Loading judgment…
No AI summary yet for this case.
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA, AM & SHRI AMARJIT SINGH, JM
सुनवाई क� तार�ख / : 26.09.2017 Date of Hearing घोषणा क� तार�ख / : 07.11.2017 Date of Pronouncement आदेश / O R D E R Per Shamim Yahya, A. M.: This Appeal by the assessee is directed against the Order by the Commissioner of Income Tax (Appeals)-41, Mumbai (‘CIT(A)’ for short) dated 27.05.2014 and pertains to the assessment year (A.Y.) 2010-11.
The grounds of appeal read as under:
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT 1. The CIT (A) has erred in law and on facts in passing the impugned order which is illegal and bad in law.
2. The CIT (A) has erred in law and on facts in upholding the disallowance of deduction u/s. 80-IAB of the Act amounting to 15/77,09,067/- which represented the rent received by the appellant from Satyam Computers Ltd. for a part of the lock-in-period as provided in the Lease Deed. The CIT (A) ought to have held that the said amount, though classified as forfeited amount of security deposit, was, in fact, the rent for a part of the lock-in-period as stipulated in the Lease Deed and, as such, eligible for deduction u/s. 80-IAB of the Act.
3. The CIT (A) has erred in law and on facts in not holding that the Settlement Agreement dated 30.09.2009 entered between the appellant and Satyam Computers Ltd. was only to nullify scope for litigation between the parties in view of the premature termination of the Lease Deed dated 22.10.2008 by the lessee under mitigating circumstances.
4. The CIT (A) has erred in law and on facts in upholding the disallowance of deduction u/s. 80-IAB of the Act with respect to: (i) interest on margin money deposit with State Bank of Rs.6,41,607/- (ii) interest on security deposit with MIDC Rs.92,573/- (iii) interest on security deposit with MSEB, Pune Rs.7,31,526/-
The CIT(A) ought to have held that the aforesaid deposits were required to be made in order to enable the appellant to carry on the business and, as such, the receipts therefrom were intrinsically linked with the business of the appellant and, hence, eligible for deduction u/s. 80-IAB of the Act. 5. The CIT (A) has erred in law and on facts in upholding the disallowance of deduction u/s. 80-IAB of the Act with respect to the following receipts even after considering them as business income:
(i) Sale of scrap Rs.94,982/- (ii) Discount received on electricity charges Rs.4,08,170/- (iii) Cabling and other charges for cell phone towers Rs.6,53,696/- (iv) Recovery of damages from vendors Rs.50,000/-
The assessee has also filed additional ground of appeal which reads as under: "Without prejudice to the grounds of appeal already filed by the Appellant before the ITAT and the CIT(A), where the security deposit forfeited by the Appellant to recover the amounts receivable from Satyam Computers Ltd
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT which was payable to the Appellant under the Lease Deed is held to be ineligible for deduction under section 80IAB of the Act, only the net receipt, being the income, net of expenses attributable to such income, should be excluded from the claim of deduction of the Appellant under section 80IAB of the Act and brought to tax in the hands of the Appellant as its business income and not the gross receipt itself."
Apropos ground nos. 2 & 3 relating to disallowance u/s. 80IAB amounting to Rs.15,16,14,301/- The assessee is engaged in the business of development of Special Economic Zone (SEZ) in the nature of Infotech Parks, Cyber Parks and Business Parks. The assessee has constructed a sector specific SEZ for Information Technology and Information Technology Enabled Services (IT & ITES) at Plot No. 28, MTDC, Rajiv Gandhi Infotech Park, Hinjewadi, Phase-II, District Pune, Maharashtra. The principal income received by the assessee is from lease of premises and also from certain maintenance services provided to the occupants of such premises. The assessee filed its return of income for the assessment year under consideration on 30.09.2010 at a total income of Rs. NIL after claiming deduction u/s.80-IAB of Rs.15,77,09,067/- on its entire income.
