Ita/382/2010 Of Oil Palm India Ltd v. The Asst.commissioner Of Income Tax

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN THURSDAY, THE 1ST DAY OF DECEMBER 2011/10TH AGRAHAYANA 1933 ITA.No. 382 of 2010 ( ) ======================= ITA.521/COCH/2005 (1997-98) of INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH, KOCHI ....... APPELLANT/APPELLANT IN ITA: =========================== OIL PALM INDIA , XII,354, OLD STAR THEATRE, PB NO.1715, KOTTAYAM SOUTH PO., KOTTAYAM 686 039. BY ADVS.SRI.E.K.NANDAKUMAR, SRI.A.K.JAYASANKAR NAMBIAR, SRI.K.JOHN MATHAI, SRI.P.BENNY THOMAS, SRI.P.GOPINATH, SMT.PREETHA S.NAIR. RESPONDENT(S)/RESPONDENT IN ITA: ================================== THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-1, KOTTAYAM. BY ADV. SRI. P.K.R.MENON, SC,INCOME TAX SRI.JOSE JOSEPH, SC,INCOME TAX THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 01-12-2011 ALONG WITH ITA. 383 OF 2010 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: Kss ITA.NO.382/2010 APPENDIX PETITIONER'S ANNEXURES: ANNEX.A:COPY OF THE ASSESSMENT ORDER FOR 1997-98 ISSUED BY THE INCOME TAX DEPARTMENT TO THE APPELLANT DTD. 31/08/2004.INCOME TAX DEPARTMENT TO THE APPELLANT DTD. 31/08/2004. ANNEX.B:COPY OF THE ORDER ISSUED BY THE COMMISSIONER OF INCOME TAX (APPEALS) TO THE APPELLANT DTD. 29/01/2005.INCOME TAX (APPEALS) TO THE APPELLANT DTD. 29/01/2005. ANNEX.C:COPY OF THE TRIBUNAL ORDER ISSUED BY THE INCOME TAX APPELLATE TRIBUNAL TO THE APPELLANT DTD. 16/06/2010.APPELLATE TRIBUNAL TO THE APPELLANT DTD. 16/06/2010. RESPONDENT'S ANNEXURES: N I L /TRUE COPY/ P.S.TO JUDGE C.N. RAMACHANDRAN NAIR, &K. VINOD CHANDRAN, JJ =========================== I.T.A. Nos. 382,383,393,394,395,396,398,402,403,406& 407 of 2010 =============================Dated this the 1[st] day of December , 2011 JUDGMENT , J C.N. Ramachandran Nair In the 11 appeals filed by the assessee, the questionraised is whether the Income-tax Appellate Tribunal wasjustified in sustaining assessment of part of the incomederived by the appellant company from the sale of crudepalm oil as “business income” under Rule 7 of theIncome-tax Rules, 1961. We have heard the learnedSenior Counsel Sri.A.K.J. Nambiar appearing for theassessee and the learned Senior Counsel Sri.P.K.R.Menon appearing for the respondents. 2. The appellant is a plantation company in thepublic sector under the control of the State Government engaged in cultivation of oil palm and processing andextraction of crude palm oil from the fruit as well as fromthe kernel. For several years, the appellant has beenassessed only under the Kerala Agricultural Income-taxAct treating 100% of the income as “agricultural income”and, therefore, the appellant has been filing returnsunder the Agricultural Income-tax Act and paying tax tothe State Government on the entire income. However,from the assessment year 1997-98 onwards, theAssessing Officer under the Central Income-Tax Act madeassessments treating part of the income earned by theappellant from sale of palm oil as business income byapplying Rule 7 of the Income-Tax Rules against whichthe appellant filed statutory appeals but without success.The Income-tax Appellate Tribunal on second appealsconfirmed the assessment of part of the income asbusiness income under Rule 7 of the Income Tax Rulesand also confirmed the method of computation acceptingthe deduction under Section 43 B in respect of Agricultural Income Tax paid. It is against these ordersof the Tribunal, the assessee has filed appeals against theassessments confirmed for the assessment years 1997-98to 2006-07. During hearing of these appeals, the SeniorCounsel appearing for the assessee brought to our noticethe pendency of W.P.(C) No. 36862/2004 before thisCourt, which is basically against the income-taxassessments which are now impugned in the instantappeals. For the disposal of the writ petition, it isnecessary that the agricultural income tax authoritiesunder the State are also heard. At the request of thecounsel for the assessee, we have ordered posting ofthat case before the Division Bench because the writpetition has to be disposed of based on the judgmentin these appeals. 