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Section 28 in The Income- Tax Act, 1995
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Income Tax Appellate Tribunal - Mumbai
Swan Energy Ltd ( Formerly Known As ... vs Assessee on 16 January, 2013

आयकर अपील य अ धकरण,

धकरण, मंुबई यायपीठ 'ई

ई' मंुबई

IN THE INCOME TAX APPELLATE TRIBUNAL

"E" BENCH, MUMBAI

ी बी.

बी रामकोट

रामकोट य,

य लेखा सद य,

य एवं ी अ मत शु ला, या यक सद य के सम

BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND

SHRI AMIT SHUKLA, JUDICIAL MEMBER

आयकर अपील सं. / ITA no. 596/Mum./2013

( नधारण वष / Assessment Year : 2009-10)

M/s. Swan Energy Limited .................... अपीलाथ / (Formerly known as Swan Mills Ltd.)

Appellant

PFeltham House, 2nd Floor

Ballard Estate, Mumbai 400 001

बनाम v/s

Addl. Commissioner of Income Tax ................... यथ / Range-7(2), Aayakar Bhavan Respondent 101, M.K. Road, Mumbai 400 020

थायी लेखा सं./ Permanent Account Number - AABCS7890Q राज व क ओर से / Assessee by : Mr. J.P. Bairagra नधा रती क ओर से / Revenue by : Mr. Girija Dayal

सनवाई

ु क तार ख / आदे श घोषणा क तार ख / Date of Hearing - 11.03.2013 Date of Order - 03.05.2013 आदे श / ORDER

अ मत शु ला, या यक सद य के ारा /

PER AMIT SHUKLA, J.M.

The present appeal preferred by the Assessee, is against the impugned order dated 16th January 2013, passed by the learned Commissioner (Appeals)-XIII, Mumbai, for the quantum of assessment passed under M/s. Swan Energy Limited

2

section 143(3) of the Income Tax Act, 1961 (for short "the Act"), for the assessment year 2009-10, on the following grounds:- "1. The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs. 9,45,855/- under Section 14A of the Income-tax Act read with Rule 8D of the Income-tax Rules.

2. The learned Commissioner of Income Tax (Appeals) further erred in holding that the proportionate deduction of Rs. 8,20,25,000/- out of the income offered and assessed in assessment year 2004-05 on account of reduction in the value of stock in trade is not allowable.

3. The learned Commissioner of Income Tax (Appeals) further erred in confirming the action of the Assessing Officer in not reducing 22% of the rental receipt amounting to Rs. 2,47,19,200/- while computing the rental income under the head Income from House Property as the same belonged to and declared by M/s. Peninsula Land Ltd.

4. The learned Commissioner of Income Tax (Appeals) further erred in not deciding and holding that even the net rent income is taxable in the hands of the appellant company after deducting 22% of the rent belongs to and assessed in the hands of M/s. Peninsula Land Ltd; the appellant is entitled to full credit of the TDS deducted from the total rent.

5. The learned Commissioner of Income Tax (Appeals) further erred in confirming the addition of Rs. 2,25,00,00,000/- being alleged reduction from the sale consideration of Tower 'A' at Kurla."

2. At the outset, the learned Counsel for the assessee submitted before us that he did not wish to press ground no.1. Consequently, this ground is dismissed as "not pressed".

3. The issues arising out of the other grounds are as under:- (i) Addition of ` 225 crores, on account of deduction claimed by the assessee on the sale consideration of Tower-A, at Kurla; (ii) Addition of ` 8,20,25,000, on account of proportionate deduction in the value of stock-in-trade; and

M/s. Swan Energy Limited

3

(iii) Addition of ` 2,47,19,200, on account of reduction of rental receipts to the extent of 22% from gross rental receipts while computing the rental income under the head "Income From House Property".

4. The relevant facts, apropos the first issue, arising out of ground no.5, are that the assessee has taken a bridge loan from Peerless General Finance and Investment Co. Ltd. (for short "PGFICL") from time to time for its business purpose against the mortgage of its land at Kurla where the assessee had its textile mill and was shown as fixed asset in its balance sheet. It has also deposited its title deeds of the said land. As on 31st March 1995, the total loan taken from PGFICL aggregated to ` 47,71,22,000 as per the balance sheets furnished. The assessee, at the time of obtaining the loan, was engaged in the business of manufacturing and sale of textile and also derived income from leasing and warehousing. The said loan could not be re-paid within the stipulated time. As per the records, some kind of a settlement was going on between the assessee and PGFICL, however, the same could not be materialized. The PGFICL then filed a suit for recovery of the loan along with the interest and compensation before the Bombay High Court being Suit no.787 of 1997. Thereafter, a consent term was arrived at between the assessee and PGFICL on 5th March 1997 and accordingly, consent decree was passed by the Jurisdictional High Court on 7th July 1997, whereby the defendant assessee was required to deliver the plaintiff PGFICL a constructed building upto an area admeasuring 1,50,000 sq.ft. on the plot of Kurla land belonging to the assessee. Such an area was to be delivered within the period of 24 months starting from 21st June 1997. By this decree, M/s. Swan Energy Limited

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the plaintiff was given sole ownership of the area admeasuring 1,50,000 sq.ft. with all rights, title and interest in the same. However, it seems that the assessee could not construct the said building within the stipulated time. Thereafter, a supplementary consent terms was entered between the assessee and PGFICL on 29th April 2004, whereby the assessee was required to give 1,62,000 sq.ft. of built-up area with all the rights, title and interest to PGFICL. This supplementary consent was also the subject matter of the decree by the High Court on the same date i.e., 29th April 2004 in continuance with the earlier decree order. In the meanwhile, the assessee has converted its land which was its fixed assets into stock-in-trade in the year 2002 and necessary entries were made in the books of account and in the audited balance sheet for the year ending 31st March 2002. In order to develop the stock-in-trade i.e., land, the assessee had entered into a development agreement with Piramal Holdings Ltd. vide agreement dated 31st March 2004, for development and construction of commercial and residential building on the land at Kurla and Sewree. Under the said development agreement, the area was earmarked for PGFICL which was termed as "committed area" and the developer was entitled to 22% of the total constructed area. This share of 22% was sans the committed area of 1,62,000 sq.ft. which was to be given to the PGFICL in terms of decree the of the Hon'ble Bombay High Court. The assessee, along with the developer had constructed two towers i.e., Tower-A and Tower-B at Kurla and, thereafter, made an offer to PGFICL to accept one time payment of ` 225 crores in lieu of constructed area of Tower-A which had an area of 1,62,756 M/s. Swan Energy Limited

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sq.ft. and also to relinquish all rights and interest in the building. This proposal was accepted by the PGFICL. Subsequently, the assessee entered into an agreement on 8th August 2008, with Essar Tech Park Pvt. Ltd. to sell the property of Tower-A at Kurla and as per the said agreement, the total sale consideration for the Tower-A was at ` 256 crores. In the agreement itself it was clearly stated that out of ` 256 crores a sum of ` 225 crores was to be paid by Essar Tech Park Pvt. Ltd. directly to PGCFICL and balance amount of ` 31 crores was to be paid to the assessee.

