Ita/126/2011 Of The Rehabilitation Plantations Ltd v. Commissioner Of Income Tax,Tvm

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR & THE HON'BLE MR. JUSTICE BABU MATHEW P.JOSEPH TUESDAY, THE 21ST DAY OF FEBRUARY 2012/2ND PHALGUNA 1933 ITA.No. 126 of 2011 ( ) -----------------------AGAINST ORDER DATED 01/04/2011 IN ITA.153/COCH/2009 ofI.T.A.TRIBUNAL,COCHIN BENCH APPELLANT(S)/APPELLANT: ---------------------- THE REHABILITATION PLANTATIONS LTD. PUANALUR, PAN:AAACT 8105A BY ADVS.SRI.A.K.JAYASANKER SRI.E.K.NANDAKUMAR SRI.K.JOHN MATHAI SRI.P.BENNY THOMAS SRI.P.GOPINATH SRI.KURYAN THOMAS SMT.PREETHA S.NAIR RESPONDENT(S):/ RESPONDENT -------------- COMMISSIONER OF INCOME TAX, AAYKAR BHAVAN, KOWIDAR, THIRUVANANTHAPURAM-695003. BY MR.JOSE JOSEPH, STANDING COUNSEL THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON21-02-2012, ALONG WITH ITA NOS.128, 129, 130, 131 & 132 OF 2011,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA NO.126/2011 APPENDIX APPELLANT'S EXHIBITS ANNEXURE-A :COPY OF ASSESSMENT ORDER DATED 28/12/2006. ANNEXURE-B :COPY OF ORDER OF THE ADDL. COMMISSIONER OF INCOMETAX, KOLLAM DATED 18/07/2008. ANNEXURE-C : COPY OF ASSESSMENT ORDER DATED 22/07/2008. ANNEXURE-D :COPY OF ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS) DATED 27/01/2009. ANNEXURE-E :COPY OF ORDER OF THE INCOME TAX APPELLATETRIBUNAL, COCHIN BENCH DATED 01/04/2011. //TRUE COPY// jg PA TO JUDGE. C.R. C.N.RAMACHANDRAN NAIR & BABU MATHEW P.JOSEPH, JJ. .................................................................... ITA Nos.126, 128, 129, 130, 131 & 132 of 2011 .................................................................... Dated this the 21[st] day of February, 2012. J U D G M E N T Ramachandran Nair, J. Agricultural income is not liable to be assessed under theCentral Income Tax Act by virtue of the exemption specificallyprovided under Section 10 of the Act. However when plantersprocess or manufacture agricultural produce converting it intointermediary or final products for sale in the market, theincome attributable to processing or manufacture becomesbusiness income that attracts tax under the Central IncomeTax Act (hereinafter referred to as the Central Act for short).From the very beginning income from Tea was assessablepartly as agricultural income and partly as business incomeand specific provision is provided in Rule 8 of the CentralIncome Tax Rules (hereinafter referred to as the Rules) forassessment of income from Tea and for bifurcation of the ITA Nos.126, 128, 129, 130, 131 & 132 of 2011 -2- same in the ratio given thereunder for the purpose ofassessment under the Agricultural Income Tax Act (hereinafterreferred to as the AIT Act for short) and under the Central Act.In fact Rule 7 of the Rules makes a general provision forassessment of income, partly agricultural and partly frombusiness. Even though rubber planters were also engaged inprocessing of the crop derived from rubber plants, namelyfield latex into centrifugal latex and other allied products,which are value added products, there was no specificprovision in the Rules until the assessment year 2002-2003for assessment and bifurcation of income from processing ofrubber for assessment under the State AIT Act as well as underthe Central Act. However, from the assessment year 2002-03,Rule 7A was introduced specifically providing for assessmentof income from processed rubber and bifurcation of the samein the ratio of 65:35 for assessment under the State AIT Actand under the Central Act respectively. When Rule 7A wasintroduced, it was specifically provided therein that alreadyconcluded assessments for past years will not be reopened for ITA Nos.126, 128, 129, 130, 131 & 132 of 2011 -3- the purpose of levying tax on income from processed rubberunder the Central Act. ITA Nos.126, 128, 129, 130, 131 & 132 of 2011 -3- the purpose of levying tax on income from processed rubberunder the Central Act. 2.The appellant is a Plantation Company jointly set upby the State and Central Governments and is engaged inrubber cultivation in Kerala. Since the appellant is engaged inprocessing of rubber latex into centrifugal latex, the appellantis liable to be assessed under the Central Act under Rule 7A ofthe Rules, which provides for assessment of 