2018 (7) TMI 742 - AT - Income Tax

Disallowance on account of sundry balances written off u/s 36(l)(vii) - Held that - Principle of holding the security deposits as expenditure in the capital field is concerned, we do not find any error in the order of the Ld. CIT(A). However, before us the Ld. counsel has submitted that part of the security deposits were adjusted toward pending rent and therefore, same would fall in the nature of business expenditure. We find that this issue has not been verified by the lower authorities and before coming at conclusion that the security deposits written off are not allowable as revenue expenditure, it is essential to examine the factual position, whether part of such security deposits were adjusted against outstanding rent. In view of the above facts and circumstances, we feel it appropriate to restore this issue to the file of the Ld. CIT(A) for verification of the claim of the assessee - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance of ?26,93,019/- on account of sundry balances written off under Section 36(1)(vii) of the Income-tax Act, 1961.
2. Whether the sundry balances written off can be treated as business loss allowable under Section 37(1) of the Act.

Issue-wise Detailed Analysis:

1. Disallowance of ?26,93,019/- on Account of Sundry Balances Written Off under Section 36(1)(vii):
The assessee filed a return of income declaring a loss of ?48,84,022/-. During scrutiny, the Assessing Officer (AO) observed that the assessee wrote off sundry balances amounting to ?26,93,019/- related to security deposits forfeited by landlords. The AO noted that the assessee provided a list of 38 premises but failed to submit supporting documents justifying the claim. The AO found the writing off of security deposits for 38 landlords in a single year suspicious and unexplainable, as tenants typically adjust security deposits against the last month's rent before vacating premises. Consequently, the AO disallowed the claim, adding ?26,93,019/- to the declared loss, arguing that the amount was not in the nature of trading liability and had not been declared as income in previous years.

2. Treatment of Sundry Balances Written Off as Business Loss under Section 37(1) of the Act:
Before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee submitted rent agreements and other information as additional evidence, claiming that the security deposits were business-related expenses. The assessee argued that the deposits were advance rent payments for premises vacated due to uncontrollable circumstances, and the write-off should be considered a business loss. However, the CIT(A) held that the security deposits were capital in nature and not allowable as business loss under Section 37(1). The CIT(A) relied on the Delhi High Court's decision in CIT vs. Triveni Engineering Industries Ltd., which stated that security deposits for obtaining tenancy rights are capital assets, and their write-off is not allowable as revenue expenditure.

Appeal Before the Tribunal:
The assessee appealed to the Tribunal, submitting a paper book with rent agreements and relying on decisions in Fab India Private Limited vs. ACIT and Social Media India vs. ACIT, where similar losses were treated as business losses. The assessee contended that part of the security deposits were adjusted against pending rent, thus qualifying as business expenditure. The Tribunal noted that the CIT(A) followed the jurisdictional High Court's decision, which classified security deposits as capital expenditure. However, the Tribunal acknowledged the necessity to verify whether part of the deposits were adjusted against rent, which could change their nature to business expenditure.

Tribunal's Decision:
The Tribunal restored the issue to the CIT(A) for verification of the assessee's claim regarding the adjustment of security deposits against rent. The CIT(A) was directed to examine the factual position and decide according to the law. The assessee was instructed to provide necessary documents for verification within one month of receiving the order. Both parties were to be given adequate opportunity to be heard.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the CIT(A) to verify the claims and decide accordingly. The decision was pronounced in the open court on 6th July 2018.