DCIT 7(2), MUMBAI V. SWAN ENERGY LTD ( FORMERLY SWAN MILLS LTD, MUMBAI

ITA 2062/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 100975 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 23-06-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 14-03-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIJAY KUMAR BORA
• Keywords: Capital asset; Business income; Revenue expenditure
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ITA NO.2062/M/2013 ASSESSMENT YEAR: 2009-10 DY. COMMISSIONER OF INCOME TAX-7(2), ROOM NO.624, M.K. ROAD, MUMBAI - 400020 VS. M/S. SWAN ENERGY LTD. (FORMERLY SWAN MILLS LTD.), 6, FELTHAM HOUSE, 2 ND FLOOR, J.N. HERDIA MARG, BALLARD ESTATE, MUMBAI 400 001. PAN: AABCS7890Q (APPELLANT) (RESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI J.P. BAIRAGRA, A.R. REVENUE BY : SHRI VIJAY KUMAR BORA, D.R. DATE OF HEARING : 24.06.2015 DATE OF PRONOUNCEMENT : 09.09.2015 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN PREFERRED BY THE REVEN UE AGAINST THE ORDER DATED 16.01.2013 OF THE COMMISSIONER OF INCOME TAX (APPEALS) [HEREINAFTER REFERRED TO AS THE CIT(A)] RELEVANT TO ASSESSMENT Y EAR 2009-10. THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS OF APPEAL: I) THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN RE STRICTING THE DISALLOWANCE UNDER SECTION 14A OF THE INCOME-TAX AC T TO RS.98,50,220/-, WITHOUT PROPERLY APPRECIATING THE F ACTUAL AND LEGAL MATRIX AS CLEARLY BROUGHT OUT BY THE ASSESSING OFF ICER. II) THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN RE STRICTING THE DISALLOWANCE UNDER SECTION 14A OF THE INCOME-TAX TO RS.98,50,220/-, IGNORING THE FACTS THAT THE ASSESSING OFFICER IS BO UND TO WORK OUT THE DISALLOWANCE U/S 14A AS PER RULE 8D AND IT HAS BEEN HELD BY BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE THAT WORKI NG OF DISALLOWANCE U/S 14A READ WITH RULE 8D IS MANDATORY FROM A.Y.200 8-09 ONWARDS. III) THE LEARNED CIT (A) HAS ERRED ON FACTS AND IN LAW IN DELETING THE ITA NO.2062/M/2013 M/S. SWAN ENERGY LTD. (FORMERLY SWAN MILLS LTD.) 2 DISALLOWANCE MADE AMOUNTING TO RS.1,23,02,586/-, HO LDING THAT SUCH EXPENDITURE IS NOTHING BUT COST OF IMPROVEMENT ALLO WABLE WHILE COMPUTING THE CAPITAL GAINS, IGNORING THE FACT THAT AS PER THE PROVISIONS OF SECTION 55 WHICH DEFINES COST OF IMPROVEMENT, THE AMOUNT PAID AS INTEREST ON COMPENSATION PAID DOES N OT QUALIFY AS COST OF IMPROVEMENT. IV) THE LD.CIT (A)'S ORDER IS CONTRARY IN LAW AND O N FACTS AND DESERVES TO BE SET-ASIDE. V) THE APPELLANT PRAYS THAT THE ORDER OF CIT (A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE AO RESTORED. THE APPELLAN T CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND THAT MAY BE NECESSARY. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HA S BEEN ENGAGED IN A BUSINESS OF REAL ESTATE DEVELOPMENT. DURING THE AS SESSMENT PROCEEDINGS, THE ASSESSEE HAD SHOWN A DIVIDEND INCOME OF RS.5,41,828 /- AND CLAIMED THE SAME AS EXEMPT UNDER SECTION 14A. THE ASSESSING OFFICER (HEREINAFTER REFERRED TO AS THE AO) FOUND THAT THE ASSESSEE HAD NOT DISALLOWED ANY CORRESPONDING EXPENDITURE ATTRIBUTABLE TO THE SAID TAX EXEMPT INC OME. THE AO, THEREAFTER, COMPUTED THE DISALLOWANCE UNDER SECTION 14A OF THE ACT AS PER RULE 8D OF THE I.T. RULES 1962 AND ADDED AN AMOUNT OF RS.1,07,96,0 75/- TO THE TOTAL INCOME OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF THE AO, TH E ASSESSEE FILED APPEAL BEFORE THE LD. CIT(A). 3. THE LD. CIT(A) OBSERVED THAT THE ASSESSEE COMPAN Y HAD RECEIVED DIVIDEND INCOME OF RS.5,41,828/- ON INVESTMENTS MAD E IN THE LIQUID FUNDS. HE FURTHER OBSERVED THAT THE ASSESSEE COMPANY HAD I NVESTED AN AMOUNT OF RS.260 LAKHS IN THE EQUITY SHARES OF M/S. SHAAN LEI SURE LTD. IN WHICH ASSESSEE COMPANY HAD BEEN ONE OF THE PROMOTERS AND THAT OTHE R THAN THIS INVESTMENT THE ASSESSEE COMPANY HAD NOT MADE ANY INVESTMENT IN THE SHARES OF LISTED COMPANIES IN THE MARKET. HE ALSO OBSERVED THAT THE ASSESSEE COMPANY, AS PER THE DEVELOPMENT AGREEMENT WITH PIRAMAL HOLDINGS LTD . (NOW KNOWN AS PENINSULA LAND LTD.), HAD BORROWED FUNDS FOR THE CO NSTRUCTION ACTIVITIES ON ITA NO.2062/M/2013 M/S. SWAN ENERGY LTD. (FORMERLY SWAN MILLS LTD.) 3 WHICH THE ASSESSEE COMPANY HAD ALSO PAID AN AMOUNT OF RS.8,92,67,575/- AS INTEREST. HE FURTHER OBSERVED THAT THE ASSESSEE CO MPANY HAD ALSO RECEIVED INTEREST OF RS.2,20,24,694/- DURING THE YEAR. HE F URTHER OBSERVED THAT THE ASSESSEE COMPANY HAD DEPOSITED THE TOTAL SALE PROCE EDS FROM THE CONSTRUCTION ACTIVITIES IN THE ESCROW ACCOUNT AND DISBURSEMENT O F THE SAME WAS MONITORED BY THE MONITORING COMMITTEE CONSTITUTED BY MAHARASH TRA GOVERNMENT. HENCE, PENDING THE SANCTION GRANTED BY THE MONITORI NG COMMITTEE TO WITHDRAW THE AMOUNT FROM THE ESCROW ACCOUNT, THE SA ID AMOUNT HAD BEEN INVESTED IN THE LIQUID FUNDS ON WHICH THE DIVIDEND WAS RECEIVED AND NO EXTRA INTEREST EXPENDITURE HAD BEEN INCURRED FOR EARNING THE DIVIDEND INCOME. HE OBSERVED THAT IN ORDER TO INVEST IN THE LIQUID FUND S, NO DIRECT EXPENSES WERE INCURRED BY THE ASSESSEE COMPANY AND THE AO HAD ALS O NOT MADE ANY DISALLOWANCE IN RESPECT OF DIRECT EXPENSES. THE AO HAD MADE DISALLOWANCE IN RESPECT OF INDIRECT EXPENSES ONLY. HE OBSERVED THAT THE ASSESSEE HAD RIGHTLY EXPLAINED THAT NO INDIRECT INTEREST EXPENDITURE WAS ATTIUTAB1ETOINVESTMENT ACTIVITY. HE OBSERVED FROM THE BALANCE SHEET THAT THE OPENING BALANCE OF INVESTMENTS WERE AT RS. 10.14 CRORE WHEREAS CLOSING BALANCE WAS RS.27.69 CRORES. AS PER SCHEDULE 5 OF BALANCE SHEET THERE WA S NO CHANGE IN INVESTMENT IN SHARES OF COMPANY M/S SHAAN LEISURE AT RS. 2.64 CRORES. THE OTHER INVESTMENT WAS IN LIQUID MUTUAL FUND AND THE OPENIN G