Ita/50/2016 Of Pr. Commissioner Of Income Tax-Iii v. M/S Sami Labs Ltd

IN THR HIGH COURT OF KARNATAKA AT BENGALURUDATEBD THIS THE 1[‘T]DAY OF JUNE 20106) PRESENT THR HON’BLE MR.JUSTICE JAYANT PATEL AND THR HON’BLE MR.JUSTICE B.SRBBNIVASKH GOWDA ITA NO.50/2016 BETWERE 1.|PR. COMMISSIONER OF INCOME TAX-IIL|C.R. BUILDING, QUEENS ROAD,C.R. BUILDING, QUEENS ROAD, BANGALORE| D |DEBPUTY COMMISSIONER OF INCOME TAXCIRCLE 12(3),CIRCLE 12(3), BANGALORE| —. APPELLANTS (BY SRI.E.LSANMATHI, ADVOCATE). AND M/S. SAMI LABS LTD.,19/1 & 19/2, 2ND PHASE,|PEENYA INDUSTRIAL AREA,BANGALORE-5b8 _. RESPONDENT THIS [TA IS FILED UNDER SEKC.260-A OF INCOMETAXACT1961,ARISINGOUTOF|ORDERDATED:10/07/2015_PASSBHBIN|ITANO.1227/BANG/2014, FOR THE ASSESSMENT YEAR.2006-2007 PRAYING TO DBECIDEKE THRE FORBGOQUESTION OF LAW AND / OR SUCH OTHER QUESTIONSOF LAW AS MAY BR FORMULATBD BY THR HON'BLE|COURT AS DEEMED FIT, SET ASIDE THE APPELLATE|ORDER DATED:10/07/2015 PASSED BY THE ITAT, ‘B'|BENCH, BENGALURU AS SOUGHT FOR, INTHRRBSPONDENT-ASSEBSSBE BCASE,|IN-APPEAL|PROCEEDINGS NO. ITA NO.1227/BANG/2014 ANDGRANT|SUCHOTHERRE LIEHASDEREBMEFIT, INTBRBST OF JUSTICE. THIS APPEAL COMING ON FOR ADMISSION THIS|DAY,JAYANT PATEL J., DELIVERED THE FOLLOWING: JUDGMBNT The appellants-Revenue has preferred the presentappeal by raising the following substantial questions oflaw: in"Whether on the facts and circumstances ofthe case, the tribunal is justified in allowing|cultivation expenses to be set-off against other|business incomes on the ground that the same| were incurred due to commercial expediency,|without appreciating that the assessee has)undertaken cultivation as a separate activityby way of entering into agreements with thefarmers which is in the nature of contractfarming?" | 2. Whether on the tacts and circumstances otthe case, the Tribunal is right in allowing|setting of losses claimed by assessee by|following the decision of this Hon'ble Court in|case of CIT v/s.Yokogowa when same has not.reached finality’? | 2. We have heard Mr.E.I.Sanmathi, learnedCounsel appearing for the appellants-Revenue. 3. The perusal of the order passed by the Tribunalwhich is impugned in the present appeal shows that theTribunal has relied upon the decision of this Court incase of ITA No.207/2011 dated 21.02.2012 in respect ofthe very assessee for the assessment year 2004-05. 4. We may record that in the above referreddecision of this Court in ITA No.207/2011, it wasobserved thus: “TheRevenuehas|preferred|thisappealchallenging the order passed by the Tribunal,|which has held the cultivating expenses incurred|by the Assessee is in the nature of expenditure|in the course of business, as such assessee is entitled to claim deduction of said expenditure. D |The.ASSeSS€Eisinvolvedin|the.manufacture and export of standardized herbal|extracts as well as in the manutacture of fine.chemicals. The assessee filed return ot Income.for the year 2004-2005. Assessee claimed)deduction under Section 10-B of the Income Tax.Act, 1961 (for short hereinafter referred to as ‘the Act’). The Assessing Authority disallowed the)cultivation EXPeC#lseamountingTO490.64Lakhs. The Appeal preferred by the Assessee to)the Commissioner of the Income Tax (Appeals)|came to be dismissed. In the further appeal| against the said order to the Tribunal, the,Tribunal held the assessee had not generated|any agricultural income out of it’s venture; the)Assessee has not engaged in any agricultural|activities but for cultivation of coleus plants to)facilitate its business and due to commercialexpediency, it had incurred cultivation expenses|to the tune of.v.90.64 Lakhs. These expenses|incurred by the Assessee were for a commercial|expediency and wholly and exclusively for the)purpose of its business. Therefore, the Tribunal|held that authorities below were not justified in|disallowing the cultivation expenses ofvQO0.64Lakhs claimed by the Assessee. Aggrieved by the)said order, Revenue is in appeal. | against the said order to the Tribunal, the,Tribunal held the assessee had not generated|any agricultural income out of it’s venture; the)Assessee has not engaged in any agricultural|activities but for cultivation of coleus plants to)facilitate its business and due to commercialexpediency, it had incurred cultivation expenses|to the tune of.v.90.64 Lakhs. These expenses|incurred by the Assessee were for a commercial|expediency and wholly and exclusively for the)purpose of its business. Therefore, the Tribunal|held that authorities below were not justified in|disallowing the cultivation expenses ofvQO0.64Lakhs claimed by the Assessee. Aggrieved by the)said order, Revenue is in appeal. | 3. The learned Senior Counsel appearing forRevenue,assailingthe.impugnedorder,contended that the Tribunal has recorded aefindingthatASS@CSSEEWas involvedinagricultural activity. In fact, it has advanced)money to the farmers for growing coleus crop.