Rental Income from Sublease of Office Premises to be Considered for Section 10A Benefit

• Subex Limited (taxpayer), a public limited company, is engaged in the business of development and export of software. The taxpayer is a 100% Export Oriented Unit (EOU) approved by the Software Technology Park of India (STP).
• The taxpayer had entered into a non-cancelable lease agreement for its branch office in Canada which was used for development of software.
• A portion of the said premises being vacant was sub-let by the taxpayer on a temporary basis. The taxpayer received rental income from the sub-letting of part of the office premises and such rental income was lower than the rent paid.
• The taxpayer claimed that it did not carry on any activity other than development of software in Canada, and hence the sub-lease of office premises is inextricably connected with its business operations. Therefore the rental income should form part of the profits of the undertaking eligible for deduction under section 10A of the Income-tax Act, 1961 (“Act”).

Issue

• Whether the rental income from temporary sub-lease of office premises can be regarded as “part of the profits of the business” for the purpose of deduction under Section 10A.

Ruling: