Rental income from subleasing by 100% EOU in STPI qualifies as profits under Section 10A; appeals dismissed

HC held that rental income received by a 100% EOU located in an STPI from subleasing part of its premises qualifies as profits derived under Section 10A, reasoning that the statutory conditions are satisfied and drawing analogy to prior authority where interest income was held eligible. The court concluded the appeals fail and dismissed them.

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Issues:
1. Interpretation of Section 10A of the Income Tax Act regarding the eligibility of rental income for deduction.

Analysis:
The High Court of Karnataka considered multiple questions raised by the Revenue in two appeals regarding the interpretation of Section 10A of the Income Tax Act. The main issue revolved around whether rental income derived from Infosys BPO Ltd. and BSNL Chennai Ltd. could be considered as profits derived under Section 10A. The Revenue challenged the inclusion of rental income for deduction under Section 10A, arguing that the lease amounts received were not directly related to the export of software. The Court examined precedents and legal provisions to determine the eligibility of the rental income for deduction.

The Court noted that the assessee, a 100% Export Oriented Unit (EOU) situated in a Software Technology Parks of India (STPI), had subleased a portion of its premises to Infosys BPO Ltd. and BSNL Chennai, receiving rental income. The Revenue contended that rental income, not being part of the assessee's core business, should not qualify for deduction under Section 10A. In contrast, the assessee argued that once a unit is located in an STPI, it becomes eligible for deduction under Section 10A, citing a full Bench decision. The Court examined the nature of the rental income and its connection to the business to determine its eligibility for deduction.

Referring to previous judgments, the Court highlighted the full Bench decision in Commissioner of Income-tax Vs. Hewlett Packard Global Soft Ltd., which allowed interest income on staff loans for deduction under Section 10A. Additionally, the Court considered the formula for computing export profit as per the decision in HCL Technologies Ltd. The Court emphasized that the conditions of the unit being in an STPI were met, making the assessee eligible for Section 10A benefits based on the nature of the income received.

Ultimately, the Court dismissed the appeals, ruling in favor of the assessee and against the Revenue. The judgment clarified that the rental income received by the assessee from Infosys BPO Ltd. and BSNL Chennai Ltd. could be considered as profits derived under Section 10A of the Income Tax Act, making it eligible for deduction. The decision was based on the compliance with the conditions of Section 10A and the nature of the income received by the assessee.

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