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From the Courts »
  Vatsala Shenoy vs. JCIT (Supreme Court)
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 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

Thomson Press (India) Ltd. Vs. Commissioner Of Income Tax-II
February, 03rd 2016
            IN THE HIGH COURT OF DELHI AT NEW DELHI
%                                              Judgment delivered on: 09.10.2015

+                             ITA 83/2003

THOMSON PRESS (INDIA) LTD.                                 .....Appellant
                              versus
COMMISSIONER OF INCOME TAX-II                              ..... Respondent

                                         AND

+                             ITA 124/2003

THOMSON PRESS (INDIA) LTD.                                 .....Appellant

                              versus
COMMISSIONER OF INCOME TAX-II                              ..... Respondent

Advocates who appeared in these cases:
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.

CORAM:
DR. JUSTICE S.MURALIDHAR
MR. JUSTICE VIBHU BAKHRU

                                       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



ITA Nos. 83/2003 & 124/2003                                                 Page 1 of 32
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 export of articles or things, for the

purposes of claiming deduction under Section 10A of the Act. The Assessee

had credited interest on the surplus generated from its undertaking at NEPZ,

NOIDA in the books of accounts maintained for that undertaking.

Correspondingly, a contra entry was passed by the Assessee in the books of

accounts maintained in respect of its Head Office. The Assessing Officer

(hereafter the `AO) did not reject the inclusion of such interest as the profits and

gains of the undertaking, which were deducted by the Assessee from its total

income for computing its taxable income. The CIT considered the assessment

orders passed by the AO to be erroneous as prejudicial to the interest of the

Revenue. Consequently, the CIT passed orders under Section 263 of the Act,

which were upheld by the Tribunal. This led the Assessee to file the present

appeals. By an order dated 22nd May, 2003, these appeals were admitted and the

following questions of law were framed:-




ITA Nos. 83/2003 & 124/2003                                                Page 2 of 32
        "Assessment Year 1991-92
        1. Whether the Income Tax Appellate Tribunal was correct in law
           in upholding the orders passed by the Commissioner of Income
           Tax u/s 263 of the I.T. Act, 1961, holding the assessment order
           for the assessment year 1991-92 as erroneous in so far as the
           same was prejudicial to the interests of the Revenue.?

        2. Whether the Income Tax Appellate Tribunal was correct in law,
           in holding that the income of the assessee company had been
           under-assessed in so far as it related to the amount of interest
           debited, aggregating to Rs.8,13,651/- for the Assessment Year
           1991-92?

        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?


        Assessment Year 1992-93
        1.       Whether the Income Tax Appellate Tribunal was correct in
                 law in upholding the orders passed by the Commissioner of
                 Income Tax u/s 263 of the I.T. Act, 1961, holding the
                 assessment order for the assessment year 1992-93 as
                 erroneous in so far as the same was prejudicial to the interests
                 of the Revenue?
        2.       Whether the Income Tax Appellate Tribunal was correct in
                 law, in holding that the income of the assessee company had
                 been under- assessed in so far as it related to the amount of
                 interest debited, aggregating to Rs.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?"




ITA Nos. 83/2003 & 124/2003                                                   Page 3 of 32
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 (hereaf ter

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 Assessee

declared a total income of `1,45,73,443/-. The income derived by the Assessee

from the eligible undertaking was excluded in computation of the declared

income.


5.      The AO passed an assessment order dated 31 st March, 1994 for the AY

1991-92 determining the total income of the Assessee as `2,11,15,617/-. Whilst

the AO rejected certain expenses as deductible, there was no discussion in

respect of the interest included as the profits and gains of the eligible


ITA Nos. 83/2003 & 124/2003                                              Page 4 of 32
undertaking; the AO did not object to the inclusion of interest in profits from the

eligible undertaking, which were exempt under Section 10A of the Act and,

consequently, reduced by the Assessee from its total income for computing the

income chargeable to tax


6.      The CIT found that the eligible undertaking had accumulated profits of

`98,05,560/- as on 31st March, 1991 and an interest of `8,13,651/- had been

charged on the aforesaid surplus in the books of the eligible undertaking.

Correspondingly, the Head Office had expensed the aforesaid amount as interest

and credited the account of the eligible undertaking in its books of accounts

maintained separately. In other words, the separate books maintained in respect

of the eligible undertaking reflected interest income of `8,13,651/- and the same

was also deducted from the taxable income of the Assessee as being income

derived by the Assessee from the eligible undertaking.


7.      The CIT was of the view that the aforesaid deduction was erroneous as

prejudicial to the interest of the revenue and, therefore, issued a show cause

notice dated 5th February, 1996 under Section 263 of the Act in respect of the

AY 1991-92. A similar notice dated 5th February, 1996 was also issued in

respect of the AY 1992-93, as in the Previous Year relevant to AY 1992-93, the

Assessee had deducted a sum of `37,61,132 on account of notional interest

credited in the books of the eligible undertaking.




ITA Nos. 83/2003 & 124/2003                                               Page 5 of 32
8.      The Assessee responded to the show cause notices by its letter dated 28th

February, 1996.


9.      The CIT passed an order dated 27th March, 1996 in respect of the AY

1991-92 enhancing the total income of the Assessee by a sum of `8,12,651/- by

reducing the amount deductible under Section 10A of the Act by the aforesaid

sum. The CIT referred to the decision of the Madhya Pradesh High Court in

Malwa Mills Karamchari Parasper 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

ITA Nos. 83/2003 & 124/2003                                             Page 6 of 32
eligible undertaking could be included for the purposes of calculating the

exemption available to the Assessee under Section 80HHC.


11.     The CIT passed a separate order dated 27th March, 1996 in respect of AY

1992-93 and following its decision for the earlier AY, enhanced the total

income of the Assessee by a sum of `37,61,132/-. The said enhancement

resulted in the income of the Assessee being assessed at `4,07,172/- instead of a

loss of `33,53,960/- as assessed by the AO in its assessment order dated 20th

March, 1995. Since the assessed income was now a positive figure, the CIT

further directed the AO to compute the relief under Section 80HHC of the Act

after giving due opportunity to the Assessee.


12.     The Assessee filed appeals against the orders passed by the CIT, inter

alia, on the ground that CIT had erred in holding that the assessment orders

were erroneous as prejudicial to the interests of the revenue. In the alternative,

the Assessee contended that the CIT had erred in not allowing deduction under

Section 80HHC of the Act by including turnover of the eligible undertaking in

the total turnover of the Assessee.


13.     The Tribunal rejected the appeals filed by the Assessee. Being aggrieved

by the said decision, the Assessee has filed the present appeals.




ITA Nos. 83/2003 & 124/2003                                              Page 7 of 32
Submissions


14.     Mr Salil Aggarwal, learned counsel appearing for the Assessee contended

that the orders passed by the CIT were beyond the scope of Section 263 of the

Act. He referred to the decision of the Supreme Court in Malabar Industrial

Company Ltd. V. CIT: (2000) 243 ITR 83 (SC) and submitted that before

proceeding under Section 263 of the Act, the CIT had to be satisfied in respect

of two conditions, namely, i) that the order of the AO sought to be revised was

erroneous; and ii) that it was prejudicial to the interest of the revenue. He

submitted that in a case where two views were possible and the AO had taken

one view, it was not open for the CIT to treat the order to be erroneous as

prejudicial to the interest of the revenue only for the reason that he did not agree

with the AO's view. He submitted that unless the view taken by the AO was

unsustainable and patently erroneous, the CIT could not assume jurisdiction

under Section 263 of the Act.


15.     Mr Aggarwal further argued that in the preceding year 1990-91, the

eligible undertaking had debited interest amounting to `7,75,399/-, which had

been accepted in an assessment framed under Section 143(3) 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.

ITA Nos. 83/2003 & 124/2003                                                Page 8 of 32
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 of an Assessee. He referred to the decision of this

court in CIT v. TEI Technonlogies (P) Ltd.: (2014) 361 ITR 36 (Del), in

support of the above contention.


17.     He submitted that under the scheme of the Act, the eligible undertaking

was to be treated as a separate source and its income was not to be intermingled

with any other source. He emphatically urged that Section 10A undertaking had

to be considered as a separate person whose income was not included in the

income of the Assessee. He submitted that in view of the said scheme the

reasoning of the CIT and the Tribunal that no one could earn interest from




ITA Nos. 83/2003 & 124/2003                                             Page 9 of 32
oneself was not tenable as the eligible undertaking had for all practical purposes

to be treated as a separate entity.


18.     Mr Aggarwal, further referred to Section 10A(6) of the Act by virtue of

which, the provisions of Section 80IA(8) of the Act, insofar as applicable, were

incorporated under Section 10A of the Act. Section 80IA(8) provided for the

transfer of goods and services held by eligible undertaking to non eligible

business to be computed at market value. According to Mr Aggarwal, this

indicated that the eligible business and non eligible business were to be treated

as separate sources and transactions inter se different units of an assessee were

recognised for the purposes of calculating the income derived by an Assessee

from an eligible undertaking.


19.     Mr Aggarwal contended that Section 10A provides for exemption of

"income derived by an Assessee from its undertaking". He submitted that this

was different from the language used in Section 80HH or 80IA which referred

to income "derived from an industrial undertaking". He submitted that this also

indicated that an eligible undertaking under Section 10A was to be considered

as a separate and independent source.


20.     Countering the aforesaid arguments, Mr Chaudhary, learned counsel for

the Revenue submitted that irrespective of the merits of the contentions

advanced on behalf of the Assessee, interest income could not be considered as


ITA Nos. 83/2003 & 124/2003                                             Page 10 of 32
income derived by the Assessee from the eligible undertaking as there was no

nexus between the interest claimed to be earned and activities of the eligible

undertaking. He referred to the decision of the Supreme Court in India Comnet

International v. Income Tax Officer: (2013) 354 ITR 673 (SC) in support of

this contention that unless a close nexus with the 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


ITA Nos. 83/2003 & 124/2003                                               Page 11 of 32
argued that this is a plausible view and, therefore, the assessment order allowing

such reduction could not be considered as erroneous.


23.     Section 263(1) of the Act empowers the Commissioner to call for and

examine the record of any proceeding under the Act and if it is considered that

any order passed by the AO is "erroneous in so far as it is prejudicial to the

interest of the revenue", he may after giving the Assessee an opportunity to be

heard and after making such inquiries as necessary, pass such orders thereon as

the circumstances of the case would justify including an order enhancing or

modifying the assessment. Thus, in order to exercise powers under Section

263(1) of the Act, the CIT must be satisfied that the assessment order made by

the AO was (a) erroneous; and (b) prejudicial to the interest of the revenue. The

Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT: (2000)

243 ITR 83 (SC) had interpreted the provisions of Section 263(1) in the

following words:


          "A bare reading of this provision makes it clear that the
          prerequisite to the exercise of jurisdiction by the Commissioner
          suo motu under it, is that the order of the Income-tax Officer is
          erroneous in so far as it is prejudicial to the interests of the
          Revenue. The Commissioner has to be satisfied of twin
          conditions, namely, (i) the order of the Assessing Officer sought
          to be revised is erroneous; and (ii) it is prejudicial to the interests
          of the Revenue. If one of them is absent-if the order of the
          Income-tax Officer is erroneous but is not prejudicial to the
          Revenue or if it is not erroneous but is prejudicial to the Revenue-
          recourse cannot be had to section 263(1) of the Act.


ITA Nos. 83/2003 & 124/2003                                                    Page 12 of 32
          There can be no doubt that the provision cannot be invoked to
          correct each and every type of mistake or error committed by the
          Assessing Officer, it is only when an order is erroneous that the
          section will be attracted. An incorrect assumption of facts or an
          incorrect application of law will satisfy the requirement of the
          order being erroneous. In the same category fall orders passed
          without applying the principles of natural justice or without
          application of mind.

          The phrase "prejudicial to the interests of the Revenue" has to be
          read in conjunction with an erroneous order passed by the
          Assessing Officer. Every loss of revenue as a consequence of an
          order of the Assessing Officer cannot be treated as prejudicial to
          the interests of the Revenue. For example, when an Income-tax
          Officer adopted 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."



24.     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.


25.     Following the aforesaid decision, this Court in Commissioner of Income

Tax v. DLF Ltd.:(2013) 350 ITR 555 (Del) had also emphasized that powers



ITA Nos. 83/2003 & 124/2003                                                Page 13 of 32
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.


26.     In view of the settled law as indicated above, the issue to be considered is

whether the claim of the Assessee for including notional interest as profit and

gains derived from the eligible undertaking for the purposes of Section 10A of

the Act is sustainable in law.





27.     At this stage, it would be necessary to refer to Section 10A of the Act.

Section 10A as it stood during the relevant assessment years, is reproduced

below:-


        "10A. (1) Subject to the provisions of this section, any profits and
        gains derived by an assessee from an industrial undertaking to which
        this section applies shall not be included in the total income of the
        assessee.
        (2) This section applies to any industrial undertaking which fulfils
        all the following conditions, namely:--
         (i) it has begun or begins to manufacture or produce articles or
        things during the previous year relevant to the assessment year
        commencing on or after the 1st day of April, 1981, in any free trade
        zone;
        (ii) it is not formed by the splitting up, or the reconstruction, of a
        business already in existence:
         Provided that this condition shall not apply in respect of any
        industrial undertaking which is formed as a result of the
        reestablishment, reconstruction or revival by the assessee of the
        business of any such industrial undertaking as is referred to in



ITA Nos. 83/2003 & 124/2003                                               Page 14 of 32
        section 33B, in the circumstances and within the period specified in
        that section;
        (iii) it is not formed by the transfer to a new business of machinery
        or plant previously used for any purpose.
        Explanation : The provisions of Explanation 1 and Explanation 2 to
        sub-section (2) of section 80-I shall apply for the purposes of clause
        (iii) of this sub-section as they apply for the pur-poses of clause (ii)
        of that sub-section.
        [(3) The profits and gains referred to in sub-section (1) shall not be
        included in the total income of the assessee in respect of any five
        consecutive assessment years, falling within a period of eight years
        beginning with the assessment year relevant to the previous year in
        which the industrial undertaking begins to manufacture or produce
        articles or things, specified by the assessee at his option :
        Provided that nothing in this sub-section shall be construed to
        extend the aforesaid five assessment years to cover any period after
        the expiry of the said period of eight years.]
        (4) Notwithstanding anything contained in any other provision of
        this Act, in computing the total 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 sub-
        section (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
        deduc-tion;
        (ii) no loss referred to in sub-section (1) of section 72 or sub-section
        (1) [or sub-section (3)] of section 74 and no deficiency referred to in
        sub-section (3) of section 80J, in so far as such loss or deficiency

ITA Nos. 83/2003 & 124/2003                                                Page 15 of 32
        relates to the business of the industrial undertaking shall be carried
        forward or set off where such loss, or, as the case may be, deficiency
        relates to any of the relevant assessment years;
        (iii) no deduction shall be allowed under section 80HH or section
        80HHA or section 80-I or section 80J in relation to the profits and
        gains of the industrial undertaking; and
         (iv) in computing the depreciation allowance under section 32, the
        written down value of any asset used for the purposes of the
        business of the industrial undertaking shall be computed as if the
        assessee had claimed and been actually allowed the deduction in
        respect of depreciation for each of the relevant assessment years.
        (5) Where an industrial undertaking in any free trade zone has begun
        to manufacture or produce articles or things in any previous year
        relevant to the assessment year commencing on or after the 1st day
        of April, 1977, but before the 1st day of April, 1981, the assessee
        may, at his option, before the expiry of the time allowed under sub-
        section (1) or sub-section (2) of section 139, whether fixed originally
        or on extension, for furnishing the return of income for the
        assessment year commencing on the 1st day of April, 1981, furnish
        to the [Assessing Officer] a declaration in writing that the provisions
        of sub-section (1) may be made applicable to him for each of the
        relevant assessment years as reduced by the number of assessment
        years which expired before the 1st day of April, 1981, and if he does
        so, then, the provisions of sub-section (1) shall apply to him for each
        of such relevant assessment years and the provisions of sub-section
        (4) shall also apply in computing the total income of the assessee for
        the assessment year immediately succeeding the last of the relevant
        assessment years and any subsequent assessment year.
        (6) The provisions of sub-section (8) and sub-section (9) of section
        80-I shall, so far as may be, apply in relation to the industrial
        undertaking referred to in this section as they apply for the purposes
        of the industrial undertaking referred to in section 80-I.
        (7) Notwithstanding anything contained in the foregoing provisions
        of this section, where the assessee, [before the due date for
        furnishing 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.



ITA Nos. 83/2003 & 124/2003                                                Page 16 of 32
        [(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
        notifica-tion 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 sub-
        section (3);]]
         [(iii) "manufacture" includes any--
         (a) process, or
         (b) assembling, or
        (c) recording of programmes on any disc, tape, perforated, media or
        other information storage device.]]"

28.     A plain reading of Section 10A(1) of the Act indicates that profits and

gains derived by an Assessee from an industrial undertaking to which Section

10A applies is not included in the total income of the Assessee. Section 10A(2)

of the Act specifies the conditions which are to be fulfilled by an undertaking

for being eligible for the benefits of Section 10A(1) of the Act. In the present

case, it is not disputed that the Assessee's undertaking at NEPZ, NOIDA (i.e.

the eligible undertaking) fulfilled the requisite conditions and the profits and

gains derived by the Assessee from the eligible undertaking was not to be

included in the total income of the Assessee.



ITA Nos. 83/2003 & 124/2003                                               Page 17 of 32
29.     The expression "derived" followed by the word "from" refers to the

source of profits and gains. The Oxford Dictionary defines the word "derived"

as "obtained something from (a specified source)" and "arise from or originate

in (a specified source)". It is at once clear that in order for any profits and gains

to be exempt under Section 10A of the Act, their source must be traced to "the

industrial undertaking" to which Section 10A applies. In National Organic

Chemical Industries Ltd. v. Collector of Central Excise (Bom): 106 STC

467 (SC) the Supreme Court referred to the dictionary meaning of the word

"derive" which is usually followed by the word "from" and interpreted the

expression "derived from" in the following manner:-


      "10. The dictionaries state that the word `derive' is usually followed
      by the word `from', and it means : get or trace from a source ; arise
      from, originate in ; show the origin or formation of.

      11. The use of the words "derived from" in Item 11AA(2) suggests
      that the original source of the product has to be found. Thus, as a
      matter of plain English, when it is said that one word is derived from
      another, often in another language, what is meant is that the source
      of that word is another word, often in another language. As an
      illustration, the word "democracy" is derived from the Greek word
      "demos", the people, and most dictionaries will so state. That is the
      ordinary meaning of the words "'derived from" and there is no
      reason to depart from that ordinary meaning here."


30.     The Supreme Court in CIT vs. Sterling Foods: (1999) 237 ITR 57 (SC)

considered the question, "whether income 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:

ITA Nos. 83/2003 & 124/2003                                                Page 18 of 32
      "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 "

31.     Although, the said decision was rendered in the context of Section 80HH

of the Act, the same would be equally applicable to the facts of the present case

as the court had answered the question involved by interpreting the plain

meaning of the expression "derived from", which is also the expression used in

Section 10A of the Act (as it stood at the material time). The Supreme Court

had explained that the words "derived from" indicate a direct nexus between the

profits and gains and its source. The court held that the source of profits from

the sale of import entitlements could not be said to be the industrial undertaking

as the nexus between the profits and gains from sale of import entitlements and

the undertaking was only incidental and not direct.



