DCIT, Ernakulam V. M/s. Harrison Malayalam Ltd, Cochin

ITA 77/COCH/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61548 (ITAT-COCHIN)
• Duration Of Justice: 2 year(s) 4 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-06-2012
• Appeal Filed By: Department
• Bench Allotted: DB
• Next Hearing Date: 07-06-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 11-02-2010
• Court: TRIBUNAL
• Department Lawyers: DILIP S DAMLE
• Assessee Lawyers: S R SENAPATI
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Proportionate interest; Cost of acquisition; Wholly owned subsidiary; Capital receipt; Commercial expediency; Revenue expenditure
• Section: 143(3); 115JB

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. 77/COCH/2010 ASSESSMENT YEAR: 2006-07 THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-1(1), ERNAKULAM. VS. M/S. HARRISON MALAYALAM LTD., BRISTOW ROAD, WILLINGDON ISLAND, KOCHI-3. [PAN:AAACH 6769C] (REVENUE-APPELLANT) (ASSESSEE - RESPONDENT) REVENUE BY SHRI S.R. SENAPATI, SR. DR REVENUE BY SHRI DILIP S. DAMLE, FCA DATE OF HEARING 07/06/2012 DATE OF PRONOUNCEMENT 29 06/2012 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THE APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 30.11.2009 PASSED BY LD CIT(A)-II, KOCHI AND IT RELATES TO THE ASSESS MENT YEAR 2006-07. THE REVENUE IS ASSAILING THE DECISION OF LD CIT(A) IN GRANTING REL IEF IN RESPECT OF VARIOUS ADDITIONS MADE BY THE ASSESSING OFFICER. 2. THE ASSESSEE IS ENGAGED IN VARIOUS TYPES OF ACTIVITIES LIKE GROWING, MANUFACTURING AND TRADING IN TEA, RUBBER AND COFFEE, EXECUTION OF ENGINEERING CONTRACTS, CLEARING AND SHIPPING, AQUACULTURE, PLANT TISSUE CULTURE ETC. T HE AO COMPLETED THE ASSESSMENT U/S 143(3) OF THE ACT FOR THE YEAR UNDER CONSIDERATION BY DETERMINING THE TOTAL INCOME UNDER THE NORMAL PROVISIONS OF THE ACT AT RS.75.98 CRORES AND THE BOOK PROFIT U/S 115JB OF THE ACT AT RS.68.59 CRORES BY MAKING VARIOUS ADD ITIONS. THE ASSESSEE CHALLENGED THE ASSESSMENT ORDER BEFORE LD CIT(A) AND GOT PARTIAL R ELIEF. THE REVENUE HAS FILED THIS APPEAL CHALLENGING THE RELIEF GRANTED BY LD CIT(A). I.T.A. NO. 77 /COCH/2010 2 3. THE FIRST ISSUE RELATES TO THE DISALLOWANCE OF LICENCE FEE PAID TO RPG ENTERPRISES AMOUNTING TO RS.60.00 LAKHS. WE NOTICE THAT THE AS SESSING OFFICER HAS DISALLOWED THE LICENCE FEE PAYMENTS BY FOLLOWING HIS ORDER IN THE EARLIER YEARS. IN THOSE YEARS, THE ASSESSEE HAS CARRIED THE MATTER IN APPEAL BEFORE TH E LD CIT(A) AND THEN TO THE TRIBUNAL. THE COCHIN BENCH OF THE TRIBUNAL IN ITS APPELLATE ORDER DATED 11.5.2007 IN ITA NOS. 104 TO 106 OF 2005 RELATING TO THE ASSESSM ENT YEAR 2001-02 TO 2003-04 HAS HELD THAT THE LICENCE FEE PAID TO M/S RPG ENTERPRIS ES WAS AN ALLOWABLE EXPENDITURE. THE SAID VIEW WAS REITERATED BY THE TRIBUNAL IN ITS ORDER DATED 12.5.2009 RELATING TO THE ASSESSMENT YEAR 2005-06 IN ITA NO.60/COCH/2009. WE FURTHER NOTICE THAT THE LD CIT(A) HAS FOLLOWED THE DECISIONS RENDERED BY THE T RIBUNAL IN DECIDING THIS ISSUE IN FAVOUR OF THE