Revenue had filed appeal against order dt. 28th Feb., 2001 of CIT(A)-XIV, New Delhi for asst. yr. 1997-98. On difference of opinion between learned Members of Delhi Bench-D, New Delhi, who heard appeals, Hon ble President has nominated me as Third Member in regard to following points of difference (1) Whether, on facts and in circumstances of case, CIT(A) was justified in allowing business loss of Rs. 53,57,968 during asst. yr. 1997- 98 on account of money advanced by assessee to BWA without controverting finding of AO that said sum had not become irrecoverable during asst. yr. 1997-98. (2) Whether for claiming deduction by way of business loss, onus lies o n assessee to establish that amount advanced by it has become irrecoverable. I have heard parties and perused records. relevant facts briefly stated are that assessee is in business of manufacture and export of readymade garments. For asst. yr. 1997-98, return of income had been filed declaring income of Rs. 14,92,760. AO vide order dt. 28th March, 2000 completed assessment under s. 143(3) at income of R s . 75,27,175. addition made by AO, inter alia, included disallowance of bad debts claimed at Rs. 53,57,968. addition of Rs. 6,76,444 was also made on account of foreign travelling expenses. Assessee appealed to CIT(A) and latter deleted addition of Rs. 6,76,444 out of foreign travelling expenses. In regard to disallowance of deduction on account of bad debts, CIT(A) vide para 5 of impugned order agreed with assessee s representative that after amendment of s. 36(1)(vii) w.e.f. 1st April, 1989, there is no need for assessee to establish that debt has become bad in previous year. CIT(A) has, however, referred to s. 36(2)(i) to support view that bad debt could be allowed as deduction under s. 36(1)(vii) only if it had been taken into account in computing income or represented money lent in ordinary course of business of banking or money lending carried on by assessee. CIT(A) has further held that assessee was not in business of banking or money lending and, therefore, bad debt could be allowed as deduction only if same had been taken into account in computing total income of assessee. Further, relying upon decision of Supreme Court in case of A.V. Thomas & Co. Ltd. vs. CIT (1963) 48 ITR 67 (SC), CIT(A) held that debt can be allowed as deduction if it was part of net profit of any of assessment years and that debt must be one which if recovered would swell profits of assessee. CIT(A) further held that advance given even for purchase of raw materials cannot be treated as that includible in profit and loss account or that which would be taken into account in computing income or that which if recovered would swell profits of assessee. CIT(A) accordingly held that assessee is not eligible to deduction under s. 36(1)(vii). However, CIT(A) has allowed claim of assessee as trading loss on authority of following decisions (i) CIT vs. Abdul Rajak & Co. (1981) 22 CTR (Guj) 181: (1982) 136 ITR 825 (Guj); (ii) P. Satyanarayana vs. CIT 1978 CTR (AP) 222: (1979) 116 ITR 803 (AP); (iii) CIT vs. Mysore Sugar Co. Ltd, (1962) 46 ITR 649 (SC). CIT(A) has thus allowed deduction of sum of Rs. 53,58,967 to assessee as business loss. Revenue is in appeal to Tribunal against decision of CIT(A). As pointed out earlier, appeal of Revenue was heard by Delhi Bench D , New Delhi. learned JM had proposed order dismissing appeal of Revenue. ground on which appeal of Revenue was proposed to be dismissed indicated by learned JM is that assessee is entitled to deduction on account of business loss as transactions between assessee and M/s Body Wrap Apparel were business transactions. learned AM did not agree with conclusion drawn by learned JM for reasons given in his dissenting order. It has been pointed out by learned AM that if any assessee incurs loss in course of carrying on of business, same will be permissible as deduction under s. 37. So, however, learned AM has pointed out that AO had disallowed deduction on ground that assessee had not established that amount of Rs. 53,57,968 had become irrecoverable as at end of previous year. learned AM has further pointed out that CIT(A) has allowed deduction to assessee merely on basis of legal angle without addressing himself to finding of AO about debt not having become irrecoverable. learned AM has also held that there is no material available on record on basis of which one could come to reasonable belief that there was no hope for recovery of amount of Rs. 53,57,968 from M/s Body Wrap Apparel. He has accordingly decided issue in favour of Revenue by restoring disallowance deleted by CIT(A). learned counsel for assessee contended before me that learned AM has admitted in para 6 of proposed order that transaction with M/s Body