The assessee claimed deduction towards loss arising from invocation of guarantee furnished to a lender in respect of loans availed by its group company and wrote off the amount as bad debt. The AO and CIT(A) disallowed the claim holding that furnishing of guarantee was not in the ordinary course of assessee’s business and that the arrangement was structured to transfer losses within the group. The Tribunal allowed the claim observing that the assessee was engaged in financing activities which included standing as guarantor. On appeal, the High Court reversed the Tribunal’s order. It held that standing as surety was not one of the main objects of the assessee-company; at best it was incidental and there was no material to show that the assessee was regularly engaged in the business of furnishing guarantees for consideration. The guarantee in question was an isolated transaction for a group company and not in the ordinary course of business. Further, the conditions of section 36(2) were not satisfied, as the debt had neither been taken into account in computing income nor represented money lent in the ordinary course of banking or money-lending business. The Court also noted that both the assessee and the borrower were group concerns under common control; despite the borrower having financial wherewithal (including donation of Rs. 10 crores in the same year), the assessee took no effective steps for recovery. The arrangement effectively transferred losses from a loss-making entity to a profit-making entity, while remission of liability benefited the loss-making entity, thereby indicating a colourable device. Relying on Madan Gopal Bagla v. CIT (1956) 30 ITR 174 (SC) and CIT v. Birla House (P.) Ltd. (1970) 2 SCC 88, the Court held that the assessee was not entitled to deduction. (AY. 2015-16)