The Delhi Bench of the Income Tax Appellate Tribunal has clarified that a business loss arising from the forfeiture of an earnest money deposit made in a joint bid for natural gas procurement, directly linked to core hotel operations, qualifies as a deductible revenue expenditure under Section 37 of the Income Tax Act, 1961. This decision reinforces the principle that the nature of the transaction, not its label, determines tax treatment.
Background & Facts
The Dispute
The assessee, M/s Unison Hotels Pvt. Ltd., operates a five-star hotel named 'The Grand' in Vasant Kunj, New Delhi. During the Assessment Year 2014-15, the Assessing Officer (AO) disallowed three separate write-offs totaling Rs. 6,88,22,860 as non-deductible expenditures. These included advances written off relating to (i) Rs. 3,27,56,000 paid as a refundable deposit to M/s Gomti Foods & Spices Pvt. Ltd. for a restaurant lease, (ii) Rs. 1,50,00,000 advanced to Mr. O.P. Parasrampuria for fabric supply, and (iii) Rs. 11,06,860 forfeited as earnest money deposit (EMD) in a joint bid for natural gas with M/s Sankalp Oil & Natural Resources Pvt. Ltd. The AO and the Commissioner of Income Tax (Appeals) [CIT(A)] held these amounts as capital in nature or not incidental to the hotel business, thereby adding them to the total income.
Key Facts
- The assessee filed its return for AY 2014-15 on 29.11.2014, declaring income of Rs. 7,21,35,196.
- The case was initially selected for limited scrutiny under CASS on 01.09.2015, later converted to complete scrutiny with approval from PCIT-9.
- The AO issued a notice under Section 142(1) on 30.08.2016 seeking details on the write-offs.
- The assessee submitted detailed explanations and documentary evidence for each write-off.
- The management passed a board resolution on 24.03.2014 to write off all three amounts, citing irrecoverability.
- The write-off of Rs. 3,27,56,000 arose from a refundable deposit of Rs. 4 crore paid to M/s Gomti Foods & Spices Pvt. Ltd. on 15.11.2007 for exclusive rights to renovate and operate a restaurant in a 2200 sq. ft. property at 4 Regal Building, New Delhi, for 20 years. A massive fire at The Grand on 26.01.2008 rendered the assessee unable to complete the renovation as stipulated. Despite repeated requests from 05.05.2008 to 12.09.2011, only Rs. 72.50 lakhs were refunded.
- The write-off of Rs. 1,50,00,000 related to an interest-bearing advance of Rs. 2.70 crore extended to Mr. O.P. Parasrampuria between 1995-96, of which Rs. 1.50 crore remained unpaid. The assessee claimed the advance was made to secure priority and discounted fabric supply for linen, curtains, and bed sheets. However, no fabric was ever delivered, and the repayment of partial amounts by Mr. Parasrampuria undermined the business nexus.
- The write-off of Rs. 11,06,860 resulted from an EMD of Rs. 10 lakh (in the form of two fixed deposits) paid jointly with M/s Sankalp Oil & Natural Resources Pvt. Ltd. to the Directorate General of Hydrocarbon, Ministry of Petroleum and Natural Gas, for participation in a tender for natural gas supply. The bid was unsuccessful, and the EMD was forfeited on 30.05.2013. The interest of Rs. 1,06,860 accrued on the FDRs was also forfeited. The assessee had submitted correspondence dated 10.02.2011 and 01.03.2011 evidencing the joint bid and its purpose.
Procedural History
- 29.11.2014: Assessee filed return for AY 2014-15.
- 01.09.2015: Notice under Section 143(2) issued.
- 30.08.2016: Notice under Section 142(1) issued.
- 23.12.2016: AO passed assessment order disallowing the three write-offs.
- 12.08.2024: CIT(A) upheld the disallowances.
- 19.01.2026: Hearing before ITAT Delhi.
- 20.04.2026: ITAT pronounced order.
Relief Sought
The assessee sought deletion of the additions of Rs. 3,27,56,000, Rs. 1,50,00,000, and Rs. 11,06,860, arguing they were revenue losses incurred wholly and exclusively for the purpose of its hotel business under Section 37(1) of the Act.
The Legal Issue
The central question was whether the forfeiture of an earnest money deposit made in a joint bid for natural gas, intended to secure fuel for hotel operations, constitutes a revenue expenditure deductible under Section 37(1) of the Income Tax Act, even when the assessee is not in the energy sector.
Arguments Presented
For the Appellant/Petitioner
The assessee’s counsel argued that the EMD of Rs. 11,06,860 was paid to participate in a tender for natural gas, which was essential for the hotel’s core operations. The expenditure was not speculative but directly linked to reducing operational costs through discounted fuel supply. Reliance was placed on T.K. Elevators India (P.) Ltd. v. DCIT and Pyoginam v. Addl. CIT, where similar forfeited deposits for tenders were allowed as business losses. The counsel emphasized that the intention behind the transaction, not its nomenclature, governs tax treatment, citing Bank of India v. K. Mohan Das and Delhi Development Authority v. Joint Action Committee.
For the Respondent/State
The Department contended that the assessee, being in the hotel business, had no direct connection with petroleum or gas exploration. The EMD was paid to a third party for a bid in which the assessee was not the primary bidder, making the expenditure incidental at best. The Department relied on Pragati Construction Co. v. DCIT and Ashok Leyland Ltd. v. ACIT, arguing that expenses must have a direct nexus with the principal business activity to qualify under Section 37(1).
The Court's Analysis
The Tribunal examined the nature of the transaction and the evidentiary record. It noted that the assessee had submitted documentary proof of the joint bid, including correspondence dated 10.02.2011 and 01.03.2011, establishing the purpose of securing natural gas for its hotel. The Tribunal distinguished the case of Pragati Construction Co. where the assessee had paid for a commercial space that was never acquired, whereas here, the EMD was paid for participation in a tender for a resource (natural gas) directly critical to hotel operations.
"The assessee has submitted necessary evidences in this regard, which has not been controverted by the revenue."
The Tribunal further observed that the forfeiture of the EMD was not a result of speculative investment but a commercial risk inherent in participating in a public tender. The fact that the bid was joint did not negate the business purpose, as the assessee stood to gain directly from the outcome. The Tribunal accepted the precedent set in T.K. Elevators India (P.) Ltd., where a deposit for a tender with MTNL was allowed as a business loss. The Court held that the loss was incurred in the ordinary course of business and was not of a capital nature.
The Tribunal also rejected the Department’s reliance on cases involving inter-corporate deposits or personal loans, as those involved financial transactions unrelated to procurement of operational inputs. Here, the EMD was a cost incurred to secure a critical utility - natural gas - for the hotel’s functioning.
The Verdict
The appeal was partly allowed. The Tribunal set aside the disallowance of Rs. 3,27,56,000 and Rs. 11,06,860, directing the AO to delete both additions. The disallowance of Rs. 1,50,00,000 was upheld. The order was pronounced on 20.04.2026.
What This Means For Similar Cases
Business Purpose Trumps Industry Classification
- Practitioners can now argue that expenditures made to secure essential operational inputs - even if outside the assessee’s primary industry - are deductible under Section 37(1) if they are wholly and exclusively for business purposes.
- The nomenclature of the transaction (e.g., EMD, deposit, advance) is irrelevant; the underlying business objective governs tax treatment.
Joint Bids and Third-Party Participation Are Not Fatal
- Participation in a consortium or joint bid does not automatically disqualify an expenditure as non-business, provided the assessee has a direct commercial interest in the outcome.
- Documentation proving the link between the expenditure and the business objective (e.g., correspondence, board resolutions, tender documents) is critical.
EMD for Tenders Qualifies as Revenue Loss
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Forfeited earnest money deposits paid to participate in tenders for goods or services essential to business operations are allowable as revenue losses under Section 37(1).
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This applies to sectors beyond construction or manufacturing - hotels, hospitals, and service providers may claim similar deductions for bids related to utilities, equipment, or supply contracts.
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Practitioners should advise clients to maintain clear records linking tender participation to core business needs.
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Where a bid fails, the write-off should be supported by a board resolution and contemporaneous correspondence to establish the business nexus.
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Avoid relying on cases involving personal loans or inter-corporate deposits; focus instead on precedents involving procurement-related forfeitures.
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The ITAT’s reliance on T.K. Elevators India signals a growing trend toward recognizing commercial pragmatism over rigid industry boundaries in tax law interpretation.