5. In the return of income for the assessment year 2009-10. the assessee claimed deduction for the sum of ` 225 crores and did not show this part of sale receipts and instead a sum of ` 31 crores was declared as surplus income.

6. The Assessing Officer, during the course of the assessment proceedings, noted that the sale consideration of Tower-A for sums amounting to ` 2,56,00,00,000 has neither been shown as receipts under the head "Income From Business" nor under the head "Capital Gains" and observed that the same has been camouflaged under the head "Other Income", whereby only amount of ` 31 crores has been declared [i.e., ` 256 crores (-) ` 225 crores]. He further observed that the assessee is in the business of real estate and has incurred construction expenditure of ` 1,60,30,00,000 and accordingly, required the assessee to explain why the sales proceeds from Tower-A has not been declared as sales from the business in the manner which was done with regard to the Tower-B wherein M/s. Swan Energy Limited

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the assessee had shown sale proceeds as business sales. In response, the assessee after giving the brief history of the entire events submitted that the amount of ` 225 crores was paid to PGFICL in pursuance of High Court decree order and mutual consent agreement. Therefore, this part of the amount could not have been shown as income.

7. The Assessing Officer did not accept this contention and held that the amount of ` 225 creres cannot be reduced from the assessee's income as it is not allowable as revenue deduction because it has neither been debited to Profit & Loss Account nor it has been claimed so by the assessee. Moreover, this liability was incurred prior to the year 1997 and it does not relate to real estate business of the company. The loan was taken for textile manufacturing business which, for all practical purposes, is no longer in existence as no manufacture has taken place during the year and only small scale of trading of textile goods has been carried out from where some income has been shown. He further observed that such a claim of the assessee does not even come within the realm of "diversion of income by overriding title". After referring to the principles laid down by the Hon'ble Supreme Court in CIT v/s Sitaldas Tirathdas, [1961] 41 ITR 367 (SC), he held that it is not the case of diversion of income by overriding title but an application of income. The reason for such a conclusion arrived by him was that the loan taken from PGFICL does not relate to the construction of Tower and the loan was taken for textile business long ago in the year 1997 and it was assessee's obligation to discharge this loan. This re-payment of loan is M/s. Swan Energy Limited

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application of sale proceeds and not diversion of overriding title. In support of his reasoning, he referred to the ratio of the judgment of Hon'ble Supreme Court in CIT v/s Attili N. Rao, [2001] 252 ITR 880 (SC) and the judgment of Jurisdictional High Court in Roshan Babu Mohamad Hussein Merchant Fancy Corporation Ltd. v/s CIT, [2005] 275 ITR 231 (Bom.) and held that the amount of ` 225 crores is not deductible either as "cost of acquisition" or as "cost of improvement" from the portion of sale proceeds of ` 256 crores, nor this amount can be treated as diversion of business income by overriding title. Further, it is also not a revenue expenditure of the current year relating to real estate business. Thus, he concluded that the amount of ` 225 crores is not deductible from the sale proceeds of Tower-A. The final conclusion while adding the same amount is reproduced herein below:- "In the light of the aforesaid discussion, it is held that the amount given to the PGFICL is an application of income by the assessee company to discharge its longstanding obligation to repay the loan taken long back. The assessee company has taken this loan and consumed it for whatever purposes. It can never be reduced from the business profits of the assessee company. It is to be noted here that the company has been carrying forward and setting off the losses of hundreds of crores incurred in the textile business agianst the taxable business income over the last 10 years or so. To claim the discharge of the liability on capital account from that period against taxable revenue receipts of real estate business, would be giving double benefit to the assessee.

Accordingly, in the light of the above discussion, an amount of ` 225 crores is added to the income of the assessee."

8. Before the Commissioner (Appeals), the assessee referred to the relevant facts and the history of the loan and the way this loan was discharged in pursuance of the decree order of the Jurisdictional High Court. M/s. Swan Energy Limited

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He submitted that in the assessment year 1996-97, when the consent payments were being finalized with PGFICL whereby it was being agreed to give 1,50,000 sq.ft. constructed area on the said land to PGFICL, the assessee passed the relevant entries in the books of account and the entire loan payable to PGFICL was squared off after crediting the land account by ` 67,16,000 and ` 47,04,06,000 i.e., totaling to 47,71,22,000 to the Profit & Loss Account. Under these circumstances, the assessee has included ` 31 crores as its income and not the amount of ` 225 crores which was received on sale of Tower-A, and only ` 31 crores was declared by the assessee in its return of income. The Tower-A which had the constructed area of little more than 1,62,000 sq.ft. was assigned and earmarked to PGFICL as per the consent terms approved by the Jurisdictional High Court on 7th July 1997 and, thereafter, the said amount cannot be said to have accrued to the assessee. Hence, there was no question of crediting the amount of ` 225 crores in the Profit & Loss Account on one hand and thereafter, debiting ` 225 crores payable to PGFICL on the other hand. Alternatively, it was submitted that if the value of constructed area given to PGFICL is considered to be satisfaction of mortgage of Kurla land which cannot be allowed as deduction, then income tax in the hands of the assessee should be taxed at the market value of the constructed area of 1,62,000 sq.ft. as on 7th July 1997 i.e., the date on which consent decree was passed. Since the sale had taken place on 8th August 2008, and the entire liability was discharged in this assessment year, therefore, it does not mean that the current value of the property should be taken. By virtue of High Court decree the assessee had M/s. Swan Energy Limited

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no right, title or interest either on the constructed area or in the amount which was to be given to the PGFICL in pursuance of such consent decree, therefore, such a huge value as on 8th August 2008, cannot be referred to as an income of the assessee in this year when it was discharge of liability of the year 1997.

9. The Commissioner (Appeals), rejected the entire contentions of the assessee. In coming to his conclusion, he relied upon the following case laws:-

i) Salay Mohamad Ibrahim Sait v/s ITO & Ors., [1994] 210 ITR 700 (Ker.);

ii) V.S.M.R. Jagadishchandran (DECD) by Lrs. V/s CIT, [1997] 227 ITR 240 (SC);

iii) CIT v/s N. Vajrapani Naidu, [2000] 241 ITR 560 (Mad.); iv) CIT v/s S.R.V. Press & Publications (P) Ltd., [2000] 241 ITR 626 (Ker.);

v) CIT v/s N.M.A. Mohammed Haniffa, [2001] 247 ITR 66 (Mad.); vi) CIT v/s Attili N. Rao, [2001] 252 ITR 880 (SC); vii) CIT v/s Sunil J. Kinariwala, [2003] 259 ITR 10 (SC) and viii) CIT v/s Sharad Sharma, [2008] 305 ITR 24 (All.). The above case laws relied upon by the learned Commissioner (Appeals) for the proposition that it is not a case of diversion of income by overriding title but application of income and, therefore, the entire amount of ` 225 crores should be considered as sale proceeds from its business of real estate development. Accordingly, he confirmed the entire income of ` 225 as taxable under the head "Income From Business" from the sale proceeds of M/s. Swan Energy Limited

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Tower-A. Regarding the alternate contentions of the assessee that market value of 7th July 1997, should be taken, he rejected the same on a grounds which have been discussed in Pages-36 and 37 of the appellate order.