35% of the incomefrom processed rubber under the Central Act. 3.The question that arises for consideration in thisbatch appeals filed by the appellant for the assessment years2004-05, 2005-06 and 2006-07 is whether the appellant isentitled under Rule 7A of the Income Tax Rules for deductionof expenditure incurred on replantation of rubber.Admittedly, expenditure for new planting and for up keep untilthe plants start yielding which in the case of rubber is 6 to 7years from the year of planting is to be capitalized as there isno income from the new immature plantation against whichexpenditure can be set off. Until the Central Income Tax ITA Nos.126, 128, 129, 130, 131 & 132 of 2011 -4- Department started assessment under Rule 7A of the IncomeTax Rules from 2002-03 onwards, the appellant was beingassessed under the State AIT Act treating the entire incomefrom rubber as 100% agricultural income against which theappellant could not claim deduction of the entire expenditureincurred in replantation and for maintenance of immatureplants, which was treated as capital expenditure. Even thoughthe State AIT Act prohibits deduction of expenditure incurredon replantation and maintenance of immature area, theAgricultural Income Tax Rules in Kerala provides an incentivein Rule 3 thereof, which provides for deduction of replantationallowance subject to a ceiling of a certain percentage ofincome from plantation. In fact under Rule 3 of theAgricultural Income Tax Rules, the deduction provided forreplantation by rubber planters is up to 2.5% of theagricultural income from rubber. This is only by way ofincentive for planters to keep on replacing old and unyieldingtrees with new plantation. Obviously in order to avail theincentive provided in Rule 3, the Assessee should have both ITA Nos.126, 128, 129, 130, 131 & 132 of 2011 -5- yielding area and unyielding/immature area, and only when there is income from yielding area, replantation allowance canbe claimed in respect of immature area that too up to 2.5% ofthe income from yielding area. Admittedly, the appellant isnot entitled to replantation expenditure claimed by them inthe computation of agricultural income for assessment underthe State AIT Act. The question therefore to be considered iswhether a claim of deduction which is inadmissible in thecomputation of income under the State AIT Act can be allowedunder Rule 7A(2) of the Income Tax Rules in the computationof agricultural income as well as income assessable as“business income” under the Central Act by the Central IncomeTax Officer. The claim made by the assessee for all the aboveyears was disallowed in the assessment by the Income Taxofficer, which is confirmed by the CIT (Appeals) and also bythe Tribunal, against which these appeals are filed underSection 260A of the Income Tax Act. 4.We have heard learned Senior counselShri.A.K.Jayasankar Nambiar appearing for the appellant- We have heard learned Senior counsel ITA Nos.126, 128, 129, 130, 131 & 132 of 2011 -6- assessee and also learned Standing Counsel appearing for therespondent. 4.We have heard learned Senior counselShri.A.K.Jayasankar Nambiar appearing for the appellant- We have heard learned Senior counsel ITA Nos.126, 128, 129, 130, 131 & 132 of 2011 -6- assessee and also learned Standing Counsel appearing for therespondent. 5.Before proceeding to consider the claim madespecifically under Rule 7A(2) of the Rules, we have to considerthe nature of the rubber cultivation in contrast with otherplantations, namely tea and coffee. Rubber seedlings areplanted in a pattern providing a distance of around 15 feetbetween two plants and in the course of 6 to 7 years theplants mature into full trees and start yielding. Modern clonesgive economic yield for 20 to 25 years and thereafter the treesare cut and removed and the area is fully replanted, whichagain start yielding after 6 to 7 years. Since the foliage fullycover the planted area preventing entry of sun light, evengrass does not grow in rubber plantation. Therefore, deadplants within the plantation cannot be replaced or substitutedthrough infilling. In fact the appellant also has no case thatinfilling is done in yielding area, which is not possible inrubber plantation because under the foliage without sunlightnew plants cannot grow. Even though replacement of plants is ITA Nos.126, 128, 129, 130, 131 & 132 of 2011 -7- not possible in a rubber plantation, tea bushes and coffee bushes can be replanted in existing plantation throughinfilling. The Rule making authority under the Central Actprobably was unaware of the limitations in the rubberplantation, and therefore, they have made Rule 7A(2) in samelines as Rules 7B(2) and 8(2), which provide for deduction ofexpenditure incurred for replacement of plants in coffee aswell as tea estates. 