The Thiruvambadi Rubber Co., Ltd, Calicut V. DCIT, Cochin

ITA 628/COCH/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73801 (ITAT-COCHIN)
• Duration Of Justice: 3 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-01-2014
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 26-12-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 30-09-2013
• Court: TRIBUNAL
• Department Lawyers: LATHA V KUMAR
• Assessee Lawyers: R V VEERAMANI
• Keywords: Capital asset; Business income; Capital receipt

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A. NO. 626, 627 & 628/COCH/2013 ASSESSMENT YEARS : 2006-07, 2007-08 & 2008-09 THE THIRUMBADI RUBBER CO. LTD., THIRUMBADI ESTATE, MUKKOM, CALICUT-673 602. [PAN: AABCT 0021G] VS. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1, RANGE 1, KOCHI. (ASSESSEE -APPELLANT) (REVENUE-RESPONDENT) ASSESSEE BY SHRI R.V. VEERAMANI, CA REVENUE BY SMT. LATHA V. KUMAR, CIT(DR) DATE OF HEARING 26/12/2013 DATE OF PRONOUNCEMENT 03/01/2014 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: ALL THESE THREE APPEALS FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDERS PASSED BY LD CIT(A)-II, KOCHI AND THEY RELATE TO TH E ASSESSMENT YEARS 2006-07 TO 2008-09. SINCE IDENTICAL ISSUES ARE URGED IN THESE APPEALS, THEY WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. 2. THE SOLITARY ISSUE URGED IN THESE APPEALS IS WHE THER THE LD CIT(A) WAS JUSTIFIED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER I N TREATING THE SALE VALUE OF OLD RUBBER TREES AS AGRICULTURAL INCOME AND CONSEQUENTLY ASSES SING 35% OF THE SAME AS TAXABLE INCOME IN TERMS OF RULE 7A OF INCOME TAX RULES. 3. THE FACTS RELATING TO THE ISSUE ARE STATED IN BRIEF. THE ASSESSEE COMPANY DERIVES ITS INCOME FROM RUBBER PLANTATIONS. DURING THE YEAR S UNDER CONSIDERATION, THE ASSESSEE RECEIVED MONEY ON SALE OF OLD RUBBER TREES. THE AS SESSEE CLAIMED THE SAME AS CAPITAL I.T.A. NO.626-628/COCH/2013 2 RECEIPT AND DID NOT OFFER IT FOR TAXATION. HOWEVER , THE AO TOOK THE VIEW THAT, AFTER INTRODUCTION OF RULE 7A IN THE INCOME TAX RULES, EN TIRE INCOME OF RUBBER ESTATE IS TO BE BIFURCATED IN THE RATIO OF 65 : 35, I.E., 65% IS TO BE TAKEN AS AGRICULTURAL INCOME AND 35% IS TO BE TAKEN AS TAXABLE INCOME. SINCE THE RU BBER REPLANTING EXPENSES IS ALLOWED AS A DEDUCTION UNDER RULE 7A(2) OF THE IT R ULES, THE AO TOOK THE VIEW THAT THE SALE PROCEEDS OF RUBBER TREES CANNOT BE CONSIDERED AS CAPITAL RECEIPT. ACCORDING TO AO, THE SALE VALUE OF OLD AND UNYIELDING RUBBER TRE ES IS AKIN TO MONEY OBTAINED ON SALE OF EMPTY GUNNY BAGS BY A CEMENT DEALER OR EMPTY BOT TLES BY A BAR HOTEL. BEFORE THE AO, THE ASSESSEE PLACED RELIANCE ON CERTAIN DECISIO NS RENDERED BY HONBLE SUPREME COURT. HOWEVER, THE AO TOOK THE VIEW THAT THOSE DE CISIONS WERE RENDERED IN A DIFFERENT CONTEXT AND ALSO AT A POINT OF TIME