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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 ..... d 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 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 dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted 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 beh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 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. 10. The Assessing Officer then proceeded to consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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. 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... 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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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mprises 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered 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. Incometax 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 "income from other sources" and held to be not eligible for deduction u/s.80-IAB of the Act. 29. Upon the assessee's appeal, the ld. CIT(A) confirmed the action of the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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