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M/s. Quadron Business Part Ltd. Versus Dy. CIT, C.C. 36, Mumbai

2017 (11) TMI 635 - ITAT MUMBAI

Disallowance of deduction u/s. 80-IAB - 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? - Held that:- By no stretch of imagination a short period of lease rental can be given any different treatment then the longer period of lease rental. - 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 assesse .....

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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. - 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 .....

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est 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 the ld. CIT(A) as not derived from the business of the assessee but may be attributable thereto. Hence, they donít quality for deduction u/s. 80IAB. We further note that the similar disallowance .....

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ins to the assessment year (A.Y.) 2010-11. 2. The grounds of appeal read as under: 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 .....

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he 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 th .....

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other charges for cell phone towers Rs.6,53,696/- (iv) Recovery of damages from vendors Rs.50,000/- 3. 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 which was payable to the Appellant under the Lease Deed is held to be ineligible for deduction unde .....

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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 i .....

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ase 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 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 ₹ 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 .....

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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 su .....

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ase. 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. 7. For this purpose, a Settlement Agreement was executed between Satyam and the assessee on September 30, 2009. Under Clause 5 of the Settlement A .....

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y Deposit paid by Satyam amounting to ₹ 11,06,62,022/- and the outstanding Interest Free Fit out Security Deposit as mentioned in clause 2 (f) of this Agreement amounting to ₹ 4,06,62,022/- payable simultaneously on execution of this agreement as detailed in Annexure-in of this Agreement aggregating to ₹ 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 co .....

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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 .....

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s 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 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 .....

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t 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 unexpi .....

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conclusion that the receipt from the erstwhile lessee 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. 9. 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 Agreem .....

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s 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 .....

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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 .....

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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 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 lea .....

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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 su .....

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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 distinguished the decisions referred by the assessee. He further dismissed the assessee s contention that merely because the premises vacated by the lessee would .....

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ed 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. Counsel further sub .....

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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. 18. 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 s .....

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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 .....

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eveloper, 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 g .....

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e 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) .....

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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 .....

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.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 Commenc .....

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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 .....

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nd 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 .....

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our 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 .....

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ng 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 amo .....

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s of development of Special Economic Zone in the nature of Infotech 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 .....

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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 Offic .....

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riod lock-in-period as per the lease agreement, than the impugned sum of ₹ 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 forfeitu .....

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o only to 9 month lease rental. 23. 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. 24. 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 of the lease agreement. We find that the Settlement Agreement was only a .....

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nce, 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. 25. As regards the case laws referred by the Revenue authorities, we find that the same .....

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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 purp .....

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der 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. 26. From the above, this is am .....

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feiture 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. 27. 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 mone .....

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w 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 .....

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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 .....

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hermore, 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 bus .....

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