2023 (1) TMI 224 - HC - Income Tax

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, ... Computation of deduction u/s 10A - Income derived from rental income from Infosys BPO Ltd and BSNL Chennai Ltd as profits derived under Section 10A - HELD THAT:- Undisputed facts of the case are, assessee is situated in the STPI and is a 100% EOU. A portion of the premises which was taken on lease has been given on sublease to the two units and the assessee has received certain sum of money as rental income. In the case of Hewlett Packard [2017 (11) TMI 205 - KARNATAKA HIGH COURT] has held that the interest earned on the deposit and interest income of the staff loans are also eligible for deduction u/s 10A of the IT Act. Admittedly, the income earned as interest on the staff loans is not in any way connected with the business of Hewlett Packard, which was under consideration before the full Bench. In the case on hand, the assessee was receiving the amount as rental income and in Hewlett Packard, the amount was received as interest on deposits and the staff loans. Therefore, in our considered view, the conditions such as location of unit in an STPI having been complied with, the benefit of Section 10A of the IT Act must be available to the assessee in this case also. These appeals must fail and they are accordingly dismissed. 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.