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

The respondent is a registered firm carrying on business as commission agents. It was treated as the agent of a non-resident principal Haji Mohomed Syed Al Barbari of Port Sudan (hereinafter referred to as the non resident principal). It was carrying on the business of export of cloth and kariana (i.e., miscellaneous goods) to Aden, Saudi Arabia and Sudan. It used to supply goods from India to the non resident principal, who on his part, was sending cotton to the respondent and other merchants for sale in India. For the years 1942-43, 1943-44, 1944-45 and 1945-46, the respondent firm was treated as the agent of the non-resident principal under S. 43 of the Income-tax Act (which will hereinafter be termed the Act) for the purpose of income-tax and Excess Profits Tax. The respondent firm had to pay in all Rs. 3,78,491 under S. 42 (1) of the Act and after allowing for the amounts which were in its hands the account of the principal non-resident showed a debit balance of Rs. 3,20,162. For the year of assessment,1953-54, the respondent firm treated this amount as a bad debt and claimed it as a deductible loss to be set off against profits. The Income tax officer treating this claim as one under S. 10 (2)(xv) of the Act, disallowed it. The Appellate Assistant Commissioner treated it as one under S. 10 (2) (xi) of the Act and he also disallowed it. On appeal to the Income-tax Appellate Tribunal it was held to be a bad debt and an allowable deduction as it was incurred as a result of the business activities which the respondent firm was carrying on with the non-resident principal. At the instance of the Commissioner of Income-tax, the case was stated to the High Court and the High Court modified the question and answered the same in the affirmative, i.e., against the appellant. The High Court held that as the law imposed an obligation upon the respondent firm to discharge the liability and it was incidental to the business of the respondent the amount was a deductible loss; and even if it was not a debt, then also the amount could be claimed by the assesssee as a business or trading loss, because in arriving at the true profit of the respondents business that loss had to be deducted. The High Court thus applied S. 10(1) of the Act to the amount claimed by the respondent.        3. The allowability of the amount in dispute depends upon the nature of the liability imposed upon the respondent firm. The contention of the respondents counsel was that it was carrying on foreign trade and had dealings with a foreign merchant and in the course of the business there were imports and exports and therefore the inter-connection between the respondent firm and the non-resident principal was so intimate as to invite the application of S. 42 (1), i.e., the establishment of agency as contemplated in that section. The liability to pay arises under S. 42 (2) which provides:Where a person not resident or not ordinarily resident in the taxable territories carries on business with a person rersident in the taxable territories, and it appears to the Income-tax Officer that owing to the close connection between such persons the course of business is so arranged that the business done by the resident person with the person not resident or not ordinarily resident produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business, the profits derived therefrom or which may reasonably be deemed to have been derived therefrom, shall be chargeable to income-tax in the name of the resident person who shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-taxRelying on this provision it was argued that the nature of the respondents business was foreign trade which was inter-connected with the business of the non-resident principal. Its nature was such as to attract the imposition of liability on the respondent firm under S. 42 (2) of the Act and therefore the the loss so incurred must be taken to be incidental to and arising out of the business of the respondent.

Reasoning: 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.