2015 (12) TMI 353 - AT - Income Tax

Disallowance of bad debts relating to write off of rental advance - whether the rental advance given by assessee whether a capital asset or revenue asset? - Held that - The admitted facts of the case are that as the rental advance given by the assessee as security deposit to the lessor M/s Chettipunyam Properties Pvt. Ltd. for taking their premises on lease vide lease agreement dated 24th June, 2005 for manufacturing of garments, no doubt, it is for the business of the assessee. The assessee get a right to occupy and run the business uninterruptedly. As per the ratio laid down in the case of Triveni Engg. (2010 (9) TMI 26 - DELHI HIGH COURT), capital asset is created, not the revenue asset. In the case of Badri Dass Daga (1958 (4) TMI 2 - SUPREME Court) held as the result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act. It is clear that this advance payment was not for the normal course of business/trade. Since the capital asset is created, the same cannot be treated as revenue loss but capital loss. - In the other cases raised by assessee, the bad debts arose in the normal course of business and are revenue in nature, but, in the present case, advance written off was in the nature of capital asset - Decided against assessee. Other income not considered for allowing deduction u/s 80IB - Held that - The assessee is eligible to claim income from scrap sales. The scrap is part and parcel of any industrial undertaking, without which, there is no manufacturing activity. Hence, entitled to claim benefit u/s 80IB. Coming to the income from insurance, the undertaking claimed loss from insurance company, it is nothing but compensation for the finished goods lost after manufacturing in the undertaking and during transit. It is similar to the scrap sales income derived as part of the industrial process. Similarly, the insurance income derived due to loss of manufactured finished goods. Hence, it is entitled to claim benefit u/s 80IB. With respect to other income like interest, which is not part of industrial activities or manufacturing, hence, it is not entitled for the benefit u/s 80IB. In the result, assessee is allowed to claim benefit on scrap sales and insurance income, rest are dismissed. - Decided partly in favour of assessee.

Summary

Issues:
1. Disallowance of bad debts relating to write off of rental advance.
2. Claim of deduction u/s 80IB for other income.

Analysis:

Issue 1 - Disallowance of Bad Debts:
The assessee filed an appeal against the order of the ld. CIT(A) regarding the disallowance of bad debts claim of &8377; 7,65,028 relating to rent deposit. The AO disallowed the claim as the rent deposit was written off without sufficient efforts for recovery. The CIT(A) upheld the disallowance, stating that the loss on non-recovery of rent deposit was not a revenue loss but a capital loss. The Tribunal agreed with the CIT(A) that the rent deposit was not directly related to the business activities and was not incidental to the business. The Tribunal dismissed the appeal, concluding that the rental advance created a capital asset, not a revenue asset.

Issue 2 - Claim of Deduction u/s 80IB for Other Income:
The second issue pertained to the claim of deduction u/s 80IB for other income of &8377; 22,56,743. The AO disallowed the excess claim of &8377; 6,77,023, stating that the other income was not derived from the business activities of the assessee. The CIT(A) upheld the AO's decision, ruling that the other income did not exclusively arise from the industrial operations of the assessee. However, the Tribunal disagreed and allowed the claim for income from scrap sales and insurance, considering them integral to the industrial process. Other income like interest, not related to industrial activities, was not eligible for the deduction u/s 80IB. The Tribunal partly allowed the appeal, permitting the deduction for scrap sales and insurance income.

In conclusion, the Tribunal partially allowed the appeal of the assessee, disallowing the claim for bad debts but permitting the deduction u/s 80IB for income from scrap sales and insurance.