Thunder Ltd., an Indian company, had taken on lease a commercial premises for its operations, with an initial security deposit of 4.2 crores paid to…

CA Final · Direct Tax Laws and International Taxation · MTP · May 2025
Thunder Ltd., an Indian company, had taken on lease a commercial premises for its operations, with an initial security deposit of 4.2 crores paid to the lessor at the start of the lease agreement. After several years, the company decided to vacate the premises and relocate to a new location. However, a dispute arose between the company and the lessor concerning the terms for vacating the premises. To avoid prolonged litigation and expedite the resolution of the issue, Thunder Ltd. agreed to forgo the security deposit of 4.2 crores. Whether the amount of security deposit foregone by Thunder 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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