ASSESSEE. THE ASSESSEE SUBMITTED BEF ORE US THAT THERE WAS NO CHANGE IN THE FACTS SURROUNDING THIS EXPENDITURE. HOWEVER, T HE LD D.R, BY PLACING RELIANCE ON THE DECISION OF JURISDICTIONAL KERALA HIGH COURT IN THE CASE OF CIT VS. PREMIER BREWERIES LTD (2005)(279 ITR 51), SUBMITTED THAT MERE EXISTENCE O F AN AGREEMENT IS NOT SUFFICIENT TO PROVE COMMERCIAL EXPEDIENCY IN RESPECT OF THIS PAYM ENT. THERE CANNOT BE ANY DISPUTE THAT THE QUESTION OF EXISTENCE OF COMMERCIAL EXPEDI ENCY HAS TO BE DECIDED ON THE FACTS PREVAILING IN EACH CASE. IN THE INSTANT CASE, THE CO-ORDINATE BENCH OF THE TRIBUNAL HAS EXAMINED THIS PAYMENT AND HAS TAKEN THE VIEW THAT T HIS EXPENDITURE IS ALLOWABLE AND IT WAS SO HELD BY THE TRIBUNAL IN MORE THAN ONE YEAR. HENCE, WE ARE INCLINED TO FOLLOW THE VIEW CONSISTENTLY TAKEN BY THE TRIBUNAL. SINC E THE LD CIT(A) HAS FOLLOWED THE DECISION OF THE TRIBUNAL, WE DO NOT FIND ANY REASON TO INTERFERE WITH HIS DECISION ON THIS ISSUE. 4. THE NEXT ISSUE RELATES TO THE DISALLOWANCE O F PROPORTIONATE INTEREST RELATING TO THE INTEREST FREE LOANS GIVEN TO THE SUBSIDIARY COMPANI ES. THE ASSESSEE HAD CLAIMED A SUM OF RS.975.12 LAKHS AS INTEREST EXPENDITURE. THE AO NOTICED THAT THE ASSESSEE HAD GIVEN INTEREST FREE LOANS OF RS.21221.04 LACS AS ON 31.3. 2006 TO ITS WHOLLY OWNED SUBSIDIARY COMPANIES AS AGAINST THE OPENING BALANCE OF RS.4849 .04 LACS. THE AO WORKED OUT THE AVERAGE OF OPENING AND CLOSING BALANCES STATED ABOV E AT RS.13035.04 LACS. THE RATIO OF INTEREST BEARING FUNDS AND INTEREST FREE FUNDS AS P ER THE BALANCE SHEET WAS 9775.94 : I.T.A. NO. 77 /COCH/2010 3 30168.70. BY APPLYING THIS RATIO, THE AO WORKED OU T THE INVESTMENT MADE IN SUBSIDIARY COMPANIES OUT OF INTEREST BEARING FUNDS AT RS.3190. 16 LAKHS. ACCORDINGLY, THE AO CALCULATED THE PROPORTIONATE INTEREST RELATABLE TO THE ABOVE AMOUNT AT RS.3,18,21,074/- AND DISALLOWED THE SAME. 5. THE LD CIT(A) DELETED THIS DISALLOWANCE WITH THE FOLLOWING OBSERVATIONS: I HAVE GONE THROUGH THE ASSESSMENT ORDER AND CONS IDERED SUBMISSIONS OF THE APPELLANT. I HAVE ALSO PERUSED THE JUDICIAL DECISI ONS RELIED UPON BY THE A/RS OF THE APPELLANT. IN SO FAR AS THE APPELLANTS CASE FOR AY 2006-07, I FIND THAT THE NET OWN FUNDS OF THE APPELLANT IN THE FORM OF SHAR E CAPITAL AND RESERVES AS ON 31.03.2006 WAS RS. 30168.70 LACS WHICH WAS IN EXCE SS OF THE OUTSTANDING LOAN OF RS. 21221.04 LACS GRANTED TO WHOLLY OWNED SUBSI DIARIES. DURING THE RELEVANT PREVIOUS YEAR THE APPELLANT HAD A TURNOVER OF RS. 15267.54 LACS AND IT ALSO REALIZED RS. 7250 LACS ON SALE OF ITS RUBBER ESTAT ES AND RS. 3748.77 LACS FROM SALE OF INVESTMENTS. THE APPELLANT MAINTAINED COM POSITE BANK ACCOUNT IN WHICH ALL RECEIPTS FROM SALE OF GOODS, SALE OF INVESTMEN TS AND ASSETS ETC. WERE DEPOSITED. THE AMOUNTS SO DEPOSITED WERE IN EXCES S OF THE LOANS GRANTED TO SUBSIDIARIES. I ALSO FIND THAT THE INTEREST-FREE L OANS WERE GRANTED TO THE APPELLANTS WHOLLY OWNED SUBSIDIARIES WHEREIN THE APPELLANT HAD 100% DIRECT ECONOMIC INTEREST. IT IS NOT A