TaxTMI 
TaxTMI 
2011 (3) TMI 1031
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.... case and in law the learned CIT(A) has legally erred in not allowing deduction of depreciation on computers whilst computing the income from subletting activity." 3. The assessee is a company and is engaged in the business of data processing and transmission of data. The assessee carries on its business activities through its units at Mumbai, set up during the previous year 1996- 97, and Pune (hereinafter referred to as Pune Unit 1) set up during the previous year 2000-01. The assessee claimed deduction under section 10A of the Income Tax Act, 1961 (the Act), in respect of the profits from the Pune Unit 1 and deduction under section 10B of the Act, in respect of the profits from the Mumbai Unit. During the previous year relevant to the captioned assessment year, the assessee had set up a second Software Technology Park ('STP') unit at Pune ('hereinafter referred to as Pune Unit II'). The STP Registration was obtained on November 14, 2000. It was ready to commence operations in December, 2000 but did not undertake any activities till March, 31, 2001. Till March 31, 2001, the Pune Unit II incurred a loss of Rs. 23,393,312/- (as computed under the provisions of the Act). Th....
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.... as Income from Business. The expenses include proportionate electricity charges, rental charges paid by the assessee to Sofotel and depreciation on computers leased with the premises by the Assessee to CTS. The Income from Subletting Income which was claimed by the Assessee as Income from Business was arrived at by the Assessee as follows: Amount (Rs.) Subletting Income received 13,509,921 Electricity charges 661,607 Rental charges 3,783,748 Depreciation on computers 5,945,806 10,391,16 Net subletting income 3,118,760 6. As per the MOU between the assessee and CTS, the assessee had agreed to provide one hundred and seventy workstations, i.e. computers to CTS alongwith the premises with a specific clause to provide additional work-stations if required. The sub-letting receipts of Rs. 13,509,921 also include the rental charges for the use of the computers. Copies of debit notes raised by the assessee on CTS for the period September 2000 to March, 2001 were enclosed and it was submitted that depreciation of Rs. 5,945,806 on computers is directly related to the earning of sub-lett....
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....e assessee had debited various expenses from the rent income, which are not deductable expenses under the 'Income from Other Sources'. According to him the deductions to be allowed against 'Income from Other Sources' were those expenses, which are allowable u/s. 57(iii) of the I.T. Act, viz.: "Any other expenditure (not being in the nature of capital expenditure) laid out or expenses wholly and exclusively for the purpose of making or earning such income". According to him, the test of allowability u/s. 57(iii) was that the expenditure must be for the purpose of making or earning the income. He was of the view that in the case of Assessee, none of the expenditure claimed as deduction by the assessee against rental income and service income could be said to have been incurred for the purpose of wholly or exclusively earning or making the rental and service income except certain expenses. On perusal of the Profit and Loss A/c., the AO found that there were only four kinds of expenditure, which had close nexus with earning the rental and service income. The comparative expenditure incurred on the subletted area of 11,805 sq. ft. was calculated by the AO as follows:....
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....u/s. 194-I. Thus considering the facts of the case as also relying on the judgment of the apex court in the case of Shambhu Investment 263 ITR 142, I am in agreement with the AO that income from lease of premises was taxable under the head income from other sources and consequently only such expenses which are directly expended for the purpose of earning such income would only be allowed to be deducted has been done by the AO in both the years. The appellant has alternatively submitted that depreciation on computer system should be allowed as such computers were used to provide the services. In this regard the AO has categorically found that the appellant had not provided any documentary evidence to show that such computer system was actually used for earning such income and therefore, in absence of such details he had disallowed the appellant's claim. The appellant, during the appellate proceedings also has not provided any such details barring relying on the terms of MOU and therefore in absence of any such details I am not inclined to accept the arguments of the appellant and as such the appellant's claim for depreciation is also rejected in both the years." 13. Aggrie....