WHEN THE INCOME FROM VALUE ADDED RUBBER WAS NOT CONSIDERED FOR INCOME TAX PURPOSES. ACCORDINGLY, T HE AO TOOK THE VIEW THAT THOSE DECISIONS WILL NOT APPLY AFTER INTRODUCTION OF RULE 7A OF THE INCOME TAX RULES. THE LD CIT(A) ALSO UPHELD THE VIEW OF THE AO AND HENCE THE ASSESSEE HAS FILED THIS APPEAL BEFORE US. 4. WE HAVE HEARD THE RIVAL CONTENTIONS AND CARE FULLY PERUSED THE RECORD. WE NOTICE THAT THIS BENCH OF TRIBUNAL HAS CONSIDERED AN IDENT ICAL ISSUE IN THE CASE OF M/S HARRISONS MALAYALAM LTD IN ITA NO.77/COCH/2010 AND THE TRIBUNAL, VIDE ITS ORDER DATED 29.06.2012, HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE RELEVANT OBSERVAT IONS MADE AND THE DECISION TAKEN BY THE TRIBUNAL IN THE CASE OF HARRISONS MALAYALAM LTD (SUPRA):- 13. THE NEXT ISSUE RELATES TO THE ADDITION OF AMOUNT REALISED ON SALE OF OLD AND UNYIELDING RUBBER TREES AMOUNTING TO RS.5,12,84 ,878/- AS REVENUE RECEIPT UNDER RULE 7A OF THE INCOME TAX RULES. THE ASSESSE E CLAIMED THE AMOUNT REALISED ON SALE OF OLD AND UNYIELDING RUBBER TREES AS NOT TAXABLE BY FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F KALPETTA ESTATES LTD (221 ITR 601). HOWEVER, THE AO TOOK THE VIEW THAT THE T AXABLE POSITION OF AMOUNT REALISED ON SUCH SALE HAS UNDERGONE A CHANGE AFTER THE INTRODUCTION OF RULE 7A OF THE INCOME TAX RULES. ACCORDING TO RULE 7A, THE INCOME FROM RUBBER ESTATE HAS TO BE APPORTIONED IN THE RATIO OF 65 : 35 AND T HE 35% OF THE INCOME IS TO BE ASSESSED AS BUSINESS INCOME. ACCORDINGLY HE TOOK T HE VIEW THAT THE SALE VALUE OF OLD AND UNYIELDING TREES IS ONLY A SALVAGE VALUE GOT FROM AN EXHAUSTED STOCK JUST LIKE THE MONEY GOT ON SALE OF EMPTY GUNNY BAGS BY A CEMENT DEALER OR OF EMPTY BOTTLES BY A BAR HOTEL AND HENCE THE TREES CA NNOT BE CALLED AS A CAPITAL I.T.A. NO.626-628/COCH/2013 3 ASSET. THE AO FURTHER TOOK THE VIEW THAT THE CAPIT AL ASSETS ARE NOT ALLOWED AS A DEDUCTION UNDER THE INCOME TAX ACT. HOWEVER, IN TH E INSTANT CASE, THE EXPENSES INCURRED ON ESTATE EXPENSES AND REPLANTING EXPENSES HAVE BEEN CLAIMED BY THE ASSESSEE ITSELF, WHICH SHOWS THAT THE RUBBER TREES ARE NOT CAPITAL ASSETS. ACCORDINGLY, THE AO BROUGHT TO TAX 35% OF THE AMOUN T REALISED ON SALE OF OLD AND UNYIELDING TREES. THE LD CIT(A) ALLOWED THE CL AIM OF THE ASSESSEE BY HOLDING THAT RULE 7A SHALL NOT APPLY TO THE SALE OF OLD AND UNYIELDING TREES. 14. THE MAIN CONTENTION OF THE DEPARTMENT IS THAT THE RULE 7A SHALL APPLY TO THE INCOME GENERATED ON SALE OF OLD AND UNYIELDING RUBB ER TREES. WE HAVE GONE THROUGH RULE 7A OF INCOME TAX RULES AND FOR THE SAK E OF CONVENIENCE, WE EXTRACT THE SAME BELOW:- INCOME FROM THE MANUFACTURE OF RUBBER 7A (1) INCOME DERIVED FROM THE SALE OF CENTRIFUGED LATEX OR CENEX OR LATEX BASED CREPES (SUCH AS PALE LATEX CREPE) OR B ROWN CREPES (SUCH AS ESTATE BROWN CREPE, REMILLED CREPE, SMOKED BLANKET CREPE OR