6.For easy reference we extract hereunder Rule 7A(2)and the corresponding provisions applicable for coffee and teaplantations, namely Rules 7B(2) and Rule 8(2) of the IncomeTax Rules. “7A(2)In computing such income, an allowanceshall be made in respect of the cost of plantingrubber plants in replacement of plants that havedied or becomes permanently useless in an areaalready plated, if such area has not previously beenabandoned, and for the purpose of determiningsuch cost, no deduction shall be made in respect ofthe amount of any subsidy which, under theprovisions of clause (31) of section 10, is notincludible in total income. 7B(2) In computing the incomes referred to in sub-rule (1) and (1A), an allowance shall be made in ITA Nos.126, 128, 129, 130, 131 & 132 of 2011-8- respect of the cost of planting coffee plants inreplacement of plants that have died or becomepermanently useless in an area already planted, ifsuch area has not previously been abandoned, andfor the purpose of determining such cost, nodeduction shall be made in respect of the amount ofany subsidy which, under the provisions of clause(31) of section 10, is not includible in the totalincome. 8(2) In computing such income as allowance shallbe made in respect of the cost of planting bushes inreplacement of bushes that have died or becomepermanently useless in an area already planted, ifsuch area has not previously been abandoned andfor the purpose of determining such cost, nodeduction shall be made in respect of the amount ofany subsidy which, under the provisions of clause(3) of section 10, is not includible in the totalincome.” 7. Even though we have stated that Rule 7A(2) has no application because rubber saplings are not planted in yieldingplantation in replacement of plants that have died or havebecome permanently useless because the saplings cannotgrow under the shade of foliage and therefore no planter doesinfilling in yielding area, still we feel if the assessee is able toprove that they have made infilling in existing plantation theyare entitled to deduction of replanting expenditure in terms of 7. Even though we have stated that Rule 7A(2) has no application because rubber saplings are not planted in yieldingplantation in replacement of plants that have died or havebecome permanently useless because the saplings cannotgrow under the shade of foliage and therefore no planter doesinfilling in yielding area, still we feel if the assessee is able toprove that they have made infilling in existing plantation theyare entitled to deduction of replanting expenditure in terms of ITA Nos.126, 128, 129, 130, 131 & 132 of 2011-9- Rule 7A(2) of the Rules. However, in this case, admittedly, the appellant has claimed deduction towards replantingexpenditure of above 1.90 crores each for the first two yearsi.e. 2004-05 and 2005-06, and around Rs.2.49 crores for theassessment year 2006-07. Since the expenditure so claimedis not for infilling or replacement of dead or useless plants ascontemplated under Rule 7A(2) of the Rules and on the otherhand, the replanting expenditure claimed is for replantation ofcertain areas after cutting and removal of old trees therein, theexpenditure claimed for replanting such area cannot beallowed as a deduction under Rule 7A(2), which providesdeduction of expenditure only for infilling by way ofreplacement in existing yielding plantation, which is not thecase here. 8.Learned Senior counsel appearing for the assesseecontended that after the introduction of Rule 7A, income fromprocessed rubber has to be assessed by the Central IncomeTax Officer and 65% of the income so determined by theCentral Income Tax Officer is to be assessed for assessment ITA Nos.126, 128, 129, 130, 131 & 