2018 (9) TMI 1313 - AT - Income Tax

Addition towards write off of rent deposits - whether not in the nature of a revenue loss allowable as a deduction? - Held that - Rental advance in the given case, is not unrecoverable but it was adjusted towards agreed rent for lock in period as per agreement between the assessee and landlord. Therefore, in our considered view, the assessee has taken conscious decision to vacate the leased property and as per agreement, assessee has obligation towards lock in period as per the lease agreement. Therefore, the negotiated settlement for the lock in period can only be treated as business loss as the premises was taken on rent for the purpose of business. The facts in the case of Triveni Engg. Industries Ltd. (2010 (9) TMI 26 - DELHI HIGH COURT) were that the company was amalgamated and in the amalgamated company, advances given for securing the premises could not be recovered. Therefore, the unrecovered advances of rent was not allowed as revenue in nature. But, in the given case, it was recovered and settled for the rent for lock in period. Therefore, it is distinguishable on facts to the case of the assessee. Hence, the grounds raised by the assessee are allowed.

Summary

Issues:
1. Whether the write-off of rent deposit by the assessee is a revenue expenditure or a capital expenditure for the assessment year 2010-11?

Analysis:
1. The assessee, a health insurance company, filed its return for AY 2010-11 declaring a loss. The assessment was completed u/s.143(3) with a loss amount. The CIT-1 found the order erroneous and passed an order u/s.263 setting it aside. The AO made an addition towards write-off of rent deposits.

2. The Assessing Officer issued notices regarding the claim of write-off of rent deposit. The assessee argued that the deposit was for rent and should be treated as revenue expenditure. However, the AO concluded that the deposit was for obtaining tenancy rights, a capital asset, and disallowed the write-off based on a High Court decision.

3. The assessee appealed to the CIT(A), submitting details of the lease agreement, negotiations with the landlord, and accounting treatment. The CIT(A) upheld the disallowance by the AO, considering it a capital expenditure.

4. The assessee appealed further, arguing that the expenditure was revenue in nature. The AR cited case law supporting the revenue treatment of similar expenses. The DR supported the revenue authorities' orders.

5. The Tribunal analyzed the case law cited by the AR and noted that when rental advances become unrecoverable, they are business losses. In this case, the deposit was adjusted towards rent for the lock-in period, a conscious decision by the assessee. Therefore, it was considered a business loss, not capital loss.

6. The Tribunal distinguished the case of Triveni Engg. Industries Ltd., where unrecovered advances were not allowed as revenue, as it was recoverable and settled in the present case. Thus, the Tribunal allowed the grounds raised by the assessee, considering the negotiated settlement for the lock-in period as a business loss.

7. Consequently, the Tribunal allowed the appeal of the assessee, holding that the write-off of rent deposit was a revenue expenditure, pronounced on 19th September 2018.