Ita/87/2010 Of The Commissioner Of Income Tax v. State Farming Corporation Of Kerala

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE M.L.JOSEPH FRANCIS MONDAY, THE 3RD JANUARY 2011 / 13TH POUSHA 1932 ITA.No. 87 of 2010() -------------------- AGAINST ORDER IN ITA.505/2007 DATED 13/08/2009 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT ---------------------------------------- THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): APPELLANT ------------------------ M/S.STATE FARMING CORPORATION OF KERALA LTD,KOLLAM. ADV. SRI.K.ANAND (A.201) SMT.LATHA KRISHNAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 03/01/2011, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C .N. RAMACHANDRAN NAIR, &M.L. JOSEPH FRANCIS, JJ. -------------------------------------------- -------------------------------------------- Dated this the 3[rd] day of January, 2011 JUDGMENT Ramachandran Nair, J. The question raised in the appeal filed by the Revenue is whether35% of the income received by the respondent-assessee on sale of scraprubber could be brought to central income tax by applying Rule 7A ofthe Income Tax Rules, 1962. We have heard senior counsel Sri. P.K.R. Menon appearing for the appellant, and learned counsel appearing for the respondent-assessee which is a Government undertaking. 2. Natural rubber obtained from plantation is essentiallyagricultural income which could not be brought to tax under theCentral Income Tax Act. However, when large planters startedprocessing field latex to intermediary products of rubber, CentralGovernment felt that so much of the income attributable to theindustrial activity, that is conversion and manufacture of rubberintoproducts should be brought to tax under the Central Income Tax Act. ITA No.87/2010 This is in line with the provision under the Income Tax Rulesproviding for bifurcation of income from manufactured tea betweenagricultural income and income taxable under the Central Act.Accordingly, Rule 7A was introduced to the Income Tax Rules fromthe assessment year 2004-05 onwards. For easy reference we extracthereunder Rule 7A(1) and (2): 7(A)(1). Income derived from the sale of centrifuged latexor cenex or latex based crepes (such as pale latex crepe) orbrown crepes (such as estate brown crepe, remilled crepe,smoked blanket crepe or flat bark crepe) or technicallyspecified block rubbers manufactured or processed fromfield latex or coagulum obtained from rubber plants grownby the seller in India shall be computed as if it were incomederived from business, and thirty-five per cent of suchincome shall be deemed to be income liable to tax. (2) In computing such income, an allowance shall be madein respect of the cost of planting rubber plants inreplacement of plants that have died or becomepermanently useless in an area already planted, if such areahas not previously been abandoned, and for the purpose ofdetermining such cost, no deduction shall be made inrespect of the amount of any subsidy which, under the ;provisions of clause (31) of Section 10, is not includible inthe total income.”. 3. The question to be considered in this case is whether scrap rubber generated in the respondent's industry should be treated as ITA No.87/2010 (2) In computing such income, an allowance shall be madein respect of the cost of planting rubber plants inreplacement of plants that have died or becomepermanently useless in an area already planted, if such areahas not previously been abandoned, and for the purpose ofdetermining such cost, no deduction shall be made inrespect of the amount of any subsidy which, under the ;provisions of clause (31) of Section 10, is not includible inthe total income.”. 3. The question to be considered in this case is whether scrap rubber generated in the respondent's industry should be treated as ITA No.87/2010 falling under Rule 7A for the purpose of levy of tax on 35% of theincome therefrom. What we notice is that the most crucial questionthat is nature, identity and source of scrap rubber is not considered byany of the authorities. The Tribunal, however, accepted the contentionof the respondent that scrap sold was generated in the course ofagricultural operation, and so much so, it is not assessable under Rule7A. The contention of the revenue on the other hand is that respondenthas sold scrap rubber generated by the industry as a whole whichattracts tax under Rule 7A. Even though without details on facts as tothe nature and source of scrap obtained and sold by the respondent, itwould not be possible to decide the issue this way or that way, we stillfeel Rule 7A requires some clarification for the purpose of not onlydeciding the issue in this case, but also cases that will arise in future inthe case of this assessee as well as similar industries. 