TMI Blog2022 (3) TMI 1332X X X X Extracts X X X X X X X X Extracts X X X X ..... letter of intent. As per the termination clause of the letter, in case the lease has been terminated by the lessee, the entire amount of security deposit shall be forfeited by the lessor - HELD THAT:- As gone through the judgment in the case of Badridas Daga [ 1958 (4) TMI 2 - SUPREME COURT] wherein it was held that the profit to be assessed are the real profits and they must be ascertained on ordinary principles of commercial training and commercial accounting. The profit should be computed after deducting losses and expenditure incurred for the purposes of business unless such losses or expenditure are expressly, or by necessary implication, disallowed by the Act. Hon'ble Supreme Court in the case of CIT vs. Nainital Bank Ltd.[ 1964 (9) TMI 11 - SUPREME COURT] wherein it was held that under section 28, the trading loss of a business is deductible in computing the profits earned by a business. Every loss is not deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. Whether loss is incidental to the operation of a business or not, is a question of fact to be decided on facts of each case, having regard to the na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer and reached a factual finding that the assessee could not have conducted their business with the trademark of 'Benetton' without making the impugned payments and as a matter of fact the assessee had been using the technical know-how developed by the associated enterprise in its manufacturing activities on account of use of trademark and technical know-how. Further Ld. CIT(A) followed the decision of the Tribunal in assessee's own case for the Assessment Year 2006-07 which was followed by the Ld. CIT(A) for the Assessment Years 2007-08 to 2009-10. Ld. AR also produced copy of the order dated 27/10/2017 in assessee's own case for the Assessment Year 2009-10 in ITA No. 4229/Del/2014 wherein the identical issue was dealt with and answered in favour of the assessee. 8. We have gone through the record in the light of the submissions made on either side. Having considered the facts in their entirety, Ld. CIT(A) found that the entire sale of the 4 assessee has been due to the use of the brand name Benetton and the assessee has been using the technical know-how developed by the AE in its manufacturing activities on account of use of trademark and technical kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial change in the factual matrix and legal proposition, we decline to interfere with the order of the ld. CIT(A). Security deposit written off: 7. During the year, the assessee has entered into a letter of intent for obtaining shops on lease. As per this letter, the assessee was required to pay security deposits at the time of executing this letter of intent. As per the termination clause of the letter, in case the lease has been terminated by the lessee, the entire amount of security deposit shall be forfeited by the lessor. 8. The advances given are as under: Parties Advances written off in AY 2012-13 (Rs.) VastrapurLake, Ahmadabad 3,06,900 Empress City, Nagpur 4,31,917 PondaRoad, Goa for Ucb 3,01,056 Ponds Road, Goa For Sisley 94,580 Total 11,34,452 9. Owing to certain business reason and as per the management decisions, the assessee has terminated these letters of intent and resultantly the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear was unexplainable and suspicious as normally the tenant is at liberty to adjust the security deposit against last month rental before vacating the premises. The Ld. Assessing Officer also held that said written off was not allowable under section 36(1)(vii) of the Act as the said amount was not in the nature of trading liability and not declared as income in any of the previous years. In view of the observations, he disallowed the claim of the assessee and added the amount of ₹ 26,93,019/- to the loss declared by the assessee. Aggrieved, the assessee filed appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee filed copy of rent agreements entered into between the assessee and the landlords of premises as additional evidences for admission under Rule 46A of Income-tax Rules, 1962 (in short 'the Rules') along with other information and claimed that payments were made by the assessee to take the premises on rent to run its business and the assessee was required to pay the landlords the amount of security deposit with reference to agreed rent per month. According to the assessee, it was rent paid in advance in respect of the premises which was vacated, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .... 15. Coming to the security 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 ass essee 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. The action of the AO in disallowing the claim of write off of security deposit of ₹ 26,93,019/- is therefore, upheld and the addition is confirmed. These grounds of appeal are ruled against the appellant. 2.1 Aggrieved with the above finding of the Ld. CIT(A), the assessee in appeal before the Tribunal raising the grounds as reproduced above. 3. Before us, the Ld. counsel filed a paper book containing pages 1 to 394 and referred page 41 to 314, which are copy of various rent agreement in respect of the premises taken on lease. The Ld. counsel relied on the decision of the Tribunal, Delhi Benches in the case of Fab India Private Limited Vs. ACIT in ITA No. 119/Del/2012 and 672/Del/2012 for assessment year 2008- 09, wherein the loss of security deposit has been held as business loss in the revenue field. The Ld. counsel also relied on the decision dated 20/05/2014 of the Tribunal of Hyderabad bench in the case of Social Media India Vs. ACIT in ITA No. 390/Hyd./2013 for assessment year 2009-10. The Ld. counsel also referred to the decision of the Hon'ble Supreme Court in the case of Empire Jute Industries, reported in 124 ITR 1 (SC). 4. The Ld. cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al contentions and perused the orders of the CIT(A). Following the principles relied upon in earlier ground, Ld. CIT(A) in this case also held that advances are not revenue expenses and the liability to incur expenses has not accrued until the time liability arises the advance remains in capital field, written off of such amounts was not allowed as revenue loss. On considering the principles on the issue and the decision relied upon, we are of the view 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. Thus, advances even if crystallized would not result in any capital asset. Since these 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. Since the rentals paid are on revenue account, the forfeiture of the deposits in the rentals also shall be on revenue account. Therefore, we are of the opinion that the write off of deposits is to be allowed as loss to assessee in the course of its business. Therefore, A.O. is directed to allow the above amount. Accordingly, Ground No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dinary course of business either. These were given for securing the premises on rent; albeit for the purpose of carrying on business therein. Once we keep in mind this true nature of deposits, we find force in the submission of Ms. Bansal, learned counsel for the Revenue. 17. We may point out that the assessee had relied upon the judgment of the Supreme Court in the case of Commissioner of Income Tax Vs. Madras Auto Service (P) Ltd. [233 ITR 468]. However, that judgment would not be applicable to the facts of the present case. The expenditure incurred on the construction of building on a leased property was treated as revenue expenditure by the Supreme Court, as the assessee was getting business advantage and was acquiring the business asset in the context of specific Clause in the lease deed. Therefore, the property was not treated as that of the lessor. Further, the Supreme Court found that by incurring the expenditure of this nature, the assessee had taken the advantage in the form of reduced rent for a much longer period. This judgment is, thus, not applicable in the present context. 18. In view of the above, this appeal is partly allowed, holding that the amount of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T (37 ITR 1) wherein it was held that the profit to be assessed are the real profits and they must be ascertained on ordinary principles of commercial training and commercial accounting. The profit should be computed after deducting losses and expenditure incurred for the purposes of business unless such losses or expenditure are expressly, or by necessary implication, disallowed by the Act. 14. The Hon'ble Supreme Court in the case of CIT vs. Nainital Bank Ltd., 55 ITR 707 (SC) wherein it was held that under section 28, the trading loss of a business is deductible in computing the profits earned by a business. However, every loss is not deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. Whether loss is incidental to the operation of a business or not, is a question of fact to be decided on facts of each case, having regard to the nature of the operation carried on and the nature of risk involved in carrying them out. The degree of the risk or its frequency is not much relevant but its nexus to the nature of the business is material. 15. Having gone through the entire judgments quoted by both the parties, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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