Ita 15/2010 & Conn v. Ita 15/2010 & Conn

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE B.P.RAY MONDAY, THE 27TH JUNE 2011 / 6TH ASHADHA 1933 ITA.No. 15 of 2010() -------------------- ITA.1219/COCH/2004 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT ---------------------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/APPELLANT ------------------------ THE THIRUVAMBADI RUBBER CO. LTD., MUKKOM P.O. ADV. SRI.P.RAGHUNATH SRI.PREMJIT NAGENDRAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 27/06/2011, ALONG WITH ITA Nos.31,37&43 OF 2010, THE COURT ON 27/06/2011 DELIVERED THE FOLLOWING: APPENDIX (ITA 15/2010) ANNEXURE A: COPY OF ORDER U/S.143(3) DT.20.3.2000 FOR THE ASST. YEAR 1997-98. ANNEXURE B: COPY OF ORDER DT.9.8.2004 OF THE COMMISSIONER OF INCOME TAX(APPEALS). ANNEXURE C: CERTIFIED COPY OF ORDER DT.17.6.2009 OF THE INCOME TAX APPELLATETRIBUNAL, COCHIN BENCH IN ITA NO.1219/COCH/2004. TRUE COPY P.S. TO JUDGE C.N.RAMACHANDRAN NAIR &BHABANI PRASAD RAY, JJ.....................................................................I.T. Appeal Nos15,31,37 & 43 of 2010....................................................................Dated this the 27th day of June, 2011. C.R. JUDGMENT Ramachandran Nair, J. Revenue has filed these appeals challenging the order of theIncome Tax Appellate Tribunal allowing the appeals filed by therespondent-assessee for the assessment years 1997-98 to 2000-2001.Assessee, a plantation company engaged in rubber cultivation andderiving agricultural income is also liable to pay tax under the IncomeTax Act on the income derived on the manufacture of rubber products.On comparing the income returned by the assessee for all theassessment years involved in these appeals with the book profit, theAssessing Officer felt that assessment has to be completed on bookprofit as provided under Section 115JA of the Income Tax Act(hereinafter called "the Act"). The assessee also raised no objection forthe assessments made on book profit under Section 115JA of the Act.However, the claim made by the assessee in the assessment which was ITA 15/2010 & conn. rejected by the Assessing Officer is exclusion of income derived onsale of old and unyielding rubber trees credited in the Profit and LossAccount prepared by the assessee under the provisions of theCompanies Act, based on which block assessment under the IncomeTax Act has to be made. Even though Assessing Officer adopted bookprofit from the Profit and Loss Account prepared by the assessee underthe provisions of the Act, in the course of assessment, assessee claimedspecific exclusion from book profit the income credited which wassales proceeds obtained on sale of old and unyielding rubber trees. TheAssessing Officer rejected assessee's claim by holding that in thecomputation of book profit deductions allowable are only thoseprovided under clauses (i) to (ix) of Explanation to Section 115JA(2)which have to be deducted from the Profit and Loss Account preparedby the assessee under the provisions of the Companies Act. TheAssessing Officer accordingly completed the assessment on book profitwithout excluding income derived on sale of old and unyielding rubbertrees credited by the assessee in the Profit and Loss Account preparedin accordance with the provisions of the Companies Act. The assessee ITA 15/2010 & conn. ITA 15/2010 & conn. having failed to succeed in first appeals on merit, filed second appealsbefore the Tribunal. Before the Tribunal the department opposedassessee's appeals by contending that the computation of book profitstands covered by decision of the Honourable Supreme Court inAPPOLLO TYRES LTD. Vs. COMMISSIONER OF INCOME TAXreported in 255 ITR 273 wherein the Supreme Court held that Profitand Loss Account prepared in accordance with the provisions of Part IIand Part III of Schedule VI to the Companies Act, 1956, is the basis forcomputation of book profit and in order to arrive at the book profit onwhich tax is assessable, the additions and deductions permissible areonly those provided under Explanation to Section 115JA(2) of the Act.The Tribunal, however, referring to few decisions of this court, that ofthe Bombay High Court and the Honourable Supreme Court, which areconsidered in detail hereinbelow, held that sale proceeds of old andunyielding rubber trees is "agricultural income" and, therefore, it is anitem to be excluded in the computation of book profit under clause (ii)of Explanation to Section 115JA(2) read with Section 10(1) of the Act.It is against these orders the Revenue has filed these common appeals ITA 15/2010 & conn. raising the same question whether in the computation of book profitincome derived on sale of old and unyielding rubber trees credited inthe Profit and Loss Account should be excluded as held by theTribunal. We have heard Senior counsel Sri.P.K.R.Menon appearingfor the Revenue and Adv. Sri.P.Raghunath appearing for therespondent-assessee. 