2010 (11) TMI 507 - AT - Income Tax

Disallowed - Under section 36(2)(i) and 28 - Whether the rental deposit paid for accommodation and writ ten off is a business loss - As per the Hon. Allahabad High Court in the case of Jwala Prasad Radha Kishan V/s CIT 1970 -TMI - 7948 - ALLAHABAD High Court has held that the payment of security money cannot be regarded as capital expenditure - It was in fact, not an expenditure much less the capital expenditure because the deposits was not made to acquire the selling agency business - But the deposit was made in accordance with agreement for the purpose of earning the profit, accordingly, the same is allowable - Held that when the assessee has acquired the debts which is in the nature of deposits made by the erstwhile merged company for arranging the residential accommodation for its employees and subsequently the said deposits become unrecoverable then it is allowable as business loss u/s 28 - Hence, appeal of the revenue is dismissed.

Summary

Issues:
1. Whether the rental deposit paid for accommodation and written off is a business loss allowable under section 28 of the IT Act.

Analysis:
The appeal by the revenue was against the order of CIT(A)-III, Mumbai for the assessment year 2003-04. The revenue contended that the CIT(A) erred in holding that the rental deposit paid for accommodation and written off is a business loss not in accordance with the conditions provided under section 36(2)(i) and 28 of the IT Act. The assessee claimed Rs.50 lakhs for rental deposits paid by a company for residential premises taken on behalf of its employees. The deposits were made for obtaining accommodation for employees, and the assessee argued that the non-recovery of these deposits constituted a business loss as bad debts, not allowable under section 36(1)(vii) but should be allowed as a business loss under section 28 itself.

The Assessing Officer (AO) viewed that the assessee had no business to rental deposits related to personal benefits of its employees and lacked evidence to show the deposits were connected to the business. The AO disallowed the claim as bad debt under section 36(2)(i). However, the CIT(A) allowed the claim as a business loss. The revenue argued that the deposits were not debts considered for income computation and that the claim was not maintainable under bad debts or business loss provisions. The revenue contended that the deposits were akin to loans and not allowable as business loss under section 28.

The assessee argued that the advances were for hiring properties for its employees, which were business advances. Due to employees leaving the company and the inability to locate them for recovery, the deposits were deemed unrecoverable. The assessee cited legal precedents to support treating the unrecoverable amount as a business loss under section 28. The Tribunal noted that the deposits were made by a merged company for employee accommodation and became irrecoverable, thus qualifying as a business loss under section 28. Referring to legal judgments, the Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal.

In conclusion, the Tribunal upheld the CIT(A)'s order, stating that the unrecoverable deposits constituted a business loss under section 28, as they were made for employee accommodation purposes and became irrecoverable due to unforeseen circumstances. The legal precedents cited supported the treatment of such losses as deductible business expenses. Therefore, the appeal of the revenue was dismissed.