4. Natural rubber is obtained by tapping matured rubber treesand when it is extracted from rubber tree by tapping it, it is in liquidform, looks like milk and depending upon the variety, and health of thetree, rubber content in the liquid rubber may vary. Rubber latex has ITA No.87/2010 short life and rubber in all forms are industrial raw materials used in themanufacture of various products like tyre, tube, flap, glouse, bush, etc.Whatever be the form in which natural rubber is sold, that is even whenit is sold in the latex form, it's price is based on dry rubber content(DRC) in the latex. For the purpose of most of the industries, rubberrequired is in dry smoked sheet form. However, for industries engagedin production of tubes, glouses, baloon, rubber thread, etc., rubber usedis in liquid form. Small and medium farmers do not have factories toprocess rubber latex and therefore they either sell field latex mixedwith ammonia for short term preservation to processing industries orconvert field latex into rubber sheet, dry, smoke and sell the same.However, large planters are engaged in processing of field latex intocentrifuged latex, from which tube, gloves, rubber thread, etc. areproduced. Centrifuging is a process done with extensive machinery inthe factory and in the process excess water in the field latex is skimmedout and concentration of rubber content in the latex is increased toaround 60%. In other words, centrifuging is nothing but a processwhereunder rubber latex is concentrated, coloured and preserved. ITA No.87/2010 Centrifuged rubber also has a shelf life of around 6 months. As is clearfrom Rule 7A, apportionment of income derived from manufacture ofcentrifuged latex and other products referred to therein for the purposeof assessment between agricultural income and central income is in theratio of 65:35. What is intended to be taxed under the Central Act is35% of the income from sale of rubber products referred to in Rule 7A(1), that is centrifuged latex, latex based crepe, pale latex crepe (PLC),etc. ITA No.87/2010 Centrifuged rubber also has a shelf life of around 6 months. As is clearfrom Rule 7A, apportionment of income derived from manufacture ofcentrifuged latex and other products referred to therein for the purposeof assessment between agricultural income and central income is in theratio of 65:35. What is intended to be taxed under the Central Act is35% of the income from sale of rubber products referred to in Rule 7A(1), that is centrifuged latex, latex based crepe, pale latex crepe (PLC),etc. 5. Rubber latex is extracted from rubber trees by cutting the barkin a particular pattern. In the course of tapping the trees for extractionof latex, rubber scrap in dry form also is obtained from the cuttinggroove in the tree and also from the shell which is the sticking latexthat solidifies. Similarly latex spills over from the shell or otherwisefalls from the trees on earth and soldifies which is also collected asscrap rubber. In fact sizable quantity of scrap rubber is generated in thecourse of extraction of rubber latex from trees and these are generallyknown as tree scrap, shell scrap & earth scrap. The sale of these itemsof scrap rubber obviously cannot be brought to central income tax by ITA No.87/2010 applying Rule 7A above referred because such scrap is generated in thecourse of taking yield which is purely an agricultural operation.However, if any scrap is generated in the industrial activity in whichproducts referred to in Rule 7A are made, certainly such scrap rubber isalso an item assessable to central income tax by applying Rule 7A(1).In fact all items of rubber products or intermediaries and bye productsand scrap obtained while processing rubber latex to make the productsreferred to in Rule 7A are assessable to central income tax andagricultural income tax in the ratio stated in the said rule. However, itis a matter to be seen whether some of the products referred to in Rule7A(1) namely latex based crepes is a solid rubber formed in the processof centrifuging latex and if so there will not be any other scrap as suchin the production process. In any case, what is required to be found outis whether the scrap involved in this case is scrap generated in theindustrial activity of processing latex into the products referred to inRule 7A(1) and only the income from the scrap so generated could bebrought to central income tax under the said Rule. In other words,scrap rubber obtained in the course of agricultural operations as stated ITA No.87/2010 above cannot be brought to tax under Rule 7A(1). In view of the findings and observations above, we allow theappeal by setting aside the order of the Tribunal and that of the CIT(Appeals) and by remanding the matter to the assessing officer to verifywhether income from scrap assessed is obtained in the course ofagricultural operations that is in the course of taking yield or whether itis industrial scrap generated in producing rubber products covered byRule 7A and to assess income from scrap to the extent indicated above,only if such scrap falls under the latter category stated above.Respondent-assessee should produce accounts and also agriculturalincome tax assessment which will disclose the income from scrapassessed. (C.N.RAMACHANDRAN NAIR)Judge. (M.L. JOSEPH FRANCIS) Judge.