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2015 (10) TMI 756

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..... rder sought to be reviewed was prejudicial to the interests of the revenue and was unsustainable in law. In the present case, the interest so credited and debited by the Assessee in the books maintained does not, in the first instance, represent any real profit or gain by the Assessee. Assessee has not derived any interest income. Therefore, reducing such notional income - which has neither been accrued nor received - from the Assessee’s total income is completely alien to the scheme of the Act. Such notional interest could never form a part of the Assessee’s income and thus the Assessee’s claim that the same is to be excluded under Section 10A of the Act is flawed and wholly unsustainable in law. The view as canvassed on behalf of the Assessee is not, even remotely, plausible and we find no infirmity with the CIT’s exercise of jurisdiction under Section 263 of the Act. We are also unable to accept the contention that since in the preceding year, no issue has been raised with regard to charging of interest by one unit to another, the same could not be picked up by the CIT under Section 263 of the Act. Merely because an issue remained unchecked in a preceding year does not mea .....

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..... rightly so. - Decided against revenue. - ITA 83/2003, ITA 124/2003 - - - Dated:- 9-10-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr SalilAggarwal, Mr Ravi Pratap Mall and Mr S. Krishnan For the Respondent : Mr Rohit Madan, Senior Standing counsel with Mr Aakash Bajpai, Mr Rahul Chaudhary Senior Standing Counsel with Mr Ruchir Bhatia JUDGMENT Vibhu Bakhru, J 1. The Assessee - by way of these appeals filed under Section 260A of the Income Tax Act, 1961 (hereafter the Act ) - impugns a common order dated 5th August, 2002 passed by the Income Tax Appellate Tribunal (hereafter the Tribunal ) in ITA No.2641/Del/96 and ITA No.2642/Del/96 in respect of the Assessment Years 1991-91 and 1992-93 respectively. Both the said appeals (ITA No.2641/Del/96 and 2642/Del/96) were filed by the Assessee against separate orders passed by the Commissioner of Income Tax (hereafter the CIT ) under Section 263 of the Act in respect of AY 1991-92 and AY 1992-93. 2. The controversy involved in the present case relates to whether the Assessee could include notional interest as income in computation of profits and gains derived by its undertaking from exp .....

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..... egating to ₹ 37,61,132/- for the Assessment Year 1992-93? 3. Whether the Income Tax Appellate Tribunal was correct in law in not considering the alternative submissions pertaining to deduction u/s 80HHC of the Act as also 10A of the Act pertaining to the unit at Faridabad and NEPZ, Noida respectively? 3. The relevant facts, necessary to consider the controversy in these appeals are, briefly, narrated as under:- 3.1 The Assessee is engaged in the business of running printing presses. The Assessee has three independent undertakings, namely, (i) Thomson Press, Faridabad; (ii) Thomson Press EOU, Noida; and (iii) Thomson Press NEPZ, Noida. 4. Admittedly, the Assessee s undertaking at NEPZ Noida (hereafter referred to as the eligible undertaking ) fulfilled the conditions as specified under section 10A(2) of the Act as it stood at the material time and, consequently, was eligible for exemption under Section 10A of the Act for a block of five years relevant to the AYs 1991-92 to 1994-95. The Assessee filed its return of income for AY 1991-92 on 31st December, 1991 declaring a taxable income of ₹ 32,86,776/-. This return was subsequently revised and the .....

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..... Sekhkari Sanstha Ltd. V. CIT: (1983) 140 ITR 379 (MP) in support of his view that the transaction of crediting interest by the Head office to the account of the eligible undertaking was between the two branches of the Assessee and did not give rise to any real expenditure or income. He, accordingly, held that the expenditure could not be allowed in the hands of one unit and correspondingly, the question of enhancing income of the eligible unit by such notional income, did not arise. 10. The CIT also considered alternative pleas on behalf of the Assessee including the plea that relief under Section 80HHC of the Act as available to the Assessee should be computed by including the turnover of the eligible undertaking for the purposes of computing the profits and gains from the exports exempt under Section 80HHC. The CIT held that the aforesaid issue did not arise in the proceedings under Section 263 of the Act and the only issue was with regard to the interest charged in the books maintained by the assessee. Nonetheless, the CIT also considered the question whether the turnover of the eligible undertaking could be included for the purposes of calculating the exemption available to .....

