2015 (1) TMI 875 - HC - Income Tax

Deduction u/s 10A - rental from temporary sublease of office premises cannot be regarded as part of the profits of the business - Held that - In view of the explanation used in sub Section (4) of Section 10A of the Act 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 under Section 10A of the Act to a newly established undertaking in a free trade zone. In that view of the matter, the order passed by the Tribunal is un-sustainable and contrary to law. - Decided in favour of the assessee.

Summary

Issues:
Interpretation of Section 10A of the Income Tax Act regarding rental income derived from a temporary sublease of office premises and its treatment for the purpose of deduction under Section 10A.

Analysis:
The case involved an appeal by a public limited company engaged in software development and export against the tax treatment of rental income derived from a temporary sublease of office premises. The assessing officer disallowed the excess rent paid as a loss, bringing the amount to tax under 'income from other sources'. The Commissioner of Income Tax and the tribunal upheld this decision, leading to the appeal.

The primary issue revolved around the interpretation of Section 10A of the Income Tax Act. The key question was whether the rental income from the temporary sublease of office premises could be considered as "part of the profits of the business" for the purpose of deduction under Section 10A. The appellant argued that if the assessee temporarily lets out leased premises and derives rental income, it constitutes profits of the business of the undertaking, entitling them to the benefit of Section 10A.

On the contrary, the revenue contended that only profits and gains derived from the export of articles or software fall under Section 10A, excluding rental income. Section 10A(4) was crucial in this analysis, stating that profits derived from exports shall be a proportion of the profits of the business of the undertaking. The court emphasized the importance of the opening words of Section 10A and the relevance of sub-section (4) in recognizing profits beyond exports.

The court ruled in favor of the assessee, stating that the rental income derived from the temporary sublease of premises constituted "income from business" rather than "income from house property" or "income from other sources". The court held that this income should be considered as profits of the business of the undertaking for the purpose of extending the benefit of tax exemption under Section 10A. Consequently, the appeals were allowed, the impugned order was set aside, and the assessing authority was directed to treat the rental income as income derived from the business of the undertaking for Section 10A benefits.