Whether rental income derived from temporary sublease of office premises is to be treated as part of business profits eligible for Sec 10A benefits - YES: HC

THE issue before the Bench is - Whether rental income derived from temporary sublease of office premises is to be treated as part of business profits eligible for Sec 10A benefits. And the answer favours the assessee.

Facts of the case

The assessee is a public limited company engaged in the business of development of software and export of software. It is an 100% EOU approved by the STP of India. The AO noticed from Schedule "M" to the financial accounts that a certain sum was shown as rent receipt. When that was sought to be clarified, the assessee stated that they were having a branch office at Canada for development of software product. They had entered into a non-cancelable lease for 36 months with the lessor from 01.06.2001 to 31.05.2004. As the company does not carry on any activity other than development of software in Canada and the letting out of the property was inextricably connected with its business operations, the rental income for the period had been claimed as forming part of Section 10A. The assessee had paid an actual rent of more than the rent received. It had claimed that the excess rent paid should be treated as loss and should be allowed to be carried forward. The AO did not accepted the said explanation and brought the aforesaid amount to tax under 'income from other sources'. On appeal, CIT(A) also held the same cannot be admitted as 'income from house property' as the asseessee was not the owner of the property in question. The rent income cannot be assessed as business income as there was no direct nexus between the assessee's software development business and the industrial undertaking with the payment of rent. Therefore, dismissing the appeal, the tribunal affirmed the finding of AO and the appellate authority.

Held that,

++ if the assessee is entitled to deduction of only profit derived under Section 10A(1), the sub section (4) would be redundant. The sub section which came into effect on 01-04-2002 by Finance Act 2001 recognizes that the profits of the business of the undertaking would be, not only the profits and gains from the exports of articles or things or computer, in addition to that, the undertaking may have some other profits also, which is derived from business of the undertaking. In the instant case, the assessee took the premises on lease. Assessee has paid a sum of Rs.43,38,350/- as rent from April 2002 to March 2003. It is shown as 'business expenses', as against the 'expenses incurred'. The assessee has received a sum of Rs.17,27,385/- as rent receipt for the relevant period. Assessee is not the owner of the said premises. Assessee is carrying on the business of development of Software in Canada. The said premises was taken for the aforesaid business purpose. As a portion of the said premises was not used for business purpose, instead of keeping it vacant and suffering loss, it was rented out. Therefore, the said income derived from lease of the said premises constitutes "income from business". Neither it would be 'income from house property' nor 'income from other sources'. In view of the explanation used in sub Section (4) of Section 10A for the purpose of Sub section 1, the profit derived from export of articles or things or computer software shall be the amount which bears to the profits of business of the undertaking. Though the said profits are not derived from export of articles or things or computer software, by virtue of sub Section (4) it is deemed to be the profits of the business of the undertaking for the purpose of extending the benefit of exemption of payment of tax u/s 10A to a newly established undertaking in a free trade zone. Thus, the order passed by the Tribunal is un-sustainable and contrary to law. Therefore, the first substantial question of law is answered in favour of the assessee as against the revenue. The second substantial question of law does not arise for consideration. Hence, we allow the appeals and direct AO to extend the benefit of Section 10A, even in respect of this rental income as Income derived from business of the undertaking.