132 of 2011 -10- under the State AIT Act by the Agricultural Income Tax Officer. There can be no dispute on this position because the law issettled by various decisions of the Supreme Court in thecontext of assessment of tea income under Rule 8, wherein theSupreme Court held that assessment of the income partly asagricultural and partly as business income by the CentralIncome Tax Officer is binding on the AIT Officer forassessment under the AIT Act. Learned Standing Counselappearing for the Revenue also did not oppose the legalposition but he supported the assessment confirmed in twolevel appeals by contending that Rule 7A(2) does not authorisededuction of replantation expenditure for replanting an area,which is capital in nature. There can be no dispute that theinvestment in planting and development of plantation up tomaturity i.e. until the plants start yielding has to be treated ascapital expenditure for development of a capital asset whichstarts yielding after 6 to 7 years of planting. The assessee'scounsel submitted that there is no difference between infillingin an yielding plantation and replantation of an area because ITA Nos.126, 128, 129, 130, 131 & 132 of 2011 -11- expenditure in both cases are of the same nature i.e. for planting and maintaining immature trees up to 7 years. Hetherefore contended that the Central Act overrides the StateAIT Act, and so much so, the claim is allowable under Rule 7A(2) of the Rules. After hearing both sides, we are unable to accept the case of the assessee for more than one reason. In the firstplace, expenditure covered by Rule 7A(2) does not coverexpenditure incurred for replantation of an area. On the otherhand, Rule 7A(2) only provides for deduction of expenditurefor infilling through replacement of dead trees or other treesthat have become useless, which is not the case here. Asalready stated by us, Rule 7A(2) is in the same line as Rule 7B(2), which provides for replacement of dead or old orunyielding coffee plants in yielding coffee plantation, and Rule8(2) which provides for replacement of dead or useless teabushes in tea plantation. Yielding healthy rubber plantationdoes not admit replacement of dead plants within such area asnew saplings cannot grow under shade and is never done by ITA Nos.126, 128, 129, 130, 131 & 132 of 2011 -12- ITA Nos.126, 128, 129, 130, 131 & 132 of 2011 -12- any planter. So much so, expenditure for replantation of an area is not covered by Rule 7A(2) and in our view the lowerauthorities including the Tribunal rightly rejected the claim.We also feel that the Central Income Tax Officer whiledetermining income in the nature of agricultural as well asbusiness income under Rule 7A should keep in mind theprinciples of computation of agricultural income under theState AIT Act and as far as possible, assessment should bemade without violating the provisions of the State AIT Act. Ifthe appellant's claim is allowed, certainly so much of theportion of the agricultural income determined by the CentralIncome Tax Officer will be in direct conflict with the Scheme ofassessment of agricultural income under the State AIT Actwhich prohibits deduction of expenditure on replantation of anarea and only an incentive is provided by way of replantationallowances under Rule 3 of the State Agricultural Income TaxRules as stated above. We are of the view that the Tribunalrightly held that the expenditure on replantation of an areawherefrom no income is derived by the assessee is not to be ITA Nos.126, 128, 129, 130, 131 & 132 of 2011 -13- reckoned or considered in the computation of income from yielding area. Expenditure incurred for planting anddevelopment of the plantation up to maturity has to benecessarily capitalised and is not allowable as a revenueexpenditure. Since the assessee has no case that they haveincurred any expenditure for infilling the yielding area and theexpenditure incurred is only for replantation after cutting andremoving old plantation, there is no question of considering orallowing the claim under Rule 7A(2). The assessee's claim isthoroughly misconceived and the lower authorities includingthe Tribunal rightly held so. Consequently, we dismiss all theappeals. (C.N.RAMACHANDRAN NAIR, JUDGE) (BABU MATHEW P.JOSEPH, JUDGE)