32.     It follows from the above and a plain reading of Section 10A(1) of the

Act that only those profits and gains of an Assessee which have a direct nexus

with an undertaking to which Section 10A of the Act applies would be excluded

from the income of an Assessee. In the present case, the interest credited by the


ITA Nos. 83/2003 & 124/2003                                                Page 19 of 32
Assessee in the books of the eligible undertaking is notional and practically

unconnected with the eligible undertaking; the interest has been credited on the

surplus generated, which has been transferred from the accounts of the eligible

undertaking to the head office.


33.     Concededly, the interest credited does not represent any real inflow of

funds to the Assessee. The Assessee merely reflects inflow of funds in separate

books maintained with respect to the eligible undertaking with a corresponding

outflow of funds in the books maintained with respect to the head office (i.e.

non-eligible undertaking).


34.     In Commissioner Of Income-Tax vs Menon Impex P. Ltd.: (2003) 259

ITR 403 (Mad.) a Division Bench of the Madras High Court considered the

question, "Whether, on the facts and in the circumstances of the case, the

Tribunal was right in law in holding that the interest income derived by the

assessee from funds in connection with letter of credit is income derived from

the profits of business of the industrial undertaking so as to be entitled to get the

benefit of section 10A of the Income-tax Act, 1961 ?" In that case the Assessee

had set up an industrial undertaking in Kandla Free Trade Zone for

manufacturing of light engineering goods. These goods were exported and in

the course of business, the Assessee was required to open the letter of credit.

For the said purpose, the Assessee had made deposits with banks on which it

earned interest. The Court held that the interest earned by the Assessee was not

ITA Nos. 83/2003 & 124/2003                                                Page 20 of 32
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."

35.     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 where an Assessee had claimed interest on foreign currency

deposits as profits and gains exempt under Section 10A of the Act.                 The

Supreme Court referred to the decision of the Madras High Court in Menon

Impex P. Ltd. (supra) and remanded the matter to the Tribunal for deciding the

issue whether the interest earned by the Assessee therein had a direct nexus with

the business of the undertaking as was done by the Madras High Court in

Menon Impex P. Ltd. (supra).




ITA Nos. 83/2003 & 124/2003                                                Page 21 of 32
36.     Indisputably, the interest credited by the Assessee in the books of its

eligible undertaking is not earned from its business but is only a notional credit

in the books on the surplus as generated by the eligible undertaking. Mr

Aggarwal had sought to contest the above position by arguing that the CIT had

not held the interest credited in the books of the eligible undertaking as income

from other sources and, therefore, the same must be considered as profit and

gains derived by the Assessee from its eligible undertaking. In our view, this

contention is bereft of any merit as the CIT has proceeded on the basis that the

interest credited in the books of the eligible undertaking is not the income of the

Assessee at all. Therefore, the question of treating the same under the head of

`profits and gains from business' or `income from other sources' did not arise.


37.     In view of the aforesaid, the interest cannot be considered as profits and

gains derived by the Assessee from the eligible undertaking as it does not bear a

direct nexus with the activities of the eligible undertaking.


38.     The next aspect to be considered is whether notional interest could be

considered as profits and gains derived by an Assessee for the purposes of

Section 10A of the Act.


39.     The CIT as well as the Tribunal has referred to the decision of the

Madhya Pradesh High Court in Malwa Mills Karamchari Parasper Sahakari

Sanstha Ltd. (supra) and held that the same squarely applied to the facts of the


ITA Nos. 83/2003 & 124/2003                                              Page 22 of 32
present case. This was stoutly disputed by Mr Aggarwal. He contended that the

said decision has been rendered in the context of Section 80P of the Act, which

allowed a deduction to a cooperative society in respect of profits and gains of

business attributable to any of the specified activities under that Section. He

further submitted that there was a difference between deductions available

under Chapter VI-A - which included Section 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.


40.     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-



ITA Nos. 83/2003 & 124/2003                                            Page 23 of 32
heading C of Chapter VI-A of the Act. We are also in agreement that the

deduction under Section 10A of the Act in respect of profits and gains derived

from a specified source and the entire income of the eligible undertaking from

the specified source is required to be excluded. However, the profits and gains

must be real profits and gains derived by an Assessee and not notional or unreal

income.