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..... ) of the Act. He referred to the decision of this Court in the case of CIT v. Escorts Ltd.: (2011) 338 ITR 435 (Del) in support of his contention that where a view has been accepted in the preceding assessment years, CIT would have no occasion to take recourse to the revisional powers under Section 263 of the Act. 16. On merits, Mr Aggarwal contended that the decision in the case of Malwa Mills Karamchari Parasper Sekhkari Sanstha Ltd. (supra) was not applicable in the facts of the present case. He sought to distinguish the said decision on the ground that the same was rendered in the context of Section 80P of the Act, which is amongst a funiculus of sections under Chapter VI-A of the Act that provide for deductions to be made in computing total income of an Assessee; whilst, the present case concerned Section 10A of the Act, which was part of Chapter III of the Act that pertained to income which do not form part of the total income . He argued that the deduction under Section 10A of the Act provided for a deduction in respect of incomes profit and gains derived by an Assessee from an industrial undertaking at the threshold and not as a deduction included in the gross income .....

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..... e income by way of interest of the undertaking was established, the same could not be considered as a part of profit and gains derived by the Assessee from the eligible undertaking. 21. Mr Aggarwal in his rejoinder submitted that in the present case no other view was plausible and the assessment order was, clearly, erroneous. He submitted that Section 10A did not contemplate any notional income but only such profits and gains that were derived by an Assessee from an undertaking, to which Section 10A applies. Reasoning and Conclusion 22. The principal issue to be addressed is whether the CIT can assume jurisdiction under Section 263 of the Act and enhance the assessed income by reducing the deduction allowed to the Assessee in respect of the eligible undertaking. According to the Assessee, the interest credited in the books of the Assessee maintained with respect to the eligible undertaking would be part of the profit and gains derived from the eligible undertaking and, thus, deductable from the total income of the Assessee under Section 10A of the Act. It has been argued that this is a plausible view and, therefore, the assessment order allowing such reduction could not be .....

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..... d one of the courses permissible in law and it has resulted in loss of Revenue ; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law. 25. Following the aforesaid judgment, the Supreme Court in Commissioner of Income Tax v. Max India Ltd.: (2007) 295 ITR 282 (SC) reiterated that the phrase prejudicial to the interest of revenue as used in Section 263(1) of the Act must be read in conjunction with the expression erroneous and unless the view taken by the AO is found to be unsustainable in law, the powers under Section 263 of the Act cannot be invoked. 26. Following the aforesaid decision, this Court in Commissioner of Income Tax v. DLF Ltd.:(2013) 350 ITR 555 (Del) had also emphasized that powers under Section 263(1) of the Act were available only if the order sought to be reviewed was prejudicial to the interests of the revenue and was unsustainable in law. 27. In view of the settled law as indicated above, the issue to be considered is whet .....

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..... income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment 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 industrial 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 sub-section (3) of section 32A, clause (ii) of subsection (2) of section 33, sub-section (4) of section 35 or the second proviso to clause (ix) of sub-section (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 .....

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..... the return of income under sub-section (1) of section 139] , furnishes to the [Assessing] Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years. [(8) References in sub-section (5) to any other provision of this Act which has been amended or omitted by the Direct Tax Laws (Amendment) Act, 1987 shall, notwithstanding such amendment or omission, be construed, for the purposes of that sub-section, as if such amendment or omission had not been made.] Explanation : For the purposes of this section,- (i) free trade zone means the Kandla Free Trade Zone and the Santacruz Electronics Export Processing Zone and includes any other free trade zone which the Central Government may, by notification in the Official Gazette, specify for the purposes of this section; [(ii) relevant assessment years means the five consecutive assessment years specified by the assessee at his option under subsection (3);]] [(iii) manufacture includes any- (a) process, or (b) assembling, or (c) recording of programmes on .....

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..... come derived by an Assessee from the sale of import entitlements was profits and gains derived from an industrial undertaking , in the context of Section 80HH of the Act and held as under: We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words derived from , a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessee s industrial undertaking 32. Although, the said decision was rendered in the context of Section 80HH of the Act, the same would be equally applicable to the facts .....

