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2015 (12) TMI 353 - ITAT HYDERABAD

2015 (12) TMI 353 - ITAT HYDERABAD - TMI - Disallowance of bad debts relating to write off of rental advance - whether the rental advance given by assessee whether a capital asset or revenue asset? - Held that:- The admitted facts of the case are that as the rental advance given by the assessee as security deposit to the lessor M/s Chettipunyam Properties Pvt. Ltd. for taking their premises on lease vide lease agreement dated 24th June, 2005 for manufacturing of garments, no doubt, it is for the .....

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to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and 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.

It is clear that this advance payment was not for the normal course of business/trade. Since the capital asset is created, the same cannot be treated as revenue loss but capital loss. - In the ot .....

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benefit u/s 80IB.

Coming to the income from insurance, the undertaking claimed loss from insurance company, it is nothing but compensation for the finished goods lost after manufacturing in the undertaking and during transit. It is similar to the scrap sales income derived as part of the industrial process. Similarly, the insurance income derived due to loss of manufactured finished goods. Hence, it is entitled to claim benefit u/s 80IB.

With respect to other income like i .....

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ur Rahaman, A. M. This appeal by assessee is directed against the order dated 31/01/2012 of ld. CIT(A) - IV, Hyderabad for the AY 2008-09. 2. Briefly the facts of the case are that assessee is engaged in the business of manufacture of asbestos sheets, synthetic blended Yarn and Garments. Assessee filed its return of income and declared total income of ₹ 16,56,27,491/-. The assessment was completed u/s 143(3) of the Income-tax Act (Act) on 22/12/2010 determining taxable income of ₹ 17 .....

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ave appreciated the fact that in the earlier years rent paid was allowed as revenue expenses, therefore on the same analogy advance rent given as rent deposit being forfeited/ irrecoverable ought to have been allowed as business expenses. 3. The CIT (A) based on the facts of the case and circumstances of the case should have allowed the write off of the advance rent as revenue expenses in the year of vacating the premises taken on rent or termination of the agreement . 4. The CIT (A) ought to ha .....

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os. 1 to 3 regarding disallowance of bad debts claim of ₹ 7,65,028/- relating to rent deposit, the assessee had debited ₹ 7,65,028/- towards non-recovery of rent deposit. Subsequently, in reply to AO s enquiry, Assessee submitted a copy of the ledger account along with a copy of letter dated 20/02/08 addressed by it to M/s Chettipunyam Properties P. Ltd. requesting them to return the security deposit. The AO observed that the assessee had only written a letter in the last week of Feb .....

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sessee to write off the unrecovered rental advance. 4. On appeal, before the CIT(A), the AR of assessee contended that the AO had not disputed that the amount of ₹ 7,65,028 being rent deposit was not recoverable. He submitted that the premises had been vacated and all rents were also paid. The premises was taken for the purpose of business and such non-recovery of deposit amounts to bad debt. The payment of rental deposit was exclusively for the purpose of business and hence allowable. 5. .....

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emises on rent. The CIT(A), therefore, following the decision of the Hon ble Delhi High Court in case of CIT Vs. Triveni Engg. and Industries Ltd., [2010[ INDLAW DEL 2397, dtd. 14/09/10, held that the loss on account of non-recovery of rent deposit of ₹ 7,65,028 was not in the nature of a revenue loss allowable as a deduction. 6. Aggrieved by the order of CIT(A), the assessee is in appeal before us. 7. The ld. AR filed a petition for admission of additional evidence. Since the assessee cou .....

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y deposit of ₹ 30 lakhs as per the agreement filed. . Ld. AR drew our attention to lease covenants, point No. F of the lease agreement wherein lessee cannot assign, sublet or part of the demised premises or any part thereof except to their sister concerns. Ld. AR submitted that this lease was taken only for the purpose of business and paid rent for the same claiming it as revenue expenditure. It does not create any capital asset since the lease was conditional as enumerated from clause f ( .....

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ecision of the Hon ble Delhi High Court in the case of Triveni Engg. Industries Ltd. (supra) and the order of CIT(A). He submitted that the property taken on lease gives right of occupancy exclusively and thereby creates a capital asset, hence, writing off such advance as non-recoverable amounts to capital loss. 9. We have heard the arguments of both the parties and perused the material on record as well as the orders of revenue authorities. We have also applied our mind to the decisions cited a .....

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ated. As per the ratio laid down in the case of Triveni Engg. (supra), capital asset is created, not the revenue asset. The submissions made by the ld. AR relying on the other judgments; In the case of LG Soft India Pvt. Ltd. (supra), the assessee paid rent free advance to obtain permissive use or licence to use premises. This was not the case in the present appeal on hand. The Appollo case is not subject under consideration. Since the ratio laid down were, which reconfirms the provisions that w .....

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, the Hon ble Supreme Court has held as under: The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, expres .....

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e claim of deduction u/s 80IB raised in ground Nos. 4 & 5, the AO noticed that while calculating the profits eligible for deduction u/s 80IB, the assessee had considered the other income of ₹ 22,56,743/- as eligible income u/s 80IB also. He opined that since such other income was not derived from the business of the assessee, the same was not eligible for claim of deduction u/s 80IB. The assessee contended that the other income was generated out of normal course of business. However, t .....

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re derived from the business of the assessee . He, therefore, argued that the same should have been included for the purpose of calculation of deduction u/s 80IB. 12. After considering the submissions of the assessee, the CIT(A) following the decisions of the ITAT and the decision of the Hon ble Supreme Court, held that since the assessee could not establish that the scrap or broken/damaged sheets were generated from the industrial operations of the assessee company only, the other income on thi .....

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g Ltd., 336 ITR 444 (Del.) 15. The ld. DR, on the other hand, relied on the orders of the revenue authorities. 16. We have heard the arguments of both the parties and perused the material on record as well as the orders of revenue authorities. We have also applied our mind to the decisions cited. The AO disallowed the claim of assessee u/s 80IB by holding that other income was not derived from the business of assessee. The CIT(A) confirmed the action of the AO. 16.1 The cases referred by the ass .....

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