TMI Blog2014 (6) TMI 498X X X X Extracts X X X X X X X X Extracts X X X X ..... owners of the property – Held that:- The acquisition of premises on lease was not ordinarily be in the capital field as the monies are advanced for the purpose of running business - advances even if crystallized would not result in any capital asset - the advances are made in the course of assessee’s business on which assessee did earn incomes, premature closure of lease agreements resulted in forfeiture of deposits - the rentals paid are on revenue account, the forfeiture of the deposits in the rentals also shall be on revenue account - the write off of deposits is to be allowed as loss to assessee in the course of its business – Decided in favour of Assessee. Advance written off as not recovered – money paid for advertising contract – Held that:- There is nothing on record to notice whether the advances and deposits were made as part of obtaining advertising space or for doing any project or for any other purpose of acquiring asset/business - It is also not on record whether the said company is sister concern or not - There is nothing on record to consider why the contracts have been cancelled and assessee has to forego the amounts - CIT(A) did not analyse the claim, thus, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into contracts with various organisations for utilising space for advertisement, that it had made earnest money deposits for the purpose, that the charges had to be paid whether assessee was able to generate revenue or not, that assessee was unable to generate enough revenue and decided to terminate the business altogether. In the process, assessee had to forego earnest money deposit and advance payments made. Assessee relied on the following decisions : (1) CIT vs. Textool Co. Ltd. 135 ITR 200 (2) Thackers H.P. Co. vs. CIT 134 ITR 21 (3) JSW Steel Ltd. vs. ACIT 9 taxmann.com 77 (Bang.) 5. Ld. CIT(A) while analyzing various case law came to the conclusion that deposits written off were capital in nature. The detailed order on this issue is as under : 7.2. I have given the matter due consideration. While deciding a similar Issue, the Supreme Court, In the case of CIT Vs. Naintal Bank Ltd. [1965] 55 ITR 707 (SC), held that every loss is not deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. This was the case of a banking company and the court held that the loss of cash in a dacoity was incidental to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... license granted to it. The assessee had been unable to utilize the license in full as a result of which the premium to the extent of the shortfall stood forfeited. The court held that when the assessee claims a business loss, the main question to be considered is whether the loss is incidental to the business. It approved of the Tribunal s finding that the deduction claimed in writing off the forfeited amount was in the course of said incidental to the assessee s business and therefore deductable to its total income. 7.7. The decision in this case has been rendered in favour of the assessee on the basis of the specific facts of the case. The premium paid by the assessee was in the course of the business which prompted the court to allow the assesse3e s appeal. The decision acknowledges the principle that a loss of the forfeited amount can be allowed only when the expense has been incurred in the course of and is incidental to the business. In the appellant s case, as already observed, the expense had been incurred for acquisition of a profit-earning apparatus and was therefore, not an expense incidental to the business. This decision cannot, therefore, be said to be supportive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re based on the period of time and the charges have to be paid to these agencies, whether the bidder has generated revenues or not. All these bids are backed by bank guarantees and advance payments to the respective agencies. Even after the company putting its best efforts, it did not find the clientele to advertise at these higher rates. Consequently, the company has to meet monthly/quarterly lease rentals to all these agencies without generating sufficient revenues to meet the fixed lease rental apart from the other over heads like salaries, branch office expenses, travelling expenses etc,. The management has taken a view to close down the operations immediately to contain further losses and opted for termination of contracts. Thus, the company has to forego all the EMD s, deposits and advance payments made to various agencies. The company had aggregated all such deposits under Advances written off and debited the same to the P L account. Ld. Counsel placed on record details of various tendered documents along with EMD placed as under :- 6.1. Ld. Counsel submitted that assessee has to submit the tenders also with security deposits which are likely to be forfeited unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.2. Since the security deposits and earnest money deposits made did not give any enduring advantage or capital asset and the amounts were written off in the course of assessee s business, the same are to be considered as incidental to the business. Expenditure was not incurred for acquisition of any profit earning apparatus as wrongly observed by the Ld. CIT(A). Therefore, relying on the principles on the issue, we uphold assessee s contentions and direct the A.O. to allow the above amount. Accordingly, Ground No.2 of assessee is allowed. 9. Ground No.3 pertains to disallowance of sum of Rs.53,33,000/- being expenditure written off which represented forfeiture of rental deposit by the owners of the property. Here also, assessee opened Study Abroad Division during A.Y. 2008-09, earned an amount of Rs.1.38 crores from the division. However, during the year, the receipts were only Rs.8.20 lakhs. It was submitted that with a view to expand the study abroad even in various cities, assessee incurred expenditure towards rental deposit and interiors of premises. The advances written off included sum of Rs.53,33,000/- being rental advances given to owners of properties. Since these re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is allowed. 12. Ground No.4 pertains to sum of Rs.75 lakhs being advance paid to M/s. Shreya Broadcasting Corporation towards advertising contract and written off by assessee as not recovered. Assessee paid sum of Rs.75 lakhs to the above said company towards advertisement contract of which sum of Rs. 25 lakhs was refundable security deposit and the balance Rs. 50 lakhs was advanced. Since the business with this concern was terminated abruptly, entire amount of Rs. 75 lakhs had been written off. Ld. CIT(A) vide para 9.2 briefly noticed that circumstances and the manner in which these advances/deposits were made are similar to those relating to advance for obtaining advertisement space (contested in Ground No.2). Accordingly, CIT(A) upheld disallowance made by the Assessing Officer. 13. It was submitted that forfeiture of deposits and advances due to unavoidable reasons which are beyond control of assessee are allowable as business deduction. Assessee relied on the settled position of law and also invited attention to decision in the case of Fab India Overseas ITA.No.199/Del/2012. While admitting that on principles of law, the amount is allowable as loss to assessee, as CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tible expenditure. Assessee relied on the case of ACIT vs. Set India (P) Ltd. 3 ITR (Trib.) 454 (Mum.) for the proposition that any expenditure incurred on leased premises will be in the nature of revenue and therefore, liable to be allowed as deduction. Assessee also relied in principles laid down in the case of IBM world Trade Corpn Vs CIT( supra) that expenditure is of revenue nature. Ld. CIT(A), however, did not agree and for the reasons stated in earlier grounds, held that amount is capital loss and therefore, cannot be allowed. In order to consider the allowance of this expenditure, it is, necessary to examine the agreements with the lease holders. In the case relied upon by assessee i.e., ACIT vs. Set India (P) Ltd (supra), there is a finding that expenditure has resulted in third party assets and more so, the agreements stipulates that assessee was not entitled to remove any of the additions and alterations of permanent nature made to the property. However, as seen from the details of payments made, some of them are for purchase of machinery, some of them are acquiring certain intangible rights and some amounts are for interior works. Whether interior work was undertaken or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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