5 In the course of assessment proceedings, the Assessing Officer noted that a perusal of the income schedule of the Profit & Loss Account of the assessee showed that an income of Rs.15,16,14,301/- had been received on account forfeiture of security deposit. It was noted that this forfeiture had been executed in case of the lessee, M/s Satyam Computers Ltd. (hereinafter referred as ‘Satyam’ for short) who had acquired lease of a total area of 4,73,361/- sq. ft. in Block 3 of the Rajiv Gandhi
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT Infotech Park, Hinjewadi, Phase-n, Pune from the assessee company. It was observed that the lease had been executed on 22.10.2008 and the deposit of Rs.11,06,62,022/- was received by the assessee in the year 2008. M/s.Satyam Computers had taken the possession of the premises between April, 2008 and September, 2008 and paid rent for the months falling in A.Y.2009-10. It was also observed that the total income received from M/s.Satyam Computers Ltd. (hereinafter referred to as "Satyam") during the A.Y.2009-10 was Rs.8,84,78,165/- on which claim of deduction u/s.80- IAB had been made by the assessee in A.Y.2009-10 and allowed by the A.O. In other words, the receipt of rental income from leased premises was accepted to be eligible for deduction u/s.80-IAB of the Act
However, according to the Assessing Officer, whether the act of forefeiture of security deposit would amount to conduct of business of developing a SEZ was a question which needed to be closely scrutinized. In this regard the ld. Authorized Representative of the assessee was asked during the course of assessment proceedings to explain as to why the claim of deduction u/s.80-IAB of the Act should be allowed to the assessee on the amount forefeited during the year. In this respect, the ld. Authorized Representative made detailed submissions. It is stated that in terms of the lease deed dated 22.10.2008, Satyam had placed with the assessee company a refundable, interest free security deposit of Rs.6,61,19,064/- which was equivalent to six months rent. Clause 15 of the lease deed provided for a lock-in
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT period of 60 months wherein Satyam was not permitted to terminate the lease and if the lease was terminated by Satyam during the lock-in period, Satyam was liable to pay the rent for the entire unexpired period of the lease. It was pointed out that Satyam was faced with certain financial and other difficulties and was thus unable to pay the monthly lease rentals which had fallen in arrears during the year 2009.
Finally, during the quarter ended September 30, 2009 it was submitted that Satyam approached the appellant company for the premature termination of the lease.
For this purpose, a Settlement Agreement was executed between Satyam and the assessee on September 30, 2009. Under Clause 5 of the Settlement Agreement, Satyam agreed to pay Rs.26.98 crores towards the existing outstanding liability as at 30.09.2009 towards lease rentals and other charges and further sum of Rs.7.57 crores approximately towards rent and fit out lease rent for the period October to December, 2009 during which Satyam was to retain possession of the premises to ensure successful vacation of the premises. It was also agreed that total deposit towards Interest Free Security Deposit and Interest Free Fit out Security Deposit paid by Satyam amounting to Rs.11,06,62,022/- and the outstanding Interest Free Fit out Security Deposit as mentioned in clause 2 (f) of this Agreement amounting to Rs.4,06,62,022/- payable simultaneously on execution of this agreement as detailed in Annexure-in of this Agreement aggregating to Rs.15,13,24,044/- shall be forfeited by the assessee on signing of this agreement. The assessee claimed that Satyam was unable to pay the entire rent for the lock-in period and consequent thereto only six
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT months' rent was recovered for the said period by way of adjustment against the security deposit in accordance with clauses 12,15 and 17 of the Lease Deed which state that the security deposit received from Satyam shall be refunded on termination of the lease only after payment of all the dues by Satyam. It was submitted that the forfeiture of the security deposit was in fact the adjustment of the rent for the lock-in period. According to the assessee, the adjustment of the security deposit was nothing but rent for the premises which had been received in the ordinary course of carrying on the business of maintaining and operating the SEZ. It was claimed that the security deposit had been received in terms of the lease agreement and forfeited/adjusted in case of violation of any terms of the lease. The assessee contended that it emanated from the SEZ premises and is thus directly derived from the business of operation and maintenance of the SEZ. It was submitted that the compensation received by the company was a business receipt in the ordinary course of business and that the assessee was eligible to the deduction u/s.80IAB on such income. In this regard, reliance was placed by the assessee on the following judicial pronouncements:-
• CIT v. State Trading Corporation of India Ltd. 247ITR 114 (Del) • CIT & EPT v. South India Pictures Ltd. 29 JTR 910 (SC) • CITv.Balaji Chitra Mandir 154 ITR 777(AP) 8. However, the Assessing Officer was not satisfied with the explanation furnished on behalf of the assessee. As regards the nature of the receipt, the Assessing Officer was of the view that the forfeiture of security deposit was not in the nature of rent. For this according to the Assessing Officer, firstly the Lease Agreement provided
