TMI Blog2006 (3) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... ecome irrecoverable. I have heard the parties and perused the records. 2. The relevant facts briefly stated are that the assessee is in the business of manufacture and export of readymade garments. For assessment year 1997-98, return of income had been filed declaring income of Rs. 14,92,760. The Assessing Officer vide order dated 28-3-2000 completed the assessment under section 143(3) at an income of Rs. 75,27,175. The addition made by the Assessing Officer, inter alia , included the disallowance of bad debts claimed at Rs. 53,57,968. The addition of Rs. 6,76,444 was also made on account of foreign travelling expenses. Assessee appealed to the CIT(A) and the latter deleted the addition of Rs. 6,76,444 out of the foreign travelling expenses. In regard to the disallowance of deduction on account of bad debts, the CIT(A) vide para 5 of the impugned order agreed with the assessee s representative that after the amendment of section 36(1)( vii ) w.e.f. 1-4-1989, there is no need for the assessee to establish that the debt has become bad in the previous year. The CIT(A) has, however, referred to section 36(2)( i ) to support the view that a bad debt could be allowed as a dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same will be permissible as a deduction under section 37. So, however, the ld. Accountant Member has pointed out that the Assessing Officer had disallowed the deduction on the ground that the assessee had not established that the amount of Rs. 53,57,968 had become irrecoverable as at the end of the previous year. The ld. Accountant Member has further pointed out that the CIT(A) has allowed deduction to the assessee merely on the basis of legal angle without addressing himself to the finding of the Assessing Officer about the debt not having become irrecoverable. The ld. Accountant Member has also held that there is no material available on record on the basis of which one could come to a reasonable belief that there was no hope for recovery of the amount of Rs. 53,57,968 from M/s. Body Wrap Apparel. He has accordingly decided the issue in favour of the revenue by restoring the disallowance deleted by the CIT(A). 4. The ld. Counsel for the assessee contended before me that the ld. Accountant Member has admitted in para 6 of the proposed order that the transaction with M/s. Body Wrap Apparel was a business transaction and, therefore, the non-recovery of the same was a business l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee ended on 31-3-1997. At the end of the previous year, the assessee had not filed any suit for recovery of a huge sum of Rs. 53,57,968. The suit had been filed by the assessee on 26-3-1998. According to the ld. D.R., the facts clearly establish that the assessee had a strong hope of recovery of the amount from the debtor. 6. My attention was also invited to the fact that the suit of the assessee was dismissed by the Hon ble Delhi High Court on 13-1-2005 on account of non-appearance of the petitioner. It was contended that in order to get a deduction on account of business loss, the burden is upon the assessee to establish that it has suffered such loss and that the assessee had miserably failed to discharge the onus. My attention was invited to para 4 of the proposed order by the ld. Accountant Member and also his findings in para 5.1 to the effect that specific query was made during the course of hearing of the appeal as to on what material the assessee had come to the conclusion at the end of the previous year that the advance paid to M/s. Body Wrap Apparel could not be recovered. The assessee had emphatically replied that there was no material on the basis of which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udicial Member may be concurred with and deduction allowed to the assessee. 9. I have given my careful consideration to the rival contentions. It is not disputed that assessee had claimed deduction on account of bad debt. The Assessing Officer denied the deduction for the following reasons as contained in the assessment order : "Now, the assessee has during the relevant assessment year claimed Rs. 53,57,965 as bad debts of M/s. Body Wrap Apparels. It is essential that to claim that a debt has become bad, it must actually have become bad and irrecoverable. But so long as there is any ray of hope left to recover a debt, however, dim it may be, and so long as a debt is in the process of realisation, it cannot be said that the debt has become irrecoverable G.C.G.A. (Punjab) Ltd. v. CIT [1997] 5 ITR 279 , 307 (Lahore). Whether a debt is bad is a factual matter which depends on actual facts relevant thereto and not on the hopes, fears or judgment of the creditor himself R.S.PLP Chidambaram Chettair v. CIT [1967] 64 ITR 181 (Mad.). In the case of the assessee coy, bad debts of Rs. 53,57,968 have been claimed and ( a )an agreement which was signed by the assessee compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n off as irrecoverable in the accounts of the assessee is allowed deduction. I agree with the ld. AR that after the amendment with effect from 1-4-1989 there is no need for the assessee for this allowance to establish that the debt has become bad in the previous year. It is enough if the debt has been written off as irrecoverable in the accounts of the assessee. To that extent, I agree with the ld. AR that the bad debt could not have been disallowed. [Emphasis supplied] 6. However, under section 36(2)( i ) such books of account debt can be allowed only if it has been taken into account in computing the income or represents money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee. It is apparent that the appellant is not in the business of banking or money lending and, therefore, the bad debt can be allowed if it has been taken into account in computing the income. The question arises as to the meaning and scope of the expression taken into account in computing the income , whether it would mean that the sum must have appeared on the credit side of the Profit and Loss Account of the previous year or of any earlier years. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduce, and he has to advance money to borrowers under an agreement to have the advances adjusted towards the price of the produce to be delivered to the assessee it amounts to making a forward arrangement for the next year s crops and paying an amount in advance out of the price; the losses incurred on such advances becoming irrecoverable arise out of the business and are allowable. 8. The issue can be looked at from another point of view also. Had the other party manufactured the goods and given it to the appellant, the price would have been claimed in the Profit and Loss Account in the year of receipt of goods though the actual payment in that year would have been adjusted or reduced by the amount of advance. The appellant would have thus claimed the full cost, even though the actual amount paid was less. In other words it can be said that the amount paid in advance was claimable subsequently in the year of receipt. When the other party fails to deliver the goods and also does not pay back the sum of advance, the advance does not cease to be claimable. It would represent the cost of the goods though not received and that would be allowable for arriving at the profit. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... established that the debt had become bad in any other year. The assessee has not been given the right to write off any debt in the books of account of the purpose of deduction under section 36(1)( viii ) is amply demonstrated by the fact that the Legislature in its wisdom has used the words bad debts in section 36(1)( vii ) after the amendment on 1-4-1989 as against any debt which is actually established to have become bad in the previous year. In my view, a deduction would be admissible to the assessee under section 36(1)( vii ) of a bad debt written off in the previous year and not of any debt which is written off by the assessee. The intention of the Legislature cannot be presumed to allow deduction of any debt written off by the assessee in the books of account but of a bad debt . Therefore, the Assessing Officer would be justified in verifying the claim of deduction made by any assessee under section 36(1)( vii ) as to whether the deduction is claimed of debt or of a bad debt. It would be for the assessee to establish that the deduction claimed is of bad debt and not only a debt which may not be a bad debt. 12. However, in the present case, the CIT(A) having rejected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verlooked the fundamental aspect of the matter as to whether deduction could be allowed to the assessee under section 37 notwithstanding the finding of fact recorded by the Assessing Officer that no evidence was produced to establish that the debt had become bad in the previous year. 15. In my considered view, there may be a divergence of opinion in regard to interpretation of section 36(1)( vii ) as to whether after 1-4-1989 it is necessary for the assessee to establish that the debt had become bad for the purpose of claiming deduction, yet there is no scope for two opinions in respect of deduction under section 37(1) insofar as a deduction would be permissible to the assessee of business loss and the burden to prove the loss is undoubtedly upon the assessee. What is permissible to the assessee as a deduction is of a business loss - whether the assessee has suffered a loss or not, is a question of fact which is to be decided on the basis of evidence on record. The burden to establish that the assessee has suffered a loss, in my view, is undoubtedly upon the assessee. Their Lordships of the Supreme Court in the case of Associated Banking Corpn. of India Ltd. ( supra ) have he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved by Their Lordships. There being no appearance on behalf of the plaintiff, the suit is dismissed for default. The assessee has not only failed to furnish evidence to establish that the debt had become bad for the purpose of deduction under section 37 but the necessary correspondence between the parties was also not placed on record. The assessee had recovered some amount by cheques and was given allotment of flat in Gurgaon by the debtor. What was the understanding between the assessee and the debtor has not been disclosed to the revenue or to the appellate authorities what are the reasons for not pursuing the suit for recovery is also shrouded with mystery. The claim of the assessee that it has suffered a loss is not supported by any evidence except that there was a debt outstanding against the party. The debt is not of a small amount but more than Rs. 50 lakhs. Mere statement that the amount has become bad, in my considered view, would not be enough for allowance of deduction under section 37. The request of the assessee that an opportunity may be given to establish that assessee has actually suffered a loss at this stage is too late in the day, more so in the light of find ..... X X X X Extracts X X X X X X X X Extracts X X X X
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