2014 (6) TMI 498 - AT - Income Tax

Disallowance of advances written off by debiting to P & L account Held that - Assessee has made the deposits in the course of obtaining the advertisement business and these were written off as assessee has closed down that particular business - No asset has been created at the time of making deposit and assessee as part of its business only has to make deposits Relying upon United Motors India Ltd. vs. ITO 2010 (4) TMI 726 - ITAT, MUMBAI - by making the interest free deposits for the purpose of obtaining the permissive use or licence to use the premises, assessee did not obtain any enduring advantage or capital asset - the security deposits and earnest money deposits made did not give any enduring advantage or capital asset and the amounts were written off in the course of assessee s business, they are to be considered as incidental to the business - Expenditure was not incurred for acquisition of any profit earning apparatus as wrongly observed by the CIT(A) Decided in favour of Assessee. Disallowance of expenses written off - Forfeiture of rental deposit by the owners of the property Held 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 - advances even if crystallized would not result in any capital asset - the 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 - the rentals paid are on revenue account, the forfeiture of the deposits in the rentals also shall be on revenue account - the write off of deposits is to be allowed as loss to assessee in the course of its business Decided in favour of Assessee. Advance written off as not recovered money paid for advertising contract Held that - There is nothing on record to notice whether the advances and deposits were made as part of obtaining advertising space or for doing any project or for any other purpose of acquiring asset/business - It is also not on record whether the said company is sister concern or not - There is nothing on record to consider why the contracts have been cancelled and assessee has to forego the amounts - CIT(A) did not analyse the claim, thus, the matter is required to be remitted back to the AO for fresh consideration Decided in favour of Assessee. Disallowance of interior work advance payment Setting up of study abroad centres Held that - Payments are for purchase of machinery, some of them are acquiring certain intangible rights and some amounts are for interior works - Whether interior work was undertaken or not, whether that may result in any capital asset, has not been examined - Unless the nature of advances, the purpose for which the amount was paid were analysed in detail, it is difficult to hold that expenditure is capital or revenue thus, the matter is remitted back to the AO for reexamination Decided in favour of Assessee. Cost of acquisition treated as NIL STCG arrived by denying WDV Held that - The contention of the assessee is accepted - ITAT while analyzing the TPO orders held that website purchased by assessee was at arm s length, therefore, cost paid should be considered as cost of the asset - the AO is directed to allow the depreciation as claimed - the WDV for the year has to be allowed as deduction while computing short term capital gain- Decided in favour of Assessee.

Issues Involved:
1. Disallowance of advances written off as capital loss.
2. Disallowance of forfeited rental deposits as capital loss.
3. Disallowance of advance paid for advertising contract as capital loss.
4. Disallowance of interior work advance payments as capital loss.
5. Treatment of cost of acquisition as NIL for short-term capital gain calculation.

Detailed Analysis:

Issue 1: Disallowance of Advances Written Off as Capital Loss
The assessee claimed a loss of Rs.1,21,21,330/- due to advances written off, which were made for obtaining advertisement space. The CIT(A) upheld the AO's decision, treating the deposits as capital in nature, citing precedents like CIT Vs. Naintal Bank Ltd. and CIT vs. Mysore Sugars Co. Ltd. The CIT(A) reasoned that the deposits were for acquiring a profit-making apparatus, not incidental to the business. However, the Tribunal disagreed, stating that the deposits were made in the course of business without creating an asset, thus should be treated as a revenue loss. The Tribunal allowed the assessee's claim, referencing the case of United Motors India Ltd. vs. ITO.

Issue 2: Disallowance of Forfeited Rental Deposits as Capital Loss
The assessee claimed Rs.53,33,000/- as a revenue loss due to forfeited rental deposits after terminating rental agreements for its "Study Abroad" division. The CIT(A) treated these as capital losses. The Tribunal, however, held that since the deposits were made for running the business and not for acquiring a capital asset, the losses should be considered revenue in nature. The Tribunal allowed the assessee's claim, directing the AO to treat the forfeiture as a revenue loss.

Issue 3: Disallowance of Advance Paid for Advertising Contract as Capital Loss
The assessee claimed Rs.75 lakhs paid to M/s. Shreya Broadcasting Corporation for an advertising contract, which was written off after the business was terminated. The CIT(A) upheld the AO's decision without detailed analysis. The Tribunal noted the lack of analysis and remanded the issue back to the AO for a fresh examination, directing to allow the amount as revenue or capital loss based on facts.

Issue 4: Disallowance of Interior Work Advance Payments as Capital Loss
The assessee claimed Rs.76,12,452/- as a revenue loss for advance payments made for interior works in leased premises. The CIT(A) treated these as capital losses. The Tribunal noted that the nature of advances and the purpose of payments were not examined in detail. It directed the AO to re-examine the agreements and the nature of the expenses to determine if they were capital or revenue in nature, restoring the issue for fresh examination.

Issue 5: Treatment of Cost of Acquisition as NIL for Short-Term Capital Gain Calculation
The AO treated the cost of acquisition of the website "Bharatstudent.com" as NIL, bringing the entire sale consideration of Rs.3.85 crores to tax as short-term capital gain. The CIT(A) upheld this view. The Tribunal, however, referred to its earlier decision in A.Y. 2008-09, where it accepted the cost of acquisition at Rs.3,67,82,683/- and directed the AO to allow depreciation. Consequently, the Tribunal directed the AO to compute the short-term capital gain considering the WDV, allowing the assessee's claim.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to re-examine and re-compute the disallowed claims based on the principles discussed and the factual matrix of each issue. The order was pronounced on 28.05.2014.

← Previous Next →