Forfeiture of Security Deposit shall be treated as Capital Loss: ITAT grants relief to Ebony Retail [Read Order]

ITAT - forfeiture - Security Deposit - Taxscan

The Income Tax Appellate Tribunal (ITAT), Delhi Bench while upholding the order passed by the CIT(A) held that disallowance made on account of forfeiture of security deposit being treated as capital loss not sustainable.

The assessee, M/s. Ebony Retail was disallowed the amount of Rs.67,46,470 made on account of forfeiture of security deposit treating the same as capital expenditure by the AO.

The assessee agitated the addition before the Ld. CIT(A). It was observed that the security deposit for the premises in Lucknow, Indoor and Delhi were forfeited as the assessee-company could not manage to open the stores. The impugned amount was treated as revenue loss and debited in the books of account of the assessee.

Consequently, the CIT(A) noted that the forfeiture of the earnest money deposit has occurred during the course of business activities carried on by the assessee-company and hence, it is a case of business loss.

The revenue contended that the assessee-company is not doing any business of real estate or rental. Therefore, the security advance given to the lessor is capital expenditure.

However, the assessee contended that the allegations of the AO were that the assessee did not file documentary evidence in support of the contention which fact is incorrect. He has referred to the replies filed before AO, copies of which were filed in the paper book along with copies of the agreements and submitted that since the assessee did not continue with the rental property, therefore, security deposit given were forfeited.

The two-member bench of B.R.R. Kumar and Bhavnesh Saini noted that the assessee- company filed sufficient documentary evidence before AO, which have not been properly considered and at the appellate stage the A.O. did not rebut the submissions of the assessee-company to prove that security deposit was forfeited which is a business loss as the same was arising out of the business activities of the assessee.

“The CIT(A), therefore, correctly following the material on record in proper perspective, rightly deleted the addition. We do not find any infirmity in the Order of the Ld. CIT(A) in deleting the addition,” the tribunal said.

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