2021 (8) TMI 481 - HC - Income Tax

Amount written off as incurred in the course of assessee's business - Validity of Security deposit written off as irrecoverable as a revenue expenditure - HELD THAT - Assessee by treating the expenditure as business expenditure, the Tribunal took note of the fact that the AO and the CIT (Appeals) have not disputed the details regarding the income and expenditure furnished by the assessee and the AO only concluded that, since the security deposit is in the nature of a capital expenditure, the same cannot be allowed as a business loss. Though the Commissioner of Income Tax (Appeals) had rendered a finding that the transaction itself was a sham transaction, the Tribunal rightly noted that the Assessing Officer has not disputed or doubted the genuineness of the transaction. Tribunal noted that the income and expenditure from business was accepted by the Revenue authorities for the earlier years treating the business activity of dehydrated vegetables as a separate and discontinuation of the business of the assessee, is not a correct view taken by the authorities when the assessee has considered both the business activities as its business and offered the income and expenditure for the earlier years, which was accepted. No substantial question of law.

Summary

Issues:
1. Disallowance of security deposit as irrecoverable amount.
2. Treatment of security deposit as revenue expenditure.

Analysis:

Issue 1: Disallowance of security deposit as irrecoverable amount
The case involved an appeal against the order passed by the Income Tax Appellate Tribunal regarding the disallowance of a security deposit of ?6 crores as irrecoverable. The appellant, a company engaged in manufacturing, had deposited the amount with another company for a business arrangement that did not materialize, leading to the write-off. The Assessing Officer disallowed the amount as it was considered a capital item not incurred in the course of business. The Commissioner of Income Tax (Appeals) upheld the disallowance, but the Tribunal allowed the appeal. The Tribunal's decision was based on a detailed analysis of the business activities, losses incurred, and the nature of the transaction. It concluded that the security deposit was made for business purposes and the loss suffered was a business loss, hence allowable under Section 37 of the Income Tax Act. The Tribunal highlighted the genuineness of the transaction and the acceptance of income and expenditure by revenue authorities in previous years, supporting the treatment of the amount as a business expenditure.

Issue 2: Treatment of security deposit as revenue expenditure
The second issue pertained to whether the security deposit of ?6 crores, written off as irrecoverable, should be treated as a revenue expenditure. The Tribunal's detailed analysis focused on the terms of the agreement, the business objectives of the appellant company, and the circumstances leading to the write-off. It emphasized that the security deposit was directly related to the business operations and not a capital asset of enduring benefit. The Tribunal held that the forfeiture of the security deposit due to discontinuation of operations before the agreement's expiry was a business loss and allowable under Section 37 of the Act. The Tribunal rejected the notion that the transaction was a sham, noting the acceptance of income and expenditure in previous years by revenue authorities. Ultimately, the Tribunal concluded that the security deposit was incurred for business purposes in line with the appellant company's business objectives, making it a legitimate business expenditure.

In the judgment, the High Court dismissed the appeal by the Revenue, stating that no substantial question of law arose from the factual conclusions reached by the Tribunal. The decision reaffirmed the Tribunal's findings regarding the treatment of the security deposit as a business expenditure and the allowance of the loss incurred as a legitimate business loss under the Income Tax Act.