2015 (10) TMI 756 - HC - Income Tax

Tax Court Rules Notional Interest Not Profitable for Section 10A

Thomson Press (India) Ltd. Versus Commissioner of Income Tax-II

The court upheld the Commissioner of Income Tax's orders under Section 263, finding the assessment orders for the years 1991-92 and 1992-93 erroneous. The ... Revision u/s 263 - 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 ? - 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? - Held that:- Supreme Court in Commissioner of Income Tax v. Max India Ltd. (2007 (11) TMI 12 - Supreme Court of India) 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. Following the aforesaid decision, this Court in Commissioner of Income Tax v. DLF Ltd.(2012 (9) TMI 626 - DELHI HIGH COURT ) 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. 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 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. (2011 (2) TMI 579 - DELHI HIGH COURT) 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 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. 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. - Decided against revenue. Issues Involved:1. Whether the Income Tax Appellate Tribunal was correct in law in upholding the orders passed by the Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961, holding the assessment orders for the assessment years 1991-92 and 1992-93 as erroneous and 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 for the assessment years 1991-92 and 1992-93.3. Whether the Income Tax Appellate Tribunal was correct in law in not considering the alternative submissions pertaining to deduction under Section 80HHC of the Act as also Section 10A of the Act pertaining to the unit at Faridabad and NEPZ, Noida respectively.Detailed Analysis:1. Upholding Orders under Section 263:The primary issue was whether the CIT could assume jurisdiction under Section 263 of the Income Tax Act, 1961, to revise the assessment orders for AY 1991-92 and AY 1992-93. The Assessee contended that the CIT's actions were beyond the scope of Section 263, arguing that the CIT must be satisfied that the AO's order was both erroneous and prejudicial to the interests of the Revenue. The Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT was referenced, which stated that if the AO's view was plausible, the CIT could not revise it simply because he disagreed. The court found that the CIT had satisfied both conditions as the AO's order was unsustainable in law, thus justifying the CIT's jurisdiction under Section 263.2. Under-assessment of Income:The second issue was whether the interest credited as notional income in the books of the eligible undertaking could be considered as profits and gains derived from the undertaking for the purposes of Section 10A. The court examined the language of Section 10A, which exempts 'profits and gains derived by an assessee from an industrial undertaking.' The court emphasized that the profits must have a direct nexus with the industrial undertaking, citing the Supreme Court's interpretation in CIT vs. Sterling Foods. The court concluded that the notional interest credited did not represent real income and was not directly connected with the eligible undertaking's activities, thus it could not be considered as profits derived from the undertaking.3. Alternative Submissions for Deductions:The third issue involved the Tribunal's refusal to consider alternative submissions for deductions under Section 80HHC and Section 10A for the units at Faridabad and NEPZ, Noida. The court agreed with the CIT's and Tribunal's stance that the only issue under Section 263 was related to the interest charged by the head office to the NEPZ branch. The alternative issue of including the turnover of the eligible undertaking for computing exemption under Section 80HHC did not arise as the primary focus was on whether the notional interest could be considered as income derived from the eligible undertaking. Thus, the Tribunal was correct in not considering the alternative submissions.Conclusion:The court upheld the CIT's orders under Section 263, finding the AO's assessment orders for AY 1991-92 and 1992-93 erroneous and prejudicial to the interests of the Revenue. The notional interest credited in the books of the eligible undertaking could not be considered as profits and gains derived from the undertaking for the purposes of Section 10A. The Tribunal was correct in not considering the alternative submissions for deductions under Section 80HHC and Section 10A. The appeals were dismissed, and the questions of law were answered in favor of the Revenue.