By TIOL News Service

HYDERABAD, OCT 01, 2018: THE issue before the Bench is - Whether if rental advance is adjusted against the lock-in period liabilities, such loss is to be treated as business loss. And the verdict is YES.

Facts of the case

THE assessee-company, engaged in the business of health insurance, was subjected to scrutiny assessment. However, the CIT found that such order was erroneous and prejudicial to the interests of revenue as the claim made by the assessee to write off security deposit of rent was not allowable. Accordingly, the CIT initiated reassessment proceedings by invoking section 263. In the subsequent assessment proceedings, the assessee submitted that it had appropriated security deposits towards the rent payable to the landlord M/s. Finest Promoters Pvt Ltd for the remaining period of lock-in-period treating it as revenue expenditure. The security deposit was given by the assessee in terms of the lease deed and was for the purposes of taking the premises on lease. However, according to the assessee, the lease had been cancelled. According to the assessee, such cancellation does not change the nature and purpose for which the deposit was given it would still be treated as intimately connected with smooth operations of assessee company. The assessee further stated that it was wrongly described the transaction as write-off of the security deposit, however, in substance, it was only a manner of settlement of rent payable by the assessee towards unexpired lock-in-period of lease and incidental to business of the assessee.

However, the AO did not accepted the submissions and concluded that the security deposits given by the assessee for securing the premises on rent were not given as part of the regular business, but by making refundable security deposit. The AO also concluded that the assessee had obtained right to use the property (tenancy right) which was a capital asset, as per Section 55(2). Therefore, the write off of rental deposit could not be construed as Revenue Expenditure. On assessee's appeal, the CIT(A) upheld the decision.

The Tribunal held that,

++ the rental advance, when it becomes unrecoverable, it becomes the business loss and not capital loss. But in the given case, it is not unrecoverable but it was adjusted towards agreed rent for lock in period as per agreement between the assessee and landlord. Therefore, the assessee has taken conscious decision to vacate the leased property and as per agreement, assessee has obligation towards lock in period as per the lease agreement. Therefore, the negotiated settlement for the lock in period can only be treated as business loss as the premises was taken on rent for the purpose of business.

(See 2018-TIOL-1673-ITAT-HYD)