M/s KPL International Ltd., New Delhi V. ACIT, New Delhi

ITA 3798/DEL/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7574 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 14-10-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 09-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

DELHI BENCH D : NEW DELHI BEFORE SHRI T.S. KAPOOR, ACCOUNTANT MEMBER AND SHRI A. T. VARKEY, JUDICIAL MEMBER ITA NO. 3798 /DEL/ 2011 (ASSESSMENT YEAR: 2008 - 09 ) M/S. KPL INTERNATIONAL LTD., 10 TH FLOOR, INDRAPRAPRAKASH BUILDING, 21, BARAKHAMBA ROAD, CANNAUGHT PLACE, NEW DELHI PAN:AAACK3878R VS. ACIT CIRCLE - 5(1), NEW DELHI (APPELLANT) (RESPONDENT) O R D E R PER A. T. VARKEY, JUDICIAL MEMBER THIS APPEAL ARISES FROM AN ORDER OF LD CIT(A), VIII, NEW DELHI DATED 09.06.2011 FOR THE ASSESSMENT YEAR 2008 - 09. 2. GROUND NOS. 1 , 2 TO 2.4 RELATES TO DISALLOWANCES OF RS.19,11,293/ - PERTAINING TO TEA BUSINESS CARRIED OUT BY THE ASSESSEE COMPANY. 3. THE AO DENIED THE LOSS ON THE GROUND THAT THERE WERE NO SALES OF TEA IN THE INSTANT YEAR. BEFORE THE LD CIT(A), THE ASSESSEE CONTENDED THAT IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE H AD ACQUIRED A TEA GARDEN ON 15 TH JANUARY 2008. AND THAT FROM 15 TH JANUARY 2008 TO 31 ST MARCH 2008, THOUGH THERE WAS PRODUCTION OF 1295 KGS OF TEA (RAW TEA) , YET THERE WAS NO SALES. IT WAS STATED THAT DURING THIS PERIOD EXPENDITURE WAS INCURRED ON MANUFACTURING OF TEA AND AS A RESULT, THERE WAS A LOSS OF RS.47,78,232/ - AND OUT OF WHICH RS.19,11,293/ - BEING 40% OF THE TOTAL LOSS ATTRIBUTABLE TO TEA BUSINESS IN ACCORDANCE TO RULE 8 OF INCOME TAX RULES, 1962 (HEREIN AFTER THE RULES) WAS CLAIMED AND AS SUCH SHOULD HAVE BEEN ALLOWED BY THE AO, IRRESPECTIVE OF THE SALES. THE LD CIT(A), HELD THAT RULE 8, REGULATES THE RATIO IN WHICH GROSS RECEIPTS FROM TEA GARDEN ARE TO BE ALLOCATED BETWEEN AGRICULTURAL INCOME AND BUSINESS INCOME, AND DOES NOT PROVIDE F OR ALLOWANCE OF ANY EXPENDITURE IN THE YEAR IN WHICH NO SALES OF TEA PRODUCTS TAKES PLACE. IN HIS O PINION, THE ENTIRE COST OF SEMI - FURNISHED GOODS SHOULD HAVE BEEN DEBITED TO THE MANUFACTURING AND TRADING ACCOUNT; AND CORRESPONDING AMOUNT SHOULD HAVE BEEN CREDITED AS SEMI - FURNISHED GOODS. IN OTHER WORDS, HE HELD THAT APPELLANT BY : GAUTAM JAIN, CA RESPONDENT BY : VIVEK NANGIA, SR. DR PAGE 2 OF 6 EXPENDITURE INCURRED IN THE COURSE OF MANUFACTURING OF TEA, SHOULD HAVE BEEN CREDITED AS VALUE OF THE CLOSING - STOCK AND NOT CLAIMED IN THE INSTANT YEAR AND THUS DENIED THE CLAIM OF LOSS MADE BY THE ASSESSEE. 