3. The short question arising for decision is whetherthe entire income generated by the appellant in thecourse of plantation and in the subsequent activity ofextracting crude palm oil from palm pericarp(fruit I.T.A. NOS. 382/2010 & connected cases: 4 : portion excluding the kernel) and also from the kernelconstitute agricultural income as defined under Section 2 (1A) of the Income Tax Act, 1961. The Agriculturalincome as defined under the above provision is as follows: (1A) “agricultural income” means- (a) any rent or revenue derived from land which issituated in India and is used for agriculturalpurposes; (b) any income derived from such land by- (i)agriculture; or (ii)the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed bya cultivator or receiver of rent-in-kind to render theproduce raised or received by him fit to be taken tomarket; or (iii)the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, inrespect of which no process has been performed otherthan a process of the nature described in paragraph (ii) of this sub-clause. From the above definition, what is clear is that theagricultural activity includes any process ordinarilyemployed by a cultivator or a receiver of rent in kind to render the produce raised or received also fit to be takento the market. Admittedly, the plantation activity whichculminates in taking the crop with the outside fruitpericarp outside and the kernel inside is an agriculturalactivity and the respondent also have no dispute on that.However, dispute starts with regard to the subsequentprocess, that is industrial activity, wherein the appellantengages a series of process of curing and extracting oilfrom the pericarp(pulp) and also from the kernel in thefactory. The process involved is extracted in theimpugned orders particularly by the first appellateauthority wherein the process is stated briefly asfollows: Details of processing: Fresh fruit bunches received in the factory issterilized by steaming in a large autoclave for aperiod of 50 minutes. After that the fruits arestripped by using a bunch stripper. After strippingthe bunches the fruits are fed into the Digester torelease the oil from the pericarp cells by mashingthem and to raise the temperature of the mash to Details of processing: Fresh fruit bunches received in the factory issterilized by steaming in a large autoclave for aperiod of 50 minutes. After that the fruits arestripped by using a bunch stripper. After strippingthe bunches the fruits are fed into the Digester torelease the oil from the pericarp cells by mashingthem and to raise the temperature of the mash to facilitate a subsequent pressing. By pressing with ascrew press the solid portions and liquid portions ofthe mash are separated. The liquid portion ischannelled to the Clarifier to clarify. Afterclarification of the oil it is passed through aCentrigure to remove the sand and heavy wasteparticles and to dry the oil. the dried oil is thencontinuously pumped to the storage tank for finaldispatch. By this processing the company produceonly Crude Palm Oil and not edible oil. The wholeprocess of extraction of oil is to convert the same as asaleable commodity. The CPO is sold to Vanaspathymanufacturers etc. for further processing andmanufacture of end products. the solid portionsobtained from the press is passed through thedepericarper system to separate the fibre and nut forfurther processing. As the company do not have aKernel Oil Extraction Plant the nut is sold as such.Approximately a quantity of 2000 ton is producedannually”. From the above, the assessee's fairly concedes that thewhole activity of processing and extraction of oil is in afactory done through mechanical and other process andthe assessee has also made massive investment in thefactory. There can be no controversy that the : 7 : sophisticated process engaged in by the appellant is onewhich no ordinary cultivator can engage in and furtherthe assessee is the sole company in the State engaged inextraction of palm oil from palm kernels and the pericarp(fruit). In fact, the small growers supply the fruit to theappellant/assessee, which alone has the processingfacility for extraction of oil. In our view, the processingcovered by sub-clause (ii) of Section 2 (1A)(b) is only somuch of the process which a cultivator ordinarily engagesto make the product fit for marketing. Normally theprocess engaged by cultivators are curing, drying,garbling etc. and not any industrial activity which ispossible only in a