Security deposit foregone could not be claimed as revenue expenditure

Security deposit given for renting a premise could not be treated as revenue expenditure when the deposit if foregone – Supreme Court dismissed SLP.

ABCAUS Case Law Citation:
ABCAUS 3779 (2023) (07) SC

Important Case Laws relied upon:
Commissioner of Income Tax vs. Triveni Engg. & Industries Ltd. 343 ITR 245 (Del.)
CIT vs. Madras Auto Services (P.) Ltd. 233 ITR 468 (SC)
Commissioner of Income Tax v. Madras Auto Service (P) Ltd. [233 ITR 468

In the instant case, the appellant assessee had challenged the order passed by the Hon’ble High Court confirming the order of the ITAT holding that the amount of security deposit foregone could not be claimed as revenue expenditure.

The assessee inter alia had entered into a lease agreement with a company. As part of the lease agreement, he paid a large amount of security deposit. The amount was reflected in its balance sheet and in the capital under assets, as “receivables”.

However, on account of unforeseen circumstances i.e. sealing of the premises on account of non-conforming user by directions of the Supreme Court through the Monitoring Committee, the premises could not be used by the assessee

The assessee, therefore, sought to vacate the property which resulted in the dispute between the lessor and the appellant/lessee. To end the dispute, the lessee i.e. assessee agreed not to claim the security deposit.

The assessee sought to claim the amount of security deposit as deduction. The AO disallowed it holding that such disallowance was impermissible.

The CIT(A) and ITAT relying on the judgment of the Hon’ble High Court confirmed the disallowance.

Before the Hon’ble High Court, the assessee contended the judgment relied upon by the Revenue was inapplicable because of peculiar facts of that case. It was further contended that the amount was paid by way of damages, it was in the course of business and therefore, entitled to deduction as claim.

The Hon’ble High Court observed that the question in the judgment relied upon by the Revenue was as to whether the security deposit written off was given for securing the capital assets? It was a refundable security deposits, which were to be given back by the landlords to the company on the conclusion of tenancy period and surrendering of the leased premises by the company to the landlords. Therefore, these security deposits were not in the form of rent.

The Hon’ble High Court This Court opined that the amount of security deposit could be treated as a revenue expenditure merely because it was paid in the course of a dispute.

It was held that clearly, the character of the amount was of a capital nature and remained so; all that the assessee did was to agree that it would not claim a refund.

In view of the above the Hon’ble High Court dismissed the appeal of the assessee as not giving rise to any question of law.

Not satisfied with the judgment of the Hon’ble High Court, the assessee challenged it before the Hon’ble Supreme Court by filing a special leave petition (SLP) which was dismissed as without any reason to interfere with the impugned order of the Hon’ble High Court.

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