41.     The language of Section 10A(1) of the Act must be given its plain

meaning and any profits and gains derived by an Assessee from its eligible

undertaking are not to be included in Assessee's total income. Plainly, such

profits and gains referred to in Section 10A must mean real income of the

Assessee and not fictional or notional income.


42.     It is also important to note that the profits and gains which are exempt

under Section 10A are not to be included in the total income of the Assessee. It

would, obviously, follow that but for the exemption under Section 10A of the

Act the profits and gains would be included in the total income of an Assessee.

In other words, the profits and gains derived by an Assessee from an eligible

undertaking - a designated source - have to be separated from the total income

of the Assessee, which otherwise would subsume such income. Section 10A of

the Act does not contemplate exclusion of profits and gains which are not

derived by an Assessee and would not form part of the income of an Assessee.




ITA Nos. 83/2003 & 124/2003                                            Page 24 of 32
43.     In our view, the decision of this Court in TEI Technologies Pvt. Ltd.

(supra) is of little assistance to the Assessee. The issue involved in that case

was whether, for the purposes of computing the gross total income of the

Assessee, the loss of non-eligible undertaking could set off against the income

derived from the undertaking to which Section 10A of the Act applied. In that

case, the AO had set off the loss of non-eligible unit against profits of an

eligible unit and further added back disallowances to compute the gross total

income of the Assessee. It is in that context that this Court had held that the

income of the Assessee was to be excluded at the threshold and would not form

part of the gross income of the Assessee. It is relevant to note that in that case

the period involved was relevant to the assessment years 2002-03 & 2003-04;

the controversy had arisen on account of the amendment to Section 10A(1) of

the Act made w.e.f. 1st April, 2001, which allowed a "deduction" of profits 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


ITA Nos. 83/2003 & 124/2003                                             Page 25 of 32
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.


44.      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. The Assessee has not derived any real income. Therefore,

the question of deriving such profits from the eligible undertaking does not

arise.


45.      Section 10A if read in the manner as suggested by the Assessee, would

imply that profits and gains of an Assessee from its eligible undertaking would

include fictional income which is otherwise not chargeable to tax and

correspondingly, the Assessee would show fictional expenditure in relation to

its business, other than that falling within the scope of Section 10A, which an

Assessee has not incurred.


46.      This view is clearly unsustainable in law. Plainly, the Supreme Court in

Kikabhai Premchand (supra) had explained the fundamental principle that




ITA Nos. 83/2003 & 124/2003                                                Page 26 of 32
fictional profits could not be conjured by separating the business from their

owner. The relevant passage from the said judgment is quoted below:-


       "It is well recognised that in revenue cases regard must be had to the
       substance of the transaction rather than to its mere form. In the
       present case disregarding technicalities it is impossible to get away
       from the fact that the business is owned and run by the assessee
       himself. In such circumstances we are of opinion that it is wholly
       unreal and artificial to separate the business from its owner and treat
       them as if they were separate entities trading with each other and then
       by means of a fictional sale introduce a fictional profit which in truth
       and in fact is non-existent. Cut away the fictions and you reach the
       position that the man is supposed to be selling to himself and thereby
       making a profit out of himself which on the face of it is not only
       absurd but against all canons of mercantile and income-tax law. And
       worse. He may keep it and not show a profit. He may sell it to
       another at a loss and cannot be taxed because he cannot be compelled
       to sell at a profit. But in this purely fictional sale to himself he is
       compelled to sell at a fictional profit when the market rises in order
       that he may be compelled to pay to Government a tax which is
       anything but fictional."

47.     The aforesaid principle was followed by the Madhya Pradesh High Court

in Malwa Mills Karamchari Parasper Sahakari Sanstha Ltd. (supra). In that

case the Assessee concerned was a cooperative 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

ITA Nos. 83/2003 & 124/2003                                               Page 27 of 32
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 an Assessee would not include fictional profits and unreal income,

would also be applicable to exemption under Section 10A of the Act. Clearly

Section 10A does not contemplate income not derived by the Assessee to be

reduced from the real income of the Assessee.