BALANCE OF 7.50 CRORES INCREASED TO CLOSING BALANCE OF 25.05 CRORES. THUS THERE WAS INCREASE IN INVESTMENT DURING THE YEAR AT RS. 17.55 CRORES IN M UTUAL FUND. THE ASSESSE HAD EXPLAINED THAT FOR THE REASONS EXPLAINED ABOVE, THE BUSINESS SALE PROCEEDS WERE REQUIRED TO BE DEPOSITED IN AN ESCROW ACCOUNT. PEND ING PERMISSION OF GOVERNMENT AUTHORITIES, SUCH BLOCKED FUNDS WERE INV ESTED IN LIQUID MUTUAL FUNDS. IN THE FACTS AND CIRCUMSTANCES, THE INTEREST EXPENDITURE WAS ATTRIBUTABLE TO THE BUSINESS ACTIVITIES AND NOT TO THE INVESTMEN T ACTIVITY. HAD THERE BEEN NO SUCH INVESTMENT, THE INTEREST EXPENDITURE WOULD HAV E REMAINED THE SAME. HE ITA NO.2062/M/2013 M/S. SWAN ENERGY LTD. (FORMERLY SWAN MILLS LTD.) 4 THEREFORE HELD THAT THE INTEREST EXPENDITURE WAS NO T ATTRIBUTABLE TO INVESTMENT ACTIVITY. HE FURTHER OBSERVED FROM THE BALANCE SHEE T THAT THERE WAS A DECREASE IN BORROWED FUNDS ON WHICH INTEREST EXPENDITURE WAS INCURRED. THEREFORE, THE INCREASE IN INVESTMENT DURING THE YEAR COULD NOT BE RELATED TO THE BORROWED FUNDS. HE FURTHER OBSERVED THAT AS PER CASH FLOW ST ATEMENT IN THE BALANCE SHEET, THE COMPANY WAS HAVING CASH BALANCE WHICH WAS INCRE ASED DURING THE YEAR. HE THEREFORE CONSIDERING THE OVERALL FACTS AND CIRC UMSTANCES OF THE CASE OBSERVED THAT NO INDIRECT INTEREST EXPENSES WERE AT TRIBUTABLE TO INVESTMENT ACTIVITY AND COULD NOT BE RELATED TO EARNING OF EXE MPT DIVIDEND INCOME. HE THEREFORE DELETED THE DISALLOWANCE OF INDIRECT INTE REST EXPENDITURE OF RS.98,50,220/-. THE LD. CIT(A) HOWEVER UPHELD THE D ISALLOWANCE OF ADMINISTRATIVE AND MANAGERIAL EXPENSES PERTAINING T O MANAGEMENT OF INVESTMENTS WHICH HAD YIELDED EXEMPT DIVIDEND INCOM E MADE BY THE AO AS PER FORMULA PROVIDED IN SUB CLAUSE (III) OF RULE 8D (2) AT RS. 9,45,855/-. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE REVEN UE HAS COME IN APPEAL BEFORE US. 4. BEFORE US, THE LD. DR OF THE DEPARTMENT COULD N OT POINT OUT ANY NEW FACT OR LAW ARISING OUT IN THE CASE UNDER CONSIDERA TION WHICH MAY JUSTIFY OUR INTERFERENCE IN THE ABOVE WELL REASONED ORDER OF TH E CIT(A). WE THEREFORE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT( A) ON THE ABOVE ISSUE AND THE SAME IS ACCORDINGLY UPHELD. 5. THE NEXT ISSUE IS RELATING TO THE DELETION OF T HE DISALLOWANCE OF INTEREST EXPENDITURE MADE BY THE AO AMOUNTING TO RS.1,23,02 ,586/- WHILE COMPUTING THE LONG-TERM CAPITAL GAIN ON ACCOUNT OF COST OF IM PROVEMENT. THE FACTS OF THE CASE WERE THAT IN THE COMPUTATION OF CAPITAL GAIN, THE ASSESSEE HAD TAKEN AN AMOUNT OF RS.1,17,25,000/- AS A COST OF IMPROVEMENT IN THE YEAR 2000-01, AND ITA NO.2062/M/2013 M/S. SWAN ENERGY LTD. (FORMERLY SWAN MILLS LTD.) 5 ACCORDINGLY CLAIMED A DEDUCTION OF RS.1,23,02,586/- U/S 48 (II) OF THE ACT, AFTER INDEXATION OF THE AMOUNT. THE ASSESSE EXPLAINED TO THE AO THAT AN AMOUNT OF