TMI Blog2011 (3) TMI 1031X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bletting 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). The assessee filed the original return of income for the year declaring loss of Rs.11,995,740/- and claiming refund of Rs. 4,887,644/-. In the return of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed 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-letting income and hence should be allowed as deduction from such income under section 32 of the Act. 7. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: Nature of Expenditure Expenditure on 46,800 sq. ft. Expenditure on subletted area of 11,805 sq. ft. Rent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Aggrieved by the order of the CIT(A) the assessee has raised Ground No.1 and 2 before the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 disputed by the AO. It was submitted by him that it was a simple case of sub-letting and in this regard relied on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 general principles relating to income from leasing out the assets of the business by an assessee were laid down as under: (1) no pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 include a firm number for the workstation requirements for the immediately next month and a tentative requirement for the next two months. The first forecast is due o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. 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 have been accepted. We accordingly direct the AO to allow the claim of the assessee in this regard. Ground No.1 and 2 are accordingly allowed. 24. Ground No.3 raised by the Assessee re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind 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 the impugned assessment year, therefore, it cannot be said that the amount which is credited to the Profit and loss account under section 41(1) is not derived from export activity;. We find force in the above submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld 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 of the Income Tax Act. The AO in this regard also drew support from the ratio of the judgement of Hon'ble Supreme Court in the case of Starling Foods reported in 237 ITR 579 and Hon'ble Supreme Court in the case of Pandian Chemicals Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provisions of Sec.10-A of the Act, as it was originally introduced in the Act, exempted the entire profits of STP units and they did not form part of the total income under the Act. However those provisions were amended by the Finance Act, 2000, w.e.f. 1-4-2000 and they became deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business and therefore they could not be capitalized and in this regard relied on the order of CIT(A) for AY 99-00, wherein it was held that Pune Unit-2 was an expansion of the existing business of the Assessee. The AO however held that the decision of CIT(A) was not correct because u/s.35-D of the Act, where an Assessee incurs expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redecessor 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 law the learned CIT(A) has legally erred in confirming that the losses of Pune unit amounting to Rs.3,98,35,579/- should not be allowed to be set off against the income from other sources. 4. Based on the facts and circumstances of the case and in law the learned CIT(A) has legally erred in confirming that considering the provisions of Section 14A of the Income Tax Act, 1961, the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed. 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 difference. That is not a thing, which he expends or disburses. That is a thing, which comes upon him as extra business expenditure is allowable if it is laid out or expended wholly and exclusively for the assessee's business, while a business loss is allowable if it is of non-capital nature and is not only connected with the trade, but incidental to the trade itself. In assessing the amount of profit and gains of a year accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 decisions were rendered by the ITAT in Honeywell International (India) Pvt. Ltd. vs. DCIT 108 TTJ (del) 924 and Sovika Infotek Ltd. vs. ITO (2008) 23 SOT 271 (Mum). Respectfully following the decisions referred to above, we direct the AO to allow the claim of the Assessee. Ground No.5 and 6 raised by the Assessee is accordingly allowed. 37. Ground No. 7 and 8 raised by the Assessee reads as follows: "7. Based on the facts and circumstances of the case an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; Expln.-2 (vi) to Sec.10-A of the Act defines "relevant Assessment year" for the purpose of Sec.10-A of the Act as follows: "(vi) "relevant assessment year" means any assessment year falling within a period of ten consecutive assessment years referred to in this section ;" 41. It is clear from the aforesaid provisions that they apply during the assessment years after the end of the holiday period. Admittedly the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CIT(A) has legally erred in confirming that the losses of Pune unit should not be allowed to be set off against the income from other sources. 6. Based on the facts and circumstances of the case and in law the learned CIT(A) has legally erred in confirming that considering the provisions of Section 14A of the Income Tax Act, 1961, the expenditure relating to the Pune undertaking should not be allowed as it is exempt under section 10A of the Act. 7. Based on the facts an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igible 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:" According to the Assessee, sub section (1) clearly provides that an assessee will be allowed deduction for such profits as are derived from undertaking from export of software. Section 10A(4) clarifies that for the purpose of section (1) of the profits derived from export of articles or things shall be the amount which bears to the profits of the business the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. The Assessee pointed out that it was engaged in export of services through its unit in Mumbai and Pune. Accordingly the enti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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