2011 (3) TMI 1031 - AT - Income Tax

Income from sub-letting - Business income or other sources - Deduction u/s 10A - Depreciation claim - Held that - It is 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 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. Therefore of the view that claim of the assessee ought to have been accepted. Deduction u/s 10A/10B - Held that - It is not in dispute that in AY 2000-01 in assessee s own case decided identical issue - when the assessee writes off the provisions during the impugned assessment year as liability no longer required written back and the amount was credited to the Profit and Loss account therefore such income in our opinion will be eligible for deduction u/s. 10B of the Act being derived from export activity - As regard the remaining amount relating to Pune unit which admittedly had loss cannot claim the benefit of deduction u/s. 10B as there is no profit - Appeal is partly allowed miscellaneous income derived from the export undertaking - Held that - Though the learned counsel argued that the issue can be decided because the Assessee is entitled to deduction statutorily on the incomes in question - Appeal is allowed by way of remand Losses of Pune unit - whethet not be allowed to be set off against the income from other sources? - Held that - There 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 direct the AO to allow the claim of set off of the assessee. Disallowance of setoff of losses of earlier years against the income of the appellant - Held that - In the case of Enercon Wind Farms (Krishna) Ltd. vs. ACIT (2007 (12) TMI 306 - ITAT MUMBAI) this Tribunal has taken the view that provisions of Sec.10-B(6)(ii) are applicable only after the tax holiday period is over. The Tribunal held that if after allowing deduction u/s.10-B there was certain income still left with the Assessee the same will be total income of the Assessee to which all other sections of the Act including Sec.72 would apply and carried forward losses could definitely be set off against such total income. Respectfully following the decisions referred to above we direct the AO to allow the claim of the Assessee.

Summary

Issues Involved:
1. Taxability of income from subletting of premises, furniture, computers, etc.
2. Allowance of depreciation on computers for subletting activity.
3. Eligibility of liability no longer required written back for deduction under section 10A/10B.
4. Eligibility of miscellaneous income for deduction under section 10A/10B.
5. Setoff of losses of Pune unit against income from other sources.
6. Applicability of Section 14A to expenditure related to the Pune undertaking.
7. Setoff of losses of earlier years against the income.
8. Allowance of the second installment under section 35D.

Issue-wise Detailed Analysis:

1. Taxability of Income from Subletting of Premises, Furniture, Computers, etc.:
The assessee argued that the income from subletting should be treated as business income, as the premises and computers were used as business assets. The AO and CIT(A) classified it as income from other sources, citing the nature of the lease agreement and TDS certificates indicating rent. The Tribunal, however, found that the subletting was an exploitation of business assets and should be treated as business income, allowing the assessee's claim.

2. Allowance of Depreciation on Computers for Subletting Activity:
The AO disallowed the depreciation claim, stating no evidence of computers being leased. The Tribunal found sufficient evidence in the MOU and auditor's certificate confirming the lease of computers to CTS, thus allowing the depreciation claim under business income.

3. Eligibility of Liability No Longer Required Written Back for Deduction Under Section 10A/10B:
The AO and CIT(A) denied the deduction, considering it not derived from export activity. The Tribunal, following its previous decision, allowed the deduction, reasoning that the written-back liabilities were originally part of business expenses, thus eligible for deduction under sections 10A/10B.

4. Eligibility of Miscellaneous Income for Deduction Under Section 10A/10B:
The AO excluded miscellaneous income from the deduction, citing a lack of direct nexus with export activity. The Tribunal remanded the issue to CIT(A) for a detailed decision, emphasizing the need for clarity on the nexus between the income and the business activity.

5. Setoff of Losses of Pune Unit Against Income from Other Sources:
The AO and CIT(A) disallowed the setoff, applying Section 14A. The Tribunal, referencing its earlier decision, allowed the setoff, stating that Section 14A applies to expenditure, not losses, and the losses were from an ongoing business activity.

6. Applicability of Section 14A to Expenditure Related to the Pune Undertaking:
The AO applied Section 14A, disallowing expenditure related to the exempt income. The Tribunal, following its precedent, ruled that Section 14A does not apply as the income was not exempt but deductible, allowing the expenditure.

7. Setoff of Losses of Earlier Years Against the Income:
The AO and CIT(A) disallowed the setoff, citing Section 10A(6)(ii). The Tribunal clarified that these provisions apply post-holiday period, not during it, thus allowing the setoff of earlier years' losses against the current income.

8. Allowance of the Second Installment Under Section 35D:
The AO and CIT(A) deferred the claim, directing consideration under Section 154. The Tribunal instructed the AO to consider the claim in accordance with the law, ensuring the assessee's opportunity to be heard.

Judgment Summary:
The Tribunal allowed the assessee's appeals on all grounds, directing the AO to treat the income from subletting as business income, allow depreciation on leased computers, permit deductions under sections 10A/10B for written-back liabilities and miscellaneous income, set off losses of the Pune unit and earlier years' losses, and consider the second installment under section 35D. The revenue's appeal was dismissed.