CIT(A) erred in allowing business loss deduction without proving debt irrecoverability. Third Member's decision pending.

The Third Member held that the CIT(A) erred in allowing the deduction of Rs. 53,57,968 as a business loss without addressing the Assessing Officer's findings. The assessee failed to prove the debt's irrecoverability, and thus, no deduction was permissible. The matter was to be placed before the regular Bench for a decision in accordance with the majority opinion.

---

---

Issues Involved:

1. Whether CIT(A) was justified in allowing the business loss of Rs. 53,57,968 during the assessment year 1997-98 on account of money advanced by the assessee to BWA without controverting the finding of the Assessing Officer that the said sum had not become irrecoverable during the assessment year 1997-98.
2. Whether for claiming deduction by way of business loss, the onus lies on the assessee to establish that the amount advanced by it has become irrecoverable.

Issue-wise Detailed Analysis:

1. Justification of CIT(A) Allowing Business Loss:

The assessee, engaged in manufacturing and exporting readymade garments, claimed a business loss of Rs. 53,57,968 for the assessment year 1997-98 due to money advanced to BWA. The Assessing Officer disallowed this claim, arguing that the debt had not become irrecoverable during the assessment year. The CIT(A) allowed the deduction, interpreting that post-amendment of section 36(1)(vii) w.e.f. 1-4-1989, it was unnecessary for the assessee to prove the debt had become bad in the previous year. However, the CIT(A) also referenced section 36(2)(i), stating that a bad debt could be deducted only if it had been accounted for in computing the total income or represented money lent in the ordinary course of business. Since the assessee was not in banking or money lending, the CIT(A) concluded that the bad debt could only be deducted if included in the income computation. The CIT(A) allowed the claim as a trading loss based on precedents, including CIT v. Abdul Rajak & Co., P. Satyanarayana v. CIT, and CIT v. Mysore Sugar Co. Ltd. The Revenue appealed against this decision.

2. Onus of Establishing Irrecoverability for Deduction:

The Revenue's appeal was initially heard by the Delhi Bench-D, resulting in differing opinions. The Judicial Member proposed dismissing the appeal, supporting the deduction as a business loss from transactions with BWA. The Accountant Member disagreed, emphasizing the need for the assessee to prove the amount had become irrecoverable. The Third Member was nominated to resolve this difference.

The Third Member reviewed the facts and arguments. It was noted that the CIT(A) and Judicial Member overlooked the Assessing Officer's finding that the debt had not become irrecoverable. The Third Member found that the CIT(A) misinterpreted the amendment to section 36(1)(vii), which still required the debt to be bad, not just written off. The Third Member emphasized that for a deduction under section 37(1), the assessee must prove the loss, which was not done in this case. The assessee's lack of evidence and failure to pursue the recovery suit seriously were highlighted.

Ultimately, the Third Member concluded that the CIT(A) was unjustified in allowing the deduction without addressing the Assessing Officer's findings. The onus was on the assessee to prove the irrecoverability of the debt, which was not established. Therefore, the deduction was not permissible.

Conclusion:

The Third Member held that the CIT(A) erred in allowing the deduction of Rs. 53,57,968 as a business loss without addressing the Assessing Officer's findings. The assessee failed to prove the debt's irrecoverability, and thus, no deduction was permissible. The matter was to be placed before the regular Bench for a decision in accordance with the majority opinion.

---