TaxTMI 
TaxTMI 
2015 (10) TMI 756
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....n 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:- "Assessment Year 1991-92 1. Wheth....
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.... 1994-95. The Assessee filed its return of income for AY 1991-92 on 31st December, 1991 declaring a taxable income of Rs. 32,86,776/-. This return was subsequently revised and the Assessee declared a total income of Rs. 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 31st March, 1994 for the AY 1991-92 determining the total income of the Assessee as Rs. 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 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 Rs. 98,05,560/- as on 31st March, 1991 and an interest of Rs. 8,13,651/- had been charged on the aforesaid surplus in the books of the eligible undertaking. Correspondingly, the Head Office had expensed th....
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.... considered the question whether the turnover of the 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 Rs. 37,61,132/-. The said enhancement resulted in the income of the Assessee being assessed at Rs. 4,07,172/- instead of a loss of Rs. 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 Assess....
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....t 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 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 c....
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.... of the Act. It has been argued that this is a plausible view and, therefore, the assessment order allowing such reduction could not be considered as erroneous. 24. 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 ....
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.... 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 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. 28. 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 ....
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....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 and no deficiency referred to in sub-section (3) of section 80J, in so far as such loss or deficiency 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 ....
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....utive 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 any disc, tape, perforated, media or other information storage device.]]" 29. 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. 30. 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 origi....
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.... 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 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. 33. 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 Assessee in the books of t....
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.... 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 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). 37. 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 ....
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.... 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 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. 42. 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. 43. 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 ....
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....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, 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. 46. 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. 47. This view is clearly unsustainable in law. Plainly, the Supreme Court in Kikabhai Premchand (supra) had explained the fundamental principle that fictional profits could not be conjured by separating the business from their owner. The relevant ....
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....e 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. 49. 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 ....
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....tion 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 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 inter....