FLAT BARK CREPE) OR TECHNICALLY SPECIFIED BLOCK RUBBERS MANUF ACTURED OR PROCESSED FROM FIELD LATEX OR COAGULUM OBTAINED F ROM RUBBER PLANTS GROWN BY THE SELLER IN INDIA SHALL BE COMPUTED AS I F IT WERE INCOME DERIVED FROM BUSINESS, AND THIRTY-FIVE PER CENT OF SUCH INCOME SHALL BE DEEMED TO BE INCOME LIABLE TO TAX. ON A CAREFUL PERUSAL OF RULE 7A, WE NOTICE THAT THE SAID RULE TALKS ABOUT COMPUTATION OF INCOME DERIVED FROM SALE OF CENTRIFUGED LATEX OR CE NEX OR LATEX BASED CREPES (SUCH AS PALE LATEX CREPE) OR BR OWN CREPES ETC . THE SAID RULE DOES NOT TALK ABOUT THE TAXABILITY OF INC OME FROM SALE OF OLD RUBBER TREES. ACCORDING TO LD A.R, THE RULE 7A PROVIDES F OR ASCERTAINMENT OF BUSINESS INCOME OBTAINED ON SALE OF CENTRIFUGED LATEX ETC. WHEN MANUFACTURED OR PROCESSED FROM FIELD LATEX OR COAGULUM OBTAINED FROM RUBBER PLANTS GROWN BY THE SELLER IN INDIA , I.E., WHEN THERE IS A COMBINED ACTIVITY OF GROWIN G RUBBER TREES AND ALSO MANUFACTURING OR PROCESSING O F FIELD LATEX OR COAGULUM OBTAINED FROM RUBBER PLANTS, RULE 7A PROVIDES FOR S EGREGATION AND ASCERTAINMENT OF AGRICULTURAL INCOME AND THE BUSINESS INCOME. ON A PLAIN READING OF RULE 7A, WE ARE INCLINED TO ACCEPT THE CONTENTIONS OF LD A.R . THUS, THE SAID RULE 7A DOES NOT TAKE IN ITS AMBIT THE QUESTION OF SALE OF OLD R UBBER TREES. WITH REGARD TO THE POSITION OF RUBBER TREES, THE LD CIT(A) HAS OBSERVE D AS UNDER:- IN SO FAR AS SALE OF OLD AND UNYIELDING RUBBER TRE ES ARE CONCERNED, RUBBER TREES ARE GROWN BY CARRYING OUT AGRICULTURAL OPERAT IONS ON LAND. AS HELD BY THE SUPREME COURT, RUBBER TREES ARE NOT GROWN FO R THE PURPOSE OF SELLING THE TREES BUT FOR GENERATING INCOME FROM TH E TREES IN THE SHAPE OF LATEX. THE RUBBER TREES CONSTITUTE CAPITAL ASSET O F RUBBER ESTATE AND DOMINANT PURPOSE OF GROWING RUBBER TREES IS TO CREA TE SOURCE FOR SUPPLY I.T.A. NO.626-628/COCH/2013 4 OF LIQUID LATEX. THE RUBBER TREES THEREFORE CONSTI TUTE CAPITAL ASSET OF AGRICULTURAL OPERATIONS. THERE IS NO MANUFACTURING ACTIVITY INVOLVED EITHER AT THE STAGE OF CULTIVATION AND GROWING OF RUBBER T REE OR AT THE TIME OF ITS FELLING ON TREES BECOMING OLD AND UNYIELDING. INCO ME DERIVED FROM SALE OF OLD AND UNYIELDING TREES DO NOT INCLUDE ANY ELEMENT OF INCOME DERIVED FROM SALE OF CENTRIFUGED LATEX OR SENEX OR LATEX BA SED CREPES. IN THE CIRCUMSTANCES, CONDITION PRECEDENT FOR APPLYING RUL E 7A IS ABSENT WHEN OLD AND UNYIELDING RUBBER TREES ARE SOLD AS NO MANU FACTURING OR PROCESSING ELEMENT IS INVOLVED IN THE ACTIVITY. IN MY OPINION THEREFORE RULE 7A OF INCOME TAX RULES HAS NO APPLICATION TO T HE INCOME DERIVED ON SALE OF OLD RUBBER TREES. NO MATERIAL CHANGE HAS BE EN BROUGHT ABOUT BY INTRODUCTION OF RULE 7A BECAUSE RULE 7A IS APPLICAB LE ONLY WHEN THE GROWER OF RUBBER TREES HIMSELF CARRIES ON MANUFACTU RING ACTIVITY ON LATEX OR COAGULUM SOURCED FROM RUBBER