Case Law Details
The brief facts are that assessee engaged in the business of Super Market/Hyper Market filed its original return of income on 15.10.2010 declaring loss of Rs.13,87,46,874/- which was revised to Rs.14,20,95,245/- by filing revised return on 24.01.12. The assessment was completed u/s 143(3) on 20.12.2012 determining the loss at Rs.13,77,94,205/- and while completing the assessment the Assessing officer disallowed sundry balances written off of Rs.43,01 ,040/-. The assessing officer in the assessment proceedings noticed that assessee has debited a sum of Rs.43,01 ,040/- in P&L A/c on account of sundry balances written off. The AO noticed that this amount represents deposit given to the lessor in respect of Dev Arcade Property at Ahmedabad, which was taken on lease by the assessee for its hyper market business. He noticed that the lessor Devdip Arcade (P) Ltd. has forfeited this deposits from the assesee and was of the view that since security deposit given by the assessee is not revenue expenditure right off of this amount by the assessee is not an allowable expenditure. The assessee contended before the AO that since it could not obtain all the necessary licenses required for running hyper market store in the leasing premises, it had to curtail the area from which the business was to be carried on and ultimately it had to shut the store as per the notice issued by the concerned department to avoid penal action. Assessee contended that the lessor completely ignored its application and various warnings from the fire department which was brought to their notice and with the result assessee had to show that the lessor did not comply with various clauses of the terms and conditions of the lease deed. It was also contended that assessee has terminated the lease and demanded compensation of Rs.3.56 crores form the lessor. The asessee contended that the deposit written off should be allowed as revenue expenditure. It was further contended that security deposit was adjusted against the outstanding rent and other charges therefore should be allowed. Further the assessing officer disallowed the right off of security deposit holding that deposit was given against lease of property therefore is capital deposit and it cannot be revenue expenditure. The CIT(A) sustain the disallowance holding that it is not allowable u/s 36(1)(vii) as bad debt and further held that since it is not allowable as bad debt the same is also not allowable expenditure u/s 37(1).
The AO while completing the assessment disallowed the write off of security deposit treating it as capital deposit and by observing that it cannot partake the nature of revenue expenditure. He also observed that this deposit was not offered as income in the books of account and the transaction of passing security deposit is a capital transaction and does not qualify the basic condition that it was credited as income in the past. The AO ignored the contention of the assessee that security deposit was adjusted against the outstanding rent and other charges and therefore should be allowed as revenue expenditure. Ld. CIT(A) sustained the disallowance holding that it is not a write off bad debt, not allowable u/s 36(1)(vii) and also not allowable expenditure u/s 37(1) of the Act. We find that the assessee terminated the lease agreement which was entered into by it with the lessor for the reason that assessee could not continue the business in the said premises as the lessee could not comply with the terms and conditions of the lease agreement and also the assessee could not obtain necessary permissions from various Government authorities. Both lessor and the assessee entered into deed of cancellation of lease deed on 20.07.2009 for termination of the lease deed entered into on 07.06.2008 and agreed to terminate and cancel the lease deed w.e.f.30.06.2009. In the cancellation deed it was specifically agreed that security deposit paid by the assessee to the lessor has been adjusted towards outstanding rent, taxes, charges, electricity bills, telephone bills, and other charges upto 30th June, 2009 and there is no outstanding amount to be paid or refunded. The assessee has also break up of rent outstanding for seven months i.e. from December 2008 to June 2009 at Rs.75,26,820/- which is at page no.2 of the paper book. Ld. Counsel submitted that though the AO has mentioned that these details are not available that were submitted in the course of assessment proceedings and also in the course of appellate proceeding before CIT(A).
Taking the totality of facts and circumstances into account we are of the considered view that the security deposit has to be adjusted against the rent payable by the assessee and this has already been done by entering into cancellation agreement wherein clause 2 of the cancellation deed specifically mentioned about adjustment of security deposit against the rent payable by the assessee. The details filed by the assessee also suggest that the rent payable by the assessee far exceed security deposit and hence no disallowance is required to be made by the AO. Thus, we directed the AO to delete the disallowance.