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.... regard it was submitted by him that the terms of the lease agreement were clear with regard to lease of the computers. He also submitted that as per terms of the lease deed 170 work stations had been provided by the lessee and lessee had paid @ Rs. 18,040 per work station. The debit note raised by the assessee on CTS in this regard was also brought to our notice. It was submitted by the ld. Counsel for the assessee that in any event deduction on account of depreciation cannot be denied to the assessee and the same should be allowed under section 57(ii) or (iii) of the Act. It was the submission that the lease in question cannot be said to be a simple letting out of property but was a case of exploitation of a commercial asset and the same should be assessed under the head income from business. It was also submitted that the fact that TDS has been deducted by CTS under section 194-I of the Act, treating the payment to the assessee as a rent, will not change the character of the receipt in hands of the assessee and the same will continue to be income from business. 17. The ld. D.R on the other hand, submitted that basic facts with regard to lease of computers, has been dis....
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....se of business. 20. In Sultan Brothers Pvt. Ltd. v. CIT [1964] 51 ITR 353 (SC), the income was found assessable as income from other sources, because the property was let out for a composite rent along with plant and machinery and furniture. Where mining lease for coal was acquired with the object of business in sub-leasing, income was found to be assessable as business income in Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC). In Karnani Properties Ltd. v. CIT [1971] 82 ITR 547 (SC), the rent part of the receipt was found taxable as property income and the service charges as income from business. In S. G. Mercantile Corporation P. Ltd. v. CIT [1972] 83 ITR 700 (SC), the property was taken on lease and sublet to different tenants, so that it was found assessable as business income. The fact that it was let out even to daily casual market vendors probably prompted the inference, that it is business. Where the business asset like the factory is let out admittedly for a short time along with other assets, the income could be from business as held in Universal Plast Ltd. v. CIT [1999] 237 ITR 454 (SC). In Universal Plast Ltd. v. CIT [1999] 237 ITR 454 (SC), the g....
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....is in the process of constructing its own premises, to meet its immediate business requirements it has approached WNS for a work space and WNS hereby agrees to allow CTS to carryout their business of software development from the office space at Softel Building, Deepak Complex, National Games Road, Yerawada, Pune 411 006. To authorize CTS to utilize all the furnitures and fixtures, workstations, server rooms, pantry, meeting rooms, managerial cabins and other common floor areas available to carryout their business activity. Agreed to provide CTS up to one hundred seventy workstations. However, WNS has confirmed that it may not be in a position to offer more than one hundred workstations until 31st December, 2000 but can offer seventy workstation thereafter from January 2001. To start with, initially thirty five workstations will be made available by 1st September 2000, and henceforth the monthly requirements of workstations will be discussed and decided by the parties mutually on time to time basis. Further CTS to provide WNS with a rolling forecast of workstation requirements on a quarterly basis by the first working day of each month. This forecast would inclu....
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....ures, fixtures, computers, servers and all other facilities to carry on the business of developing computer software. These facilities had already been created by the assessee for its use. It is only the facilities so created, which were not immediately needed by the assesse, that were let out to CTS. It was therefore, a case where a few of the business assets were let out by the assessee while the assessee was carrying on his other business activities. It will thus be a case where the assessee exploited its business assets to earn income. In these circumstances, we are of the view that the income in question has to be assessed under the head income from business. It is clear from the terms of the agreement that hard ware and net-working equipment were also provided to CTS by the assessee. Therefore, the assessee would be entitled to depreciation on the various assets leased. The fact that in the TDS certificate the payment to the assessee is shown as rent will not be conclusive. In such matters the real nature of the receipt has to be examined in the light of facts of a given case and the terms of the agreement. We are therefore, of the view that claim of the assessee ought to hav....
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....ction under section 10A/10B of the Act in respect of liability no longer required written back amounting to Rs. 14,34,954/- holding the same to be income from other sources and not derived from export activity. We find that the CIT(A) treated the amount of Rs. 14,34,954/- written back by the assessee as liability no longer required written back u/s. 41(1) of the Act as 'business income' as against 'Income from other sources' treated by Assessing Officer. The Revenue is not in appeal before us against such finding of the CIT(A). However, we find the CIT(A) rejected the claim of deduction u/s. 10B on the ground that the amount in question cannot be said to be derived from export of article or thing as has been envisaged u/s. 10B of the Act. It is the submission of the learned counsel for the assessee that during the earlier year the claim of expenses of the assessee has been allowed and, therefore, the profit was shown at a lesser amount. Had this amount not been considered during those years the profit in the respective years would have been more and the assessee would have got the benefit of higher deduction u/s. 10B of the Act. .... the assessee has written back the amount during ....