10. Before us, the learned Counsel for the assessee after referring to the entire facts and the material placed on record with regard to the history of loan taken, consent agreements between assessee and PGFICL, decrees of the High Court, development agreement with Piramal Holdings Ltd., final sale proceeds and treatment of the income by the assessee, submitted that the assessee has not received the amount of ` 225 crores at all, as the same was given directly by the seller to the PGFICL in terms of decree passed by the Hon'ble Jurisdictional High Court, therefore, it is a clear cut case of diversion of income by overriding title. From the decree order and the subsequent supplementary consent terms, the assessee was required to provide 1,62,000 sq.ft. area with all the rights, title and interest to PGFICL, therefore, the amount on sale of such an area cannot be taxed as "Income From Business". Regarding the case laws relied upon by the Commissioner (Appeals) as well as by the Assessing Officer, he submitted that all these judgments relate to the computation of capital gains and none of the case relate to the business income, therefore, the case laws relied upon by the Commissioner (Appeals) would not be applicable to the facts of the present case.

11. The learned Counsel also reiterated its alternate contentions which were raised before the Commissioner (Appeals) that market value as on 7th M/s. Swan Energy Limited

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July 1997 i.e., the date of High Court decree has to be taken towards the satisfaction of the mortgage whereby the value of the constructed area of 1,62,000 sq.ft. was around ` 12 crores and odd. In support of this, he submitted that the approved valuer's report was also submitted before the Commissioner (Appeals). Thus, the current market value of ` 225 crores cannot be added as income when the assessee had not received the said amount at all otherwise it will lead to a great hardship upon the assessee. Lastly, he submitted that the amount paid to PGFICL should be allowed as business deduction or loss while computing the income under section 28, as the Assessing Officer has treated the amount of ` 225 crores as business income.

12. During the course of hearing, the learned Counsel was required to furnish copies of balance sheet and profit & loss account for the earlier years and also the nature of business activities and the business income earned right from the earlier years to the present assessment year. In response, the learned Counsel had submitted the copies of balance sheet and profit & loss account for the earlier years and also a statement giving nature of business income right from assessment years 1991-92 to 2010-11.

13. Per contra, the learned Departmental Representative after referring to the various findings and conclusions drawn by the Assessing Officer as well as by the Commissioner (Appeals), submitted that the discharge of loan liability even in pursuance of High Court order cannot be held to be diversion of income by overriding title but it is a clear cut case of application of M/s. Swan Energy Limited

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income. All the judgments which have been relied upon by the Commissioner (Appeals), though were rendered in the context of capital gain, would also be applicable to the present case because the amount of ` 225 crores which was received towards sale proceeds is income of the assessee from where it has discharged its loan liability. The learned Commissioner (Appeals) has, therefore, rightly held that it is a case of application of income. He, thus, strongly relied upon the findings of the learned Commissioner (Appeals).

14. Regarding alternative plea of the learned Counsel that market value as on 7th July 1997, should be taken as satisfaction of mortgage is also not correct and for this, he relied upon the findings of the Commissioner (Appeals).

15. We have carefully considered the rival contentions, perused the orders of the learned Commissioner (Appeals) as well as the Assessing Officer and the material placed on record. The primary facts which needs to be reiterated for the purpose of adjudication of this issue are that the assessee has taken a bridge loan from time to time after mortgaging its plot of land at Kurla to PGFICL which aggregated to ` 47,71,22,000 as on 31st March 1995, for the purpose of its business. The assessee, at the time of taking the loan was engaged in the business of manufacturing of textile items and was also having business income from trading of textile products, leasing and warehousing. Since the loan could not be repaid within the stipulated time, the assessee had entered into some kind of negotiation for settlement of its loan liability along with the interest thereon with PGFICL after developing the M/s. Swan Energy Limited

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property and handing it over to them. However, failing such negotiations, PGFICL filed a suit for recovery before the Bombay High Court and as per the consent decree dated 7th July 1997, by the High Court, the assessee was required to handover the constructed area admeasuring 1,50,000 sq.ft. to the PGFICL. Thus, as per the order of the High Court, the assessee has to alienate 1,50,000 sq.ft. of constructed area which was to be built up at the plot available at Kurla with all the rights, title and interest in favour of PGFICL in lieu of a loan as well as the accrued interest. This was a kind of compensation, as there was no proper quantification interest of amount and instead a constructed area was to be given. The assessee, thereafter, converted its land which was held as its fixed asset into stock-in-trade and entered into an agreement with Piramal Holdings Ltd. for development of the property / building on its land. In the mean time, a revised consent was agreed upon and consent decree was obtained from Bombay High Court on 29th April 2004, that instead of 1,50,000 sq.ft., 1,62,000 sq.ft. constructed area shall be handed over to PGFICL. Two towers viz. "A" and "B" were developed by the assessee along with the Piramal Holdings Ltd. and in Tower-A area of 1,62,000 sq.ft. was to be handed over to PGFICL. Instead of that, the assessee entered into a sale agreement with Essar Tech Park Ltd. for the sale of Tower-A for a consideration of ` 256 crores out of which a sum of ` 225 crores was to be paid directly to the PGFICL as per their mutual understanding based on the negotiation. The balance ` 31 crores has been offered as income by the assessee. In the course of assessment, the assessee has claimed the deduction for the entire sum of ` 225 crores which M/s. Swan Energy Limited

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it had neither shown it as sale receipts nor claimed any deduction of interest or business loss. The Assessing Officer too has added the entire sum of ` 225 crores as business income of this year by holding that it does not fall within the parameter of "diversion of income by overriding title" and the entire payment of ` 225 crores is nothing but application of income which is to be added back as business income. He has also held that no deduction can be allowed from the business profit because the loan was taken for the textile business which is no longer in existence and the assessee has claimed this deduction out of business income from the development of the property. This has been confirmed by the learned Commissioner (Appeals).

16. The main issue for adjudication before us is whether the amount of ` 225 crores can be allowed as deduction while computing the profits and gains of business under section 28.

