2019 (2) TMI 1541 - HC - Income Tax

Characterization of income - security deposit paid in lieu of lease agreement - in B/S shown as assets, as receivables - concurrent nature of the findings - unforeseen circumstances as sealing of the premises on account of non-conforming user by directions of the Supreme Court through the Monitoring Committee, the premises could not be used - lessee/assessee agreed not to claim the security deposit and as a result sought to claim the amount as deduction which was denied by revenue - denial of treatment as revenue expenditure merely because it was paid in the course of a dispute - assessee urges that the ruling in Triveni Engineering 2010 (9) TMI 26 - DELHI HIGH COURT is inapplicable because of peculiar facts of that case as relied upon to deny claim of deduction HELD THAT - The distinctions sought to be made by the assessee/appellant that Triveni Engineering (supra), was decided in peculiar circumstances of the case, since the amalgamated company s books were assessed as it were in the hands of the transferee company Triveni Engineering , in the opinion of this Court, is an insubstantial aspect which is not sufficient to distinguish the ruling. The reasoning in Triveni Engineering (supra) is not limited to such a fact situation. Furthermore, this Court notices that the decision in Madras Auto Services (P.) Ltd. apart from other judgments were also noticed by this Court in Triveni Engineering (supra). This Court is also un-persuaded with the argument that the amount of ₹ 5.8 crores, could be treated as a revenue expenditure merely because it was paid in the course of a dispute. Clearly, the character of the amount was of a capital nature and remained so; all that the assessee did was to agree that it would not claim a refund out of ₹ 10.58 crores, agreeing to forgo ₹ 5.8 crores. As a result, the Court is of the opinion that given the concurrent nature of the findings, no question of law arises - Decided against assessee.

Summary

Issues:
1. Disallowance of security deposit as deduction for A.Y. 2008-09.

Analysis:
1. The assessee contested the order of the Income Tax Appellate Tribunal (ITAT) regarding the disallowance of a security deposit of &8377; 5.8 crores, which was made by the Revenue and upheld by all Appellate Authorities. The assessee had entered into a lease agreement where it paid the security deposit, but due to unforeseen circumstances leading to a dispute, the assessee agreed not to claim the security deposit. The Assessing Officer (AO) disallowed the deduction, citing impermissibility, and this decision was upheld by the CIT(A) and the ITAT based on the Commissioner of Income Tax vs. Triveni Engg. & Industries Ltd. 343 ITR 245 (Del.) judgment.

2. The Senior Counsel for the assessee argued that the Triveni Engineering case was not applicable due to unique circumstances. The counsel highlighted the Supreme Court decision in CIT vs. Madras Auto Services (P.) Ltd. 233 ITR 468 (SC), stating that the amount paid as damages in the course of business should be allowed as a deduction. The Court noted that the security deposit was given for securing premises for business purposes, and the character of the amount was capital in nature, even though the assessee agreed not to claim it.

3. The Court referred to the Triveni Engineering case, which dealt with a similar situation and held that security deposits were given for obtaining premises for business use, making it a capital asset. The Court rejected the argument that the payment was a revenue expenditure due to the dispute, emphasizing that the character of the amount remained capital, and the assessee merely agreed not to claim it. The Court concluded that no question of law arose, and the appeal was dismissed.