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....ed from', used in Section 10A, a direct nexus between the Profit and Gains and Industrial Undertaking. According to the AO, in the case of the Assessee in respect of the aforesaid income, there was no direct nexus but only incidental. He held that the assessee was engaged in the business of providing computer software and data processing services. By reason of such business, the assessee company has earned miscellaneous income, which could not be included in income of the business of the assessee. The bank charges was paid in previous year which was refunded to the extent of Rs.99,885/- as it was regarded wrong adjustment by the Bank Authority. According to the AO such income does not constitute business income. The interest charges of Rs. 12,952/- was received on the amount advanced to the staff of the assesse, which according to the AO had no nexus with the business because he assessee was not involved in the money lending business. The AO also held that the miscellaneous income of Rs. 1095/- has no nexus with the business and was only incidental to the business of the assessee. Therefore, the AO held that aforesaid incomes were not eligible income for deduction under Chapter VI ....
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....ses and depreciation. They were to the extent of Rs.1,98,44,646. As per the computation of income under the Act, the loss worked out to Rs.2,33,93,312 and there is no dispute on this quantum. The Assessee claimed in the return of income loss under the head business and profession of Pune unit-2 against the income from sub-letting of its office premises which was declared under the head business income. The question before the AO was whether such a set off was permissible. 31. The AO was of the view that the loss in question cannot be allowed because the profit from Pune Unit-2 is exempt u/s.10-A of the Act, the loss in question which has arisen by reason of incurring of revenue expenditure relating to Pune Unit-2, was an expenditure incurred in earning income which does not form part of the total income under the Act, and therefore cannot be allowed as deduction in view of the provisions of Sec.14-A of the Act, which provides that any expenditure incurred in earning income which does not form part of the total income under the Act, cannot be allowed as a deduction while computing total income. 32. The Assessee submitted before the AO as follows: 1. The....
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....ons of Sec.14-A of the Act, could not be applied. 2. The Assessee also took a stand that the provisions of Sec.14-A of the Act applies only to expenditure incurred in earning income which does not form part of the total income under the Act and not to a business loss. The Assessee submitted that u/s.71 of the Act, it was entitled to set off loss of the previous year under the head business against income from other sources. 33. The AO however did not agree with the contentions put forth on behalf of the Assessee. He held that because the provisions of Sec.10-A of the Act, were in Chapter III of the Act which deals with income which does not form part of the total income under the Act, the income in question was to be considered as Income which does not form part of the total income under the Act. Thereafter the AO held that the business of the Assessee had not commenced and therefore even though the expenditure which has resulted in the loss in question was revenue expenditure they could not be allowed as deduction and had to be capitalized. The Assessee in reply submitted that the expenditure in question was incurred in connection with expansion of an existing ....
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....llant company had contradicted its own stands when it came to profit of Mumbai unit and loss from Pune Unit. Further the AO has also treated such expenses in respect of Pune Unit as capital expenses thereby not allowing such loss as business loss. Aggrieved by such action of the AO the appellant is in appeal before me. This issue was also an issue before my predecessor for the A.Y. 1999- 2000 and for the reasons recorded therein it was held that though the appellant's claim for revenue loss was acceptable loss from such unit was not eligible for set off against the interest and other income and applying the provisions of section 14A my predecessor had rejected the appellant's claim of such losses. As the facts of the case and issue remaining the same respectfully following the decision of my predecessor these grounds of appeal are rejected." 35. Before us it is not in dispute that in AY 2000-01 on an identical issue, this tribunal in Assessee's own case in ITA No.794/Mum/06 in its order dated 26/8/09 held as follows: "11. Ground's of appeal No. 3 and 4 by the assessee read as under:- "3. Based on the facts and circumstances of the case and in....
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.... for the first three assessment years i.e. 1987-88, 1988-89 and 1989-90. That benefit was available for a period of five years. In the assessment year 1990-91, the assessee incurred a loss in respect of the said undertaking. The loss was adjusted against profits of some other units. The Assessing Officer disallowed the adjustment of loss and held that, as profits of SEEPZ units were not taxable, loss could not be allowed. On appeal the CIT(A) confirmed the action of the Assessing Officer. However, on second appeal, while the Accountant Member opined that the assessee's claim was admissible the Judicial Member opined that it was not admissible. The matter was referred to the Third Member on reference under section 255(4) who held as under:- Spending in the sense of paying out or away of money is the primary meaning of 'expenditure'. Expenditure is what is paid out or away and is something, which is gone irretrievably. Expenditure relates to a disbursement that means something that a trader paid out indicating a sort of violation on his part. He chooses to pay out some disbursement it is an expense, it is something, which comes out of his pocket. A 'loss' is something diffe....
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....e is no dispute that the expenditure incurred by the assessee are revenue in nature as they are incurred on rent, electricity charges, brokerage, security expenses, etc. The expenses towards brokerage, rent, electricity etc. cannot be said that they are in the character of capital in nature. The observation of the CIT(A) that in future year the assessee has to claim exemption u/s. 10A and thereafter he disallowed the claim of the assessee for set off of the loss against the income of other unit by observing that since the income is exempt u/s. 10A, therefore, the provisions of section 14A are applicable. In our considered view, the provisions of section 14A are not applicable. Because the assessee has not claimed any exemption u/s. 10A for the year under consideration. Therefore, in view of the above facts and the circumstances and in view of the decision of the Tribunal in the case of Navin Bharat Industries Ltd. (supra), we direct the Assessing Officer to allow the claim of set off of the assessee. We order accordingly." 15. Respectfully following the decision of the Tribunal in assessee's own case these grounds raised by the assessee are allowed." 36. Similar....
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....ssment year,- (i) section 32, section 32A, section 33, section 35 and clause (ix) of sub-section (1) of section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment years, in relation to any building, machinery, plant or furniture used for the purposes of the business of the undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and accordingly sub-section (2) of section 32, clause (ii) of subsection (3) of section 32A, clause (ii) of sub-section (2) of section 33, sub-section (4) of section 35 or the second proviso to clause (ix) of subsection (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduction; (ii) no loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74 in so far as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years; ....
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.... ITA No.796/Mum/06: (AY 2002-03): 45. The grounds of appeal of the Assessee read as follows: "1. Based on the facts and circumstances of the case and in law the learned Commissioner of Income Tax(Appeals) [CIT(A)] has legally erred in confirming that the income from subletting of premises, furniture, computers etc. is taxable under the head income from Other Sources. 2. Without prejudice to ground No.1, based on the facts and circumstances of the case and in law the learned CIT(A) has legally erred in not allowing deduction of depreciation on computers whilst computing the income from subletting activity. 3. Based on the facts and circumstances of the case and in law, the learned CIT(A) has legally erred in confirming that liability no longer required written back amounting to Rs. 3,75,168/- is not eligible for deduction under section 10A/10B of the Act. 4. Based on the facts and circumstances of the case and in law the learned CIT(A) has erred in not adjudicating on the ground that miscellaneous income of Rs. 95,758/- is derived from the export undertaking. 5. Based on the facts and circumstances of the case and in law the learned ....
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.... in confirming that Miscellaneous Business Income amounting to Rs.13,236/- from Mumbai Unit I, Rs,115,311 from Pune Unit I and Rs. 14,774/- from Pune Unit II is not eligible for exemption under section 10A of the Income Tax Act, 1961. 2. Based on the facts and circumstances of the case and in the law the learned CIT(A) has legally erred in confirming the action of the Assessing Officer in not allowing the set off of unabsorbed depreciation of earlier years against the income of the appellant." 52. The AO treated the above miscellaneous income as not eligible for deduction u/s.10-A of the Act. According to the Assessee Sub Section (1) of section 10A of the Act reads as under: "Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee:" Accordi....