1978 (2) TMI 114 - AT - Income Tax

Summary

Issues:
1. Disallowance of deduction on account of forfeiture of earnest money and security deposit.

Detailed Analysis:
The appeal was filed by the assessee against the order of the AAC disallowing the claim of deduction for forfeiture of earnest money and security deposit. The assessee firm engaged in the purchase and sale of Kendu leaves paid Rs. 10,000 as earnest money and Rs. 19,883 as a security deposit. Subsequently, due to potential heavy losses, the assessee decided not to proceed with the contract, resulting in the Forest Department forfeiting both amounts. The ITO disallowed the claim, considering it capital expenditure, which was confirmed by the AAC as penal in nature.

The assessee contended that the expenditure was part of its regular business activity and cited the Madras High Court case of Inden Biselers (1973) 91 ITR 42 in support. The Departmental Representative argued that the amounts were forfeited as a penalty and should be considered capital expenditure, referring to the Allahabad High Court case of Shadilal Sugar & General Mills Ltd. 103 ITR 748. The central issue was whether the forfeiture of earnest money and security deposit constituted a business expense or capital expenditure.

The ITAT observed that the genuineness of the claim was not disputed, and the ITO did not challenge the reason for the forfeiture. It was noted that the security deposit and earnest money were assets of the assessee. Referring to the Privy Council case of Mohanlal Hargovind vs. CIT (1949) 17 ITR 473, the ITAT emphasized that expenses to obtain raw material or stock-in-trade were revenue expenditures, not capital. The ITAT disagreed with the Departmental Representative's argument that the claim was capital in nature.

The ITAT held that the forfeiture amounts were deductible as business expenses, citing the Supreme Court case of Prafulla Chandra Mallik 63 ITR 62 and the Orissa High Court case of Govind Choudhury & Sons 79 ITR 493. Consequently, the ITAT allowed the appeal, directing the lower authorities to permit the deduction of Rs. 29,883.