2016 (8) TMI 405 - AT - Income Tax

Addition of sundry balances written off as falling outside the purview of section 36(2) r.w.s.36(1)(vii) of the Act and also not allowable u/s 37(1) - Held that - The security deposit has to be adjusted against the rent payable by the assessee and this has already been done by entering into cancellation agreement wherein clause 2 of the cancellation deed specifically mentioned about adjustment of security deposit against the rent payable by the assessee. The details filed by the assessee also suggest that the rent payable by the assessee far exceed security deposit and hence no disallowance is required to be made by the AO. Thus, we directed the AO to delete the disallowance - Decided in favour of assessee.

Summary

Issues:
Addition of sundry balances written off as revenue expenditure.

Analysis:
The appeal was filed against the Commissioner of Income Tax's order for the assessment year 2010-11. The main issue was the addition of ?43,00,040 made by the assessing officer for sundry balances written off, deemed outside the purview of section 36(2) r.w.s.36(1)(vii) of the Act and not allowable u/s 37(1) of the Act.

The assessee, engaged in the Super Market/Hyper Market business, declared a loss in the original return of income. The assessing officer disallowed the sundry balances written off of ?43,01,040, stating it was a security deposit given to the lessor for a property taken on lease. The AO considered it a capital deposit and not revenue expenditure. The CIT(A) upheld this disallowance, stating it was not allowable u/s 36(1)(vii) as bad debt and hence not an allowable expenditure u/s 37(1).

The appellant argued that the deposit written off should be allowed as revenue expenditure as it was adjusted against outstanding rent and other charges. The appellant contended that the deposit was for business purposes and not to acquire a capital asset. The AO and CIT(A) disregarded the details submitted by the appellant regarding the adjustment of the security deposit against rent payable.

The Tribunal found that the security deposit was adjusted against rent payable by the assessee as per the cancellation agreement. The details provided by the assessee indicated that the rent payable exceeded the security deposit. Therefore, the Tribunal directed the AO to delete the disallowance, allowing the appeal of the assessee.

In conclusion, the Tribunal ruled in favor of the assessee, directing the assessing officer to delete the disallowance of the sundry balances written off.