|The expenses incurred in connection with the)cultivation of said crop could be set-off against| the income which was exempted from paymentof Income Tax. But, it cannot be construed as.an expenditure incurred in carrying on thebusiness. Such activity is a separate activity of)the Assessee which is not in connection with the.business and therefore, Assessee was notentitled to claim deduction under the heading“revenue expenditure’. 4 The material on record disclose that coleusisaTATEherbal|plantwhichcommandsappreciation value in medicinal fraternity for)research. The Assessee has been in the business of manufacture and export of herbal extracts|including cultivation of coleus. To maximize the)production and sale of herbal extract, the,assessee incurred expenditure on cultivation|activities for the development of coleus. The said|plant was grown in wild. Vast research was)required to make a commercial cultivation of the plant. To cultivate this plant, the Assessee had|to undertake farm trials to optimize in different|fields such as:- >%Optimization of the right season for|cultivation. >>%standardization of the right fertilizer|application. >>>%Optimization of the right solid conditions. >7%Use of various organic fertilizers. 7%Use of bio-controls and other controlmeasures for disease control. These exercises done by the assessee duringthe relevant period for maximizing the yield, did)not result in a desired effect. In order to promote|the cultivation of coleus, the farmers were roped-in to cultivate this rare herbal plant and)encouraged them to opt for this crop. For this)purpose, the assessee had to incur expenditure|for - >%supply of planting materials to the|farmers free of cost. >>%supply of farm inputs free of cost &. >>>%Arranging payments to them. To propagate its intention to supply seedlingsfrom its nursery to other farmers, it had entered|into agreements and supplied coleus seedlings to)the farmers with a condition to recover the cost.of coleus seedling at 10 paise per seedling at the)time of harvest. However, the Assessee was not|able to achieve the desire of generating sufficient|quantities of coleus. Instead, it had rather gone)to purchase spree of coleus seedlings in a large)scale from other farmers. Therefore, theassessee did not generate any agricultural|income of the said income. In fact they did not,involve themselves in any agricultural activities|but they encouraged cultivation of coleus plants|to facilitate business. In this context, they have|incurred cultivation expenses to the tune ofL.Q0.64 Lakhs. The fact that Assessee hadincurred a sum otLY90.64 Lakhs expenses, in|this regard, is not in dispute. o>. The question for consideration is, whether itis to be considered as capital expenditure or) revenue expenditure. The Tribunal relied on)CircularNo.6/2007issued.by|theBoard,wherein it has been clarified as under:- o>. The question for consideration is, whether itis to be considered as capital expenditure or) revenue expenditure. The Tribunal relied on)CircularNo.6/2007issued.by|theBoard,wherein it has been clarified as under:- “2... These expenses are incurred by thesugar mills for ensuring an adequate andsustained supply of freshly cut sugarcane that is an essential input for the continuous running of)such mills. These expenses are, therefore,|incurred for a commercial expediency and are.prima facie wholly and exclusively for thepurpose of business. such expenses are,therefore, allowable....... 6. In fact, the Apex Court had an occasion toconsider|thisquestionintheCASEot|Commissioner of Income Tax, Mysore Vs. Mysore.sugar Co. Ltd., reported in 1962 ITR VoLXLVIpage 649.The question which was posed forconsideration was, for what was the money laid)out? Was it to acquire an asset of an enduring|nature for the benefit of the business or was it.an outgoing in the doing of the business?. If,money be lost in the first circumstance, it is a)loss of capital, but if lost in the second)circumstance, it is a revenue loss. In the first,it bears the character of an investment, but in|the second, to use a commonly understood| phrase, it bears the character of currentexpenditure. 