Wrap Apparel was business transaction and, therefore, non- recovery of same was business loss. It was contended that when goods supplied by M/s Body Wrap Apparel were found defective, agreement for manufacture and supply of goods to assessee was cancelled. It was pointed out that money advanced to M/s Body Wrap Apparel was only upto 27th Sept., 2004 and thereafter no money was advanced to said party. It was contended that loss suffered by assessee on account of rejection of goods sold by assessee has been accepted by Tribunal as genuine loss. According to learned counsel, this supports claim of assessee about genuineness of business loss. It was further contended that if assessee is given opportunity, it would not be difficult for them to establish loss. When it was pointed out to learned counsel for assessee that none of learned Members of Division Bench have expressed opinion of setting aside issue for further opportunity to assessee, it was pleaded that Third Member can take different view even not expressed by learned Members of Division Bench. It was accordingly pleaded that either view of learned JM may be concurred with or matter remitted back to AO for purpose of giving opportunity to assessee to establish genuineness of loss. learned Departmental Representative, on other hand, contended learned Departmental Representative, on other hand, contended that question before Third Member is restricted to determine as to whether CIT(A) was justified in allowing business loss of Rs. 53,57,968 without controverting finding of AO that said sum had not become irrecoverable during asst. yr. 1997-98. It was also pointed out that Third Member has also to consider as to whether onus to establish that amount had become irrecoverable was upon assessee. It was also pointed out that Third Member has also to consider as to whether onus to establish that amount had become irrecoverable during asst. yr. 1997-98 has been discharged. learned Departmental Representative further contended that CIT(A) has placed wrong interpretation on amended provisions of s. 36 to effect that mere claim of debt is permissible as deduction. It was contended that deduction is permissible to assessee on account of bad debt and not of any debt written off in books of account. It was contended that previous year of assessee ended on 31st March, 1997. At end of previous year, assessee had not filed any suit for recovery of huge sum of Rs. 53,57,968. suit had been filed by assessee on 26th March, 1998. According to learned Departmental Representative, facts clearly establish that assessee had k hope of recovery of amount from debtor. My attention was also invited to fact that suit of assessee was dismissed by Hon ble Delhi High Court on 13th Jan., 2005 on account of non-appearance of petitioner. It was contended that in order to get deduction on account of business loss, burden is upon assessee to establish that it has suffered such loss and that assessee had miserably failed to discharge onus. My attention was invited to para 4 of proposed order by learned AM and also his findings in para 5.1 to effect that specific query was made during course of hearing of appeal as to on what material assessee had come to conclusion at end of previous year that advance paid to M/s Body Wrap Apparel could not be recovered. assessee had emphatically replied that there was no material on basis of which assessee could establish that he had no reasonable hope of recovering amount from party. According to learned Departmental Representative, assessee has contested issue on legal principles and not on facts. assessee had not contested before CIT(A) or before Tribunal that amount recoverable from M/s Body Wrap Apparel was bad debt. On other hand, it was argued that mere writing off of debt in books of account was sufficient for grant of deduction under s. 36. Reliance was placed on decision of Supreme Court in case of CIT vs. Calcutta Agency Ltd. (1951) 19 ITR 191 (SC) and in case of Associated Bankings Corpn. of India Ltd. vs. CIT (1956) 56 ITR 1 (SC) in support of contention that when there is reasonable possibility of recovery of debt, same cannot be termed bad debt. It was further contended that assessee had not produced any material to establish that there was no reasonable possibility of recovery of amount from party. financial position of party is not available on record. No correspondence has been produced between assessee and debtor. learned Departmental Representative also pointed out that decision cited by JM for allowance of business loss are distinguishable on facts insofar as in none of cited cases was there any dispute about incurring of loss. According to learned Departmental Representative, in this case, there is dispute about incurring