Security deposit written off allowed as business loss us 37(1) even though rent security w/o in books was claimed wrongly as bad debts u/s 36.-ITAT

Security deposit written off allowed as business loss us 37(1) even though rent security w/o in books was claimed wrongly as bad debts u/s 36-ITAT

Security deposit written off allowed as business loss

ABCAUS Case Law Citation:
1059 (2016) (11) ITAT
A.Y : 2010-11

Important Case Laws considered:
Fab India Overseas P. Ltd. vs. ACIT
CIT vs. Khaitan Chemicals & Fertilizers Ltd.
CIT vs. Mahalakshmi Textile Mills Ltd.
CIT vs. Rose Services Apartments India P. Ltd.
Empire Jute Co. Ltd. vs. CIT

Brief Facts of the Case:
The assessee-company was engaged in the business of trading in flavours, fragrance, dehydrated vegetable and its allied products. It filed return of income for the relevant assessment year declaring NIL income from business after set off of brought forwarded losses. The assessment was completed u/s 143(3) of the Income Tax Act, 1961 (Act). While completing the assessment, the Assessing Officer (AO) inter alia, disallowed Rs. 6,51,852/- which represented an advance deposit given by the assessee company to the lessor of the premises taken on lease and which was written off by the assessee. The AO was of the view that it was not allowable as bad debt u/s 36.

CIT(A) also upheld the order of Assessing Officer in observing that the deposits written off are not covered u/s 36 of the Act.

Contentions of the Assessee:
It was submitted that out of total deposit given to the lessor, the company had written off only the amounts which could not be adjusted, against the rent as there was dispute between the lessors and the assessee on the amount of municipal taxes and later on the assessee has vacated the premises. It was submitted that since those amounts were not recoverable and as these amounts could not be adjusted, these were written off in the books of account and claimed as deduction.

It was also submitted by the assessee that these amounts if not allowed u/s 36 of the Act, should be allowed u/s 37 of the Act as revenue loss being an expenditure laid out wholly and exclusively for the purpose of the business.

Observations made by the Tribunal:
The Tribunal observed that as relied by the assessee, almost an identical issue had been considered in the case of Fab India by Delhi ITAT. In the said case the assessee had given security deposit as well as advance rent to the lessor and when the lease contarct could not be executed due to legal glitches, the assessee backed out. and ITAT had allowed the claim towards the advance and security deposit withheld by the lessor as business loss u/s 28.

Also the Delhi High Court on identical facts had upheld that the ITAT rightly allowed the claim u/s 37(1) irrespective that the assessee wrongly claimed it as a bad debt u/s 36(1)(vii). of the said Act. However, we find that the Tribunal has examined the matter in the correct light and allowed the same as an expenditure u/s 37(1) of the said Act.

Regarding the plea of the Revenue that  the Tribunal ought not to have done this and ought to have remanded the matter to the AO to examine the allowability of the claim u/s 37(1), the Delhi High Court had also observed that in all the case laws relied by the Revenue, there was give a clear indication that the Tribunal was empowered to deal with the issue of allowability of the expenditure u/s 37(1).

what may be a capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer.

In Fab India case, the ITAT had also observed that the Hon’ble Supreme Court on the issue of whether a payment is revenue or capital had held as under:

(i) It is not universally true proposition that what may be a capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer.

(ii) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.

(iii) What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency.

Held:
The security deposit which was written off by the assessee was allowed as business loss.

Security deposit written off allowed as business loss

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