factory. So much so, going by thecomplicated process involved in extraction of crude palmoil from pericarp and kernel, we conclude that so muchof the activity carried out by the appellant in theextraction of oil from the fruit/ from the kernel is anindustrial activity and, therefore, income from suchactivity is assessable as its “profits and gains of business” under Section 28 of the Income Tax Act. 4. Rule 7 of the Income Tax Rules visualizes thesituation where the income from various activitiesconstitute partly agricultural income and partly businessincome. For easy reference, Rule 7 is extractedhereunder: “Rule 7. Income which is partiallyagricultural and partially from business. (1) In the case of income which is partiallyagricultural income as defined in Section 2 andpartially income chargeable to income-tax underthe head “Profits and gains of business” indetermining that part which is chargeable to income-tax the market value of any agriculturalproduce which has been raised by the assessee orreceived by him as rent-in-kind and which has beenutilized as a raw material in such business or thesale receipts of which are included in the accountsof the business shall be deducted, and no furtherdeduction shall be made in respect of anyexpenditure incurred by the assessee as a cultivatoror receiver of rent-in-kind. (2) For the purpose of sub-rule (1) “marketvalue” shall be deemed to be :- I.T.A. NOS. 382/2010 & connected cases a) where agricultural produce is ordinarily (2) For the purpose of sub-rule (1) “marketvalue” shall be deemed to be :- I.T.A. NOS. 382/2010 & connected cases a) where agricultural produce is ordinarily sold in the market in this raw state, or afterapplication to it of any process ordinarily employedby a cultivator or receiver of rent-in-kind to renderit fit to be taken to market, the value calculatedaccording to the average price at which it has beenso sold during the relevant previous year; (b) where agricultural produce is notordinarily sold in the market in its raw state or afterapplication to it of any process aforesaid, theaggregate of - (i)the expenses of cultivation; (ii)the land revenue or rent paid for the area in which it was grown; and (iii)such amount as the Assessing Officer finds, having regard to all the circumstances in eachcase, to represent a reasonable profit.” 5. So much so, so much of the income attributable to agricultural operations, as per sub-rule (2) abovestated, that is the market value of the agriculturalproduce; which in this case is the fruit with the pulpand the kernel therein, has to be excluded and business income has to be computed only for the value addedproduct namely crude palm oil extracted and sold. There is no serious controversy with regard to thecomputation of business income done by the assessingauthority under the Income Tax Act by applying Rule 7.Even though, it would be desirable to provide a ratio forbifurcation of income as is done in Rule 7A in the case ofrubber, under Rule 7B for coffee, and under Rule 8 fortea, the Central Government has not chosen to make anyspecific provision for computation of income in the caseof palm oil. We, therefore, feel that assessment byapplying Rule 7 is perfectly in order. Since thecomputation made by the officer and modified in firstappeal and by the Tribunal is not in contest, we do not gointo the correctness of computation and apportionment ofincome for assessment under the Central Act and theState Act. So far as the appellant's grievance againstdouble assessment of part of the income inasmuch asthey have filed returns and paid tax under theAgricultural Income Tax Act on the entire income asagricultural income, we feel eligible relief can be I.T.A. NOS. 382/2010 & connected cases : 11 : considered only in the writ petition pending and not in these statutory appeals filed by the appellant underSection 260A of the Income Tax Act; wherein we haveconsidered the substantial question of law arising fromthe orders of the Tribunal. For the reasons above stated, the appeals aredismissed upholding the orders of the Tribunal leavingfreedom to the appellant to raise the grievances ondouble assessment in the writ petition pending. Sd/- C.N. RAMACHANDRAN NAIR(Judge) Sd/- K. VINOD CHANDRAN (Judge) ks True copy P.S.To Judge I.T.A. NOS. 382/2010 & connected cases: 12 :