Forfeiture of Earnest Money/Security Deposits allowed as Deductible Income Tax Expense

Is it possible for the hotel to legitimately classify these losses as “bad debts” or business failures to reduce its tax liability?

Fact of the Case

The assessee, M/s Unison Hotels Pvt. Ltd., operates The Grand Hotel in New Delhi. In the 2014-15 assessment year, the company wrote off about Rs. 4.90 crore as ‘advances written off.

This included Rs. 3.27 crore for a security deposit to M/s Gomti Food Spices for a failed restaurant project due to a fire, Rs. 1.50 crore loan to Mr. O.P. Parasrampuria in 1995-96 for discounted fabrics, and Rs. 11.06 lakhs for an unsuccessful joint venture to acquire cheaper natural gas for hotel operations.

Issue of this Case

Whether the advances written off are deductible as bad debts or business losses under Sections 36(1)(vii), 28, or 37(1) or  if they are non-deductible as the assessee is not a money lender and the payments were capital or personal in nature?

Decision of the Tribunal

The ITAT partially approved the appeal, recognising the losses from the security deposit (Gomti Food Spices) and gas bid (Sankalp Oil) as deductible business losses related to hotel operations.

However, it upheld the rejection of the Rs. 1.50 crore advance to Mr. O.P. Parasrampuria, saying it as a personal loan due to the absence of documented business reciprocity over twenty years.