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..... ned interest. The Court held that the interest earned by the Assessee was not derived by the Assessee from its undertaking to which section 10A of the Act applied. The Court held that deposits made by the Assessee with banks were the source of income by way of interest and a direct nexus between interest and the undertaking could not be established. The relevant extract from the judgement is quoted below: In this case the interest received by the assessee was on deposits made by it in the banks. It is that deposit which is the source of income. The mere fact that the deposit made was for the purpose of obtaining letters of credit which letters of credit were in turn used for the purpose of the business of the industrial undertaking does not establish a direct nexus between the interest and the industrial undertaking. The Tribunal, therefore, was in error in holding that there was direct nexus between the two. The question referred to us is answered in favour of the Revenue and against the assessee. 36. In India Comnet International Pvt. Ltd. v. Income Tax Officer: (2013) 354 ITR 673 (SC), the Supreme Court referred to the above decision and considered the case wher .....

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..... on 80P - and exemptions under Chapter III of the Act. He submitted that in the case of deductions under Chapter VI-A of the Act, the total income of the Assessee is computed and, thereafter, the deductions in respect of certain incomes as are allowed; but, incomes exempt under provisions of Chapter III of the Act are excluded from the stream of total income of an Assessee at the threshold. He had also referred to Section 80AB of the Act, which in effect limits the deductions available under Chapter VI-A sub-heading C captioned deductions in respect of certain incomes , to the extent to which such incomes are included in the gross total income of an Assessee. He submitted that no such provision exists in respect of exemptions under Chapter III of the Act. 41. We are in agreement with the Assessee s contention that under the scheme of the Act, the exemptions under Chapter III and deductions available under Chapter VI-A of the Act are qualitatively different. The incomes exempt under Chapter III of the Act are excluded from the stream of income at the threshold and the same cannot be treated as deductions available under sub-heading C of Chapter VI-A of the Act. We are also in agr .....

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..... rofits and gains derived from an undertaking from export of articles or things or computer software. In view of the amendment, the Revenue had contended that since the expression deduction had been used, the gross total income of the Assessee was to be computed as per the normal provisions of the Act (without giving effect to Section 10A(1) of the Act) and, thereafter, the deduction under Section 10A(1) of the Act was to be allowed. Plainly, this controversy does not arise in the present case as the plain language of Section 10A(1) of the Act as it stood during the assessment years involved in the present case of the Act, clearly, indicated that the income of the Assessee derived from an eligible unit will have to be excluded from the total income of the Assessee. The point in issue in the present case is not whether the profits and gains derived by the Assessee from the eligible undertaking is to be deducted after computation of the gross income of the Assessee or at the threshold, but whether, for the purposes of Section 10A of the Act, notional interest could be considered as profits and gains derived by the Assessee from the eligible undertaking. 45. In the present case, t .....

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..... rative society and was carrying on banking business as well as business of running consumer stores. The Assessee therein had maintained separate set of books of accounts for the two business streams. During the relevant period, the consumer stores unit had credited interest in the account of the banking unit maintained in its books. Correspondingly, the banking unit had also passed entries in its books debiting the consumer stores unit with the amount of interest charged. The interest credited in the books of the banking unit was sought to be included as profits and gains of business attributable to carrying on the business of banking. The Madhya Pradesh High Court upheld the decision of the Tribunal in reducing the profits available for deduction under Section 80P of the Act. The Court reasoned that an Assessee could not be said to have earned income from itself and, therefore, the deduction as available under Section 80P was not available to the Assessee in respect of the interest paid by the consumer stores unit to the banking unit of the Assessee. Although the said decision was rendered in the context of Section 80P of the Act, the fundamental principle that income derived by a .....

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..... derived any interest income. Therefore, reducing such notional income - which has neither been accrued nor received - from the Assessee s total income is completely alien to the scheme of the Act. Such notional interest could never form a part of the Assessee s income and thus the Assessee s claim that the same is to be excluded under Section 10A of the Act is flawed and wholly unsustainable in law. The view as canvassed on behalf of the Assessee is not, even remotely, plausible and we find no infirmity with the CIT s exercise of jurisdiction under Section 263 of the Act. 51. We are also unable to accept the contention that since in the preceding year, no issue has been raised with regard to charging of interest by one unit to another, the same could not be picked up by the CIT under Section 263 of the Act. Merely because an issue remained unchecked in a preceding year does not mean that the CIT is estopped from exercising its powers under Section 263 of the Act. It is well established that the principles of res judicata do not apply to income tax proceedings and an error in the preceding year need not be repeated or ignored in the subsequent years. The decision of this Court in .....

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