2. There is no controversy on the facts in this case in as much asassessee is assessable on book profit for all the four years above statedand in the Profit and Loss Account prepared by the assessee under PartII and Part III of Schedule VI to the Companies Act referred to inSection 115JA(2) of the Act based on which book profit assessmenthas been made, assessee has credited sale proceeds of old andunyielding rubber trees as income. The Honourable Supreme Court hassettled the procedure for book profit assessment in the decision inAPPOLLO TYRES by holding that additions and deductionspermissible from the Profit and Loss Account prepared under theCompanies Act for the purpose of determining book profit are thosespecifically stated in Explanation to Section 115JA(2) of the Act. We ITA 15/2010 & conn. notice that the Tribunal has considered the decision of this court inCOMMISSIONER OF INCOME TAX VS. RAJAGIRI RUBBER &PRODUCE CO. LTD. reported in 189 ITR 182 wherein this court heldthat there can be no capital gain on sale of old and unyielding rubbertrees and this view taken by this court is confirmed by Supreme Courtin the case of KELPETA ESTATES LTD. Vs. COMMISSIONER OFINCOME TAX reported in 221 ITR 601. It may be noticed thatcapital gain is determined by deducting from the sale proceeds themarket value or cost of acquisition with cost of improvement as on thebase year. This court held that base year value of the rubber tree has tobe determined by taking into account future yield from the rubber treeuntil it becomes old and unyielding and if so taken, base year value willbe more than the sale proceeds of old and unyielding tree sold as wood.It is only by applying this principle this court held that there can be nocapital gain on sale of old and unyielding rubber trees. Counsel for theassessee relied on these decisions before us also and contended that nocapital gain is assessable on the sale of rubber trees and according tohim, what is not taxable in the regular assessment cannot be brought to ITA 15/2010 & conn. ITA 15/2010 & conn. tax in the course of assessment on book profit. Senior counselappearing for the Revenue on the other hand contended that in thecourse of assessment on book profit, there is no scope for consideringexemption, deductions and rebate available under other provisions ofthe Act which have to be followed in the normal computation ofbusiness income as provided under Section 29 of the Income Tax Act.We feel after the decision of the Supreme Court in APPOLLO TYESCase above referred this issue is academic in as much as book profitassessment has to be strictly made in accordance with the provisions ofSection 115JA of the Act which is the provision relevant for all theassessment years involved in this case and additions and deductions toarrive at the book profit has to be made strictly in accordance with theExplanation to Section 115JA(2) of the Act. The only question,therefore, to be considered is whether the sale proceeds of old andunyielding rubber trees credited by the assessee in the Profit and LossAccount prepared under the provisions of the Companies Act abovereferred is an item covered by clause (ii) of Explanation to Section115JA(2) of the Act. For easy reference we extract hereunder the “.Deemed income relating to certain companies 115JA. (1) Notwithstanding anything contained in any otherprovisions of this Act, where in the case of an assessee,being a company, the total income, as computed under thisAct in respect of any previous year relevant to theassessment year commencing on or after the 1st day ofApril, 1997 but before the 1st day of April, 2001 (hereafterin this section referred to as the relevant previous year) isless than thirty per cent of its book profit, the total incomeof such assessee chargeable to tax for the relevant previousyear shall be deemed to be an amount equal to thirty percent of such book profit. (2) Every assessee, being a company, shall, for thepurposes of this section prepare its profit and loss accountfor the relevant previous year in accordance with theprovisions of Parts II and III of Schedule VI to theCompanies Act, 1956 (1 of 1956): ............. ............. Explanation:- For the purposes of this section, “bookprofit” means the net profit as shown in the profit and lossaccount for the relevant previous year prepared under sub-section(2), as increased by-- ............. if any amount referred to in clauses (a) to (g) isdebited to the profit and loss account, and as reduced by,-- (i) the amount withdrawn from any reserves or ITA 15/2010 & conn. provisions if any such amount is credited to the profit andloss account: ............ (ii) the amount of income to which any of theprovisions of Chapter III applies, if any such amount iscredited to the profit and loss account; or .............” In deciding the case in favour of the assessee the Tribunal has followedthe decision of the Bombay High Court in COMMISSIONER OFINCOME TAX Vs. M/S.AKSHAY TEXTILES TRADING &AGENCIES P. LTD. reported in 203 Taxation 303 (Bom) wherein theBombay High Court held that capital gains cannot be considered as partof book profit for the purpose of assessment under Section 115JA ofthe Act. However, the clear finding of the Tribunal is that saleproceeds of old and unyielding rubber trees is "agricultural income"which to our mind is very strange and unacceptable because assesseeitself has no case that sale proceeds of old and unyielding rubber treesis agricultural income because if such a claim is advanced, assesseewhich is regularly exigible to agricultural income tax will have to pay ITA 15/2010 & conn. In deciding the case in favour of the assessee the Tribunal has followedthe decision of the Bombay High Court in COMMISSIONER OFINCOME TAX Vs. M/S.AKSHAY TEXTILES TRADING &AGENCIES P. LTD. reported in 203 Taxation 303 (Bom) wherein theBombay High Court held that capital gains cannot be considered as partof book profit for the purpose of assessment under Section 115JA ofthe Act. However, the clear finding of the Tribunal is that saleproceeds of old and unyielding rubber trees is "agricultural income"which to our mind is very strange and unacceptable because assesseeitself has no case that sale proceeds of old and unyielding rubber treesis agricultural income because if such a claim is advanced, assesseewhich is regularly exigible to agricultural income tax will have to pay ITA 15/2010 & conn. agricultural income tax which assessee has not admittedly paid.Besides this, the finding of the Tribunal is exactly contrary to thedecision of the Honourable Supreme Court in KAILAS RUBBERCOMPANY's case reported in 60 ITR 435 wherein the HonourableSupreme Court held that rubber tree is a capital asset. Any one familiarwith rubber cultivation very well knows that rubber tree takes 6 to 7years for maturity and on maturity, tapping starts to take yield in theform of latex from the tree and the tree can be economically tapped for20-25 years and thereafter when the yield is very low and the treebecomes old, it is sold for use as wood. Therefore, rubber tree is theagricultural asset from which yield is derived for 20 to 25 years and wedo not know how the agricultural asset from which income is derivedcan also be treated as income when it is sold on becoming old andunyielding. In order to arrive at this decision, the Tribunal relied ondecision of the Supreme Court in COMMISSIONER OF INCOMETAX Vs. RAJA BENOYKUMAR SAHAS ROY reported in 32 ITR466. Even though counsel for the assessee also tried to justify thedecision of the Tribunal, we do not think there is any scope for us to ITA 15/2010 & conn. consider the position canvassed which is exactly contrary to what theHonourable Supreme Court has held in KAILAS RUBBERCOMPANY's case. We do not find any provision in clauses (i) to (ix)of Explanation to Section 115JA(2) to exclude capital gains in thecomputation of book profit. In fact, what clause (ii) says is that incomeexempt from tax under Chapter III of the Income Tax Act only areexcludable from Profit and Loss Account in computing the book profit.Though Section 10(1) in Chapter III excludes agricultural income,going by the above decisions of the Honourable Supreme Court we areunable to uphold the finding of the Tribunal that sale proceeds of oldand unyielding rubber trees is also agricultural income which positionassessee itself does not canvass because if the assessee take such aposition, assessee should have paid huge amount of agricultural incometax which would be more than the tax payable on book profit under theCentral Act. Capital gain is assessable under Chapter IV of the IncomeTax Act and is not an item falling under Chapter III to permit exclusionunder clause (ii) to Explanation to Section 115JA(2) of the Act as heldby the Tribunal. Since we do not find any provision in clauses (i) to (ix) of Explanation to Section 115JA(2) to exclude capital gain fromProfit and Loss Account, we cannot uphold the order of the Tribunalallowing deduction in computation of book profit. In our view, it isimmaterial whether capital gain included in the Profit and LossAccount prepared under the Companies Act is otherwise assessable toincome tax or not for the purpose of book profit. Since the assesseehas included the sale proceeds of assets as income in the Profit andLoss Account prepared under Part II and Part III of Schedule VI to theCompanies Act for the purpose of assessment of book profit underSection 115JA(2), the assessee has no escape but to pay tax on thebook profit including such income. We, therefore, allow the appealsfiled by the Revenue by reversing the orders of the Tribunal and byrestoring the assessments. Even though some of the appeals decidedby the Tribunal were against the orders of the CIT (Appeals) againstrectified orders issued by the Assessing Officer under Section 154 ofthe Act, such an issue is not specifically raised or decided by theTribunal. However, for the sake of finality, we hold that if book profitassessment originally made were not in accordance with the statutory provision, then the Assessing Officer was certainly free to rectify theassessment to make it in compliance with statutory provisions whichexhaustively deals with the scheme of book profit assessment. We,therefore, allow the appeals by reversing the orders of the Tribunal andby restoring the assessments, whether original or rectified underSection 154 of the Act. Sd/-C.N.RAMACHANDRAN NAIRJudge Sd/-BHABANI PRASAD RAYJudge True copy P.S. to Judge pms