Rental Advance adjusted towards Negotiated Settlement for Lock in period is Business Loss: ITAT [Read Order]

Rental Advance - Taxscan

The Income Tax Appellate Tribunal (ITAT), Hyderabad has held that the rental advance adjusted towards the negotiated settlement for lock-in the period must be treated as Business Loss.

The Assessing Officer, while completing assessment against the assessee, disallowed the claim of ‘write off of rent deposit of masterpiece building’.

The assessee claimed that it was wrongly described the transaction as the 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 the period of lease and incidental to the business of the assessee.

Based on the judicial decisions, the Tribunal noted that the 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 the 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 the agreement, the assessee has the obligation towards lock-in period as per the lease agreement. Therefore, the negotiated settlement for the lock-in period can only be treated as a business loss as the premises was taken on rent for the purpose of business,” the Tribunal said.

The Revenue relied on the decision in Triveni Engg. Industries Ltd. Rejecting the contention, the Tribunal held that “the facts in the case of Triveni Engg. Industries Ltd. was that the company was amalgamated and in the amalgamated company, advances given for securing the premises could not be recovered. Therefore, the unrecovered advances in rent were 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.”

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