2009 (8) TMI 1166 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of forfeiture of security deposit.
2. Taxability of damages received for premature termination of the leave and licence agreement.
3. Disallowance of postage, telegram, and telephone expenses.
4. Disallowance of motor car depreciation.
5. Disallowance of repair expenses related to building at Mazgaon.

Issue-wise Detailed Analysis:

1. Taxability of Forfeiture of Security Deposit:
The assessee treated the forfeiture of the security deposit of Rs. 1.55 crores as a capital receipt, while the AO considered it a revenue receipt and taxable as income. The Tribunal analyzed the nature of the security deposit, referring to the agreement dated 5th May 1999, which indicated that the deposit was intended to secure the performance of obligations under the leave and licence agreement. The Tribunal concluded that the security deposit was a capital receipt, akin to a loan, citing the Supreme Court decision in K.M.S. Lakshmanier & Sons v. CIT and other relevant case law. The Tribunal held that the forfeiture of the security deposit did not change its character from a capital receipt to a trading receipt upon termination of the agreement. Therefore, the addition on account of forfeiture of the security deposit was deleted.

2. Taxability of Damages Received for Premature Termination:
The assessee received Rs. 24,37,500 as damages for premature termination of the leave and licence agreement, which the AO treated as revenue income. The Tribunal noted that the payment was made in view of the hardship and inconvenience suffered by the licensor due to the premature termination. Since the assessee treated rental receipts as business income, the Tribunal held that the damages received were in lieu of rental income and therefore taxable as revenue income. The Tribunal distinguished this from the remission of a loan liability, which would be a capital receipt.

3. Disallowance of Postage, Telegram, and Telephone Expenses:
The AO disallowed Rs. 62,984 claimed under postage, telegram, and telephone expenses, suspecting personal use. The Tribunal upheld the disallowance, noting that the assessee did not provide evidence to prove the absence of personal use.

4. Disallowance of Motor Car Depreciation:
The AO disallowed Rs. 30,139 claimed as motor car depreciation, again due to suspected personal use. The Tribunal upheld this disallowance as well, for the same reasons as the postage, telegram, and telephone expenses.

5. Disallowance of Repair Expenses Related to Building at Mazgaon:
The AO disallowed Rs. 6,66,815 out of Rs. 9,67,979 incurred on repairs and maintenance, treating it as capital expenditure. The CIT(A) found that the expenses were for maintaining the existing structure, involving replacements, painting, repairs, etc., and not for creating any new asset of enduring nature. The Tribunal agreed with the CIT(A), noting that the repairs were necessary for the upkeep of the tenanted premises and did not result in any capital asset. Therefore, the disallowance was deleted.

Conclusion:
The Tribunal allowed the appeal of the assessee in part, specifically on the issue of the forfeiture of the security deposit, and dismissed the appeal of the Revenue, thereby upholding the deletion of disallowance on repair expenses. The damages received for premature termination were held to be taxable as revenue income, and the disallowances on postage, telegram, telephone expenses, and motor car depreciation were upheld.