In CIT v. Sree Ganesh Stores (2004) 137TAX261 the Madras Tribunal was persuaded to hold that the result of the transaction amounted to a trading loss if not a bad debt. For this purpose it took support from the Madras High Court decision in CIT v. Inden Biselers (1990) 181ITR69. The Madras High Court upheld the decision of the Tribunal allowing deduction of payment made to a third party when it held that it was not expenditure unconnected with the assessee’s business activities.
On the basis of this decision it is therefore possible to claim expenditure even as trading loss incidental to business.