Writing off security deposit is allowable if Co. discontinued its business for which such deposit was made: HC

Case Details:CIT v. Pricol Ltd. - [2021] 130 taxmann.com 459 (Madras)

Judiciary and Counsel Details

• • T.S. Sivagnanam and Sathi Kumar Sukumara Kurup, JJ.
  • Ms. K.G. Usha Rani, Jr. Standing Counsel for the Appellant. 
  • R. Meenakshi Sundaram for the Respondent.

Facts of the Case

Assessee-company was engaged in the business of manufacturing Dash Board instruments, sensors accessories, auto components, etc. The assessee had deposited a sum of Rs. 6 Crores as security with M/s. Terra Agro Technologies Ltd. for leave and license operations to take over its operations for a period of 24 months.

However, the assessee was able to carry on the business only for six months; it suffered loss and business could not be continued thereafter. Thus, the assessee wrote off the said security deposit paid to M/s. Terra Agro Technologies Ltd. as an irrecoverable security deposit for the previous Assessment Year.

The Assessing Officer (AO) disallowed the return of income on the ground that it was not incurred in the course of the assessee’s business and it was a capital item reflected in the assessee’s balance sheet. Against such order, the assessee preferred an appeal to the CIT(A), which was dismissed. However, the Tribunal had allowed relief to the assessee. Aggrieved revenue filed the instant appeal before the Madras High Court.

High Court Held

The Madras High Court upheld the order of Tribunal wherein it was held that as per the terms of the agreement, the assessee was to continue with operations for at least 24 months. But, when the assessee had discontinued the operation before the expiry of terms of the agreement, that would certainly disentitle the assessee for claiming the security deposit which was made for the performance of its obligation under the agreement.

On the foreclosing of the agreement by the assessee before the expiry of its terms made the assessee disentitled from recovering the deposit, and the same stands forfeited in view of the terms and conditions of the agreement.

In these facts and circumstances, there was no hesitation in holding that the security deposit made by the assessee was for the purpose of the business of the assessee, and non-recovery of security deposit would be a business loss allowable under section 37.