I-T - Whether when assessee writes off security deposits paid against leased premises as ordinary business loss it can be construed as revenue expenditure - YES: ITAT
By TIOL News Service
NEW DELHI, AUG 02, 2013: THE issue before the Bench is - Whether when assessee writes off security deposits paid against leased premises as ordinary business loss it can be construed as revenue expenditure. And the verdict goes in favour of the assessee.
Facts of the case
The assessee is a company engaged in the export and local trading of various handloom products including readymade garments. It filed its return of income for the AY 2008-09 declaring total income of Rs.30,02,34,760/-. The AO passed an order u/s 143(3) on 25.11.2010 assessing the total income at Rs.32,96,58,880/-, inter alia disallowing the claim of depreciation on intangible assets and disallowing a claim of write off of debit balance for an amount of Rs.22,10,200/- being advance rent and security deposit.
The amount of Rs.21,10,400/- consisting of Rs.7,36,800 as advance rent of 3 months and a Rs.14,73,600/- as security deposit was paid by the appellant in pursuance to the lease agreement entered by the appellant with lessor for premises in Ghaziabad for 9 year at rental charges of Rs.2,45,600 p.m. On account of certain unavoidable circumstances, the agreement was not finalized and concluded. No refund whatsoever was given by the lessor to the appellant in spite of various remaindered and demand. Since the amount could not be recovered, it was written off in the books of accounts and claimed the same as allowable revenue expenditure. The AO allowed deduction in respect of only Rs.736800/- in respect of loss of advance rent but similar claim in respect of security deposit was rejected.
The amount of Rs.1,40,520 was the security deposit given by the appellant to KB Mall Management (‘KBMM’) pursuant to a lease agreement for a store in Ahmedabad which was opened on 24th July,2006. However, owing to less business opportunity in the said store, the appellant decided to close the store and consequently terminated the lease agreement. KBMM has not refunded the said amount on account of damages caused by the usage of the place by the appellant. It is a loss incurred by the appellant in the normal course of the business and being wholly for the purpose of business only, it is claimed as a deduction. The A.O. disallowed the same. Aggrieved the assessee carried the matter in appeal without success.
Having heard the matter, ITAT held that,
++ disallowance on account of write off of security deposit and advance rent paid to Ghaziabad Real Estate P. Ltd. - the issue is “whether the loss of security deposit in question is a business loss in the revenue field.” The above loss is a business loss; for the reason that the assessee has taken on lease many premises spread over many parts of the country, and this act of taking this show room on lease is in the normal course of business. In fact 84 show rooms are taken on lease at various places. Six months rent was given as security deposit. This was given in the course of business. The transaction is intimately connected with the business of the assessee. The AO has not disputed the genuineness of the claim. The CIT(A) has disallowed the amount on the ground that the loss was in the capital field. This finding cannot be agreed with. There is no enduring benefit to the assessee. The loss in question is in the revenue field and has been rightly claimed u/s 28. This is not a bad debt. It is not a case where “lease premium” is paid for a long term lease. It is a deposit in the usual course of taking show rooms on lease;
++ the Tribunal upheld the contentions of the assessee that the expenditure in question can be allowed as a business loss by the Tribunal, though originally it was claimed as a bad debt. The amount in question was given, not for acquiring of any asset giving enduring benefit and was incurred in the course of trade and hence is in the revenue filed;
++ Similarly the amount of Rs.1,40,250/- was given as a security deposited by the assessee to “KB Mall Management” in pursuance of a leasing agreement for opening a show room in Ahmedabad. This was later closed as the assessee exited from this show room on business considerations. The deposit was forfeited by the lessor. For the reasons given while considering the allowability of security deposit forfeited by M/s Ghaziabad Real Estate P.Ltd., we allow this claim of the assessee.
(See 2013-TIOL-672-ITAT-DEL)