17. The Assessing Officer and the Commissioner (Appeals) have relied upon a catena of case laws that the amount of ` 225 which has been claimed as deduction by the assessee is in fact application of income and, hence, cannot be allowed. However, on a perusal of the case laws relied upon by both the authorities, it is seen that all the judgments pertain to the issue of computation of capital gain and none of the case laws are relevant for deduction under the head "Business or profession". However, we are in agreement with the reasoning of the Assessing Officer and the Commissioner (Appeals) that the repayment of the loan amount is nothing but application of income because loan is on capital account and discharging of loan liability M/s. Swan Energy Limited

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out of the income is merely application of income. As per the balance sheet filed the loan amount reflected was ` 44,71,22,000 and we were informed that assessee has not provided with interest in the books and this amount was principal only. Therefore, to the extent of the loan amount taken by the assessee for sums aggregating to ` 44,71,22,000, it is a clear cut case of application of income and not diversion of income by any overriding title. Accordingly, we hold that the loan amount of ` 44,71,22,000, subject to verification of actual amount, can neither be claimed as deduction while computing profits and gains from business nor can be allowed as revenue expenditure.

18. Now, whatever is the balance amount i.e., excess of loan amount, the issue is whether the same can be allowed as deduction while computing the profits or loss under the head "Business or Profession" under section 28 of the Act or either as interest which is a revenue expenditure liable for deduction from the business income or as compensation in discharging the loan liability belatedly. From the balance sheet and profit and loss account of the earlier years as well as the statement furnished by the learned Counsel, it is noted that the assessee's income from business of textile, warehousing and leasing is being continued. This aspect of the matter has also been noted by the Assessing Officer in Pages-14 and 15 that the assessee is carrying forward and setting of the losses incurred in the textile business against the textile business income over the last ten years and further at Pages-10 and 11, he has observed that no manufacturing of textile has taken place during M/s. Swan Energy Limited

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the year but there is only small scale of trading of such goods. He, in fact, has allowed carried forward of business loss to be set-off against business income in this year, which is evident from the computation made by him.

19. For allowability of business deduction or loss, it has to be seen, whether the same business has been continued i.e., whether there is any inter-connection, inter-lacing, inter-dependence and unity of control in the two businesses by way of existence of common management, common business organisation, common business administration, common funds and common place of business. Even if one business is closed without affecting the conduct of other business, there would still be strong indication that the two business construed the same business. However, this aspect has not be examined either by the Assessing Officer or by the Commissioner (Appeals) at all.

20. The decisive test of the continuity of the same business was reiterated by the Hon'ble Supreme Court in B.R. Ltd. v/s CIT, [1978] 113 ITR 647 (SC). The facts in this case were that the assessee used to carry on the business in (i) general insurance; (ii) brokerage and commission and (iii) import of sale of wooden fabrics, leather beltings, hardware, toilet goods and various other products. The business of import and sale of articles was closed down by the assessee in the year corresponding to the assessment year 1953-54. In that year, the assessee had suffered accumulated business loss of ` 56,488 from such business. From the assessment year 1954-55, the assessee started the business of exporting of cotton textile instead M/s. Swan Energy Limited

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importing wooden fabrics which business has ceased to exist. The assessee claimed that loss of ` 56,488 incurred by it on the import of sale of articles should to be set-off against the profits made during the assessment years 1954-55, 1955-56 and 1956-57 from the new export business. The ITO & AAC rejected the assessee's claim on the ground that business of importing and selling of goods was distinct and separate from the business of exporting goods and since import business which the assessee was doing, did not constitute as same business and, therefore, the loss cannot be set-off. In this background, the Hon'ble Supreme Court, after applying the test laid down by Rowlatt J. in Scales v/s Jeorge Thompson & Co. Ltd., [1927] 13 Tax Cases 83, viz. whether there is any inter-connection, inter-lacing, inter- dependence, any unity at all embracing those two business and also the judgment of the Hon'ble Supreme Court in CIT v/s Prithvi Insurance Co. Ltd., [1961] 63 ITR 632 and host of other judgments, observed and held as under:-

"12. In the light of the objective tests evolved in these decisions, not forgetting of course the basic formulation of Rowlatt J. in Scales (supra) we are of the opinion that the CIT was wrong in taking the view that the business which the appellant was doing in the relevant assessment years was not the same business which it was doing when it incurred the unabsorbed loss. A common management, a common business organisation, a common administration, a common fund and a common place of business show in the instant case the interlacing and inter-dependence of the businesses carried on by the appellant.

13. In support of his conclusion that the two businesses are different, the CIT relies on the circumstances that "there is a distinct and marked difference in the nature of goods dealt with" by the appellant and "the procedure involved in the import of articles from foreign countries and the export of articles manufactured in India to different foreign countries is entirely different." These circumstances are not by themselves sufficient to establish that the business of import which the M/s. Swan Energy Limited

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appellant was doing is not the same business as that of export. The decisive test, as held by this Court in Produce Exchange Corporation (supra) is unity of control and not the nature of the two lines of business. The CIT also fell into the error of supposing that, apart from the fact that the two activities must form an integral part of the entire business, the "main consideration which has to prevail is" whether, "notwithstanding the fact that the assessee may close one activity, it does not interfere in the carrying on of the other activity." The fact that one business cannot conveniently be carried on after the closure of the other may furnish strong indication that the two businesses constitute the same business. But the decision of this Court in Prithvi Insurance Co. (supra) shows that no decisive inference can be drawn from the fact that after the closure of one business, another may or may not conveniently be carried on. The CIT also overlooked that in the revision applications filed by the appellant, it was expressly stated that it was true that "there was a common control and common management of the same board of directors" of the business of import and export. Thus, the unity of control and the other circumstances adverted to above show that there was dovetailing or interlacing between the business of import and the business of export carried on by the assessee and that they constitute the same business.

14. For these reasons, we set aside the orders passed by the CIT and hold that the appellant is entitled to set off the unabsorbed loss of the asst. yr. 1953-54 against the profits of the asst. yrs. 1954-55, 1955- 56 and 1956-57. The appellant will get its costs of the appeals in one set from the respondent.

21. Similarly, in Veecumsees v/s CIT, [1996] 220 ITR 185, the Hon'ble Supreme Court while dealing with the issue of allowability of interest on the capital borrowed had applied the aforesaid test. In this case, before the Hon'ble Supreme Court, the assessee was doing the business of jewellery. Later on, it had also commenced the business of exhibition cinematographic films for which it had obtained loan for building of cinema theater in the year 1961. The said theater was built in the year 1962 and was run by the assessee until 31st July 1965. For the years, the assessee claimed the interest paid on loan obtained for constructing the cinema theater. Later on, the cinema business was no longer in existence and the interest on M/s. Swan Energy Limited

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borrowing attributable to this particular business was claimed as deduction from the business income of jewellery business. This was disallowed by the ITO. The Hon'ble Supreme Court relying upon the decision in B.R. Ltd. (supra), observed and held as under:-

"3. Learned counsel for the assessee drew our attention to the judgment of this Court in B.R. Ltd. vs. V.P. Gupta, CIT 1978 CTR (SC) 82 : (1978) 113 ITR 647 (SC). This Court affirmed what had been held earlier in Produce Exchange Corpn. Ltd. vs. CIT (1970) 77 ITR 739 (SC). Both these related to the meaning to be ascribed to the expression "same business" for the purposes of set off of carry forward loss. In the former case this Court said :

"..... The decisive test, as held by this Court in Produce Exchange Corporation.....is unity of control and not the nature of the two lines of business....The fact that one business cannot conveniently be carried on after the closure of the other may furnish a strong indication that the two businesses constitute the same business. But the decision of this Court in Prithvi Insurance Co. (1967) 63 ITR 632 (SC) shows that no decisive inference can be drawn from the fact that after the closure of one business, another may or may not conveniently be carried on....Thus, the unity of control and the other circumstances adverted to above show that there was dovetailing or interlacing between the business of import and the business of export carried on by the assessee and that they constitute the same business."