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT for rent for the unexpired period of lease in case of early termination of lease agreement by the lessee. The unexpired period of lease was much longer than the period of nine months for which the assessee has received the amount and hence the amount so received is not in accordance with Lease Agreement so as to be titled as 'Rent'. Secondly, what was adjusted and received as rent by the assessee was only for part unexpired period of lease and that too in terms of Settlement Agreement and not in terms of Lease Agreement which did not make any provision for receipt of rent for part unexpired period of lease. Receipt of rent was to be covered only under the Lease Agreement and hence only that amount which is received under the Lease Agreement that can only be considered as lease rent'. Thirdly, the Settlement Agreement was executed to bring an end to lessor and lessee relationship and hence amount received to bring an end to lessor/lessee relationship cannot be considered as 'rent' even if the amount is quantified or measured with reference to monthly rent. Fourthly, the amount was received from the lessee who had shown his inability to perform his part of the Contract for the unexpired period of lease and on bringing an end to the lease agreement and hence the amount cannot be termed as receipt in terms of lease agreement and accordingly lease rent. That in fact the amount is in terms of Settlement Agreement which the assessee itself has accepted as explained in his submissions. Lastly, the amount was agreed to be paid by the erstwhile lessee not for user of right but for non-user of right which in no case can be in the nature of rent. In view of this, the A.O. came to the conclusion that the receipt from the erstwhile lessee
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT though termed as rent for unexpired period of lease was not rent though it arose from business activity and had rightly been claimed by the assessee as business receipt.
As regards the source of the said receipt, the Assessing Officer held that it was clear that the direct source of the receipt of the amount under consideration was Settlement Agreement and certainly not the Lease Agreement. As stated by the assessee, the Settlement Agreement was executed since Satyam was unable to perform its part of the contract due to financial difficulties faced by the lessee. In other words, the cause of entering into such an agreement was anticipatory and passive breach of contract by the lessee. This led the Assessing Officer to infer that the amount forfeited was nothing but damages for breach of contract committed by Satyam. He held that nine month's rent which the assessee claimed as rent was nothing but damages, though measured in terms of number of month's rent. The Assessing Officer was of the view that measurement or quantification of damages in terms of numbers of month's rent would not alter the compensation for loss, i.e. damages into rent. However, according to the Assessing Officer, though direct source of receipt was the Settlement Agreement but indirect source was the lease agreement and compensation was paid for loss of profit and was in the nature of business income. That thus, the receipt under consideration was held to be a business receipt though by way of damages and certainly not by way of lease rent.
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT 10. The Assessing Officer then proceeded to consider the issue whether income on account of damages would be income "derived from" the business as a developer of SEZ. It was noted that deduction u/s. 80-IAB is available only to that part of the business profit which is derived from any business of developing a SEZ. This meant that except those profits derived from the business of developing a SEZ, other profits of the business were not deductible u/s. 80-IAB. For coming to this conclusion, the A.O. referred to the following judicial precedents wherein the expression "derived been interpreted, explained and distinguished from the expression attributable to:
• Liberty India v. CIT 317 ITR 218 (SC) • Pandian Chemicals Ltd. v. CIT 262 ITR 278 (SC) • Cambay Electric Supply Industrial Co. Ltd. v. CIT 113 ITR 84 (SC) • CIT v. Sterling Foods 237 ITR 579 (SC) • Dy. CIT v. Parekh PIast India (P) Ltd. 137 ITD 208 (Mum) • JJC. Trust v. CIT 23 ITR 143 (Bom) 11. Accordingly, the Assessing Officer held that the amount receipt in this account is not derived from business and, accordingly, the claim of the assessee for deduction u/s. 80-IAB was reduced by the amount of Rs.15,16,14,301/-.
Against the above order, the assessee appeared before the ld. CIT(A).
The ld. CIT(A) elaborately noted the submissions of the assessee. The ld. CIT(A) held that the sole point for determination was whether the action of the assessing officer in disallowing deduction u/s.80IAB for the forfeiture of the security deposit was in accordance with law. For this purpose he observed that it was necessary to ascertain whether the said receipt can be said to be derived from the (A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT assessee’s business of developing the SEZ. He held that the plea of the assessee that the title under which the amount was booked is a misnomer and it was in fact rent for the unexpired period of the lease realized from the security deposit paid by Satyam was not acceptable. He held that the assessing officer has very elaborately dealt with the issue. The ld. CIT(A) was of the opinion that assessee's plea that the said amount represents rent for the unexpired period of lease is not acceptable, as the rent for the unexpired lease would be much higher. The ld. CIT(A) thus held that the said receipt is not in the nature of rent for the unexpired period of lease. That it is not required to go into the further question whether such a rent for the unexpired period of lease would be said to be derived from the business of developing the SEZ. He held that Satyam has also paid in arrears of rent under the terms of the settlement agreement on which deduction u/s. 80IAB has already been allowed. Hence, he held that the security deposit paid by Satyam was forfeited under the terms of the settlement agreement in order to compensate the lesser (assessee) in view of the hardship and inconvenience suffered by it due to premature termination of the lease.
The ld. CIT(A) further held that it is now well settled that the expression derived from is narrower in connotation as compared to the expression attributable to.
In this regard, he confirmed the assessing officer's observations. He held that this amount can at best be termed as incidental or ancillary profit earned by the assessee from the business which will not qualify for deduction u/s. 80IAB. He further
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT observed that merely because the said amount has been quantified as equivalent to 9 months rent will not alter the nature or character of receipt. He further held that one has to what the substance of the transaction rather than the form in which it was clothed.
The ld. CIT(A) further placed reliance upon the case laws relied upon by the assessing officer and distinguished the decisions referred by the assessee. He further dismissed the assessee's contention that merely because the premises vacated by the lessee would not be let out immediately causing loss to the assessee in terms of opportunity cost, cannot be a valid legitimate ground for granting the benefit of reduction u/s.80IAB. Accordingly, the ld. CIT(A) confirmed the assessing officer's action in disallowing deduction u/s.80IAB claimed by the assessee, amounting to Rs.15,16,14,301/-.
Against above order assessee is in appeal before us.
We have heard the parties, and perused the material on record. The ld. Counsel of the assessee submitted that it is the settled law that it is the substance of the transaction that counts and not the nomenclature given to it. He submitted that the amount shown as forfeiture of security deposit is actually the receipt of a part of the balance of the lease rental, which the lessee was obliged to pay under the lease agreement. Hence, he submitted that this amount cannot be given any different treatment than the lease rent receipt, which qualify for deduction u/s. 80-IAB. The ld.
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT Counsel further submitted that the Settlement Agreement was only to facilitate the exit of the lessee under the lease agreement. He submitted that the lease agreement provide that in case the assessee wants to terminate the lease during the lock-in period, the lessee was liable to pay the rent for the entire unexpired period of the lease. It was due to the precarious financial position of the lessee that the assessee agreed to release the lessee from the liability to pay the entire balance period of the lease and agreed to settle for a smaller period of 9 months, which the interest free security deposit comprised off. Hence, the ld. Counsel of the assessee submitted that this amount cannot be given any different treatment than the lease rental and should be included for deduction u/s. 80-IAB.
Per contra, the ld. Departmental Representative relied upon the orders of the authorities below. He stated that the Revenue has made written submission earlier. He submitted that the assessee has forfeited the security deposit received from Satyam and, hence, the amount received upon forfeiture of security deposit cannot be considered as lease rental qualifying for deduction u/s. 80IAB. He submitted that this is not receipt of balance period of lease rental for the lock-in-period, which assessee was to pay as per the lease deed in case of early termination of the lessee but forfeiture of security deposit as per settlement agreement. Hence, this does not qualify for deduction u/s. 80IAB. Hence, the ld. Departmental Representative submitted that the orders of the authorities below should be upheld.
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT 19. Before proceeding further, we may gainfully refer to the provisions of section 80IAB which reads as under:
Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone. 80-IAB. (1) Where the gross total income of an assessee, being a Developer, includes any profits and gains derived by an undertaking or an enterprise from any business of developing a Special Economic Zone, notified on or after the 1st day of April, 2005 under the Special Economic Zones Act, 2005, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent of the profits and gains derived from such business for ten consecutive assessment years: Provided that the provisions of this section shall not apply to an assessee, being a developer, where the development of Special Economic Zone begins on or after the 1st day of April, 2017. (2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which a Special Economic Zone has been notified by the Central Government : Provided that where in computing the total income of any undertaking, being a Developer for any assessment year, its profits and gains had not been included by application of the provisions of sub-section (13) of section 80-IA, the undertaking being the Developer shall be entitled to deduction referred to in this section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in sub-section (1) or sub-section (2), as the case may be : Provided further that in a case where an undertaking, being a Developer who develops a Special Economic Zone on or after the 1st day of April, 2005 and transfers the operation and maintenance of such Special Economic Zone to another Developer (hereafter in this section referred to as the transferee Developer), the deduction under sub-section (1) shall be allowed to such transferee Developer for the remaining period in the ten consecutive assessment years as if the operation and maintenance were not so transferred to the transferee Developer. (3) The provisions of sub-section (5) and sub-sections (7) to (12) of section 80- IA shall apply to the Special Economic Zones for the purpose of allowing deductions under sub-section (1).
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT Explanation.—For the purposes of this section, "Developer" and "Special Economic Zone" shall have the same meanings respectively as assigned to them in clauses (g) and (za) of section 2 of the Special Economic Zones Act, 2005
Furthermore, we may also reproduce herein below some important portions of the lease agreement and the settlement agreement:
1) Clause 12 of the lease agreement dealing with interest free security deposit read as under:
Clause 12 “The entire amount paid by THE LESSEE as Interest Free Refundable Security Deposit during the lease period shall be kept by THE LESSOR which shall be refunded by THE LESSOR to THE LESSEE without any interest simultaneous to THE LESSEE surrendering peaceful ,vacant and physical possession of the Demised premise sin as is where is condition (normal wear & tear expected) as per clause 15 of this Lease Deed, on expiry or earlier termination of this Lease Deed, if any and subject to adjustment or deduction of arrears of rent along with unamortized portion of fit out rentals , charges and any other dues , if any due and payable under this refundable security deposit simultaneous to THE LESSEE in refunding the refundable security deposit simultaneous to THE LESSEE surrendering peaceful, vacant and physical possession of the Demised Premises, THE LESSOR shall pay interest to THE LESSEE at the rate of 15% p.a. for the period of delay and the LESSEE shall be entitled to retain possession of the Demised Premises without use and without payment of rent and other charges for such period of delay."
2) Clause 15 of the lease agreement dealing with earlier termination of the lease read as under:
Clause 15 " THE LESSEE shall not have the right to terminate this lease Deed and vacant the Demised Premises until the expiry of the Lock in Period as mentioned in Annexure-II starting from the Date of Lease Commencement. On the expiry of the initial Lease Term of60 months from the Lease Commencement Date (also the lock -in period) the lease shall stand automatically renewed for a (A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT further term of 60 months, subject to SEZ Act and rules. THE LESSOR may pursuant to the renewal as stated above, execute and cause the renewed Lease Deed to be registered, at the cost of THE LESSEE, and the renewed Lease Deed shall be to the extent possible, on the same lines hereof except only that the rent (and correspondingly the security deposits, if any) shall be enhanced as mentioned in Annexure-11. THE LESSEE agrees that in case THE LESSEE terminates the lease Deed prior to the expiry of Lock -in- period as mentioned in Annexure-II to this Lease Deed, then THE LESSEE herby authorizes THE LESSOR, the entire rent along with unamortized portion of fit out rentals and any other sums due and payable under this Deed for the unexpired period of the Lock-in-period and such other sums due and payable under this tease Deed as on that date . Further, THE LESSEE undertakes to pay the balance, if any remaining after such adjustments, deductions on or before the expiry of notice of termination ,"
3) Clause 17 of the lease deed dealing with refund of security deposit read as under:
Clause 17 "Simultaneous to THE LESSEE paying all its dues under this lease Deed and delivering peaceful, vacant and physical possession of the Demised premises on or before the last day of the validity of the Lease Deed, THE LESSOR shall refund all the refundable security deposits without any interest thereon under this Lease Deed deposited by THE LESSEE only after adjusting outstanding , if any."
4) Important clauses of the Settlement Agreement may also be refer as under:
Clause 2 That Satyam shall pay simultaneously on execution of this Agreement the entire outstanding amount of Rs. 26,98,03,348.14 (Rupees Twenty Six Crores Ninety Eight Lakh Three Thousand Three Hundred Forty Eight and Paise Fourteen only)due and payable upto 30th September,2009 as per Annexure -I of this consisting of rent , fit out rent, maintenance charges, car parking charges, miscellaneous charges towards adjudication and registration of Lease Deed and unpaid Interest free fit out security deposit under Lease Deed as follows:
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT a) Rs.11,36,06,640/- (Rupees Eleven Crores Thirty Six Lakhs Six Thousand Six Hundred and Fort) Only) towards outstanding rent upto 30th September,2009. b) Rs. 11,01,98,440/- (Rupees Eleven Crores one Lakh Ninety Eight Thousand Four Hundred and Forty Only)towards outstanding fit out rent upto 30th September,2009. c) Rs.18,92,000/- (Rupees Eighteen Lakhs Ninety Two Thousand Only)towards outstanding car parking charges upto 30th September,2Q09. d) Rs. 34,77,943.90/- (Rupees Thirty Four Lakhs Seventy Seven Thousand Nine Hundred and Forty Three and Paise Ninety Only) towards outstanding maintenance charges up to 30 September 2009 less tax deducted at source of Rs.78,80/- (Rs Seventy Eight Thousand Eight Hundred and Ten Only) amounting Rs. 33,99,133.90 (Rs.Thirty Three Lakhs Ninety Nine Thousand One Hundred Thirty Three and Ninety Paise Only) e) Rs. 45,112/-(Rupees Four Crore Six Lakhs Sixty Two Thousand Twenty Two and Paise Twenty Four only) towards unpaid Interest Free Fit out Security Deposit (IFFS) under Lease Deed," Clause 4 " That it is further agreed that Satyam shall pay simultaneously on execution of this Agreement the amount of Rs.7,56,62,022.24 (Rupees Seven Crores Fifty Six Lakhs of this Agreement consisting of rent and fit out rent for the next 3 months i.e. from 1*: October 2009 till 31 December 2009." Clause 5 "Also it has been agreed by Satyam that total deposit towards Interest Free Security Deposit (ITS) and Interest Free Fit out Security Deposit (IFFS) paid by Satyam amounting to Rs.ll,06,62,022.24(Eleven Crore Six Lakhs Sixty Two Thousand Twenty Two and Paise Twenty Four only)and the outstanding Interest Free Fit out Security Deposit (IFFS) as mentioned in clause 2 (J) of this Agreement amounting to Rs.40662022.24(Rupees Four Crore Six Lakhs Sixty Two Thousand Twenty Two and Paise Twenty Four only) payable simultaneously on execution of this agreement as detailed in Annexure – III of this Agreement, aggregating to Rs.15,13,24,044.48 (Rupees Fifteen Crores Thirteen Lakhs Twenty Four Thousand Forty Four and paise Forty Eight Only) shall be forfeited by DAIPL on signing of this Agreement.
Upon careful consideration, we find that in this case the assessee is engaged in the business of development of Special Economic Zone in the nature of Infotech
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT Parks. The assessee has constructed a sector specific SEZ for Information Technology and Information Technology Enabled Services (IT & ITES) at Plot No. 28, MTDC, Rajiv Gandhi Infotech Park. It is undisputed that the assessee’s income received from Satyam by way of lease rental for the lease of premises qualifies for deduction u/s. 80IAB. This has neither been disputed by the Assessing Officer or the ld. CIT(A). The assessee has entered into the lease agreement with Satyam. Under the agreement entered into, there was a lock-in-period of 60 months, wherein Satyam was not permitted to terminate the lease and if the lease was terminated by Satyam during the lock-in-period, Satyam was liable to pay the rent for the entire unexpired period of lease. However, due to certain financial difficulties, the lessee defaulted in the payment of monthly lease rentals which fell in arrears. Ultimately, by the Settlement Agreement, the lessee paid the arrears of rental and also agreed to pay balance of security deposit. This security deposit which translated into approx nine month lease rental was to be adjusted and appropriated by the assessee. Upon this payment, the lessee got exonerated from paying the entire balance period of lease rental as per the lease agreement, which was greater than this payment. Thus settlement agreement was nothing but a mutual modification of the lease agreement.
As per the Assessing Officer, the arrear of rental received by the assessee under the same settlement agreement was allowable as income, qualifying for deduction u/s. 80-IAB. However, the approx. 9 month rental in the form of security deposit appropriated by the assessee towards balance of lease rental for lock-in period was (A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT treated as income not qualifying for deduction u/s. 80IAB. Here it may be noted that the Revenue does not dispute that the assessee was entitled to a greater amount of lease rental for the balance period lock-in-period as per the lease agreement, than the impugned sum of Rs.15,16,14,301/-. First reasoning for the disallowance by the Revenue is the nomenclature under which the amount was received. The contention of the Revenue is that since it was forfeiture of security deposit, it cannot be treated as lease rental qualifying for deduction u/s. 80-IAB. In this regard, we note that it is settled law that the substance prevails over form. Though in this case, the form is given as forfeiture of security deposit, but actually the said security deposit translates into the lease rental of 9 months. This was realized by the assessee instead of the entire balance period of monthly lease rental for the lock-in-period. The authorities below are of the opinion that if the assessee has received the entire balance of period of lock-in period lease rental on the termination, it would have qualified as lease rental eligible for deduction u/s. 80-IAB, but not this amount which is equivalent to only to 9 month lease rental.
In our considered opinion, this approach of the Revenue authorities defies any logic. By no stretch of imagination a short period of lease rental can be given any different treatment then the longer period of lease rental.
Furthermore, it is the contention of the Revenue authorities that the impugned amount has been received as a result of the Settlement Agreement and not as a result
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT of the lease agreement. We find that the Settlement Agreement was only a means of giving proper exit of the lessee under the premises of the lease agreement. Infact, the assessee has also received arrear lease rental under the Settlement Agreement which has been allowed by the authorities below as qualified for deduction u/s. 80IAB.
Hence, it is abundantly clear that the Settlement Agreement is nothing but adjunct to the lease agreement which facilitated exit of assessee in term of lease. Hence, no different treatment can be given to this impugned amount received. Hence, in our considered opinion, the assessee’s contention is very appropriate that 9 month lease rental receipt by way of forfeiture of security deposit cannot be given any different treatment then the lease rental receipt which qualify for deduction u/s. 80IAB. Hence, the distinction brought upon by the Revenue authorities that this amount is not derived from the business of the assessee, is not sustainable.
As regards the case laws referred by the Revenue authorities, we find that the same are rendered in a different context.
In the case of Liberty India v. CIT 317 ITR 218 (SC) (supra), the Hon’ble Apex Court has expounded that the words 'derived from' is narrower in connotation as compared to the words 'attributable to'. By using the expression 'derived from', the Parliament intended to cover sources not beyond the first degree. We find that there is no quarrel about this proposition. The source of the impugned income is lease rental as the said security deposit comprises of approx nine month lease rental. Hence, this (A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT income is by way of lease rental and no other source. The case before the Hon’ble Apex Court was realization of profit from Duty Entitlement Passbook Scheme and Duty Drawback Scheme which were tax incentive received by the assessee. This is not at all the case before us.
In the case of Pandian Chemicals Ltd. (supra), the issue was whether interest on deposits with Electricity Board should be treated as income derived by the industrial undertaking for the purpose of section 80HH. Hence, this case is not applicable on the facts of the case before us.
In the case of Cambay Electric Supply Industrial Co. Ltd. (supra), the issue relates to treatment of profits arising from the sale of old machinery and buildings under section 80E(1) of the Act. Hence, this case is also not applicable.
In the case of Sterling Foods (supra), the issue relate to deduction u/s. 80HH for profits on sale of import licence and the cash assistance received against its exports under any scheme of the Government of India. Hence, this case is also not applicable.
In the case of Parekh Plast India (P) Ltd. (supra), it was expounded that the property must be the effective source of income. In the present case, we found that the amount received by the assessee is nothing but lease rental by another nomenclature.
In the case of JJC Trust (supra), the issue related to ancillary profit which is not the case here as we have already found out above.
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT 26. From the above, this is amply clear that the facts of none of the case laws are applicable on the facts of the present case. The exposition in the above case laws was that the term ‘derived from’ is narrower than the term ‘attributable to’. We are in full against with this proposition. Hence, in the background of above discussion and examining the present issue on the touch stone of the ratio of above Hon’ble Apex Court decisions, we find that the lease rental for approx 9 months received by the assessee in the shape of forfeiture of security deposit as against the balance lease rental for the lock-in-period which was much larger, is certainly an income derived from the business of the assessee, and the same relates to the source of first degree and, hence, the income from this source qualifies for deduction u/. 80IAB.