of loss. Mere debt, according to t h e learned Departmental Representative, is not sufficient to establish that assessee had suffered loss. It was further contended that that assessee had made recovery from said party even at end of March, 1996. booking o f flat in DLF had also been transferred in name of assessee. In absence of any evidence placed on record, AO was justified in denying deduction to assessee contended learned Departmental Representative learned counsel for assessee in counter reply contended that assessee had filed suit in year 1998 as otherwise limitation for filing of t h e suit would have been expired. Assessee has not been in position to recover penny till date from said party. booking of flat that was transferred in favour of assessee was subsequently sold by assessee and loss suffered in said transaction. It was accordingly pleaded that view expressed by learned JM may be concurred with and deduction allowed to assessee. I have given my careful consideration to rival contentions. It is not disputed that assessee had claimed deduction on account of bad debt. AO denied deduction for following reasons as contained in assessment order "Now, assessee has during relevant assessment year claimed Rs. 53,57,965 as bad debts of M/s Body Wrap Apparels. It is essential that to claim that 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 debt, however, dim it may be, and so long as debt is in process of realisation, it cannot be said that debt has become irrecoverable G.C.G.A. (Punjab) Ltd. vs. CIT (1937) 5 ITR 279, 307 (Lahore). Whether debt is bad is factual matter which depends on actual facts relevant thereto and not on hopes, fears or judgment of creditor himself T.S.PL.P. Chidambaram Chettiar vs. CIT (1967) 64 ITR 181 (Mad). In case of assessee coy, bad debts of Rs. 53,57,968 have been claimed and (a) agreement which was signed by assessee-company was terminated by assessee-company itself and amount lying with M/s Body Wrap Apparels was asked to be refunded. (b) No other effort in form of correspondence etc. has been filed by assessee-company for recovery of amount. (c) However, assessee by such little effort has been able to recover Rs. 4.18 lakhs. (d) assessee-company has also obtained flat in DLF Qutab Enclave i n lieu of this bad debt. However, assessee-company has claimed on Rs. 2,37,276 against bad debts in lieu of this flat. (e) assessee-company has also filed summary suit in High Court of Delhi, which has not been decided yet. Hence, it cannot be said that amount of Rs. 53,57,968 lying with M/s Body Wrap Apparels is actually bad . Although assessee-company has claimed only advance of Rs. 2,37,276 paid by Mrs. Poonam Singh payment against bad debt, it should also be noted that in totality assessee-company now owns flat in DLF Qutab Enclave, Gurgaon. assessee-company has also recovered sum of Rs. 4.18 lakhs. assessee has also filed summary suit against M/s Body Wrap Apparels in Delhi High Court which has not been decided yet. Taking all these factors into account, it cannot be said that amount of Rs. 53,58,967 recoverable from M/s Body Wrap Apparels is actually bad debt. Hence, it is disallowed." It is evident from finding of AO that disallowance was made by AO on ground that debt claimed as deduction was not "bad debt". On appeal, CIT(A) vide para 5 of his order has expressed opinion that after amendment from 1st April, 1989 in s. 36(1)(vii), there is no need for assessee to establish that debt has become bad in previous year. So, however, vide para 6 of his order CIT(A) has expressed opinion that assessee does not satisfy condition imposed under s. 36(2)(i) of IT Act, 1961 insofar as said amount had not been taken into account in computing income nor did it represent money spent in ordinary course of business of banking of money lending, if any, carried on by assessee. Paras 5 and 6 of order of CIT(A) being relevant are reproduced hereunder: "5. Under s. 36(l)(vii) of Act, amount of any bad debt or part thereof which is written off as irrecoverable in accounts of assessee is allowed deduction. I agree with learned Authorised Representative that after amendment w.e.f. 1st April, 1989 there is no need for assessee for this allowance to establish that debt has become bad in previous year. It is enough if debt has been written off as irrecoverable in accounts of assessee. To that extent, I agree with learned Authorised Representative that bad debt could not have been disallowed. (Emphasis, italicised in print, supplied) However, under s. 36(2)(i) such books of account debt can be allowed only if it has been taken into account in computing income or represents money lent in ordinary course of business of banking or money lending which is carried on by assessee. It is