4. AGGRIEVED BY THE SAID ORDER OF THE LD CIT(A), THE ASSESSEE IS BEFORE US. THE LD AR, SHRI GAUTAM JAIN SUBMITTED THAT RULE 8 DOES NOT RESTRICT THE CLAIM OF EXPENDITURE INCURRED IN THE TEA - BUSINESS, AS IT IS A PROVISION FOR APPORTIONMENT OF THE EXPENSES AND INCOME OF TEA BUSINESS. HE SUBMITTED THAT HONBLE GAUHATI HIGH COURT IN THE CASE OF CIT VS. HAROOCHARAI TEA COMPANY REPORTED 111 ITR 495 (GAUHATI) HAS HELD THAT EVEN THE RENT RECEIVED FOR LEASING OF A TEA ESTATE IS COVERED BY RULE 8 READ WITH SECTION 295 OF THE INCOME TAX ACT , 1961 (HEREIN AFTER THE ACT) . 5. HE THUS SUBMITTED THAT THE INTERPRETATION DRAWN BY THE LD CIT(A) IS ERRONEOUS TO DENY THE CLAIM OF LOSS ON THE GROUND OF NO SALES TAKING PLACE IN THE INSTANT YEAR. THE LD AR, REFERRED TO THE JUDGEMENT OF THE APEX COURT IN THE CASE OF LD CIT VS. GOLD COIN HEALTH FO OD PVT LTD 304 ITR 308 (SC) WHEREIN IT WAS HELD THAT INCOME INCLUDE LOSSES THAT IS NEGATIVE PROFIT. AND AS REGARDS STOCK VALUATION IT WAS SUBMITTED THAT SUCH VALUATION HAS NOT BEEN CHALLENGED BY THE AO AND MORE OVER IT WAS POINTED OUT BY SHRI GAUTAM JAIN T HAT IN THE SUBSEQUENT ASSESSMENT YEAR NO SUCH ADJUSTMENT WAS MADE CORRESPONDING TO THAT IN THE OPENING ST O CK. COPY OF THE ORDER U/S 143(3) FOR ASSESSMENT YEAR 2009 - 10 WAS PLACED ON RECORD BY THE LD AR. THE LD DR SUPPORTED THE FINDINGS OF THE LD CIT(A) AND DOES NOT WANT US TO I NTERFERE IN THE IMPUGNED ORDER. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORDS AND HAVE GONE THROUGH THE CASE - LAWS CITED BEFORE US. IT IS WELL - SETTLED POSITION THAT EXPENDITURE INCURRED AFTER SETTING - UP OF BUSINESS IS ELIGIB LE FOR DEDUCTION WHILE COMPUTING THE INCOME. IN THE INSTANT CASE, IT IS AN ADMITTED POSITION , THAT THE BUSINESS OF THE ASSESSEE HAS BEEN SET - UP. NOT ONLY THAT THE BUSINESS HAD BEEN SET - UP , BUT, THERE WAS MANUFACTURE OF RAW - TEA IN THE INSTANT YEAR. THUS IN THE NORMAL COURSE SUCH EXPENDITURE QUALIFIES FOR DEDUCTION. HOWEVER, THE CONTROVERSY IS WHETHER RULE 8, CHANGES THE AFORESAID POSITION VIS - A - VIS THE TEA - BUSINESS. RULE 8 OF THE RULES READS AS UNDER: - PAGE 3 OF 6 INCOME FROM THE MANUFACTURE OF TEA. (1) INCOME DERIVED FROM THE SALE OF TEA GROWN AND MANUFACTURED BY THE SELLER IN INDIA SHALL BE COMPUTED AS IF IT WERE INCOME DERIVED FROM BUSINESS, AND FORTY PER CENT OF SUCH INCOME SHALL BE DEEMED TO BE INCOME LIABLE TO TAX. (2) IN COMPUTING SUCH INCOME AN ALLOWANCE SHALL BE MADE IN RESPECT OF THE COST OF PLANTING BUSHES IN REPLACEMENT OF BUSHES THAT HAVE DIED OR BECOME PERMANENTLY USELESS IN AN AREA ALREADY PLANTED, IF SUCH AREAS HAS NOT PREVIOUSLY BEE N ABANDONED, AND FOR THE PURPOSE OF DETERMINING SUCH COST, NO DEDUCTION SHALL BE MADE IN RESPECT OF THE AMOUNT OF ANY SUBSIDY WHICH, UNDER THE PROVISIONS OF CLAUSE (30) OF SECTION 10, IS NOT INCLUDIBLE IN THE TOTAL INCOME. 