Forfeiture of deposit on account of cancellation of lease allowed as business loss u/s 28 being incidental to regular business carried on by the assessee
ABCAUS Case Law Citation:
ABCAUS 3023 (2019) (06) ITAT
Important Case Laws Cited/relied upon by the parties:
CIT vs. Mysore Sugar Co. Ltd., reported in 46 ITR 649
FAB India Overseas India Pvt. Ltd.,vs. ACIT
Hasimara Industries Ltd., vs. CIT reported in 98 Taxman 303 (SC)
M/s. Tamilnadu Magnesite Ltd., vs. ACIT
The issue to be decided was to whether the CIT(A) was justifying in upholding the disallowance of claim of business loss on cancellation of lease deposit in the facts and circumstance of the case.
The assessee was a private trust assessed to tax in the capacity of “Association of Persons” (AOP). It was engaged in the retail business of textiles and jewellery.
The Assessing Officer (AO) during the course of assessment proceedings noticed that under the heading administrative expenses, assessee had debited loss on cancellation of lease.
The assessee explained that the trust had entered into Lease Deed for obtaining a property for setting up a show room. The owner was in the process of constructing the building, when the lease deed was entered. The owner was to construct the· building as per the norms of the local authority and also with the suitable modification as requested by the assessee Trust.
However on completion of the building, the owner could not obtain the power connection for the building. The Assessee had paid an advance of Rs.60 Lakhs. In order to avoid a protracted litigation and legal expenses time and money, the assessee reached a compromise with owner of the property and received back Rs.30 Lakhs out of the advance paid Rs. 60 Lakhs. Hence the balance 30 Lakhs was treated as business expenses and written off.
The AO concluded that the entire transaction was on capital account and any loss arising on write-off of such capital deposit would result only in capital loss and hence not allowable as revenue loss in the hands of the assessee AOP.
Accordingly the the AO disallowed the loss claimed. This action of the AO was upheld by the CIT(A).
Aggrieved, the assessee was in appeal before the Tribunal.
The Tribunal observed that the lease deposit was made in the regular course of carrying on the business of textiles and jewellery by the assessee by opening a showroom and as per the leave and license agreement, the landlord was supposed to carry out the construction as per the specifications of the assessee and obtain necessary regulatory approvals. The assessee had to terminate the lease due to non-performance of the landlord by getting electricity connection for the subject mentioned lease premises and in that process, the assessee had to forego a business deposit and consequently had to write-off the same in its books and claim the same as deduction.
The Tribunal opined that it would have to be construed only as a loss incidental to the regular carrying on of normal business by the assessee allowable U/s.28 of the Act as supported by the decision of the Hon’ble Supreme Court.
The Tribunal further observed that the Hon’ble Jurisdictional High Court had also adjudicated the similar issue wherein it was held that test to be applied to ascertain as to whether the expenditure is revenue or capital is not based on where the funds were drawn from. The broad parameters and tests, which have been laid down by various decisions are that there should be an enduring benefit, which should accrue to the assessee and there should be a creation of a new asset.
Following the judicial precedents the ITAT held that the loss of Rs.30 lakhs on account of cancellation of lease should be treated as business loss of the assessee and accordingly allowed this ground.