2001 (3) TMI 235 - AT - Income Tax

Issues Involved:
1. Whether the amount of Rs. 90,000 written off as irrecoverable is allowable as a business loss.
2. Whether the order passed by the Assessing Officer was erroneous and prejudicial to the interest of the revenue.
3. Whether the transaction was conducted in the ordinary course of business or for extra commercial considerations.
4. Whether the Commissioner was justified in invoking section 263 of the Income-tax Act, 1961.

Detailed Analysis:

1. Allowability of Rs. 90,000 as Business Loss:
The assessee claimed Rs. 90,000 as irrecoverable and written off from its business income for the assessment year 1985-86. The Assessing Officer initially allowed this claim. However, the Commissioner found that the transaction was not in the ordinary course of business and thus not allowable as a business loss. The Commissioner directed the Assessing Officer to recompute the income by adding Rs. 90,000.

The Judicial Member disagreed, stating that the transaction was accepted as a business transaction in the assessment year 1983-84, and the resultant short recovery of Rs. 90,000 should be allowed as a business loss. The Judicial Member emphasized that the loss was due to a sound business decision to accept Rs. 1,10,000 immediately instead of Rs. 2,00,000 over ten years, considering the uncertainty after the death of Mrs. Usha Chadha.

2. Erroneous and Prejudicial Order:
The Commissioner held that the order passed by the Assessing Officer was erroneous and prejudicial to the interest of the revenue. The Accountant Member supported this view, stating that the transaction was for extra commercial consideration and not a normal business transaction. The Judicial Member, however, argued that the transaction was accepted as a business transaction in the earlier assessment year, and thus, the loss should be allowed as a business loss.

3. Ordinary Course of Business vs. Extra Commercial Considerations:
The Commissioner and the Accountant Member believed the transaction was for extra commercial considerations, citing the unusual payment terms and the relationship between the parties. The Judicial Member countered that the transaction was accepted as a normal business transaction in the assessment year 1983-84, and the subsequent acceptance of a lump sum payment was a sound business decision.

4. Justification for Invoking Section 263:
The Commissioner invoked section 263, arguing that the Assessing Officer's order was erroneous and prejudicial to the revenue's interest. The Accountant Member upheld this view, stating that the loss could only be considered at the end of the ten-year period as per the Board's resolution. The Judicial Member, however, found that the transaction's nature had already been accepted, and the loss should be allowed in the current assessment year.

Third Member Order:
The Third Member, President V. Dongzathang, sided with the Accountant Member, agreeing that the transaction was not a normal business transaction and involved extra commercial considerations. The Third Member emphasized that the loss, if any, should be considered at the end of the ten-year period as per the Board's resolution and not in the current assessment year. Thus, the Commissioner was justified in directing the Assessing Officer to disallow the claim of Rs. 90,000.

Conclusion:
The appeal filed by the assessee was dismissed, and the order of the Commissioner under section 263 was upheld. The loss of Rs. 90,000 was not allowed as a business loss for the assessment year 1985-86.

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