7. SUB RULE (1) OF RULE 8 PROVI DES THAT INCOME DERIVED FROM SALE OF TEA - GROWN AND MANUFACTUR ED BY THE SELLER IN INDIA, SHALL BE COMPUTED AS IF IT WERE INCOME DERIVED FROM BUSINESS AND 40% OF SUCH INCOME, SHALL BE DEEMED TO BE INCOME LIABLE TO TAX. THIS PROVISION WAS CONSIDERED BY THE HO NBLE GAUHATI HIGH COURT IN THE CASE OF CIT VS. H A ROOCHARAI TEA COMPANY (SUPRA) . IN THE SAID CASE, THE ASSESSEE RECEIVED LEASE - RENT OF RS.10,000/ - WHICH WAS CLAIMED TO BE NOT - TAXABLE, BEING AGRICULTURAL INCOME. THE AO HOWEVER HELD IT TO BE BUSINESS - INCOME. ON APPEAL THE FIRST APPELLATE AUTHORITY HELD THAT RULE 8 WOULD APPLY AND ONLY 40% OF THE LEASE - RENT WOULD BE ASSESSABLE, WHICH FINDING WAS AFFIRMED BY THE TRIBUNAL. THE HONBLE HIGH COURT SUMMARIZED THE FACTS AS UNDER: - IT APPEARS FORM THE FACTS OF THE CASE THAT THE ASSESSEE, M/S. HAROOCHARAI TEA COMPANY, WHICH IS A PARTNERSHIP FIRM, AND M/S. SAMAGURI TEA ESTATE, WHICH IS ALSO A PARTNERSHIP FIRM, HAVE COMMON PARTNERS. THE ASSESSEE FIRM PURCHASES SAMAGURI TEA ESTATE AND LEASED OUT THE SAME TO THE FIRM, M/ S. GATOONGA TEA ESTATE FOR MANAGEMENT, FOR WHICH A SUM OF RS.10,000/ - WAS PAYABLE ANNUALLY AS GUARANTEED PROFITS BY THE FIRM, M/S. GATOONGA TEA ESTATE TO THE ASSESSEE - FIRM, M/S. HAROOCHARAI TEA COMPANY. THIS SUM OF RS.10,000/ - MAY BE EITHER PROFIT FROM THE BUSINESS OF GROWING AND MANUFACTURING TEA OR, TAKING THE WORST VIEW, LEASE RENT FOR LEASING OUT SAMAGURI TEA ESTATE. BOTH THE FIRM, NAMELY, THE ASSESSEE AND M/S. GATOONGA TEA ESTATE, DO THE BUSINESS OF GROWING AND MANUFACTURING TEA. SIMILARLY, IN SAMAGURI TEA ESTATE ALSO TEA IS GROWN AND GREEN LEAVES ARE TAKEN TO SOME OTHER TEA ESTATE FOR MANUFACTURING PURPOSE AS SAMAGURI TEA ESTATE ITSELF DOES NOT OWN ANY FACTORY. WHATEVER THAT MAY BE, ALL THE THREE TEA ESTATES ARE ENGAGED IN PRODUCING AGRICULTURAL PRODUC T, NAMELY, TEA. PAGE 4 OF 6 8. AND FURTHER HELD AS UNDER: - IN THE TEA GARDEN, IT IS WELL KNOWN, GROWING OF GREEN TEA LEAVES AND MANUFACTURING OF TEA ARE CARRIED ON. THAT BEING THE POSITION, RULE 8 WILL BE ATTRACTED TO THE PRODUCE OF THE TEA GARDENS IN QUESTION AND SINCE THE LEASE RENT ALSO COMES WITHIN THE DEFINITION OF AGRICULTURAL INCOME AND SINCE THIS AGRICULTURAL INCOME IS DERIVED IN PART FROM AGRICULTURAL AND IN PART FROM BUSINESS, RULE 8 WILL BE ATTRACTED TO THIS SUM OF RS.10,000/ - , WHICH IS STATED TO BE THE LEASE RENT OR THE GUARANTEED PROFITS FROM THE TEA ESTATE IN QUESTION. WE, THEREFORE, HOLD THAT, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE LEASE RENT OF RS.10,000/ - RECEIVED BY THE ASSESSEE, HAROOCHAR AI TEA CO., JORHAT, FROM M/S. GATOONGA TEA ESTATE OF SAMAGURI TEA ESTATE WAS ASSESSABLE AT 40% IN VIEWS OF RULE 8 OF THE INCOME - TAX RULES, 1962. 