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Income Tax Appellate Tribunal, DELHI BENCH: ‘F’, NEW DELHI
Before: SH. BHAVNESH SAINI & SH. O.P. KANT
ORDER PER O.P. KANT, A.M.: This appeal by the assessee is directed against order dated 11/11/2016 passed by the Ld. Commissioner of Income Tax (Appeals)-7, New Delhi, [in short ‘the Ld. CIT(A)’] for assessment year 2011-12, raising following grounds:
1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making disallowance of Rs.26,93,019/- on account of sundry balances written off u/s 36(l)(vii) and that too without observing the principle of natural justice.
2. That in any view of the matter and in any case, the' action of Ld. CIT(A) in confirming the action of Ld. AO in making disallowance of Rs.26,93,019/- on account of sundry balances written off u/s 36(l)(vii) is bad in law and against the facts and circumstances of the case.
3. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal
at the time of hearing and all the above grounds are without prejudice to each other.
2. Briefly stated facts of the case are that the assessee file return of income on 27/09/2011, declaring loss of Rs.48,84,022/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short ‘the Act’) was issued and complied with. During scrutiny proceedings, in respect of sundry balances written off of Rs.26,93,019/-, the assessee explained that same relate to security deposit forfeited by the landlords at various premises which were taken on lease by the assessee. The Assessing Officer observed that the assessee submitted a list of 38 such premises alongwith name of the landlords, but no supporting documents to justify the claim made by the assessee, were filed by the assessee. According to the Assessing Officer, writing off of security deposit of 38 landlords in a single year was unexplainable and suspicious as normally the tenant is at liberty to adjust the security deposit against last month rental before vacating the premises. The Ld. Assessing Officer also held that said written off was not allowable under section 36(1)(vii) of the Act as the said amount was not in the nature of trading liability and not declared as income in any of the previous years. In view of the observations, he disallowed the claim of the assessee and added the amount of Rs.26,93,019/- to the loss declared by the assessee. Aggrieved, the assessee filed appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee filed copy of rent agreements entered into between the assessee and the landlords of premises as additional evidences for admission under Rule 46A of Income-tax Rules, 1962 (in short ‘the Rules’) along with other information and claimed that payments were made by the assessee to take the premises on rent to run its business and the assessee was required to pay the landlords the amount of security deposit with reference to agreed rent per month. According to the assessee, it was rent paid in advance in respect of the premises which was vacated, but could not be adjusted against the rent payable, since premises vacated due to the reasons beyond the control of the assessee and for the reason that those premises were not required any further and continue in those premises would further add unnecessary financial burden for maintaining those premises. According to the assessee, the balances written off were in the nature of a business loss allowable to the assessee. The Ld. CIT(A), however relying on the decision of the Hon’ble Delhi High Court dated 14/09/2010 in the case of CIT Vs Triveni Engineering industries limited in of 2009, held the sundry balances written off for security deposits as in the nature of the capital and accordingly disallowed observing as under: “5.6. I have carefully considered the assessment order, written submissions, Remand Report and the Rejoinder thereto. The additional evidence furnished are rent agreements regarding payment of security deposits and is admitted for adjudication of appeal. The Ld. AR has stated that the amount written off by the appellant represents security deposits or part thereof which could not be recovered from the landlords, in spite of every effort made to get the refund. He has stated that since the amount of security deposit given, was for business purpose writing off of the same should be treated as a business loss which is allowable as per provisions of Section 37(1) of the Act. He has relied on a number of case laws to support his contention. Facts in most of the case laws are distinguishable as the forfeiture of deposits in those cases arose out of non fulfillment of contract obligations or breach of commitment. In the case on hand, the appellant has not provided any evidence about the efforts made to recover the security deposit from the landlords. In appellate proceedings, the Ld. AR was requested to file details, evidence to substantiate its contention that efforts had been made to obtain the refunds. The Ld. AR expressed his inability to furnish any evidence to this effect. In any case, the amounts written off cannot be treated as a business loss, as the same is in the nature of capital loss. The Hon'ble High Court of Delhi in the case of CIT vs. Triveni Engineering Industries Ltd. in of 2009 in dated 14.09.2010 held as under: ………………………………………………………………………..
Coming to the security deposit written off by the assessee, the moot question is as to whether the advances were given for securing the capital assets. It is not disputed by the Department that the payment of security deposit to landlords was for obtaining use of premises for the purposes of business against the payment of rent. The contention of the assessee, in this backdrop, is that this payment was clearly in the revenue field, viz., for facilitating carrying on of business more profitably and efficiently while leaving the fixed capital untouched. Learned counsel for the Revenue, however, argues that the security deposits were given for obtaining the premises on rent and thus, the ass essee had obtained a right to use the property, i.e., tenancy right, which is a capital asset.
In order to appreciate the controversy, we may first state the true nature of this deposit. When the premises were taken on rent by the company, the payments in the form of security deposits were given to the land lords. Since the Rent Agreement entered into with the said landlords has not been produced, which could have shown the purpose for which security deposits were made, in the absence thereof, we presume that normal practice which is followed in giving such security deposits existed here also. On that premise, it can be inferred that these were 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 question would be when such a security deposit has become non-recoverable for some reasons whether it can be allowable as deduction under Section 28 of the Act. The deposits were not given in the ordinary course of business either. These were given for securing the premises on rent; albeit for the purpose of carrying on business therein. Once we keep in mind this true nature of deposits, we find force in the submission of Ms. Bansat, learned counsel for the Revenue.
