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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