9 . FROM THE AFORESAID JUDGEMENT IT IS EVIDENT THAT THE LEASE - RENT RECEIVED BY THE ASSESSEE IN THE COURSE OF T EA - BUSINESS WAS APPORTIONED BY INVOKING RULE 8 AND 40% OF SUCH RENT WAS HELD ASSESSABLE IRRESPECTIVE OF THE FACT THERE WAS NO SALES IN THE INSTANT YEAR AND THE ONLY INCOME WAS FROM LEASE - RENT. IN OTHER WORDS, THE PURPOSE OF RULE 8 WAS APPORTIONED THE INCOM E FROM TEA BUSINESS INTO AGRICULTURAL INCOME AND BUSINESS INCOME IN THE RATIO 60:40. APART FROM THAT RULE 8 OF THE INCOME TAX RULES 1962 IS IDENTICAL TO RULE 24 OF THE INCOME TAX RULES 1922. RULE 8 HAS BEEN INSERTED IN VIEW OF THE PROVISIONS CONTAINED IN S ECTION 29 5(2)(B) OF THE ACT WHICH IS PARI METRIA WITH SECTION 59 OF THE INCOME TAX ACT 1922. SECTION 59(2)(A) READ WITH RULE 24 OF THE INCOME TAX RULES 1922 WERE EXAMINED BY THE APEX COURT IN THE CASE OF KARIMTHARUVI TEA ESTATES LTD AND ANOTHER VS. STATE OF KERALA AND OTHERS REPORTED IN 48 ITR 83 AND IT WAS HELD INTER - ALIA AS UNDER: - THE INCOME DERIVED FROM THE SALE OF TEA GROWN AND MANUFACTURED BY THE SELLER IS NOT SOLELY DERIVED FROM AGRICULTURE. IT IS AN INCOME WHICH IS DERIVED PARTIALLY FROM AGRICULTURA L OPERATIONS AND PARTIALLY FROM MANUFACTURING PROCESS. THE INCOME IS PARTLY DERIVED FROM LAND BY AGRICULTURE AND PARTLY FROM BUSINESS. IT BECOMES NECESSARY TO DETERMINE THE PROPORTIONS OF THE TWO INCOMES IN THE ENTIRE INCOME. 10 . HAVING REGARD TO THE AFOR ESAID JUDICIAL POSITION WE FIND FORCE IN THE CONTENTION OF SHRI GAUTAM JAIN THE LD AR, THAT RULE 8 IS A SPECIAL PROVISION INCORPORATED IN THE RULES FOR APPORTIONMENT OF THE INCOME SOLELY FROM THE TEA - BUSINESS. THE EXPRESSION INCOME HAS BEEN JUDICIALLY HELD TO INCLUDE LOSSES (REFER CIT VS. GOLD COIN HEALTH FOOD PVT. LTD. (SUPRA) ) . AND THUS LOSSES INCURRED ARE ALLOWABLE BUSINESS LOSS. IN THE INSTANT CASE IT IS A MATTER OF RECORD, THE LOSS PAGE 5 OF 6 CLAIMED OF RS.19,11,295/ - IS 4 0 % OF THE TOTAL LOSS INCURRED OF RS.47,78,232/ - AND AS SUCH THE SUM OF RS.19,11,295/ - IS DIRECTED TO BE ALLOWED IN TERMS OF RULE 8 OF THE RULES. BEFORE PARTING WE CONSIDER IT APPROPRIATE TO OBSERVE THAT THE FINDING OF THE LD CIT(A) SO AS TO HOLD THE ENTIRE EXPENDITURE AS PART OF THE CLOSING - STOCK IS MISCONCEIVED FOR THE SIMPLE REASON THAT THE VALUATION OF THE CLOSING - STOCK HAS NOT BEEN DISPUTED EITHER AT THE ASSESSMENT STAGE IN THE INSTANT YEAR OR IN THE SUCCEEDING YEAR. SO F O R THE AFORESAID REASON THE GROU NDS RAISED BY THE ASSESSEE ARE ALLOWED. 