The assessee wrote off security deposit under the head “administrative and other expenses” in the profit and loss account. During assessment proceeding, AO made adjustments on various issues, including write off security deposit. The assessee submitted that there was a loss of equipment taken on lease from a vendor, thus revenue account. The AO held payment were for acquisition of the capital asset, and it will be a capital loss. Subsequently, AO applied a penalty for the claim of security deposit. CIT(A) upheld the penalty mainly on the ground that it had failed to make full disclosure of the transaction in the tax audit report.

The Tribunal noted that assessee during the assessment proceedings had explained the claim of security deposit. It filed the relevant documents, and explanation has not found to be false by the AO Whether loss of security deposit is revenue or capital expenditure, is a debatable issue not free from doubt. All material in connection with the computation of income cannot be disclosed in the return of income as it does not have the relevant columns as held by the CIT(A).  (AY. 2005-06)