2022 (3) TMI 168 - AT - Income Tax

Nature of expenditure - non-recovery of security deposits provided to the landlords written off in the books of account are to be treated as a revenue expenditure - HELD THAT - The assessee is dutybound to make the rent payment every month/year and the same has been claimed as a revenue expenditure in the books of account and allowable under the Act. We find the security deposits takes the character of assurance and the enduring benefit only if there is direct benefit obtained. But in the present case, the security deposit is provided to landlord and at the same time the assessee is paying the rent. The security deposit cannot be considered as an enduring benefit to the assessee as the rent is being paid. The situation changes if the assessee has provided only security deposit and no rent has been paid. The assessee has provided the security deposit and has been paying the rent regularly. We applying the principles of going concern concept, compare with the debtors, when the recovery is doubtful the claim is written off as bad debts in the profit and loss account. Assessee claim can be allowed as a revenue expenditure in this year and in future if the assessee could able to recover the money from the landlord in the legal suit or any other mode the same has to be offered as an income of the assessee. Accordingly, we set aside the order of the CIT (Appeals) and direct the AO to delete the addition and allow the grounds of appeal of the assessee.

Summary

Issues:
1. Disallowance of business deposits/advances written off during the year.

Analysis:
The assessee, a private limited company engaged in various financial services, filed an appeal against the Commissioner of Income-tax (Appeals) order confirming the disallowance of a specific amount out of total business deposits/advances written off during the year. The Assessing Officer found that the assessee had written off deposits and advances amounting to a certain sum, which the assessee claimed were for business purposes and could not be recovered. The Assessing Officer disallowed the entire amount, leading to the assessment of a total loss. The Commissioner of Income-tax (Appeals) partially allowed the appeal, reducing the disallowance to a lesser amount. The Tribunal considered the disputed issue of write-off of deposits provided to landlords for office branches. The authorized representative argued that the advances were for opening branches and were revenue expenses, not capital expenditure. The Tribunal noted that the recovery of security deposits written off in the books of account should be treated as a revenue expenditure, as the funds were utilized for business purposes. The Tribunal found that the security deposits were disclosed in the audited financial accounts and were essential for securing tenancy rights. It concluded that the claim should be allowed as a revenue expenditure, directing the Assessing Officer to delete the addition and allow the grounds of appeal of the assessee.

Overall, the Tribunal allowed the appeal filed by the assessee, emphasizing that the security deposits were necessary for business operations and should be treated as revenue expenditure. The Tribunal's decision highlighted the distinction between capital and revenue expenditure in the context of security deposits provided to landlords for office branches, ultimately ruling in favor of the assessee and directing the deletion of the addition made by the Assessing Officer.