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Income Tax Appellate Tribunal (ITAT) Hyderabad in a recent judgment has upheld the disallowance of irrecoverable advance rent security deposit claimed as expenses holding that it was not for the normal course of business/trade and it created only a capital asset which cannot be treated as revenue.

Case Details:
ITA No. 503/Hyd/2012 AY: 2008-09
M/s Visaka Industries Ltd (Appellant) vs Addl. Commissioner of Income-tax  (Respondent)
Date of Order: 27-11-2015

Brief Facts of the Case:
The assessee was engaged in the business of manufacture of asbestos sheets, synthetic blended Yarn and Garments. The Assessing Officer (AO) completed the u/s 143(3) and made a disallowance of bad debts relating to write off of rental advance deposit.

On appeal, before the CIT(A), the assessee contended that the AO had not disputed that the amount of Rs. 7,65,028 being rent deposit was not recoverable. He submitted that the premises had been vacated and all rents were also paid. The premises was taken for the purpose of business and such non-recovery of deposit amounts to bad debt. The payment of rental deposit was exclusively for the purpose of business and hence allowable

CIT(A) observed that the rent deposit paid was not directly related to carrying on of the business of the assessee nor those were incidental to the assessee’s business. He further observed that even though the rent deposit was connected to the business of the assessee, and was given for the purpose of carrying on the business therein, it is clear that the same had not been given in the ordinary course of business but only for securing the premises on rent. The CIT(A), therefore, following the decision of the Delhi High Court in case of CIT Vs. Triveni Engg. and Industries Ltd., [2010[ INDLAW DEL 2397, dt. 14/09/10, held that the loss on account of non recovery of rent deposit of Rs. 7,65,028 was not in the nature of a revenue loss allowable as a deduction.

The assessee submitted under the lease agreement, it had paid security deposit of Rs. 30 lakhs. The lease was taken only for the purpose of business and it does not create any capital asset, since the lease was conditional and the assessee could not be assign, sublet or part of the demised premises or any part thereof except to their sister concerns. Hence, it does not form any capital asset. The assessee relied on the following judgments:
1. LG Soft India (P) Ltd., Vs. DCIT, 35 taxmann.com 202 (Bang.)
2. ACIT Vs. Appollo tyres Ltd., 33 taxmann.com 575
3. United Motors (India) Ltd. Vs. ITO, 6 taxmann.com 32 (Mum.)
4. Kanoria Securities & Financial Services (P) Ltd., Vs. ACIT, (Mum) 15 SOT 191
5. Badridas Daga Vs. CIT 34 ITR 10 (SC)

On the other hand, the revenue relied upon the orders of AO as well as on the decision in the case of Triveni Engg. Industries Ltd. and the order of CIT(A). It submitted that the property taken on lease gives right of occupancy exclusively and thereby creates a capital asset, hence, writing off such advance as non-recoverable amounts to capital loss.

Important Excerpts from ITAT Judgment
We have heard the arguments of both the parties and perused the material on record as well as the orders of revenue authorities. We have also applied our mind to the decisions cited above. The admitted facts of the case are that as the rental advance given by the assessee as security deposit to the lessor M/s Chettipunyam Properties Pvt. Ltd. for taking their premises on lease vide lease agreement dated 24th June, 2005 for manufacturing of garments, no doubt, it is for the business of the assessee . The assessee get a right to occupy and run the business uninterruptedly. The question arises, the rental advance given by assessee whether a capital asset or revenue asset is created. As per the ratio laid down in the case of Triveni Engg. (supra), capital asset is created, not the revenue asset. The submissions made by the ld. AR relying on the other judgments; In the case of LG Soft India Pvt. Ltd. (supra), the assessee paid rent free advance to obtain permissive use or licence to use premises. This was not the case in the present appeal on hand. The Appollo case is not subject under consideration. Since the ratio laid down were, which reconfirms the provisions that write off of advance given for capital assets liable to be disallowed. Similarly, write off of advance given for revenue items was allowable as deduction u/s 37. The other decisions relied on by the assessee are relating to claiming bad debts which were purely relating to commercial transactions and revenue in nature. Hence, these judicial pronouncements were irrelevant for the present case under consideration since the tenancy rights creates capital assets. In the case of Badri Dass Daga (supra), the Hon’ble Supreme Court has held as under:

“The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act.”

It is clear that this advance payment was not for the normal course of business/trade. Since the capital asset is created, the same cannot be treated as revenue loss but capital loss.

In the other cases raised by assessee, the bad debts arose in the normal course of business and are revenue in nature, but, in the present case advance written off was in the nature of capital asset.

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ITAT-Irrecoverable advance rent security deposit written off and claimed as revenue expenses not allowable as it created a capital asset only | 28-11-2015 |