Thomson Press (India) Ltd vs. CIT (Delhi High Court)

DATE: October 9, 2015 (Date of pronouncement)
DATE: October 19, 2015 (Date of publication)
AY: 1991-92, 1992-93
FILE: Click here to download the file in pdf format
S. 263: Claim that notional interest on funds placed by the s. 10A eligible unit with the H.O. is allowable as a deduction to the H.O. and is exempt in the hands of the s. 10A unit is an “unsustainable view” justifying revision action

The Assessee 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 Assessee included the 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 Assessing Officer 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 order 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. On appeal by the assessee HELD dismissing the appeal:

(i) 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 not sustainable in law. It follows from a plain reading of Section 10A(1) 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 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. 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). 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.

(ii) 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 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.

(iii) 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. 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.

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