We may point out that the assessee had relied upon the judgment of the Supreme Court in the case of Commissioner of Income Tax Vs. Madras Auto Service (P) Ltd. [233 ITR 468], However, that judgment would not be applicable to the facts of the present case. The expenditure incurred on the construction of building on a leased property was treated as revenue expenditure by the Supreme Court, as the assessee was getting business advantage and was acquiring the business asset in the context of specific Clause in the lease deed. Therefore, the property was not treated as that of the lessor. Further, the Supreme Court found that by incurring the expenditure of this nature, the assessee had taken the advantage in the form of reduced rent for a much longer period. This judgment is, thus, not applicable in the present context. 5.7. Adverting to the facts in the present appeal, it is noted from the lease agreements that the appellant has paid the impugned amount(s) as refundable interest free security deposit. These deposits were given for obtaining the premises on rent and thus, the appellant had obtained a right to use the property, i.e., tenancy right, which is a capital asset. In view thereof and in the light of judicial pronouncement reproduced above, writing off of the impugned security deposits claimed by the appellant as a business loss is not allowable as the same is in the capital field and not allowable as a revenue expenditure as per section 37(1) of the Act. The action of the AO in disallowing the claim of write off of security deposit of Rs.26,93,019/- is therefore, upheld and the addition is confirmed. These grounds of appeal are ruled against the appellant.”
2.1 Aggrieved with the above finding of the Ld. CIT(A), the assessee in appeal before the Tribunal raising the grounds as reproduced above.
Before us, the Ld. counsel filed a paper book containing pages 1 to 394 and referred page 41 to 314, which are copy of various rent agreement in respect of the premises taken on lease. The Ld. counsel relied on the decision of the Tribunal, Delhi Benches in the case of Fab India Private Limited Vs. ACIT in /Del/2012 and 672/Del/2012 for assessment year 2008- 09, wherein the loss of security deposit has been held as business loss in the revenue field. The Ld. counsel also relied on the decision dated 20/05/2014 of the Tribunal of Hyderabad bench in the case of Social Media India Vs. ACIT in ITA No. 390/Hyd./2013 for assessment year 2009-10. The Ld. counsel also referred to the decision of the Hon’ble Supreme Court in the case of Empire Jute Industries, reported in 124 ITR 1 (SC).
The Ld. counsel further submitted before us that in case of the few premises, the landlords have adjusted the security deposits towards pending rent whereas in other cases the landlords refused to refund the security deposits. Thus according to him, the security deposit adjusted against rent would be in the nature of business expenditure. However, he submitted that this factual information has not been verified by the lower authorities and therefore if required the issue may be sent back for verification .
The Ld. DR relied on the order of the Ld. CIT(A) and submitted that the Ld. CIT(A) has followed order of the jurisdictional High Court in the case of Triveni Engineering Industries Ltd. (supra) and, thus, say might be upheld, however, he did not object for verification of the claim of the Ld. counsel that part of the security deposits were already adjusted against the rent and allowable as revenue expenditure.
We have heard the rival submission and perused the relevant material on record. In the case of Fab India Overseas Pvt. Ltd (supra), the Tribunal in para 18 of the order observed as under: “18. On this factual matrix the issue before us is “whether the loss of security deposit in question is a business loss in the revenue field”. In our considered opinion the above loss is a business loss; for the reason that the assessee has taken on lease many premised spread over many part 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 Assessing Officer 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. We do not agree with this finding. There is no enduring benefit to the assessee. In our view 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 as in the case of Kribco (supra). It is a deposit in the usual course of taking show rooms on lease.
Similarly, the Tribunal in the case of Social Media India (supra) observed as under:
11. We have considered the rival contentions and perused the orders of the CIT(A). Following the principles relied upon in earlier ground, Ld. CIT(A) in this case also held that advances are not revenue expenses and the liability to incur expenses has not accrued until the time liability arises the advance remains in capital field, written off of such amounts was not allowed as revenue loss. On considering the principles on the issue and the decision relied upon, we are of the view that the acquisition of premises on lease was not ordinarily be in the capital field as the monies are advanced for the purpose of running business. Thus, advances even if crystallized would not result in any capital asset. Since these advances are made in the course of assessee’s business on which assessee did earn incomes, premature closure of lease agreements resulted in forfeiture of deposits. Since the rentals paid are on revenue account, the forfeiture of the deposits in the rentals also shall be on revenue account. Therefore, we are of the opinion that the write off of deposits is to be allowed as loss to assessee in the course of its business. Therefore, A.O. is directed to allow the above amount. Accordingly, Ground No.3 of the assessee is allowed.
However, we note that the Ld. CIT(A) has followed the order of the jurisdictional High Court in the case of Triveni Engineering Industries Private Limited (supra). The relevant part of the order of the Hon’ble High Court has already been reproduced by us in part of the order of the Ld. CIT(A) extracted above. Thus, as far as principle of holding the security deposits as expenditure in the capital field is concerned, we do not find any error in the order of the Ld. CIT(A). However, before us the Ld. counsel has submitted that part of the security deposits were adjusted toward pending rent and therefore, same would fall in the nature of business expenditure. We find that this issue has not been verified by the lower authorities and before coming at conclusion that the security deposits written off are not allowable as revenue expenditure, it is essential to examine the factual position, whether part of such security deposits were adjusted against outstanding rent. In view of the above facts and circumstances, we feel it appropriate to restore this issue to the file of the Ld. CIT(A) for verification of the claim of the assessee as mentioned above and decide in accordance with law. The assessee is directed to produce all the necessary documents in support of its claim for verification by the Ld. CIT(A), within one month of receipt of this order. Both the parties shall be afforded adequate and reasonable opportunity of being heard. The grounds of appeal
are accordingly allowed for statistical purposes.
9. In the result, the appeal of the assessee is allowed for statistical purposes.
The decision is pronounced in the open court on 6th July, 2018.