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Section 28 in The Income- Tax Act, 1995
The Income- Tax Act, 1995
Section 36(1)(iii) in The Income- Tax Act, 1995
Section 2(47) in The Income- Tax Act, 1995
Kerala Financial Corpn vs Cit on 12 May, 1994

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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

                                                                               4



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

                                                                               5



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

                                                                              6



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

                                                                                7



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

                                                                            8



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

                                                                                     9



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

                                                                            10



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

                                                                            11



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

                                                                            12



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

                                                                           13



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

                                                                            14



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

                                                                            15



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

                                                                               16



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

                                                                                17



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

                                                                                  18


      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

                                                                                  19



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