4. The fact that the Revenue had during the years when the assessee carried on the business of cinematographic films permitted as a deduction under s. 36(1)(iii) the interest on loans obtained by the assessee for the purpose of constructing the said theatre shows that at the time when the loans were obtained the said theatre was a part of the business of the assessee. It was interest on these loans, borrowed for the purpose of the business of the assessee, which was being paid in the years in question and the Tribunal was, in our view, right in concluding that such interest had to be treated as a deduction under s. 36(1)(iii). The loans had been obtained for the purposes of the assessee's business. The fact that the particular part of the business for which the loans had been obtained had been transferred or closed down did not alter the fact that the loans had, when obtained, been for the purpose of the assessee's business. The test of "same business" appropriate for set off of carry forward losses is not appropriate here." M/s. Swan Energy Limited

20

22. The aforesaid principles laid down by the Hon'ble Supreme Court has to be taken into consideration while considering the fact whether the same business has been continued and any business expenditure or liability or business deduction pertaining to the earlier years of any one business can be discharged in subsequent year from the other business or not, this has to be examined. The aforesaid vital principle of law has not been examined by the Assessing Officer or by the Commissioner (Appeals). Because in this case, the Assessing Officer and the Commissioner (Appeals) have mainly proceeded on the basis of ratio laid down by the various High Courts and Hon'ble Supreme Court which were rendered in the context of computation of capital gain, wherein the issues involved were, whether the loan which has been taken on mortgage of land and if such loan liability has been discharged, amounts to application of income or diversion of income by overriding title. In this case, the amount of ` 225 crores has been treated as income which is being assessed under the head "Business". These aspects of continuity of same business and claim for deduction of interest or compensation as deduction/ loss under section 28 has not been looked into or examined.

23. Thus, in all fairness, the issue of allowability of deduction of balance amount needs to be verified by the Assessing Officer and, therefore, in the interest of justice, the matter is restored back to the file of the Assessing Officer to examine the issues afresh. While examining this issue, the Assessing Officer will also look into the allowability of any deduction or loss M/s. Swan Energy Limited

21

of excess amount of principal loan amount of ` 41,72,22,000, while computing the profit and gain of business or profession under section 28, because the Assessing Officer as well as the Commissioner (Appeals) have treated the entire amount of ` 225 crores as business income of the assessee. The Assessing Officer will also look into the pleadings / decrees of Bombay High Court, by which the assessee was required to handover the constructed area of 1,50,000 sq.ft., which was later on enhanced to 1,62,000 sq.ft. to see whether the obligation which was to be discharged in pursuance of such a decree was in the nature of compensation for delayed payment or in the nature of any kind of interest, which was not provided in books. Ultimately, in the computation of business income under section 28, what is charged to tax is the profits or gains of business or profession and only the net amount earned on carrying on business, which necessarily requires deduction of expenditure or loss incurred in carrying on such business. This fundamental principle of law has to be kept in mind.

24. Thus, the issue of allowability of deduction / business loss on account of excess amount over the principal loan is restored to the file of the Assessing Officer who shall examine the same afresh and in accordance with the provisions of law. The Assessing Officer is also directed to examine the exact amount of principal amount also while considering the same, as we have considered the amount on the basis of annual reports filed before us. Since principal amount can be examined, the issue of excluding the cost of constructed area on the basis of valuation report as claimed by assessee M/s. Swan Energy Limited

22

does not arise. To the extent of principal amount, as per record, the same can not be allowed as deduction. While examining the issue of allowability of deduction, the Assessing Officer will provide due and effective opportunity of hearing to the assessee.

Consequently, we set aside the impugned orders passed by the Assessing Officer / Commissioner (Appeals) and treat the ground raised by the assessee as partly allowed for statistical purposes.

25. The second issue arising out of ground no.1, is disallowance of ` 8,20,25,000 on account of deduction in value of stock-in-trade.

26. The relevant facts, apropos adjudication of this issue, are that the assessee had converted all its land at Kurla and Sewree which was held by it as fixed asset into stock-in-trade in the assessment year 2002-03. After the said conversion of asset into stock-in-trade, the assessee had entered into a development agreement dated 31st March 2004 with Piramal Holdings Ltd. for the development of the properties. As per the terms of the agreement, the Piramal Holdings Ltd. was obliged to develop and construct super- structure for residential and commercial purposes along with the assessee. Out of the total consideration, 22% of the gross value of all the sales, income / revenue was earmarked for Piramal Holdings Ltd. The Piramal Holdings Ltd., in turn, as part of the agreement paid ` 32 crores to the assessee company in the assessment year 2004-05 for assigning the development rights in their favour. The said receipt of ` 32 crores was shown M/s. Swan Energy Limited

23

as business receipts in the assessment year 2004-05. However, while drawing the Profit & Loss account, the assessee had shown sale from development of properties at ` 32 crores and also reduced the said value from the closing stock. The relevant entry for reduction of value in stock-in- trade in schedule-10 of the balance sheet as on 31st March 2004, were made as under:-

Variation in value of stock-in-trade

Closing stock of land in stock-in-trade ` 31,72,00,000 Opening stock of land in stock-in-trade ` 64,45,30,000 *

Total:- ` 32,81,00,000

*

This amount of ` 32.81 crores was the reduction made in the stock.

27. At the time of filing original return of income, however, such reduction of value of closing stock was disallowed and was added back as income. In other words, the amount of ` 32 crores, received from Piramal Holdings Ltd. was shown as income on one hand and on the other the closing stock which was valued at reduced cost at 32.81 crores was also added back in the original return of income by disallowing the same. Thus, the said income was shown twice, first, as income credited in the Profit & Loss account and second, adding the same amount over and above the Profit and Loss account. Thereafter, the assessee filed a revised return of income where the said reduction in the value of stock which was disallowed in the original return of income was disregarded and only corresponding income of ` 32 crores which was already shown in the Profit & Loss account was shown as M/s. Swan Energy Limited

24

taxable income. Thus, revised return of income was to avoid the double taxation of the same amount and was in accordance with the entries made in the audited Profit & Loss account. During the course of assessment proceedings for the assessment year 2004-05, the Assessing Officer rejected the revised return of income of the assessee and disallowed the said reduction from the valuation of the closing stock. In a way, the double addition was confirmed. In this year, the assessee, while filing its return of income, claimed the proportionate amount of ` 8,20,25,000, after making the following narrations in the computation of income:- "Offered in the original return of income, as business income (by way of disallowance) in A.Y. 2004-05 and assessed with corresponding reduction in stock valuation in closing stock, stock reduction in books."

28. The Assessing Officer noted that no such expenditure was claimed in the audited Profit & Loss account and, accordingly, he required the assessee to justify this reduction from the total income. The assessee reiterating the facts as mentioned above, submitted that since the amount of ` 32.81 crores being reduction in the value of stock by the assessee was not allowed in the assessment year 2004-05, as it was wrongly added back in the original return of income, the stock value of the assessee must, therefore, be enhanced to that extent for the purpose of calculation of income tax on the business profit as and when the stock-in-trade is subsequently sold. Accordingly, an apportionment is carried out on realistic basis as the same is claimed for deduction against sale consideration in the concerned M/s. Swan Energy Limited

25

assessment year. The said explanation of the assessee was not accepted by the Assessing Officer. He held and observed as under:- "..... In nutshell, the matter is that the assessee had shown receipts of ` 32 crores as business receipts in the assessment year 2004-05. Against these receipts, the assessee claimed no deduction in the original return, but later on claimed deduction of the same amount (in the form of reduction in value of closing stock-in-trade) in the revised return. This deduction were disallowed by the Assessing Officer and the matter was contested in appeal right upto ITAT. The final decision was done by the ITAT that this deduction is not allowable. Whatever be the reasons for arriving at this conclusion, these are not the subject matter of the current adjudication, however, the same cannot be a basis of claiming the same deduction again in assessment year 2009-

10. Hence, this deduction is disallowed in the current year as well."

29. The other reasons for rejecting the assessee's contentions were that in successive audited balance sheet for more than five years after assessment year 2004-05, the assessee continued to declare the lower value of closing stock-in-trade, therefore, it cannot adopt a different value of stock-in-trade for the income tax purpose in this year. The deduction pertains to assessment year 2004-05 and not assessment year 2009-10 and, therefore, the deduction whether allowable or disallowable would be in that year and definitely not in the assessment year 2009-10. The event which had happened in assessment year 2004-05, cannot be claimed in the current year. If the same amount which has been held not allowable as business deduction in the year which was decided by the Tribunal, then how it can be allowed as business deduction in the assessment year 2009-10.

30. Before the learned Commissioner (Appeals), it was submitted that reliance placed by the Assessing Officer on the order of the Tribunal for the M/s. Swan Energy Limited

26

assessment year 2004-05 is wholly misplaced as the Tribunal has not given any finding in this regard and the issue decided by the Tribunal was on larger issue whether there was transfer of stock-in-trade to the developer and whether the capital gain arose on such transfer. There were no findings on the issue of reduction of value of stock-in-trade and double addition. The submissions which were made before the Assessing Officer were reiterated which has been incorporated by the learned Commissioner (Appeals) in his order at Para-3.1/Pages-5 to 7 of the appellate order. The learned Commissioner (Appeals) too rejected the assessee's contentions though on a slightly different footing. The relevant finding of the learned Commissioner (Appeals), for the sake of ready reference, is reproduced below:- "I have carefully considered the facts of the case. The appellant was holding land as fixed assets which were converted into stock in trade. Such conversion from fixed assets into stock in trade took place in A.Y 2002-03. The appellant entered into an agreement with M/s Piramal Holdings Ltd. for alleged development of the said land. The appellant has claimed that on entering into a development agreement dated 31.3.2004 with Piramal Hpldings Ltd. for the development of all the three properties, receipt of Rs. 32 crores as consideration for the same, on the entering into the said development agreement and assignments of certain rights in the various properties (stock-in- trade), there was diminution in the overall valuation of its stock-in- trade to the extent of Rs.32.81 crores. I am not able to appreciate/understand as to how there was diminution, if any, in the valuation of stock in trade on entering into an agreement with M/s PHL. As per the accounting standards, the closing stock is to be valued either at cost or market value whichever is less. In the case under consideration, the cost of stock in trade was fixed on conversion of asset land into stock in trade. It is worth to mention here that the appellant has not claimed deduction on account of reduction in the value of closing stock in any earlier year. In the facts and circumstances, the value of stock in trade was required to be taken as cost or the market value as on the last day of the year under consideration i.e. 3 1-03-2009. In my considered view, the market value of stock in trade as on last day of the year under consideration would have been much more and therefore, the value of closing stock was correctly taken by appellant itself as cost on conversion of land M/s. Swan Energy Limited

27

into stock in trade. It is also not understood as to how the value of stock in trade i.e. land and structure thereon will reduce only because of the fact that the appellant had entered into an agreement with some party for development of the said land. It is true that appellant had received Rs. 32 crores from the said party but that fact could not have affected the valuation of closing stock. In fact by paying Rs. 32 crores to the appellant, the said party had purchased the source of income for subsequent years in the form of alleged sharing of 22% of sale proceeds. The appellant's claim is also contradictory for the reasons that the appellant in fact developed the property on its own and the cost of construction was born by the appellant itself as stated on page 3 and 12 of ITAT order for assessment year 2004-05. For the reasons stated by the AO (mentioned above), I am in agreement with the AO in holding that there was no diminution in value of closing stock.

Without prejudice to the above findings, even if for the sake of arguments, appellant's argument/stand of diminution in value of closing stock is accepted, such diminution will be in market value of stock as on last day of the year under consideration or as on 31.03.2004 when development agreement was entered into with M/s. Piramal Holdings and not in the value (cost price) of stock on the date of conversion of same into stock in trade. The market value of land as on 3 1-03-2004 or on 3 1-03- 2009 was much more than value (cost price) on which land was converted into stock in trade. Therefore, on this count also, the appellant's claim fails."

31. The learned Counsel, before us, submitted that the assessee has converted its land into stock-in-trade in the year 2002 and when it had entered into agreement with Piramal Holdings Ltd. The assessee had received a sum of ` 32 crores for assigning the development rights on the said land. The said sum of ` 32 crores were offered as business income in the Profit & Loss account and at the same time, it reduced the value of stock by ` 32.80 crores as it was a kind of work-in-progress. However, in the original return of income, this amount was disallowed and added back to the computation. The assessee immediately thereafter filed a revised return of income rectifying its mistake that the amount of ` 32 crores has already been shown as income and was again added back in the computation. In the M/s. Swan Energy Limited

28

revised return of income, the reduction of value in stock-in-trade was claimed which was disallowed. Now, in this year, when the assessee had completed its two towers and received sale consideration, it has claimed the proportionate deduction in the work-in-progress i.e., stock-in-trade. The claim for the reduction was made at ` 8.20 crores being 25% of ` 32.81 crores. If the same is not allowed, the assessee will suffer double taxation for the reason that it has already offered twice for the sum of ` 32.00 as income in the assessment year 2004-05 and has not reduced the value by this sum to the stock-in-trade in this year. Once the assessee had sold part of its stock-in-trade, the proportionate deduction has to be allowed.

