2015 (6) TMI 177 - AT - Income Tax

Security deposits paid to Electricity Authorities and Sales tax Authorities - CIT(A) deleted the addition - whether advance given is capital in nature and the same cannot be claimed as bad debt as per the provisions of sec. 36(2) r.w.S 36(1)(vii)? - Held that - It appears that the assessee has transferred the factory premises along with the electricity connection. Therefore, no separate claim of business loss on account of security deposit of electricity connection is allowable when the same is transferred along with the factory premises Similarly, the deposit with the Sales Tax Department cannot be treated as irrecoverable amount. Merely because the assessee decided to written off these amounts in the books of account would not automatically become an allowable deduction being business loss. We further note that for the assessment year 2007 08, this claim of the assessee has been disallowed by the learned CIT(A) and the assessee has not filed any appeal against the disallowance made by the learned CIT(A). Consequently, the order of the learned CIT(A) qua this issue is set aside and the order of the Assessing Officer is restored. - Decided in favour of revenue. Applicability of section 50C, in respect of the sale of lease hold property - CIT (A) treating the value of the property at ₹ 1,40,00,0001- instead of at its stamp value of ₹ 3,07,71,0001-, as done by the AO - the lease hold rights cannot be equated with the ownership of the land and, therefore, the deemed provisions of section 50C, cannot be applied in case of transfer of lease hold rights as per assesse - Held that - There is no dispute that what is transferred by the assessee is the lease hold property and, therefore, until and unless the property is converted into free hold the lessee holds only lease hold rights over the property. See ITO v/s Pradeep Steel Re rolling Mills Pvt. Ltd. 2011 (7) TMI 1101 - ITAT MUMBAI and Atul G. Pauranik v/s ITO 2011 (5) TMI 576 - ITAT, Mumbai wherein held since the section 27(iiib) has not been extended to the computation of capital gains under section 45 and is limited to the computation of the income under the head Income from house property , the conclusion of the CIT(A) that section 50C cannot be invoked where leasehold rights in land or building are transferred, seems to us, to be correct. - Decided against revenue. Advance written off in respect of old / ex employees balance - CIT(A) allowed the claim of the assessee - Held that - CIT(A) has correctly allowed the claim of the assessee by following the orders of the Tribunal as well as the decision of the Hon ble Jurisdictional High Court in IBM World Trade Corporation v/s CIT, 1988 (12) TMI 23 - BOMBAY High Court . The amount was paid for procuring the accommodation for the employees who have already left the services of the assessee, therefore, now this amount has become irrecoverable and is allowable deduction as business loss.- Decided in favour of assesse. Deduction on account of written off amount being deposit made to EGIL - Held that - The assessee has claimed deduction of ₹ 3,75,880, written off on account of deposit made for an old premises by EGIL which were merged with the assessee and subsequently the amount was identified as irrecoverable after the merger - Decided in favour of assesse.

Summary

Issues Involved:
1. Deletion of addition of security deposits paid to Electricity Authorities and Sales Tax Authorities.
2. Applicability of section 50C in respect of the sale of leasehold property.
3. Deduction claimed on account of advance written off in respect of tender amount due from the government.
4. Deduction claimed on account of advance written off in respect of old/ex-employees balances.
5. Deduction on account of written-off amount being deposit made to EGIL.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Security Deposits Paid to Electricity Authorities and Sales Tax Authorities:
The Revenue challenged the deletion of the addition of Rs. 4,46,029/- made by the Assessing Officer (AO) on account of security deposits with Maharashtra State Electricity Board (MSEB) and Sales Tax Department. The AO disallowed the claim, stating that these deposits did not satisfy the conditions of section 36(2) and were not proven to be irrecoverable. The CIT(A) allowed the claim, but the Tribunal disagreed, noting that deposits with government departments cannot be treated as bad debts or irrecoverable. The Tribunal held that the deposits should be considered part of the sale consideration of the factory premises and restored the AO's order.

2. Applicability of Section 50C in Respect of the Sale of Leasehold Property:
The AO adopted the stamp duty valuation of Rs. 3,07,71,000/- instead of the sale consideration of Rs. 1.40 crores for the leasehold property, applying section 50C. The CIT(A) held that section 50C does not apply to leasehold rights, following the Tribunal's decision in Atul G. Puranik v/s ITO. The Tribunal upheld the CIT(A)'s decision, affirming that section 50C applies only to capital assets being land or building and not to leasehold rights.

3. Deduction Claimed on Account of Advance Written Off in Respect of Tender Amount Due from the Government:
For the assessment year 2007-08, the Revenue contested the deletion of Rs. 4,18,056/- claimed as a deduction for advances written off. The Tribunal, referencing its earlier findings for the assessment year 2006-07, held that deposits with the government cannot be treated as bad debts or irrecoverable amounts. Therefore, the Tribunal set aside the CIT(A)'s order and restored the AO's decision.

4. Deduction Claimed on Account of Advance Written Off in Respect of Old/Ex-Employees Balances:
The assessee claimed a deduction for advances written off relating to old/ex-employees. The AO disallowed the claim, stating it did not meet the conditions of section 36(2). The CIT(A) allowed the claim, referencing the Tribunal's and High Court's decisions in similar cases. The Tribunal upheld the CIT(A)'s decision, noting that advances for procuring accommodation for employees, when written off, can be considered a business loss.

5. Deduction on Account of Written-Off Amount Being Deposit Made to EGIL:
The assessee claimed a deduction for a written-off deposit made to EGIL. The Tribunal, following its findings in the previous issue, decided in favor of the assessee, affirming that the written-off amount was allowable as a business loss.

Conclusion:
The Tribunal partly allowed the Revenue's appeals for both assessment years 2006-07 and 2007-08, restoring the AO's decisions on certain issues while upholding the CIT(A)'s decisions on others. The order was pronounced in the open court on 29.5.2015.