TREES GROWN BY HIM. THE JUDICIAL PRINCIPLES LAID DOWN BY THE SUPREME COURT IN THE EA RLIER DECISIONS CONTINUE TO HOLD GOOD EVEN AFTER INTRODUCTION OF RU LE 7A. IN TUNE WITH THE SUPREME COURT DECISIONS IN THE CASE OF KALPETTA ESTA TES LTD VS. CIT REPORTED IN 221 ITR 601 AND IN THE CASE OF KAILAS R UBBER & CO. LTD REPORTED IN 60 ITR 435, I HOLD THAT NO INCOME CHARG EABLE TO TAX ACCRUED ON SALE OF OLD AND UNYIELDING RUBBER TREES. 15. WE NOTICE THAT THE LD CIT(A) HAS TAKEN THE VIEW WITH REGARD TO THE APPLICATION OF RULE 7A, WHICH IS IDENTICAL WITH THE VIEW EXPRESSED BY US IN THE EARLIER PARAGRAPH, I.E., IT APPLIES ONLY TO A PERSO N WHO CARRIES ON THE COMBINED ACTIVITY OF GROWING RUBBER TREES AND ALSO MANUFACTU RING OR PROCESSING OF FIELD LATEX OR COAGULUM OBTAINED FROM RUBBER PLANTS. TH E DOMINANT PURPOSE OF GROWING RUBBER TREES IS TO OBTAIN LIQUID LATEX FROM THEM. THE RUBBER TREES ARE NOT USED AS IT IS FOR THE PURPOSE OF MANUFACTURING OR PROCESSING, BUT ONLY THE LATEX OBTAINED FROM THEM. HENCE, THE SALE VALUE OF OLD RUBBER TREES CANNOT BE CONSIDERED AS SALVAGE VALUE OBTAINED FROM THE EXHAU STED STOCK. SINCE THE RUBBER TREES CONTINUE TO THE CAPITAL ASSET. ACCORDINGLY, THE EXAMPLES OF SALE OF OLD GUNNY BAGS OR OLD BOTTLES QUOTED BY THE AO ARE NOT APPLICABLE TO THE CASE OF RUBBER TREES. HENCE, THE DECISION OF SUPREME COURT IN HOLDING THAT THE RUBBER TREES CONSTITUTE CAPITAL ASSETS SHALL HOLD GOOD EVE N AFTER THE INTRODUCTION OF RULE 7A IN THE INCOME TAX RULES. IN VIEW OF THE ABOVE, WE AGREE WITH THE VIEWS EXPRESSED BY LD CIT(A) ON THIS ISSUE. 5. THE LD A.R INVITED OUR ATTENTION TO THE DECIS ION DATED 27.06.2011 RENDERED BY THE HONBLE JURISDICTIONAL KERALA HIGH COURT IN THE ASS ESSEES OWN CASE IN ITA NOS. 15, 31, 37 & 43 OF 2010, WHEREIN ALSO THE HIGH COURT HAS RE VERSED THE DECISION OF THE TRIBUNAL, WHICH HAD HELD THAT THE SALE VALUE OF OLD RUBBER TR EES IS AGRICULTURAL INCOME. I.T.A. NO.626-628/COCH/2013 5 6. CONSISTENT WITH THE VIEW TAKEN IN THE CASE OF HARRISONS MALAYALAM LTD (SUPRA), WE HOLD THAT THE AMOUNT RECEIVED BY THE ASSESSEE ON SA LE OF OLD RUBBER TREES IN THE THREE YEARS UNDER CONSIDERATION CONSTITUTES CAPITAL RECEI PTS. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE THE SALE VALUE OF RUBBER TREES FROM THE COMPUTATION OF INCOME. 7. IN THE RESULT, ALL THE APPEALS FILED BY THE ASSESSEE ARE ALLOWED. PRONOUNCED ACCORDINGLY ON 03-01-2014. SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 3RD JANUARY, 2014 GJ COPY TO: 1. THE THIRUMBADI RUBBER CO. LTD.,THIRUMBADI ESTATE, MUKKOM, CALICUT-673 602. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1, RANGE 1, KOCHI. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS)-II, KOCH I. 4.THE COMMISSIONER OF INCOME-TAX, KOCHI 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T, COCHIN I.T.A. NO.626-628/COCH/2013 6