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2019 (6) TMI 662 - AT - Income TaxDisallowance of claim of business loss on cancellation of lease deposit - HELD THAT - The lease deposit was made in the regular course of carrying on the business of textiles and jewellery by the assessee by opening a shop at Puducherry and as per the leave and license agreement, the landlord is supposed to carry out the construction as per the specifications of the assessee and obtain necessary regulatory approvals. The assessee had to terminate the lease due to non-performance of the landlord by getting electricity connection for the subject mentioned lease premises and in that process, the assessee had to forego a regular business deposit of ₹ 30 lakhs and consequently had to write-off the same in its books and claim the same as deduction. This, in our considered opinion, would have to be construed only as a loss incidental to the regular carrying on of normal business by the assessee allowable U/s.28. See MYSORE SUGAR COMPANY LIMITED 1962 (5) TMI 3 - SUPREME COURT - Thus loss on account of cancellation of lease should be treated as business loss of the assessee - Decided in favour of assessee Proportionate disallowance of interest on borrowed funds - HELD THAT - One of the primary requirement of making disallowance U/s.36(1)(iii) is that the borrowed funds should have been utilized for non-business purposes. In the instant case, we have already held that the payment of higher education fees to Harvard University, USA is for business purposes only. Hence we hold that no disallowance of interest U/s.36(1)(iii) of the Act could become operational. Accordingly the Ground raised by the assessee are allowed.
Issues Involved:
1. Disallowance of business loss claim on cancellation of lease deposit. 2. Proportionate disallowance of interest on borrowed funds. Detailed Analysis: 1. Disallowance of Business Loss Claim on Cancellation of Lease Deposit: Facts: - The assessee, a private trust assessed as an "Association of Persons" (AOP), engaged in retail business, claimed a business loss of ?30 lakhs due to the cancellation of a lease deposit. - The lease was for a property in Puducherry, and the owner failed to obtain a power connection, leading the assessee to compromise and recover only ?30 lakhs out of the ?60 lakhs deposit. Assessment Proceedings: - The Assessing Officer (AO) concluded that the loss was a capital loss, not a business loss, as the transaction was on capital account. - The AO disallowed the ?30 lakhs claim, a decision upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. Tribunal's Analysis: - The Tribunal noted that the lease deed was never activated, and the deposit was made in the regular course of business. - The assessee could not take possession due to the owner's failure to obtain an electricity connection. - The Tribunal found that the loss was incidental to the business and allowable under Section 28 of the Income Tax Act. Judicial Precedents: - The Tribunal distinguished the case from the Supreme Court decision in Hasimara Industries Ltd. vs. CIT, where the deposit was for acquiring a profit-making asset. - The Tribunal relied on the Supreme Court decision in CIT vs. Mysore Sugar Co. Ltd., where advances for sugarcane were considered revenue expenditure. - The Tribunal also referred to the Madras High Court decision in Tamilnadu Magnesite Ltd. vs. ACIT, where project expenses were treated as revenue expenditure. Conclusion: - The Tribunal held that the ?30 lakhs loss on cancellation of lease should be treated as a business loss and allowed the assessee's claim. 2. Proportionate Disallowance of Interest on Borrowed Funds: Facts: - The AO observed a deposit of ?89.51 lakhs for the higher education of a beneficiary, Ms. Lavanya Ramanathan, at Harvard University. - The AO disallowed proportionate interest of ?12,98,006 under Section 36(1)(iii), considering it a diversion of borrowed funds for non-business purposes. CIT(A) Proceedings: - The CIT(A) upheld the AO's decision, noting that the assessee could not prove the deposit was made from its own funds. Tribunal's Analysis: - The Tribunal noted that the assessee had significant own funds and reserves. - It was undisputed that Ms. Lavanya Ramanathan, a beneficiary and family member of the Managing Trustee, worked for the assessee before and after her higher studies. - The Tribunal emphasized that the payment for higher education was for business purposes, benefiting the assessee. Conclusion: - The Tribunal held that the payment was for business purposes, and no disallowance of interest under Section 36(1)(iii) was warranted. - The Tribunal allowed the assessee's claim, concluding that the borrowed funds were not utilized for non-business purposes. Final Judgment: - The appeal of the assessee was allowed, with the Tribunal ruling in favor of the assessee on both issues. The order was pronounced on June 7, 2019, at Chennai.
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