7. After referring to three English judgments, itwas held to be a use of money in the course ofthe company’s business and not an investment,of capital at all. The cases referred to therein|illustrate the distinction between an expenditure|by way of investment and an expenditure in the)course of business, which has been described ascurrent expenditure. The first may truly be.regarded as on the capital side but not thesecond. The amount was an advance againstprice of one crop. The oppigedars were to get the |assistance not as an investment by the assessee|company in its agriculture, but only as an.advance payment of price. The amount, so far as the.aSS@€S SECOMpanhyWas,concerned,represented the current expenditure towards the|purchase|otSUugaYrca)andit.makesTiOdifference that the sugarcane thus purchased|was grown by the oppigedars with the seedlings, fertilizers and money taken on account from the)Assessee Company. In so far as the Assessee| Company was concerned, it was doing no more.than making a forward arrangement for the next.year’s crop and paying an amount in advance)out of the price, so that the growing of the crop)may not suffer due to want of funds in the hands|of the growers. There was hardly any element of|investment.whichcontemplatesINOTEthanpayment of advance price. The resulting loss to)the assessee company was just as much a loss)on the revenue side as would have been, if it hadpaid for the ready crop which was not delivered. 8. Therefore, the law on the point is|clearly settled. If the money spent by the|Assessee is by way of investment, then the,Assessee is not entitled to deduct the same as.expenditure. It would be in the nature of capital |expenditure, which is not deductible. However, if)the money spent is not for acquiring asset ofenduring nature for the benefit of the business|but which is only an outgoing in the doing of the business, then it would be an expenditure in the |course of this business. 9. If the Assessee has spent money by way offinancial accommodation to the farmers or.EXPCYIsesincurredinsupplyingseedling,fertilizers and for other cultivation expenses,|then it would be in the nature of revenue.expenditure. It is incurred by the Assessee for a)commercial expediency. It was incurred wholly|and exclusively for the purpose of business andthe Assessee would be entitled for allowance ofthe.saidcultivationeCxpe»nseas—TEVECN Uexpenditure. | 9. If the Assessee has spent money by way offinancial accommodation to the farmers or.EXPCYIsesincurredinsupplyingseedling,fertilizers and for other cultivation expenses,|then it would be in the nature of revenue.expenditure. It is incurred by the Assessee for a)commercial expediency. It was incurred wholly|and exclusively for the purpose of business andthe Assessee would be entitled for allowance ofthe.saidcultivationeCxpe»nseas—TEVECN Uexpenditure. | 10. In the instant case, material on recorddisclose, the Assessee is in the business ofmanufacture and export of standardized herbal|extracts as well as in the manutacture of fine.chemicals. In order to carry on their business, |they were in need of herbal coleus plants. theythought of roping the farmers for growing said|herbal plant. They provided seedlings, fertiliser|and financial assistance to the farmers with an.agreement to deduct the expenses out of the cost of the plaint sold by the farmers. But, even the) farmers could not grow the said herbal plant.|Consequently, they sustained loss and in turn)the assessee sustained loss. The said cultivation|EXpenses Was=.90.64 Lakhs. Therefore, theassessee claimed the said amount as revenue.expenditure asthesaidexpenditureWas,incurred to facilitate its business and due.commercial expediency. As such the loss are.primarily attributable to the business which the)Assessee is carrying on and the said expenses|are wholly and exclusively for the purpose of)business. The said cultivation expenses incurred|by the Assessee is in the nature of revenueexpenditure in the course of business and the)Assessee is entitled to deduction of the same as.business expenditure. Therefore, the Tribunal is |justified in upholding such claim and grantingrelief to the assessee. 11. In that view of the matter, there is nomerits in this appeal and accordingly the appeal|is dismissed.” oD. In view of the above, as the questions arealready covered by the decision of this Court, nosubstantialquestionsoT law.would|ATISe|forconsideration as formulated in question No.1. So far asquestion No.2 is concerned, the matter is alreadycovered by the decision of this Court in case ofCommisstoner of Income Tax And Another Vs.Yokogawa India Ltd.,reported at(2012) 341 ITR page 385. Hence it cannot be said that any substantial question of law would arise for consideration.| Hence the appeal is dismissed. JT/-| Sd/-.JUDGE| Sd/-.JUDGE|