48.     Mr Aggarwal also referred to Section 10A(6) of the Act by virtue of

which the provisions of Section 80IA(8) of the Act , in so far as applicable,

were also incorporated in Section 10A. He submitted that Section 80IA(8) of

the Act had referred to the transfer of goods or services between eligible

businesses and other businesses carried on by the Assessee and by virtue of

Section 80IA(8) such transfer would be taken at market value irrespective of the

prices at which such goods or services had transferred. It was submitted that this

would necessarily entail one unit making a profit at the cost of another. In our

view; the reliance placed on the provisions of Section 10A(6) of the Act read



ITA Nos. 83/2003 & 124/2003                                             Page 28 of 32
with Section 80IA(8) of the Act is wholly misplaced. First of all, Section

80IA(8) only relates to transfer of goods and services between eligible and non-

eligible units of an Assessee; the same does not contemplate payment and

receipt of interest.          Secondly - and more importantly - the said provision

contains a mechanism for calculating the real income of an Assessee, which is

derived from an eligible undertaking and which otherwise, forms a part of his

total income. It is from the real income of the Assessee that a portion, which is

derived from the eligible undertaking is excluded. The real income of an

eligible undertaking is computed by evaluating the goods and services at market

value. There is no scope for computing any fictional income or unreal income

and assuming that the same is derived by an Assessee and further assuming that

the same is derived from an eligible undertaking. Section 10A(6)/80IA(8) is a

mechanism of apportioning the real income of an Assessee between the income

derived from an eligible undertaking and income derived from other sources, for

the purposes of excluding the income exempt under Section 10A of the Act. If

the total income of the Assessee is considered (without giving effect to the

exemption under Section 10A of the Act), it is at once clear that the same would

not include notional interest derived from the eligible undertaking.


49.     In the present case, the 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



ITA Nos. 83/2003 & 124/2003                                               Page 29 of 32
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.


50.     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 Escorts Ltd.

(supra) was based on the principle of consistency. In that case, the Assessee

had been carrying on transactions similar to the one which was sought to be

questioned under Section 263 of the Act, for past several years preceding the

relevant assessment year. The transaction had also received the attention of the

Commissioner of Income Tax in an earlier year and had been decided in favour

of the Assessee. The Revenue had accepted the same and not filed an appeal. It

is in that context that the Court held that since the Revenue had accepted similar






ITA Nos. 83/2003 & 124/2003                                              Page 30 of 32
transactions in the past and had allowed a view to sustain for several years, an

exercise under Section 263 of the Act was not warranted. In the present case,

the issue was not picked up in the preceding year. Further, the claim of the

Assessee cannot be stated to be of a nature which has been consistently

accepted in past several preceding years since the entry in relation to notional

interest had been passed by the Assessee only in one preceding year and had

remained undebated.


51.     Insofar as the question whether the Tribunal had erred in not considering

the submissions relating to deduction under Section 80HHC of the Act is

concerned, we are of the view that the said issue did not arise for consideration.

The CIT had rightly held that the only issue under Section 263 of the Act was

related to "interest charged by the head office to NEPZ Branch". He,

nonetheless, proceeded to consider the alternative issue whether the turnover of

the eligible undertaking (at NEPZ, Noida) could be considered for the purposes

of computing exemption under Section 80HHC of the Act. Clearly, this issue

did not arise as the CIT had only proposed to reduce the profits and gains

claimed by the Assessee as being derived from the eligible undertaking. Thus,

only question to be considered by the CIT was whether the notional interest

credited in the books could be considered as income derived by the Assessee

from the eligible undertaking. The Tribunal did not consider the aforesaid issue

and in our view, rightly so.



ITA Nos. 83/2003 & 124/2003                                             Page 31 of 32
52.     In view of the aforesaid, the questions of law are answered in the

affirmative; in favour of the Revenue and against the Assessee. The appeals are,

accordingly, dismissed. The parties are left to bear their own costs.




                                                    VIBHU BAKHRU, J



                                                    S. MURALIDHAR, J
OCTOBER 09, 2015
MK/RK




ITA Nos. 83/2003 & 124/2003                                             Page 32 of 32

 
 
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