Bad debt deduction turns on evidence of irrecoverability and business nexus; counsel's misunderstood admission did not bind the assessee.

An alleged admission by counsel before the Tribunal did not bind the assessee because it was denied on affidavit, appeared to have been misunderstood, and was not shown to have caused prejudice or created an estoppel. The advances were found to be genuine loans made in the ordinary course of the assessee's money-lending business, supported by repeated transactions, book entries and contemporaneous documents. On bad debt treatment, the debt was held to have become irrecoverable in the relevant accounting year on the evidence, including the assessee's financial assessment and legal advice. The written-off amount was therefore deductible as a bad debt.

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Issues: (i) whether an alleged admission attributed to counsel before the Tribunal bound the assessee and sustained the Tribunal's rejection of the claim; (ii) whether the lending was made in the course of the assessee's money-lending business; and (iii) whether the debt became irrecoverable in the relevant accounting year so as to qualify as a bad debt.

Issue (i): whether an alleged admission attributed to counsel before the Tribunal bound the assessee and sustained the Tribunal's rejection of the claim.

Analysis: The alleged admission was denied on affidavit, and the surrounding circumstances showed that the Tribunal had misunderstood counsel's submission. Even if such an admission had been made in argument, it was not shown to have created an estoppel or to have been acted upon by the department to its prejudice. An admission by counsel in the course of proceedings is not irrevocable and may be withdrawn where no prejudice results.

Conclusion: The alleged admission did not bind the assessee, and the Tribunal's reversal on that sole ground was unsustainable.

Issue (ii): whether the lending was made in the course of the assessee's money-lending business.

Analysis: The material on record showed repeated advances over a number of years, entries in the assessee's books and in the debtor's books, crediting of interest in the daughter's accounts, and contemporaneous documents showing that the daughter borrowed for business needs. The facts supported the finding that the advances were genuine loans made in the ordinary course of a money-lending activity and not merely personal or familial transfers.

Conclusion: The lending was in the course of the assessee's money-lending business.

Issue (iii): whether the debt became irrecoverable in the relevant accounting year so as to qualify as a bad debt.

Analysis: The governing principle is that a debt is deductible only when it is proved to have become irrecoverable in the accounting year, and that question is one of fact to be decided on the evidence. Here, the assessee split the account, obtained financial information and legal advice, and was satisfied that there was no reasonable prospect of recovery. The Appellate Assistant Commissioner's finding that the debt became bad in the year of account rested on adequate evidence and could not be disturbed in reference.

Conclusion: The debt became irrecoverable in the relevant accounting year and was allowable as a bad debt.

Final Conclusion: The assessee was entitled to deduction of the written-off amount as a bad debt, and the reference was answered in his favour.

Ratio Decidendi: In a tax reference, a debt is allowable as a bad debt only if it is shown on evidence to have arisen in the course of the assessee's business and to have become irrecoverable in the relevant accounting year; an alleged admission by counsel does not bind the assessee where it is shown to have been misunderstood or causes no prejudice.

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