RS.4,69,52,055/- WAS PAID BY ASSESSEE COMPANY TO TR OPICANA PROPERTIES LTD. THE ASSESSEE COMPANY HAD PAID THIS AMOUNT AS INTERE ST OVER AND ABOVE THE PRINCIPAL PAYMENT DUE TO THEM AS PER THE CONSENT TE RMS ENTERED UPON BETWEEN THEM, TO RELEASE THE PROPERTIES FROM THEIR LIEN. SI NCE THIS AMOUNT WAS PAID FOR 93,78.48 SQ. MTRS. THE ASSESSEE COMPANY CONSIDERED 25% OF RS. 4,16,00,000/- I.E. RS.1,17,25,000/- AS COST OF IMPROVEMENT. IT WA S ALSO EXPLAINED THAT THIS AMOUNT WAS CLAIMED AS REVENUE EXPENDITURE BY THE AS SESSEE IN AY 2001-02 BUT THE SAME WAS DISALLOWED TREATING IT AS AN EXPEN DITURE OF CAPITAL NATURE. SINCE SUCH AN EXPENDITURE WAS FOR OBTAINING CLEAR T ITLE OF THE PROPERTY AND AFTER ITS ACQUISITION, WHICH WAS SUBSEQUENTLY CONVERTED I NTO STOCK IN TRADE IN A Y 2002-03, THE SAME QUALIFIED AS COST OF IMPROVEMENT AND WAS CLAIMED AS SUCH BY US. IT WAS FURTHER EXPLAINED THAT THE ASSESSEE C OMPANY HAD ENTERED INTO AN AGREEMENT WITH THE SAID TROPICANA PROPERTIES LTD. M ANY YEARS BACK IN 1990'S AGAINST THE MORTGAGES OF THE COMPANY'S PROPERTIES. HOWEVER, THEREAFTER, THE ASSESSEE COMPANY FACED VARIOUS LEGAL/LABOUR AND OTH ER PROBLEMS. THIS HAD LED TO A SITUATION OF DISPUTE AND THERE WAS NON-FULFILL MENT OF COMMITMENT ON THE PART OF THE ASSESSEE TO TROPICANA PROPERTIES LTD. T HE SAID PARTY FILED A LEGAL SUIT AGAINST THE ASSESSEE COMPANY. BOTH PARTIES HAVE AMI CABLY SOLVED THE ISSUE BY ENTERING INTO THE CONSENT TERMS. AS PER THE SAID TE RMS, THE RIGHTS OF TROPICANA PROPERTIES LTD. ON THE ASSESSEE COMPANY'S PROPERTY WERE RELEASED ON PAYMENT OF ENTIRE DUES ALONG WITH INTEREST, WHICH WAS CLAIM ED AS COST OF IMPROVEMENT. 6. THE AO, HOWEVER, WAS NOT SATISFIED WITH THE ABOV E SUBMISSIONS. HE OBSERVED THAT THE CLAIM WAS ALSO MADE IN ASSESSMENT YEAR 2001-02 WHEREIN THE SAME WAS DISALLOWED RIGHT UP TO ITAT. THE AO HELD T HAT AS PER PROVISIONS OF SECTION 55 WHICH DEFINES THE TERMS COST OF IMPROVE MENT THIS AMOUNT DID NOT ITA NO.2062/M/2013 M/S. SWAN ENERGY LTD. (FORMERLY SWAN MILLS LTD.) 6 QUALIFY AS COST OF IMPROVEMENT. THE AO HELD THAT T HE INTEREST EXPENDITURE INCURRED TO SETTLE THE LEGAL DISPUTE WITH TROPICANA PROPERTIES LTD WAS NOT 'COST OF IMPROVEMENT' TO THE ASSET, AND THE DEDUCTION CLA IMED AT RS.1,23,02,586/- ON THIS ACCOUNT WAS THEREFORE, DISALLOWED BY HIM. 7. IN APPEAL BEFORE THE CIT(A), THE ASSESSEE EXPLAI NED THAT BY AN AGREEMENT DATED 6 TH MAY 1994, SWAN MILLS LTD. AUTHORISED AND PERMITTED TROPICANA PROPERTIES LTD. TO CONSUME/UTILISE 60% FS I I.E. 1,29,000 SQ. FT. OUT OF THE TOTAL AGGREGATE FSI OF 2,15,000 SQ. FT. AVAI LABLE IN RESPECT OF SWAN'S PROPERTY SITUATED AT L.B.S. MARG, KURLA. IN CONSIDE RATION OF SWAN AUTHORISING AND PERMITTING TROPICANA TO DEVELOP A PORTION OF TH E SAID PROPERTY AND TO APPROPRIATE TO ITSELF THE ENTIRE PROFITS ARISING FR OM THE SALE AND COMPLETION OF THE PROJECT, TROPICANA HAD AGREED TO PAY TO SWAN CO NSIDERATION RS. 2,300/- PER SQ. FT. OF FSI (1,29,000 X 2,300 = RS. 29,67,00,000 /-). AN AMOUNT OF RS.2,50,00,000/- WAS PAID ON THE EXECUTION OF THE S AID AGREEMENT AND THE BALANCE AMOUNT WAS TO BE PAID ON THE HAPPENING OF C ERTAIN EVENTS AS LISTED IN THE SAID AGREEMENT. SWAN HAD AVAILED OF A BRIDGE L OAN FROM PEERLESS GENERAL FINANCE AND INVESTMENT CO. LTD. IN SEPTEMBER 1994. TO REPAY THE BRIDGE LOAN, SWAN HAD EXECUTED A DEED OF ASSIGNMENT ON 28TH SEPT EMBER 1994 IN FAVOUR OF PEERLESS ASSIGNING THE BALANCE CONSIDERATION REC EIVABLE BY IT FROM THE TROPICANA. SINCE THE BRIDGE LOAN WAS NOT REPAID BY SWAN TO PEERLESS, PEERLESS FILED A SUIT (SUIT NO. 787 OF 1997) IN THE BOMBAY H IGH COURT AGAINST SWAN AND TROPICANA. BY CONSENT TERMS DATED 5TH MARCH 199 7, SWAN AGREED TO GIVE 1,50,000 SQ. FT. TO PEERLESS IN SETTLEMENT OF ITS C LAIM. SINCE TROPICANA WAS ALSO MADE A PARTY IN THE SUIT IN VIEW OF THE DEED OF ASS IGNMENT WHEREBY SWAN HAD ASSIGNED TO PEERLESS THE BALANCE RECEIVABLE FROM TR OPICANA, ANOTHER CONSENT TERMS DATED 7TH JULY 1997 WAS FILED BETWEEN SWAN AN D TROPICANA WHEREBY THE AGREEMENT DATED 6TH MAY 1994 BETWEEN SWAN AND TROPI CANA (AND ANOTHER ITA NO.2062/M/2013 M/S. SWAN ENERGY LTD. (FORMERLY SWAN MILLS LTD.) 7 AGREEMENT DATED 8 TH JUNE 1994 BETWEEN SWAN AND TROPICANA RELATING TO ANOTHER PROPERTY OF SWAN AT KURLA WHEREIN RS.50,00, 000/- WAS PAID AS ADVANCE) WERE CANCELLED. IN CONSIDERATION OF THE CA NCELLATION OF THE SAID AGREEMENTS, SWAN HAD TO PAY TROPICANA RS.11,14,00,0 00/- WHICH WAS INCLUSIVE OF THE REFUND OF RS. 3,00,00,000/- PAID B Y TROPICANA TO SWAN UNDER THE SAID AGREEMENTS. SINCE SWAN DID NOT PAY THE SAI D AMOUNT AS PER THE CONSENT DECREE DATED 7 TH JULY 1997, TROPICANA TOOK OUT EXECUTION PROCEEDING S AND ATTACHED ALL THE PROPERTIES OF SWAN. TO SETTLE THE MATTER, SWAN AND TROPICANA FILED CONSENT TERMS DATED 7 TH OCTOBER 1999 WHEREBY SWAN HAD TO PAY THE DECRETAL AMOUNT AS PER THE SCHEDULE LISTED THEREIN ALONG WITH INTEREST @ 21% P.A. THEREAFTER, ON 20 TH OCTOBER 1999, SUPPLEMENTAL CONSENT TERMS WERE FILED WHEREBY IT WAS AGREED THAT 70% OF THE PAYMENT OF EACH INSTALLMENT MADE BY SWAN WOULD BE APPORTIONED TOWARDS PAYMENT OF THE PRINCIPAL AMOUNT AND THE BALANCE 30% WOULD BE APPORTIONED TOWARDS INTERE ST. IT WAS THEREFORE EXPLAINED THAT THE ASSESSEE COMPANY HAD MADE THE PA YMENT OF RS.814 LAKHS TOWARDS RELINQUISHMENT OF THEIR (TROPICANA PROPERTI ES LTD.) DEVELOPMENT RIGHTS AND INTEREST FOR LATE PAYMENT OF RS. 469.52 LACS. I N THE ASSESSMENT YEAR 2000- 01, THE ASSESSEE COMPANY HAD DEBITED THE DAMAGES PA ID FOR CANCELLATION OF THE AGREEMENT AMOUNTING TO RS.814 LAKHS TO ITS PROFIT & LOSS ACCOUNT AND THE DEDUCTION OF THE SAME WAS ALLOWED WHILE COMPUTING T HE INCOME. THE INTEREST ON THE SAID DAMAGES OF RS. 469.52 LACS WAS DEBITED BY THE ASSESSEE COMPANY TO CAPITAL WIP IN THE YEAR ENDED 31-3-2000. FURTHER, I N THE YEAR ENDED 31-3- 2001, THE SAID AMOUNT WAS DEBITED TO THE FIXED ASSE TS UNDER THE HEAD 'LAND' BY TRANSFERRING THE SAME FROM THE CAPITAL WIP ACCOUNT. THE SAID LAND WAS REVALUED AND WHILE COMPUTING THE LONG TERM CAPITAL GAIN I.E. THE DIFFERENCE BETWEEN THE COST OF THE LAND AND VALUE AT WHICH IT WAS CONVERTED, THE PROPORTIONATE AMOUNT OF RS.1,23,02,586/-, WHICH WAS 25% OF THE TOTAL AMOUNT OF RS.4,69,52,055/-, WAS CLAIMED AS DEDUCTION. SINC E WHILE COMPUTING THE ITA NO.2062/M/2013 M/S. SWAN ENERGY LTD. (FORMERLY SWAN MILLS LTD.) 8 CAPITAL GAIN, ONLY THE DIFFERENCE BETWEEN COST AND CONVERTED PRICE OF LAND WAS CONSIDERED, THE AMOUNT OF RS. 469.52 LACS DEBITED T O THE LAND ACCOUNT WAS NOT CONSIDERED THEREFORE, THE SAME WAS DEDUCTED FROM TH E LONG TERM CAPITAL GAINS. SINCE THE AMOUNT WAS RELATED TO BOTH THE PLOTS AT K URLA ON WHICH FOUR BUILDINGS WERE TO BE CONSTRUCTED, THEREFORE, 25% OF TOTAL AMO UNT WAS CLAIMED AS DEDUCTION. WITHOUT PREJUDICE, IT WAS SUBMITTED THA T IN ANY CASE, THIS SHOULD BE ALLOWED AS DEDUCTION WHILE COMPUTING THE BUSINESS I NCOME. THIS AMOUNT INCLUDED DAMAGES PAYABLE FOR CANCELLATION OF THE AG REEMENT ENTERED INTO BY THE ASSESSEE COMPANY WITH TROPICANA PROPERTIES LTD. IN 1994. SINCE WITH THE PASSAGE OF TIME, THE AGREEMENT ENTERED WITH TROPICA NA PROPERTIES LTD. WAS NOT ADVANTAGEOUS TO THE ASSESSE COMPANY, IT WAS A BUSIN ESS CONSIDERATION TO CANCEL THE SAID AGREEMENT AND BECAUSE OF THIS ONLY, THE AS SESSEE WAS ABLE TO ENTER INTO A NEW DEVELOPMENT AGREEMENT WITH PIRAMAL HOLDINGS L TD. ON 31-3-2004 AND UNDER WHICH THE ASSESSEE WAS GOING TO RECEIVE MUCH HIGHER AMOUNT AS INCOME. THIS WAS BECAUSE OF THE FACT THAT THE DAMAGES FOR C ANCELLATION OF AGREEMENT OF RS. 814 LAKHS, WHICH WAS DEBITED TO THE PROFIT & LO SS A/C IN THE YEAR 2000-01, WAS ALREADY ALLOWED AS DEDUCTION WHILE COMPUTING TH E BUSINESS INCOME. 8. THE LD. CIT(A), AFTER CONSIDERING THE FACTS OF THE CASE, OBSERVED THAT VIDE DEVELOPMENT AGREEMENT DATED 6 TH MAY, 1994 ENTERED INTO BETWEEN ASSESSEE AND M/S. TROPICANA PROPERTIES LTD., THE AS SESSEE HAD ASSIGNED THE DEVELOPMENT RIGHTS OF ITS LAND TO M/S TROPICANA FOR WHICH M/S TROPICANA AGREED TO PAY A SUM OF RS. 29.67 CRORE TO THE ASSES SEE. THE ASSESSEE RECEIVED ADVANCE OF RS. 2.50 CRORES. FOR THE REASONS/ SEQUEN CES OF EVENTS, AS MENTIONED ABOVE, THE ASSESSEE HAD TO CANCEL THE DEVELOPMENT A GREEMENT ENTERED INTO WITH M/S TROPICANA FOR WHICH THE ASSESSEE HAD TO PAY TO TROPICANA A SUM/DAMAGES OF RS.11.14 CRORES WHICH WAS INCLUSIVE OF RS. 8.14 CRORES COMPENSATION AND REFUND OF RS. 3 CRORES PAID BY TROPICANA TO THE ASS ESSEE. THE ASSESSEE HAD TO ITA NO.2062/M/2013 M/S. SWAN ENERGY LTD. (FORMERLY SWAN MILLS LTD.) 9 PAY RS. 8.14 CRORES TO TROPICANA TOWARDS RELINQUISH MENT OF THEIR (TROPICANA'S) DEVELOPMENT RIGHTS AND ALSO INTEREST FOR LATE PAYME NT OF RS. 469.52 LACS. HE FURTHER OBSERVED THAT IN A.Y. 2000-01 THE ASSESSE H AD DEBITED THE AMOUNT OF RS.8.14 CRORES TO PROFIT & LOSS ACCOUNT ON ACCOUNT OF DAMAGES PAID FOR CANCELLATION OF AGREEMENT. THE ASSESSEES SUCH CLAI M WAS ALLOWED BY A.O. WHILE COMPUTING THE INCOME. HOWEVER, IN A.Y. 2000-0 1, THE AMOUNT OF INTEREST PAYABLE AT RS. 469.52 LACS WAS NOT CLAIMED BY ASSESSEE AS EXPENDITURE BUT WAS DEBITED TO CAPITAL WIP. IN A.Y. 2001-02 THE ASSESSEE TRANSFERRED THE SAID INTEREST OF RS.469.52 LACS FROM CAPITAL WIP TO THE SAID LAND WHILE COMPUTING THE LONG TERM CAPITAL GAINS. IN ASSESSMEN T ORDER OF A.Y. 2001-02 THE A.O. DISALLOWED THE ASSESSEES CLAIM HOLDING TH AT THE SAID CLAIM WAS NOT REVENUE EXPENDITURE BUT WAS CAPITAL LOSS/ EXPENDITU RE AND WAS NOT RELATED TO A.Y. 2001-02. IN APPEAL ORDER OF A.Y. 2001-02, THE LD. CIT(A) HELD THAT THE TRANSFER OF LAND HAD NOT TAKEN PLACE AND THEREFORE, THE CLAIM WAS PRE-MATURE AND WAS REJECTED. ON FURTHER APPEAL, THE ITAT HELD THAT SINCE THE CLAIM WAS NOT MADE IN THE P&L A/C., THERE WAS NO QUESTION OF MAKI NG ANY DISALLOWANCE. THE ITAT DIRECTED THE AO TO VERIFY THE FACTS. THE LD. C IT(A), THEREFORE, CONCLUDED THAT, THOUGH THE ISSUE OF ALLOWABILITY/DE DUCTION OF INTEREST OF RS.469.52 LACS WAS CONSIDERED IN ASSESSMENT/ APPEAL ORDERS OF A.Y. 2001-02, BUT THE CLAIM WAS REJECTED BY THE AUTHORITIES ON DI FFERENT GROUNDS I.E. THE TRANSFER OF LAND DID NOT TOOK PLACE IN THAT YEAR AN D MOREOVER THE CLAIM WAS NOT MADE IN P&L A/C. HOWEVER, IN THE YEAR UNDER CONSIDE RATION, THE ASSESSEE HAD OFFERED CAPITAL GAINS ON SALE OF LAND (WHICH WAS CO NVERTED FROM INVESTMENTS TO STOCK IN TRADE IN A.Y. 2002-03). THE LD. CIT(A) OB SERVED THAT AS PER SECTION 45(2), THE CAPITAL GAIN ON SALE OF SUCH LAND WAS RE QUIRED TO BE ASSESSED IN THE YEAR UNDER CONSIDERATION SINCE THE LAND, SO CONVERT ED INTO STOCK IN TRADE, WAS SOLD IN THE YEAR UNDER CONSIDERATION. THE COMPENSAT ION OF RS. 8.14 CRORE AND INTEREST THEREON AT RS. 469.52 LACS WAS PERTAINING TO SUCH LAND. THE LD. CIT(A) ITA NO.2062/M/2013 M/S. SWAN ENERGY LTD. (FORMERLY SWAN MILLS LTD.) 10 FURTHER OBSERVED THAT THE DEDUCTION OF COMPENSATION OF RS. 8.14 CRORE HAD ALREADY BEEN ALLOWED BY A.O. IN A.Y. 2000-01. ON TH E SAME LOGIC/ REASONING, THE DEDUCTION OF INTEREST OF RS. 469.52 LACS WAS AL LOWABLE TO THE ASSESSE WHILE COMPUTING THE BUSINESS INCOME. HE, HOWEVER, OBSERV ED THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF INTEREST OF RS.1.23,02,586/- ( BEING 1/4TH OF RS. 469.52 LACS) AS FORMING PART OF COST OF IMPROVEMENT OF LAN D SOLD DURING THE YEAR. THE ASSESSEE HAD CONTENDED THAT IT WAS ONLY ON ACCOUNT OF PAYMENT OF SUCH INTEREST EXPENDITURE, THAT THE ASSESSEE