TMI Blog2010 (9) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... ary course of business either. These were given for securing the premises on rent; albeit for the purpose of carrying on business therein. - the amount of ₹ 15,34,951/- (towards security) was not a revenue loss, and therefore not allowable as deduction. - 56 OF 2009 - - - Dated:- 14-9-2010 - CORAM : HON'BLE MR. JUSTICE A.K. SIKRI HON'BLE MS. JUSTICE REVA KHETRAPAL Ms. Prem Lata Bansal, Advocate. Mr. Ajay Vohra with Ms. Kavita Jha and Ms. Akansha Aggarwal, Advocates. A.K. SIKRI, J. 1. This appeal pertains to the Assessment Year 2000-01. The respondent-assessee, for that year, filed the return declaring loss at ₹ 12.58 Crores. The Assessing Officer (AO) while making the assessment took note of the fact that the assessee had claimed a sum of ₹ 8.65 Crores as unrealizable assets written off and adjusted against the reserves in computation of income. The figure of unrealized assets written off included the following two sums: (i) Rs.15,34,951 representing security deposit, which was written off by the assessee as unrealizable; and (ii) Rs.5,18,380 which was the amount of advance given to various employees and the assessee had written off t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrying on of the business and were not incidental thereto, though it was admitted that the same may have some connection with the business. 5. Aggrieved by the disallowance, the assessee-company preferred appeal before the CIT (A). Before CIT (A), the assessee-company submitted that the security deposits were given for obtaining premises on rent and that the advances were given to employees in the course of carrying on of the business. The assessee triumphed in this appeal, as CIT (A) accepted the plea of the assessee that it had not advanced the amounts for securing capital assets, non-recovery of which could have resulted in capital loss. The CIT (A) was further of the opinion that non-recovery of security deposits and employees advances were directly linked with the business of the appellant and, therefore, the loss suffered as a result of writing off of the same was in the nature of business loss allowable under Section 28 of the Income Tax Act (hereinafter referred to as "the Act"). In this behalf, the CIT (A) observed: "The security deposits were made for obtaining contracts. The same were not advanced for securing of capital asset, non-recovery of which would have resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgued that this circumstance had not been established by the assessee and in these circumstances, Section 37(1) (vii) read with Section 36(2) is not applicable to the present case. She also argued that the security deposits were given by the assessee for obtaining the premises on rent. Thus, by making refundable security deposit, the assessee had obtained a right to use the property (tenancy right), which is a capital asset. Even otherwise, tenancy right is held to be a capital asset under the Income Tax Act, which is evident from Section 55(2) of the Act. Therefore, the CIT (A) and the Tribunal have erred in holding that the security deposits had been advanced for obtaining contracts. In fact, earnest money was deposited for obtaining contracts, which had already been allowed by the AO. In support of her aforesaid contentions, she referred to various judgments. The first case is the decision of the Supreme Court in the case of Badri Dass Daga (supra), wherein it has been held that mere connection with the business is not sufficient. The items in the present case had no connection with the trading activities of the assessee and therefore, the same could not have been allowed as tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 11. He also relied upon the judgment in the case of Abdullahbhai Abdulkadar (supra) wherein the Apex Court held that in case of loss arising out of advance made in a business or profession, the deciding point is whether advances are made for the purpose of business or profession or whether they are related to business or profession or result from it. While dealing with similar issue in the case of Commissioner of Income Tax Vs. Mysore Sugar Company Limited [46 ITR 649 (SC)], it was held by the Apex Court as follows: "8. To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are : for that was the money laid out ? Was it to acquire an asset of an endu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y deposit written off by the assessee, the moot question is as to whether the advances were given for securing the capital assets. It is not disputed by the Department that the payment of security deposit to landlords was for obtaining use of premises for the purposes of business against the payment of rent. The contention of the assessee, in this backdrop, is that this payment was clearly in the revenue field, viz., for facilitating carrying on of business more profitably and efficiently while leaving the fixed capital untouched. Learned counsel for the Revenue, however, argues that the security deposits were given for obtaining the premises on rent and thus, the assessee had obtained a right to use the property, i.e., tenancy right, which is a capital asset. 16. In order to appreciate the controversy, we may first state the true nature of this deposit. When the premises were taken on rent by the company, the payments in the form of security deposits were given to the land lords. Since the Rent Agreement entered into with the said landlords has not been produced, which could have shown the purpose for which security deposits were made, in the absence thereof, we presume that nor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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