum was not an ordinary trading debt and therefore could not be a bad debt and that the loss was not connected with and did not arise out of the trade. Rowlatt, J., said at p. 330: When the Rule speaks of a bad debt it means a debt which is debt that would have come into the balance-sheet as a trading debt in the trade that is in question and that it is bad. It does not really mean any bad debt which, when it was a good debt, would not have come in to swell the profit. 7. In the present case the liability was imposed upon the respondent firm because it was treated as an agent within the meaning of S. 42 (1) of the Act and the liability was imposed because of the deeming provision in sub-s. (2) of S. 42 of the Act.Can it be said, in the present case, that the liability imposed upon the respondent firm was a business debt arising out of the business of the respondent or to use the words of Venkatarama Ayyar, J., springs directly from the carrying on of the business and is incidental to it or is a trading debt in the business of the respondent firm. As we have said above, that condition has not been fulfilled and the loss which the appellant has incurred is not in its own business but the liability arose because of the business of another person and that is not a permissible deduction within S. 10 (1) of the Act. It is not a loss which has to be deducted in respect of the business of the respondent from the profits and gains of the respondents business. 8. Counsel for the respondent also relied on Lords Dairy Farm Ltd. v. Commr. of Income-tax, Bombay, (1955) 27 ITR 700 : ((S) AIR 1955 Bom 352 ) That was a case of embezlement by an employee and it was held that the loss directly arose form the necessity of employing cashiers and therefore the loss by embezzlement was a trading loss but in that very case it was held that before a claim could be made for deduction of a debt as bad debt it must be debt in law. That case is not applicable to the facts of the present case and is of little assistance in the decision of the question before us. Counsel for the respondent next relied on Calcutta Co. Ltd. v. Commr. of Income-tax, 1959-37 ITR 1 : (AIR 1959 S C 1165). It was held in that case that the expression profits and gains has to be understood in its commercial sense and that there could be no computation of profits and gains until the expenditure necessary for earning those profits and gains is deducted therefrom and that when there is no specific provision in S. 10 (2) in regard to claim made, its allowability will depend on accepted commercial practice and trading principles and it will be allowed if it can be said to arise out of the carrying on of the business and is incidental to it. As a principle it is unexceptionable but it does not carry the matter any further. 9. It was next contended that the matter falls within S. 10 (2)(xi) of the Act, i.e., it is in respect of the business. This contention has even less substance that the claim of deduction under S. 10 (1). Under cl. (xi) also a debt is only allowable when it is a debt and arises out of and as an incident to the trade. Except in money lending trade debts can only be so described if they are due from customers for goods supplied or loans to constituent or transactions of a similar kind. In every case the test is, was the debt due as an incident to the business; if it is not of that character it will be a capital loss. Thus a loan advanced by a firm of solicitors to a company in the formation of which it acted as legal adviser is not deductible on its becoming irrecoverable because that is not a part of the profession of a Solicitor: Commrs. of Inland Revenue v. Hagart and Burn Murdoch, (1929) A C 386 : 14 T C 433. 10. In our opinion the High Court was in error in answering the question in favour of the respondent.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]7. In the present case the liability was imposed upon the respondent firm because it was treated as an agent within the meaning of S. 42 (1) of the Act and the liability was imposed because of the deeming provision in sub-s. (2) of S. 42 of the Act.Can it be said, in the present case, that the liability imposed upon the respondent firm was a business debt arising out of the business of the respondent or to use the words of Venkatarama Ayyar, J., springs directly from the carrying on of the business and is incidental to it or is a trading debt in the business of the respondent firm. As we have said above, that condition has not been fulfilled and the loss which the appellant has incurred is not in its own business but the liability arose because of the business of another person and that is not a permissible deduction within S. 10 (1) of the Act. It is not a loss which has to be deducted in respect of the business of the respondent from the profits and gains of the respondents business9. It was next contended that the matter falls within S. 10 (2)(xi) of the Act, i.e., it is in respect of the business. This contention has even less substance that the claim of deduction under S. 10 (1). Under cl. (xi) also a debt is only allowable when it is a debt and arises out of and as an incident to the trade. Except in money lending trade debts can only be so described if they are due from customers for goods supplied or loans to constituent or transactions of a similar kind. In every case the test is, was the debt due as an incident to the business; if it is not of that character it will be a capital loss. Thus a loan advanced by a firm of solicitors to a company in the formation of which it acted as legal adviser is not deductible on its becoming irrecoverable because that is not a part of the profession of a Solicitor:10. In our opinion the High Court was in error in answering the question in favour of the respondent.