32. On the other hand, the learned D.R. strongly relied upon the findings of the learned Commissioner (Appeals) and drew our attention to the relevant observations made by the learned Commissioner (Appeals) and the Assessing Officer. He submitted that even if the assessee's contentions are accepted, then also, such a revision of accounts for reduction value in stock- in-trade cannot be done after the expiry of five years. Thus, he strongly relied upon the findings given by the learned Commissioner (Appeals).

33. We have carefully considered the rival contentions, perused the orders of the authorities below and the material placed on record. The assessee entered into the business of property development after converting its land into stock-in-trade in the year 2002. In the assessment year 2004-05, it had entered into the development agreement with Piramal Holdings Ltd. to develop the property. For parting away with some rights for the purpose of M/s. Swan Energy Limited

29

development, an amount of ` 32 crores was received by the assessee from the said developer. This income was shown as business income. The controversy in that year which reached up to the stage of the Tribunal was whether by virtue of the development agreement, there was any transfer of property within the meaning of section 2(47) so as to attract capital gain in that year or not. The Tribunal had decided the issue of non taxability of capital gain and not on the issue whether the reduction of value of stock-in- trade by the assessee as claimed in the revised return of income was correct or not. In the Profit & Loss account, the assessee had shown a sum of ` 32 crores as income from sale of property and reduced the same from the value of stock. In the original return of income, this reduction in the value of stock was disallowed by the assessee itself and added back to the income which was later on claimed that same was due to mistake as it had led to double addition of income. The relevant entries in the Profit & Loss account have already been discussed above. However, the assessee's claim for reduction was disallowed which has also attained finality in the assessment year 2004-

05. In this year, the assessee is claiming the proportionate deduction of ` 8,20,25,000, on the ground that in this year, the assessee had actually sold some of its stock-in-trade, therefore, the enhanced value coming from the earlier years from the value of stock-in-trade should be reduced.

34. In the assessment year 2004-05, the assessee had not sold its stock of land but has received money for assigning of development rights to Piramal Holdings Ltd. i.e., the developer. The entry made by the assessee in M/s. Swan Energy Limited

30

the Profit & Loss account by way of reduction in value of stock-in-trade was not the correct way of claiming such deduction because there was actually no reduction in stock. In this case, the assessee perpetuated further error by adding back the amount of ` 32.81 crores as income after disallowing the reduction of the value of the stock-in-trade, because the assessee had already shown the amount of ` 32 crores as income in the Profit & Loss account. Thus, the same income was added and taxed twice. Now the assessee had actually sold some of the stocks i.e., constructed buildings and has claimed proportionate deduction to the extent of 25% on the reason that the income in relation to reduction of stock has already been taxed, therefore, it should be allowed now at the time of actual sale. Such a deduction cannot be disallowed by the Assessing Officer on the ground that the assessee should have revised its balance sheet in the earlier years or the same is not allowable in this year for the mistake committed in the earlier years because what the assessee is claiming is the write-off of income which was already offered for tax in the assessment year 2004-05. It is a well settled principle of law that the assessee cannot be subjected to tax twice for the same income. Thus, proportionate claim of deduction of ` 8,20,25,000 in this year has to be allowed, as it is a kind of write-off of income already tax earlier. It is also well settled proposition of law that the entries made in the books of account or in the Profit & Loss Account by the assessee is not dessicive factor for taxing the income but chargeability of income has to be seen as per the relevant provisions of law. Even though the assessee had made a wrong entry in the Profit & Loss account earlier, however, the M/s. Swan Energy Limited

31

assessee's claim at this stage that proportionate deduction of income which has already been offered for taxation is to be allowed in this year has to be accepted.

35. Ideally, in the present case, once the assessee has received a sum of ` 32 crores from Piramal Holdings Ltd., the assessee has as developer should have adjusted the amount against the cost and should have taken the amount to the Balance Sheet as reduced work-in-progress rather than showing it as business income. In any case, this claim of deduction has to be allowed on the peculiar facts of the assessee's case. The findings and the conclusion drawn by the learned Commissioner (Appeals) as well as the Assessing Officer cannot be upheld for this reason alone. In fact, this is merely an arithmetical adjustment of accounts so as to disclose the correct profit from the sale of stock, otherwise either the income offered and assessed in the assessment year 2004-05 is incorrect or the claim for reduction in the stock of ` 8,20,25,000 is incorrect. Both cannot be held to be incorrect simultaneously because it will leading to a double jeopardy to the assessee. Consequently, we accept the contentions raised by the learned Counsel and set aside the impugned order passed by the learned Commissioner (Appeals) and allow the ground raised by the assessee.

36. The last issue relates to addition of ` 2,47,19,200, while computing the rental income under the head "Income From House Property". M/s. Swan Energy Limited

32

37. The assessee, in the present case, had declared a rental income of ` 8,82,28,800 and offered the same under the head "Income From House Property". Majority of the rental income had been received from letting out of two commercial complexes tower viz. "A" and "B". This property has been developed by the assessee along with Piramal Holdings Ltd. which later on was known as "Peninsula Land Ltd". This property was let out to Essar Information Tech Ltd. In all, the assessee during the year had received ` 11,23,60,000 as rental receipts from the same tenant during the relevant assessment year. However, while working out the income from house property, the assessee had reduced 22% of the rental receipts amounting to ` 2,47,19,200 and offered the remaining sum as rental income. In response to the show cause notice given by the Assessing Officer, the assessee submitted that it had entered into a development agreement in the year 2004 and as per the clauses of the said agreement, the assessee was obliged to transfer by overriding the title share of 22% of the property and any income earned from the property to Piramal Holdings Ltd. i.e., "Peninsula Land Ltd". A reference was made to clause 7 of the said agreement. The assessee's explanation was rejected by the Assessing Officer on the ground that the assessee was undisputed owner of the property and the annual value of the property was ` 11,23,60,000, which was chargeable to tax has to be in the hands of the assessee only. He also relied upon the judgment of Bombay High Court in Savitri & Co. v/s ITO, 246 ITR 617 (Bom.), wherein it was held that if the same amount is paid to meet the contractual obligation of the owner of the property, it was not diversion of income by overriding M/s. Swan Energy Limited

33

title and rather application of income. Moreover, the rent which was paid by the tenant to the assessee, TDS was deducted accordingly for whole of the amount. Thus, he added the rental receipts of 2,47,19,200, in the hands of the assessee.

