Apollo Munich Health Insurance Company Ltd. Vs DCIT (ITAT Hyderabad)
Rental advance, when it becomes unrecoverable, it becomes the business loss and not capital loss. But in the given case, it is not unrecoverable but it was adjusted towards agreed rent for lock in period as per agreement between the assessee and landlord. Therefore, in our considered view, the assessee has taken conscious decision to vacate the leased property and as per agreement, assessee has obligation towards lock in period as per the lease agreement. Therefore, the negotiated settlement for the lock in period can only be treated as business loss as the premises was taken on rent for the purpose of business.
The facts in the case of Triveni Engg. Industries Ltd. (supra) were that the company was amalgamated and in the amalgamated company, advances given for securing the premises could not be recovered. Therefore, the unrecovered advances of rent was not allowed as revenue in nature. But, in the given case, it was recovered and settled for the rent for lock in period. Therefore, it is distinguishable on facts to the case of the assessee. Hence, the grounds raised by the assessee are allowed.
FULL TEXT OF THE ITAT JUDGMENT
This appeal filed by the assessee is directed against the order dated 25/07/2017 of CIT(A) – 1, Hyderabad for AY 2010-11.
2. Brief facts of the case are, the assessee company engaged, in the business of health insurance, filed its return of income for the A.Y. 2010-11 on 27.09.2010 declaring a loss of Rs.91,32,94,819/- for the AY 2010-11. The case was selected for scrutiny and the assessment was completed u/s.143(3) on 13.03.2013, determining the loss at Rs.91,31,88,142/-. The CIT-1, Hyderabad found that the order passed u/s.143(3) dated 13.03.2013 was erroneous and prejudicial to the interests of revenue. The CIT-1, Hyderabad passed an order u/s.263 dated 16.12.2014, setting aside the order of the Assessing Officer. The Assessing Officer completed the assessment u/s.143(3) r.w.s.263 on 29.01.2016 by making addition of Rs.3,51,40,716/- towards write off of rent deposits.
2.1 During the assessment proceedings, Assessing Officer issued notices u/s.143(2) and u/s.142(1) calling for information regarding the claim of ‘write off of rent deposit of master piece building’ of Rs.3,51,40,716/-. In response to the notices, the Assessee submitted that it had appropriated security deposits towards the rent payable to the landlord M/s. Finest Promoters Pvt Ltd for the remaining period of lock-in-period treating it as revenue expenditure. The security deposit was given by the assessee in terms of the lease deed and was for the purposes of taking the premises on lease. The fact that the lease has been cancelled does not change the nature and purpose for which the deposit was given it will still be treated as intimately connected with smooth operations of Assessee Company. The assessee further stated that it was wrongly described the transaction as write-off of the security deposit, however, in substance, it was only a manner of settlement of rent payable by the assessee towards unexpired lock-in- period of lease and incidental to business of the assessee.
2.2 The Assessing Officer not accepted the assessee’s submissions. The Assessing Officer concluded that the security
deposits given by the assessee for securing the premises on rent are not given as part of the regular business, but by making refundable security deposit. The Assessing Officer also concluded that the assessee had obtained right to use the property (tenancy right) which is a capital asset, as per Section 55(2) of the IT Act, the tenancy right is a capital asset. Therefore, the write off of rental deposit cannot be construed as Revenue Expenditure. The Assessing Officer relying on the decision of Hon’ble High Court in the case of CIT Vs. Triveni Engineering Industries Ltd in 343 ITR 245 disallowed write off of rent deposit amounting to Rs.3,51,40,716/- .
3. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A).
4. Before the CIT(A), the assessee submitted that it had entered into an agreement titled “Lease Deed” with Finest Promoters Private Limited for the purposes of taking the premises “The Masterpiece” owned by Finest on lease for carrying out its business operations from the said premises. The assessee submitted that as per terms of Lease agreement, the assessee had paid Interest Free Security deposit to M/s. Finest Promoters Private Ltd of Rs.3,51,40,716/- which was refundable to the assessee company on event of expiry/cancellation of lease deed. The Assessee submitted that it had given notice to M/s. Finest Promoters Pvt Ltd for vacating the premises from 30.11.2008 and at the time 35 months period was remaining considering the Lock-in-period of 4 years and 6 months as defined in Lease deed. The assessee submitted that M/s. Finest Promoters Pvt ltd has to pay Rs.10,28,43,755/- towards rent for the unexpired period of lock-in-period i.e., 35 months. The assessee submitted that it negotiated with M/s. Finest Promoters pvt. ltd to waive off the said minimum lease payment. After negotiations with landlord to reduce the rent payable for lock-in-period and it was agreed among the parties that appropriation of Security deposit
against the minimum receivable by landlord would be made for negotiated amount instead of cash payment by the assessee and security deposit appropriation was agreed as follows:
