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TMI Blog2017 (11) TMI 635X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 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. - Decided in favour of assessee. Receipts eligible for deduction u/s. 80IAB - Held that:- The ld. Counsel of the assessee conceded that the following receipts cannot be treated as business income, eligible for deduction u/s. 80IAB. i.e. interest on margin money deposit with State Bank of India, interest on security deposit with MIDC, interest on security deposit with MSEB, Pune and Recovery of damages from vendors. For rest of the receipt like Sale of scrap, Discount received on electricity charges and Cabling and other charges for cell phone towers we note that item have rightly been held by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( 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 /- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 6. 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 ₹ 6,61,19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived 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 Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 14. 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 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. 15. The ld. CIT(A) further placed reliance upon the case laws relied upon by the assessing officer and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able upto 30 th 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 ) Rs . 11,36,06,640 /- ( Rupees Eleven Crores Thirty Six Lakhs Six Thousand Six Hundred and Fort ) Only ) towards outstanding rent upto 30 th 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 30 th September,2009 . c ) Rs . 18,92,000 /- ( Rupees Eighteen Lakhs Ninety Two Thousand Only ) towards outstanding car parking charges upto 30 th 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 . Thir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 22. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rived from the business of the assessee, is not sustainable. 25. 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 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supply 7,31,526 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 . 31. Against this order, the assessee is in appeal before us. 32. 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/- (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 decide ..... X X X X Extracts X X X X X X X X Extracts X X X X
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