38. Before the learned Commissioner (Appeals), the assessee reiterated the submissions as made before the Assessing Officer and submitted that as per clause 7 of the agreement, the developer was entitled to gross revenue share corresponding to 22% of the total area constructed i.e., saleable area which include area sold, licensed, leased, car parking and any other commercial exploitation has to be of the premise. Thus, by virtue of this agreement, the assessee was entitled for 78% of any revenue received either from sale or rental income, etc. Moreover, as per their understanding, the entire revenue from the project on account of area sold, licensed lease or commercial exploitation will be deposited in escrow account and the assessee was entitled to withdraw 78% only and 22% was to be withdrawn by the developer. Moreover, this amount has been shown by the developer as taxable income in its hand and the same has actually been taxed there. They had also not claimed TDS deducted on the said amount equivalent to 22% of the total TDS deducted. Distinction was also made on the judgment of Jurisdictional High Court as relied upon by the Assessing Officer.

39. The learned Commissioner (Appeals) rejected the assessee's contentions completely and held that from the reading of various terms and conditions of the development agreement, it would be seen that the entire M/s. Swan Energy Limited

34

project was to be constructed by the assessee and every liability was upon the assessee. Even the cost of construction of the project was to be incurred by the assessee. This sharing of 22% was only a financial agreement for getting a finance / loan of ` 32 crores from Piramal Holdings Ltd. so that the assessee can fulfill certain liabilities. The assessee alone was responsible for the entire cost of construction and development of the said property and to bear all the expenses, hence, there cannot be any question of overriding title. But share of 22% in the rental income is a kind of repayment of loan taken for ` 32 crores from the said developers. Thus, he confirmed the action of the Assessing Officer though on an entirely different footing. However, he agreed with the assessee's alternative claim of allowing 100% credit of TDS of ` 2,62,90,165, which was denied by the Assessing Officer.

40. Before us, the learned Counsel submitted that the development agreement entered with Piramal Holdings Ltd. was not a financial arrangement for obtaining a loan of ` 32 crores, but for development of entire project. Even though the assessee had incurred major cost but the developer was responsible for developing the entire project on its own that is why it was agreed between the parties that 22% of the entire revenue either by way of sale or by way of rent or any kind of gain from exploitation of property would be divided in the ratio of 78:22. Clause 7 of the agreement clearly provides for such a sharing. He also referred to the letter written by the developer to the Assessing Officer which had given at Page-67 of the paper book, that 22% of the gross revenue generated from such property M/s. Swan Energy Limited

35

was their income which has been shown in the return of income in the relevant assessment year and tax has been paid. Even though the ownership of the lease continued with the assessee, however, it was entitled for share of revenue because of the entire development undertaken by it. He further pointed out that once these towers were sold, the sale proceeds too has been divided in the same ratio and this fact has been accepted by the Assessing Officer. In support of these contentions, he relied upon the details of sales and other income as shown in the audited accounts for the assessment year 2009-10. Thus, by virtue of this development agreement, there was a clear cut diversion by overriding title to the extent of 22% of the income generated from the property which will straight-away belong to the developer and not to the assessee.

41. On the other hand, the learned Departmental Representative submitted that it is not a case of diversion of income by overriding title because there was no specific provision for share of rent as per the rent agreement entered with Essar Information Tech Ltd. The assessee was liable to disclose all the rent received in its hands as being the owner of the property. Finally, he relied upon the findings of the Assessing Officer and the learned Commissioner (Appeals).

42. We have carefully considered the rival contentions, perused the orders of the authorities below and the material placed on record. Insofar the facts as have been narrated upon, they are not in dispute. The only issue is that whether the rental income to the extent of 22% which has been diverted to M/s. Swan Energy Limited

36

the developer Peninsula Land Ltd., can be held to be income in the hands of the assessee to be taxed under the head "Income From House Property". On a perusal of clause 7 of the development agreement dated 31st March 2004, which starts with the heading "Developers' Entitlement", reads as under:- "7. DEVELOPERS' ENTITLEMENT

A. The Developers shall be entitled to a gross revenue share corresponding to 22% of the total area constructed (saleable Are) on the said properties. For the purpose of this clause, the total area constructed (selable area) shall not include the committed Area. It is also agreed that for the purposes of this clause, the saleable area shall include the areas sold, licensed, leased, car parks and commercial exploitation of premises on the said properties. However, the revenue share for the Developers in respect of the areas licensed / leased shall be net of Municipal Taxes."

It is evident from the share of developer in all kinds of revenue has been earmarked. Thus, from the above, it is clear that 22% of the revenue share will come to the developer.

43. On a perusal of the details of the income shown from the sale of one of the said properties i.e., in the Tower-B for the same assessment year, it is seen that the assessee had shown net of sales i.e., reducing the developer's share by 22%. Hence, the Assessing Officer himself while treating the income from sales, has accepted the revenue sharing basis of 78% and 22%. Therefore, this principle and ratio was to be applied on rental income also. The findings of the learned Commissioner (Appeals) that the entire development agreement is a kind of financial arrangement for obtaining the loan is wholly erroneous because the sum of ` 32 crores, which was paid by the developers to the assessee at the time of entering the development M/s. Swan Energy Limited

37

agreement, has been shown as business income in the assessment year 2004-05, which has been assessed and accepted as such by the Department. Thus, the said reasons given by the learned Commissioner (Appeals) cannot be upheld that this was some kind of loan / finance arrangement. Thus, by virtue of same clause of the development agreement, if the Assessing Officer is accepting the sale on net basis i.e., removing 22% of the share of developer, then by the same logic the rental income also has to be accepted in the same proportion i.e., net of 22% of the share of developer. Thus, for this reason alone, we set aside the impugned order passed by the learned Commissioner (Appeals) and allow the ground raised by the assessee.

44. प रणामतः नधा रती क अपील सां यक य उ े य के लए आं शक वीकत ृ मानी जाती है ।

44. In the result, assessee's appeal is partly allowed for statistical purposes.

आदे श क घोषणा खले

ु यायालय म दनांकः 3rd May 2013 को क गई ।

Order pronounced in the open Court on 3rd May 2013

Sd/- Sd/- बी.

बी. रामकोट

रामकोट य अ मत शु ला लेखा सद य या यक सद य B. RAMAKOTAIAH AMIT SHUKLA ACCOUNTANT MEMBER JUDICIAL MEMBER मंुबई MUMBAI, दनांक DATED : 3rd May 2013

M/s. Swan Energy Limited

38

आदे श क त ल प अ े षत / Copy of the order forwarded to: (1) नधा रती / The Assessee;

(2) राज व / The Revenue;

(3) आयकर आयु (अपील) / The CIT(A);

(4) आयकर आयु / The CIT, Mumbai City concerned; (5) वभागीय त न ध, आयकर अपील य अ धकरण, मंुबई / The DR, ITAT, Mumbai; (6) गाड फाईल / Guard file.

स या पत त / True Copy

आदे शानुसार / By Order

द प जे. चौधर / Pradeep J. Chowdhury

वर नजी स चव / Sr. Private Secretary

उप / सहायक पंजीकार / (Dy./Asstt. Registrar)

आयकर अपील य अ धकरण, मंुबई / ITAT, Mumbai