Dynamic Ltd., an Indian company, took on lease a commercial premises for its operations. After some years, the company decided to vacate the…

CA Final · Direct Tax Laws and International Taxation · RTP · November 2024
Dynamic Ltd., an Indian company, took on lease a commercial premises for its operations. After some years, the company decided to vacate the premises and relocate to a new location. However, disputes arose with the lessor regarding the terms of vacating the premises. To resolve the dispute and avoid prolonged litigation, Dynamic Ltd. agreed not to claim the security deposit of 3.4 crores it had initially paid to the lessor at the start of the lease. Whether the amount of security deposit foregone by Dynamic Ltd. allowable as deduction while computing business income?
(A) Yes, allowable as deduction as such expenditure is of revenue nature and incurred on account of dispute
(B) No, deduction would not be allowed as such expenditure is of capital nature
(C) Yes, allowable as deduction over the five years period
(D) Yes, allowable as deduction since the amount of foregone security deposit becomes the income of lessor.

Suggested Answer and Working Notes:

Correct Answer: Option (B)

No, deduction would not be allowed as such expenditure is of capital nature

Topics: Double Taxation Relief, Non-Resident Taxation

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