Apropos ground nos. 4 & 5
During the relevant previous year, the assessee had disclosed the following under the head "Other income":-
S. No. Particulars Amount (Rs.) 1 Interest on margin money deposit with State Bank of 6,41,607 India 2 Interest on security deposit with MIDC towards 92,573 water supply 3 Interest on security deposit in favour of MSEB, Pune 7,31,526 towards electricity supply 4 Sale of scrap 94,982 5 Discount received on electricity charges 4,08,170 6 Cabling and other charges for cell phone towers 6,53,696 7 Recovery for damages from vendors 50,000 Total 26,72,554
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT 28. Since the aforesaid amount was disclosed under the head other income, the assessee was asked to show cause as to why the claim for deduction u/s.80-IAB of the Act should not be disallowed with regard to this amount. In response, it was explained that the presentation of the receipts as 'other income' was only for the sake of accounting convenience and that they were, in fact, expenditure incurred for the purpose of business which had been debited to the P & L A/c. The A.O., however, did not find the submissions of the assessee to be tenable. In his opinion, the nature of all these items of income was such that these could not be considered to be income derived by the undertaking from the business of developing a SEZ. He found that none of these items of income had any direct nexus with the activity of developing the SEZ. It was also noted that the case law ACG Associated Capsules (P) Ltd. v. CIT 343 ITR 89 cited by the assessee was applicable to section 80HHC and not to the case of the assessee as it was given with regard to netting of interest and other similar expenses. Further, the A.O. referred to the case of Asian Cement Industries v. Income- tax Appellate Tribunal 28 taxman 290 (J&K) wherein it has been held that interest on FDRs cannot be regarded as income flowing from business activity of industrial undertaking and, thus, it cannot be considered for deduction u/s. 801B. It was also noted that similar view had been taken in the case of assessee for A.Y.2009-10 which had been accepted by the assessee and no appeal had been filed against the order of the A.O. In view of the above, the total income of Rs.26,72,554/- was treated as (A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT "income from other sources" and held to be not eligible for deduction u/s.80-IAB of the Act.
Upon the assessee’s appeal, the ld. CIT(A) confirmed the action of the Assessing Officer with regard to the disallowance of interest items. For this, he placed reliance on the decision of Hon’ble Apex Court inter alia in the case of Liberty India v. CIT 317 ITR 218 (SC) and Pandian Chemicals Ltd. v. CIT 262 JTR 278 (SC).
Furthermore, regarding the other items, the ld. CIT(A) concluded as under:
5.3.2 With regard to sale of scrap (Rs.94,982/-), discount received on electricity charges (Rs.4,08,170/-), cabling and other charges for cell phone towers (Rs.6,53,696/-) and recovery of damages to property from vendors (Rs.50,000/-), I find merit in the plea of the appellant that the aforesaid receipts have arisen in the ordinary course of the business carried on by the appellant and as such these have to be assessed as 'business income’ rather than ‘Income from other sources'. However, the aforesaid receipts cannot be said to be derived from the appellant's business of developing the SEZ but are incidental to such business. In other words, such receipts constitute ancillary profits of the business carried on by the appellant. Thus, the appellant will not be entitled to deduction u/s.80-IAB on the aforesaid items which do not have first degree nexus with the appellant's business of developing the SEZ. The A.O. was thus justified in disallowing the deduction In respect of these items (though for different reasons) and accordingly, his action in doing so is confirmed.
Against this order, the assessee is in appeal before us.
We have heard both the counsels and perused the records. The ld. Counsel of the assessee conceded that the following receipts cannot be treated as business income, eligible for deduction u/s. 80IAB.
(i) interest on margin money deposit with State Bank of India Rs.6,41,607/- (ii) interest on security deposit with MIDC Rs.92,573/-
(A.Y. 2010-11) M/s. Quadron Business Part Ltd. vs. Dy. CIT (iii) interest on security deposit with MSEB, Pune Rs.7,31,526/- (iv) Recovery of damages from vendors Rs.50,000/- 33. Regarding the rest of the items, the ld. Counsel of the assessee pleaded that the issue is to be decided in favour of the assessee. For this, he placed reliance upon the following case law: ACIT vs. Zydus Infrastructure (P.) Ltd. [2016] 161 ITD 611 (Ahm - Trib.) 34. Upon careful consideration, we find that that this case law was rendered in the context of remission or cessation of trading liability and sale of scrap on the facts of the above said case. In the present case, we note that item have rightly been held by the ld. CIT(A) as not derived from the business of the assessee but may be attributable thereto. Hence, they don’t quality for deduction u/s. 80IAB. We further note that the similar disallowance made earlier was accepted by the assessee. Hence, we confirm the order of the ld. CIT(A) on this issue.
In the result, this appeal by the assessee stands partly allowed. प�रणामतः �नधा�रती क� अपील आं�शक �वीकृत क� जाती है ।
Order pronounced in the open court on 07.11.2017