COULD OBTAIN CLEAR T ITLE/LIEN OF THE LAND WHICH WAS SUBSEQUENTLY SOLD AT A HIGHER PRICE. THE LD. CIT(A) OBSERVED THAT IT WAS AN ADMITTED FACT THAT THIS INTEREST COMPONENT WAS RELA TABLE TO THE LAND (WHICH WAS CONVERTED INTO STOCK-IN-TRADE ON WHICH TOWERS HAD B EEN CONSTRUCTED). M/S. TROPICANA WERE HAVING SOME DEVELOPMENT RIGHTS ON TH E SAID LAND. IT WAS ALSO AN ADMITTED FACT THAT THIS INTEREST COMPONENT WAS P ERTAINING TO THE COMPENSATION PAID AT RS.8. 14 LACS TO M/S. TROPICAN A AND WHICH COMPENSATION HAD ALREADY BEEN ALLOWED TO THE ASSESSEE AS REVENUE EXPENDITURE. IT WAS ALSO AN ADMITTED FACT THAT WITHOUT RELINQUISHMENT OF DEVELO PMENT RIGHTS BY M/S. TROPICANA PROPERTIES LTD, THE ASSESSEE COULD NOT HA VE DEVELOPED THE SAID LAND. IN THE FACTS AND CIRCUMSTANCES, THE INTEREST COMPON ENT PAID TO M/S. TROPICANA PERTAINING TO THIS LAND WAS FORMING PART OF COST OF IMPROVEMENT OF THE SAID LAND. HE HELD THAT THE INTEREST EXPENDITURE PERTAIN ING TO COMPENSATION PAID FOR THE SAID LAND FOR RELINQUISHMENT OF DEVELOPMENT RIG HTS BY M/ S. TROPICANA PROPERTIES LTD, ULTIMATELY RESULTED IN ENHANCEMENT OF VALUE OF THE PROPERTY I.E. LAND AND THE DEVELOPMENT RIGHTS OF THE SAID LAND BE CAME AVAILABLE TO THE ASSESSEE. BY INCURRING SUCH EXPENSES, THE ASSESSEE COULD OBTAIN CLEAR TITLE/LIEN OF THE LAND AND SUCH LAND WAS SUBSEQUENTLY SOLD AT A HIGHER PRICE. THUS, THE EXPENDITURE WAS NOTHING BUT COST OF IMPROVEMENT ALL OWABLE WHILE COMPUTING THE CAPITAL GAINS. HE THEREFORE DIRECTED THE AO TO ALLOW SUCH EXPENDITURE UNDER THE HEAD CAPITAL GAINS. ITA NO.2062/M/2013 M/S. SWAN ENERGY LTD. (FORMERLY SWAN MILLS LTD.) 11 9. WE HAVE HEARD THE RIVAL CONTENTIONS. ADMITTEDLY, THE COMPENSATION WAS PAID TO M/S. TROPICANA FOR RELEASE OF ITS RIGHTS OV ER THE SAID LAND IN QUESTION. THE INTEREST COMPONENT WAS PART OF THE SETTLEMENT. THE PRINCIPAL AMOUNT OF COMPENSATION HAD ALREADY BEEN ALLOWED BY THE AO AS REVENUE EXPENDITURE. THE INTEREST EXPENDITURE PAID FOR THE SAID LAND FOR RELINQUISHMENT OF DEVELOPMENT RIGHTS BY M/ S. TROPICANA PROPERTIES LT D, ULTIMATELY RESULTED IN ENHANCEMENT OF VALUE OF THE PROPERTY AND THE DEVELO PMENT RIGHTS OF THE SAID LAND BECAME AVAILABLE TO THE ASSESSEE ON INCURRING OF SUCH INTEREST EXPENDITURE. WE THEREFORE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) IN HOLDING THAT THE INTEREST EXPENDITURE WAS NOTHING BUT COST OF IMPROVEMENT ALLOWABLE WHILE COMPUTING THE CAPITAL GAINS. THIS ISSUE IS A CCORDINGLY DECIDED IN FAVOUR OF THE ASSESSE. 10. IN THE RESULT, THE APPEAL OF THE REVENUE IS HER EBY DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 09.09.2015. SD/- SD/- (R.C. SHARMA) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 09.09.2015. * KISHORE, SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORD ER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.