11 . GROUND NO.3 RELATES TO DISALLOWANCE OF RS.4,80,242/ - BY INVOKING SECTION 14A WITH RULE 8D. FOR THE INSTANT YEAR, THE ASSESSEE MADE A DISALLOWANCE OF RS.1,03,441/ - APPLYING RULE 8D(2)(I I I), OF THE RULES. THE AO, HOWEVER COMPUTED THE DISALLOWANCE AT RS.5,83,683/ - , THEREBY ENHANCING THE DISALLOWANCE BY RS .4,80,242/ - U/ RULE 8D(2)(II ) OF THE RULES. BEFORE THE LD CIT(A) THE ASSESSEE PLEADED THAT INTEREST EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF BUSINESS AND NO PART THEREOF IS ATTRIBUTABLE TO EXEMPT INCOME. IT WAS SUBMITTED AS UNDER: - 3.2 THE ASSESSEE COMPANY HAS INCURRED RS.150,96,216/ - AS INTEREST EXPENDITURE OUT OF WHICH RS.1,32,07,461/ - WAS INCURRED FOR INTEREST ON TERM LOANS & RS.18,88,754/ - WAS INCURRED FOR INTEREST ON WORKING CAPITAL & OTHER LOANS. 3.3. THE BREAK UP EXPENDITURE ON INTEREST IS GIVEN BELOW ; - RS.95,32,014/ - FOR INTEREST ON TERM LOAN UTILIZED FOR PURCHASE OF PROPERTY WHICH WAS GIVEN ON RENT IN THE RELEVANT A SSESSMENT YEAR AND THE SAME WAS DULY CLAIMED UNDER INCOME FROM HOUSE PROPERTY. RS. 2,90,656/ - FOR INTEREST ON VEHICLE LOANS RS.33,84,790/ - FOR INTEREST ON TERM LOAN FOR BOTTLING PLANT FROM HDFC, ADDITIONAL WORKING CAPITAL LOAN & LOAN FOR AVON TEA PLANT, RS. 6,05,136/ - FOR INTEREST ON OTHER LOANS. RS.12,83,620/ - FOR INTEREST ON WORKING CAPITAL FACILITY UTILIZED FOR DAY TO DAY BUSINESS ACTIVITY. RS. 1,50,96,216/ - TOTAL 12 . THE LD CIT(A) HOWEVER, CONFIRMED THE DISALLOWAN CE. 13 . AFTER HEARING THE RIVAL - SUBMISSIONS, WE FIND THAT THE ASSESSEE HAD OWN FUNDS IN THE SHAPE OF SHARE - CAPITAL AND FRE E - RESERVES OF RS.23.49 CRORES, WHICH IS SUFFICIENT TO COVER THE INVESTMENT OF ONLY RS.30.10 LAKHS (REFER BACK SIDE OF PAGE 10 OF PB). MOREOVER OUT OF INTEREST CLAIMED OF RS.1,50,96,216/ - , SUM OF PAGE 6 OF 6 RS.95,32,014/ - HAS BEEN CLAIMED FROM HOUSE PROPERTY INCOME AND NOT FROM BUSINESS - INCOME. THE REMAINING INTEREST HAS BEEN USED FOR BUSINESS PURPOSES AND THERE IS NO ADVERSE FINDING TO SUGGEST OTHE RWISE, AS IS ALSO EVIDENT FROM THE CHART PLACED BY THE LD AR WHICH IS REPRODUCED BELOW: - SR. NO. PARTICULARS AMOUNT (RS. IN CRORES) INVESTED I) TERM LOAN FROM BANK (PAGE 12 OF PAPER BOOK) VEHICLE LOANS 10.6 INVESTMENT IN FIXED ASSETS OF RS. 38.55 CRORES (PAGE 12 REVERSE OF PAPER BOOK). .42 TOTAL 10.48 II) WORKING CAPITAL LOANS (PAGE 12 OF PAPER BOOK) 3.52 INVESTMENT IN TOCKS OF RS.8.23 CRORES AND DEBTORS OF RS. 7.10 CRORES (PAGE 13 OF PAPER BOOK) AS REDUCED BY SUNDRY CREDITORS OF RS. 8.53 CRORES (PAGE 13 REVERSE OF PAPER BOOK). THUS NET CURRENT ASSETS OF RS. 6.80 CRORES TOTAL 14 14 . HAVING REGARD TO THE ABOVE FACTUAL POSITION, WE HOLD THAT THERE IS NO - NEXUS ESTABLISHED BETWEEN BORROWED FUNDS AND TAX - FREE INVESTMENTS. AND THEREFORE WE DELETE THE DISALLOWANCE OF RS.4,40,242/ - . 15 . IN THE RESULT THE APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 1 2 . 12 .2014. - S D / - - S D / - ( T.S. KAPOOR ) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 1 2 / 12 / 2014 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI