Circular No. 420

What this is

Circular No. 420 was issued by the Central Board of Direct Taxes on 4 June 1985. Its subject is 342. Security deposited with postal authorities for telex connection - Whether admissible as business expenditure.

What it does

Allows the Rs. 10,000 security deposit paid to the postal authorities for a telex connection as revenue expenditure in the year of payment, if the assessee claims it. The Indian Telegraph Rules were amended with effect from 26 February 1983 to require a subscriber, for an existing or a new telex connection, to pay Rs. 10,000 as security to cover part of the cost of the departmental equipment installed at his premises and to protect the Postal Department against unpaid dues. Because the deposit earns no interest once the telex machine is installed, the Board treats it as revenue expenditure at that stage. When the connection is finally closed and the postal authorities return the Rs. 10,000, the refund is income of the assessee in the year of refund.

Why it was issued

It was urged before the Board that the deposit should be allowed as a bona fide business expenditure in the year of payment, on the same footing as the initial payment for a telephone connection under the Own Your Telephone scheme.

Who it reaches

• Businesses that took or held a telex connection after 26 February 1983
• Assessing Officers deciding capital or revenue on such deposits
• Assessees who later surrender a telex connection and get the deposit back

The instrument, as the Board published it

342. Security deposited with postal authorities for telex connection - Whether admissible as business expenditure
1. It has been brought to the notice of the Board that, as per an amendment made in the Indian Telegraph Rules with effect from 26-2-1983, a subscriber for a telex connection (either for existing one or a new one) is required to pay Rs. 10,000 towards security deposit to cover a part of the cost of the departmental equipment installed at the premises of the subscriber which will also protect the Postal Department against any unpaid dues by the subscriber. It has been urged that the said amount of security deposit may be allowed as a bona fide business expenditure for the year in which the said amount is paid on the same lines as the initial payment for a telephone connection under the ‘Own Your Telephone’ Scheme.
2. The matter has been examined and the Board are of the opinion that since the said deposit of Rs. 10,000 for a telex connection does not earn any interest when the telex machine is installed, at that stage, this amount may be treated as a revenue expenditure allowable as a deduction, if the assessee makes such a claim. However, when the amount is returned by the postal authorities when the telex connection is finally closed, the refund of Rs. 10,000 shall be treated as an income of the assessee of the year in which the amount is refunded.
Circular : No. 420 [F. No. 204/10/83-IT(A-II)], dated 4-6-1985.

What to watch

• The deduction depends on the assessee making the claim; it is not given automatically.
• The other half of the bargain is that the refund on closure is taxable income of the year it is received, which is easy to overlook years later.
• The reasoning rests on the deposit earning no interest once the machine is installed, so it does not extend to an interest-bearing deposit.
• It speaks to the Rs. 10,000 telex security under the Indian Telegraph Rules as amended in 1983 and to nothing else.

Where you meet it

In a capital-versus-revenue disallowance in an assessment of an old business, and on the other side when a refunded deposit has not been offered to tax.

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