apparent that appellant is not in business of banking or money lending and, therefore, bad debt can be allowed if it has been taken into account in computing income. question arises as to meaning and scope of expression taken into account in computing income , whether it would mean that sum must have appeared on credit side of P&L a/c of previous year or of any earlier years. My opinion is in affirmative. In other words, bad debt can be claimed only if it is part of net profit of any of these years. In A.V. Thomas & Co. Ltd. vs. CIT (1963) 48 ITR 67 (SC) it was held that to be claimable as bad debt, debt must be one which if recovered would swell profits of assessee. advance is given even for purchase of raw materials cannot be treated as that includible in P&L a/c or that which would be taken into account in computing income or that which if recovered would swell profits of assessee. Therefore, loss claimed by appellant may not be strictly allowable under s. 36(1)(vii)." It is evident from finding of CIT(A) that claim made by assessee on account of bad debt was disallowed by CIT(A) in terms of s. 36 of IT Act, 1961 notwithstanding ground taken by AO for disallowance was totally different than ground taken by CIT(A) for holding that assessee was not entitled to deduction under s. 36 of IT Act, 1961. In paras 7 and 8 of order, CIT(A) has referred to various decisions for coming to conclusion that assessee would be entitled to deduction under s. 37 on account of business loss. He has accordingly deleted addition. Paras 7 and 8 of his order are reproduced hereunder "7. However, bad debt may also be trading loss which has wider connotation. bad debt may also be trading loss but trading loss need not necessarily be bad debt. bad debt may well be regarded as one eligible to deduction in computation of net profits to tax because such bad debt will have to be taken into account: on side of debit which will reduce net profits. It has been held, for example, that advances to principals or another persons on his behalf can be claimed as trading loss because commission against employed for sale of principal s goods usually makes such advances CIT vs. Abdul Razak & Co. (1981) 22 CTR (Guj) 181: (1982) 136 ITR 825 (Guj). If distributors fail to realize money given by it to producers for completion of film, it can be claimed as business loss P. Satyanarayan vs. CIT 1978 CTR (AP) 222: (1979) 116 ITR 803 (AP). In CIT vs. Mysore Sugar Co. Ltd. (1962) 46 ITR 649 (SC) it was held that when assessee carries on business in agricultural produce, and he has to advance money to borrowers under agreement to have advances adjusted towards price of produce to be delivered to assessee it amounts to making forward arrangement for next year s crops and paying amount in advance out of price; losses incurred on such advances becoming irrecoverable arise out of business and are allowable. issue can be looked at from another point of view also. Had other party manufactured goods and given it to appellant, price would have been claimed in P&L a/c in year of receipt of goods though actual payment in that year would have been adjusted or reduced by amount of advance. appellant would have thus claimed full cost, even though actual amount paid was less. In other words it can be said that amount paid in advance was claimable subsequently in year of receipt. When other party fails to deliver goods and also does not pay back sum of advance, advance does not cease to be claimable. It would represent cost of goods though not received and that would be allowable for arriving at profit. Therefore, when such advance is claimed as bad debt, what in effect is done is that advance is treated as cost of goods. On careful consideration of all facts and circumstances of case, I am of opinion that sum of Rs. 53,58,967 has to be allowed to appellant. addition is deleted." On appeal, learned AM has concurred with view of CIT(A) that deduction would be permissible to assessee on account of business loss as all transactions of assessee with M/s Body Wrap Apparel were business transactions. However, no opinion has been expressed about allowability of claim under s. 36. It is also noteworthy that CIT(A) has also not expressed any opinion about finding of fact recorded by AO that deduction claimed by assessee was not of "bad debt" but only of debt. As stated earlier, CIT(A) had also expressed view in para 5 of his order As stated earlier, CIT(A) had also expressed view in para 5 of his order that it was not necessary for assessee to establish that debt had become bad in previous year. In my considered view, whether after amendment in s. 36(1)(vii) w.e.f. 1st April, 1989 deduction is permissible to assessee in respect of any debt written off in books of account or of bad debt is matter on which there is divergence of opinion amongst various Benches of Tribunal. In my considered view, amendment in s. 36(1)(vii) has given option to assessee to claim deduction of bad debt in any previous year notwithstanding fact that debt had become bad in any other preceding year(s). view expressed by learned CIT(A) that after amendment in s . 36(1)(vii) w.e.f. 1st April, 1989, deduction is permissible to assessee in respect of any debt written off in books of account and that it is not necessary for assessee to establish that debt had become bad is, in my view, not well founded. It may be pertinent to mention that before amendment to s. 36(1)(viii) w.e.f. 1st April, 1989, language used in section was "a debt which is established to have become bad in previous year". In view of peculiar language used in s. 36(1)(vii) some assessees were denied deduction even in respect of bad debt on ground that debt had not become bad in previous year notwithstanding fact that assessee had established that debt had become bad in any other year. assessee has not been given right to write off any debt in books of account of purpose of deduction under s. 36(1)(vii) is amply demonstrated by fact that legislature in its wisdom has used words bad debts in s. 36(1)(vii) after amendment on 1st April, 1989 as against any debt which is actually established to have become bad in previous year. In my view deduction would be admissible to assessee under s. 36(1)(vii) of bad debt written off in previous year and not of any debt which is written off by assessee. intention of legislature cannot be presumed to allow deduction of any debt written off by assessee in books of account but of bad debt . Therefore, AO would be justified in verifying claim of deduction made by any assessee under s. 36(1)(vii) as to whether deduction is claimed of debt or of bad debt. It would be for assessee to establish that deduction claimed is of bad debt and not only debt which may not be bad debt. However, in present case, CIT(A) having rejected claim of assessee under s. 36(1)(vii) on different ground controversy may not be relevant for disposal of appeal insofar as CIT(A) has agreed with conclusion of AO that deduction under s. 36(1)(vii) is not allowable to assessee though on different grounds." next question that arises for consideration is as to whether assessee is entitled to deduction under s. 37 in respect of business loss. As rightly argued by learned Departmental Representative, there is no difference of opinion amongst learned Members of Division Bench that if assessee has incurred business loss, same is permissible as deduction in computing profits and gains of business under s. 37 of Act. Therefore, it is unnecessary for me to refer to various decisions which have rightly been cited by learned JM in proposed order to support view that if assessee has suffered loss in course of carrying on of his business, same would be permissible as deduction under s. 37(1) of Act. It is also not disputed that if assessee has advanced money to any trader in course of carrying on his business and amount has become irrecoverable, assessee would be entitled to deduction in respect of such irrecoverable amount as business loss under s. 37(1). This, however, is accepted principle of law. However, I have no hesitation to admit my ignorance of any decision laying down principle of law that assessee would be entitled to deduction in respect of any amount which is advanced to party in course of business in respect of which there are reasonable hopes of recovery. learned JM has perhaps inadvertently overlooked finding of AO that deduction claimed by assessee is not of bad debt but of debt in respect of which no material was placed by assessee that same had become irrecoverable (This finding of fact recorded by AO has not been overruled either by CIT(A) or by learned JM). Though CIT(A) while considering claim of deduction under s. 36(1)(vii) held that it was not necessary for assessee to establish that debt had become bad in previous year, yet while considering claim of assessee under s. 37, he has overlooked fundamental aspect of matter s to whether deduction could be allowed to assessee under s. 37 notwithstanding finding of fact recorded by AO that no evidence was produced to establish that debt had become bad in previous year. In my considered view there may be divergence of opinion in regard to interpretation of s. 36{1)(vii) as to whether after 1st April, 1989 it is necessary for assessee to establish that debt had become bad for purpose of claiming deduction, yet there is no scope for two opinions in respect of deduction under s. 37(1) insofar as deduction would be permissible to assessee of business loss and burden to prove loss is undoubtedly upon assessee. What is permissible to assessee as deduction is of business loss whether assessee has suffered loss or not, is question of fact which is to be decided on basis of evidence on record. burden to establish that assessee has suffered loss, in my view, is undoubtedly upon assessee. Their Lordships of Supreme Court in case of Associated Banking Corpn. of India Ltd. (supra) have held, "So long as there is reasonable prospect of recovery of amounts, embezzled, trading loss in commercial sense cannot be deemed to have resulted." In case of Calcutta Agency Ltd. (supra). It was held that burden of proving necessary facts in order to entitle assessee to claim exemption was on assessee. It was further held that assessee had not established necessary facts and, therefore, High Court was in error to apply principles of law on assumption of facts which were not proved. In my considered view, principle laid down by Hon ble Supreme Court in aforementioned cases is aptly applicable to present case. learned CIT(A) has applied principle of law laid down in various decisions of Hon ble Supreme Court and other High Courts overlooking necessity of establishment of factum of loss. learned JM has also concurred with view of CIT(A). learned AM has also concurred with legal opinion expressed by learned JM and I also concur with my learned brothers and CIT(A) that deduction is permissible to assessee of business loss under s. 37(1). So, however, necessity of establishing loss cannot be overlooked. As pointed out earlier, AO has recorded finding of fact that assessee has failed to establish that debt was irrecoverable. In other words, AO has not accepted factum of loss. learned AM has also recorded finding of fact that assessee has no evidence to establish that it had suffered loss in previous year relevant to assessment year under appeal. Mere cancellation of agreement in my view, was not sufficient to establish that assessee had suffered loss. It is also relevant to point out that assessee had filed suit for recovery of amount in December, 1998 though amount has been written off in financial year 1996-97. Though, not filing of suit for some time may not be conclusive for determining as to whether debt had become bad or not, yet conduct of assessee would be relevant factor for determining issue. It is observed from copy of order of Hon ble High Court passed on 13th Jan., 2005 that assessee had not seriously pursued matter in Court of law for recovery of amount in question. It has been observed by Their Lordships. There being no appearance on behalf of plaintiff, suit is dismissed for default. assessee has not only failed to furnish evidence to establish that debt had become bad for purpose of deduction under s. 37 but necessary correspondence between parties was also not placed on record. assessee had recovered some amount by cheques and was given allotment of flat in Gurgaon by debtor. What was understanding between assessee and debtor has not been disclosed to Revenue or to appellate authorities what are reasons for not pursuing suit for recovery is also shrouded with mystery. claim of assessee that it has suffered loss is not supported by any evidence except that there was debt outstanding against party. debt is not of small amount but more than Rs. 50 lakhs. Mere statement that amount has become bad, in my considered view, would not be enough for allowance of deduction under s. 37. request of assessee that opportunity may be given to establish that assessee has actually suffered loss at this stage is too late in day, more so in light of finding of fact recorded by learned AM that Authorised Representative had submitted before Division Bench that he has no evidence to prove that amount had become irrecoverable at time of write off. assessee never sought this opportunity either before CIT(A) or before Division Bench. I therefore, do not entertain such request at this stage. Taking totality of facts and circumstances of this case into consideration, I hold that CIT(A) was not justified in allowing deduction of Rs. 53,57,968 in asst. yr. 1997-98 on account of money advanced by assessee to M/s Body Wrap Apparel as business loss without controverting finding of AO that said sum had not become irrecoverable during previous year relevant to asst. yr. 1997-98, also hold that it was for assessee to establish that amount advanced to M/s Body Wrap Apparel had become irrecoverable in previous year relevant to assessment year under appeal and accordingly, no deduction is permissible to assessee in respect of said amount. matter may now be placed before regular Bench in announcing decision in accordance with majority opinion. *** DEPUTY COMMISSIONER OF INCOME TAX v. PASUPATI NEW TEC. LTD.