Why Taranto's Swordfish observers sat beside leaking fuel tanks

Was the Swordfish observer's seat occupied by the spare fuel tank?

Yes. The observer moved into the rear gunner's position, where the account describes leaking fuel around him while he navigated and operated the gun.

The auxiliary tank occupied the observer's normal position, moving him into the telegraphist-air-gunner's seat in the shared rear cockpit. Poor seals allowed aviation fuel to collect around the observer. Torpedo-carrying aircraft needed that arrangement because their weapon prevented use of an under-fuselage tank. The observer still had to navigate and operate the defensive gun during the night attack. The return claim applies to aircraft surviving enemy action: none of those aircraft were lost through navigational error. It does not mean that Taranto involved no aircraft losses.