S. 263 — Assessing Officer adopted one of the permissible view — Such order cannot be said to be erroneous.

The assessee created provision for warranty on
accrual basis on the last day of each quarter. The actual warranty-related
expenses were adjusted against the provision. The assessee claimed the provision
for warranty as expenditure in its computation of income. The Assessing Officer
allowed the assessee’s claim. The CIT invoked S. 263 and disallowed the
provision for warranty.

The main contention of the assessee was that
provision for warranty was made on the basis of past experience. It placed
reliance on the decision of Wipro-GE Medical Systems Ltd. v. DCIT, (81 TTJ 455)
(Bang.).

Following the decision of CIT v. Wipro GE Medical
Systems, (supra), the provision for warranty was held to be an allowable
expenditure.

The Tribunal further held that the Assessing
Officer had adopted one of the permissible views. An order is not erroneous or
prejudicial to the interest of Revenue, unless the view taken by the AO is
unsustainable in law.

The assessee company had two units — SCS & TCM. SCS
unit’s income was exempt u/s.10B. The company maintains a common bank account
where the amounts received by both the units are deposited. As such no separate
balance sheets for both the units were prepared. The amounts received were
identified by the invoices in the name of respective units and necessary entries
passed in accounts maintained in SAP. Hence it was natural that the funds earned
by S. 10B unit were also utilised by non-10B unit. Based on the fund
utilisation, a monthly cross-charge interest at a suitable rate of interest was
made. Hence, the surplus funds which were available from the EOU have been used
by the other unit. The assessee booked a notional interest income in the account
of EOU unit and claimed expenditure u/s.10B for the said interest income.

The interest income booked by the assessee is only
a cross entry. As such the assessee has not earned any interest income. The
assessee is the same. There is no relationship of borrower or lender. Such
interest derived on notional basis cannot be considered for the purpose of
deduction u/s.10B.

Note : Though the judgment as regards second issue is
against the assessee, it discusses an important aspect of notional income which
cannot be taxed as the assessee remains the same.