Unrealised rent and temporary business lull do not justify tax additions or disallowance of depreciation and loan interest.

Unrealised rent could not be taxed by treating a security deposit as adjustable income where the deposit was not contractually linked to unpaid rent, the tenants had stopped paying, the dispute was under litigation, and the amount was offered to tax only in the later year when the matter was resolved. Depreciation on a car and interest on the car loan were also not disallowable merely because business operations were temporarily inactive, since prior use of the asset was shown, there was no evidence of permanent closure, and business activity continued through investment activity. The additions and disallowances were deleted.

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Issues: (i) Whether the addition made on account of alleged rental income by treating the security deposit as adjustable against unrealised rent was sustainable; (ii) Whether the disallowance of depreciation on car and interest on car loan was justified on the ground that no business activity was carried on during the year.

Issue (i): Whether the addition made on account of alleged rental income by treating the security deposit as adjustable against unrealised rent was sustainable.

Analysis: The tenants had stopped paying rent and the dispute between the parties was pending in litigation. The security deposit was not shown to be contractually adjustable against unrealised rent, and the assessee had not received rent for the disputed period. The assessee also brought the amount to tax in the subsequent assessment year after the dispute was decided.

Conclusion: The addition of the security deposit as rental income was not sustainable and was rightly deleted in favour of the assessee.

Issue (ii): Whether the disallowance of depreciation on car and interest on car loan was justified on the ground that no business activity was carried on during the year.

Analysis: Depreciation had been claimed on written down value, indicating prior use of the asset for business purposes. No material was brought on record to show that the business had been closed once for all. The assessee's investment in land during the year showed that business activity continued, and the borrowed funds giving rise to interest were from earlier years.

Conclusion: The disallowance of depreciation and interest was unjustified and was deleted in favour of the assessee.

Final Conclusion: The appeal was allowed and the additions/disallowances made by the lower authorities were deleted.

Ratio Decidendi: Where business has not been permanently closed and the assessee continues activities in furtherance of its business, depreciation and related interest cannot be disallowed merely for temporary lull in operations; similarly, unrealised rent cannot be brought to tax by treating an unadjustable security deposit as income in the absence of an accrual basis.

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