CASE WHERE INTERES T-FREE FUNDS WERE GRANTED TO PARTIES WHEREIN THE APPELLANT HAD NO BENEFICIAL IN TEREST. ON ANALOGOUS FACTS MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF RPG L IFE SCIENCES LTD. IN I.T.A. NO. 3999/MUM/05 DATED 28.10.2009 DELETED THE EST IMATED DISALLOWANCE OF INTEREST PAID. IN THAT CASE ALSO THE ASSESSEE BEL ONGING TO RPG GROUP HAD GRANTED INTEREST FREE LOANS TO ITS WHOLLY OWNED S UBSIDIARY AND INTEREST WAS PARTLY DISALLOWED FOR THE ALLEGED REASON THAT THE ASSESSEE HAD DIVERTED BORROWED FUNDS FOR GRANTING INTEREST FREE LOANS TO WHOLLY OWNED SUBSIDIARY. THE MUMBAI TRIBUNAL FOLLOWING THE DECISIONS OF THE SU PREME COURT IN THE CASE OF S.A. BUILDERS LTD. AND THE BOMBAY HIGH COURT IN RELIANC E UTILITIES & POWER LTD. DELETED THE DISALLOWANCE OF INTEREST. ACCORDINGLY , I HOLD THAT THE SINCE THE NET I.T.A. NO. 77 /COCH/2010 4 OWNED FUNDS OF THE APPELLANT COMPANY WERE MORE THA N THE LOANS GRANTED TO THE SUBSIDIARY COMPANY AND THAT THE LOANS WERE GRANTED TO WHOLLY-OWNED SUBSIDIARIES IN WHICH 100% ECONOMIC AND BENEFICIAL INTEREST WAS HELD BY THE APPELLANT, INTEREST ON BORROWED FUNDS CANNOT BE DI SALLOWED. GROUND NO. 2 THEREFORE IS ALLOWED. 6. BEFORE US, THE LD D.R SUBMITTED THAT THE ASS ESSEE HAS TO PROVE THE EXISTENCE OF COMMERCIAL EXPEDIENCY IN MAKING INTEREST FREE ADVAN CES TO THE SUBSIDIARIES AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF S.A BUILDE RS REPORTED IN 288 ITR 1. SHE FURTHER SUBMITTED THAT THE ECONOMIC INTEREST PROJ ECTED BY THE ASSESSEE CANNOT BE CONSIDERED AS A MEASURE OF COMMERCIAL EXPEDIENCY. 7. ON THE CONTRARY, THE LD A.R SUBMITTED THAT T HE ECONOMIC INTEREST CAN CERTAINLY BE TAKEN AS A MEASURE OF COMMERCIAL EXPEDIENCY IN MAKI NG INTEREST FREE ADVANCES TO THE SUBSIDIARY COMPANIES. HE FURTHER SUBMITTED THAT THE ASSESSEE IS THE WHOLE AND SOLE OWNER OF THESE SUBSIDIARY COMPANIES AND HAS EXERCIS ED FULL OWNERSHIP AND MANAGEMENT CONTROL OVER THEIR AFFAIRS. ACCORDINGLY , THE ASSESSEE IS ENTITLED TO THE FULL SHARE OF PROFITS EARNED BY THESE SUBSIDIARY COMPANI ES. BEING 100% HOLDING COMPANY, THE ASSESSEE HAD AN OBLIGATION TO ENSURE THAT THE B USINESS ACTIVITIES OF THE SUBSIDIARIES WERE CARRIED ON SOUND ECONOMIC FOOTING. HE FURTHER SUBMITTED THAT THESE SUBSIDIARY COMPANIES HAVE BEEN PROMOTED BY THE ASSESSEE FOR ST RATEGIC BUSINESS PURPOSE OF PROMOTING OTHER BODIES CORPORATE AND THROUGH THESE SUBSIDIARY COMPANIES, THE ASSESSEE COMPANY HAS ACQUIRED PROMOTERS HOLDING IN NUMBER OF LISTED AND UNLISTED COMPANIES, WHICH WOULD, IN TURN, HELP TO ADVANCE IT S BUSINESS INTERESTS. 8. THE LD A.R FURTHER SUBMITTED THAT THE ASSESS EE WAS HAVING SUFFICIENT INTEREST FREE FUNDS FOR MAKING THE IMPUGNED INVESTMENTS IN THE FO RM OF SHARE CAPITAL AND RESERVES TO THE TUNE OF RS.30168.70 CRORES. HE FURTHER SUBMITT ED THAT THE ASSESSEE HAD A TURNOVER OF RS.15267.54 LACS DURING THE YEAR UNDER CONSIDERA TION AND IT ALSO REALISED RS.7250 LACS ON SALE OF ITS RUBBER ESTATES AND RS.3748.77 L ACS FROM SALE OF INVESTMENTS IN THE INSTANT YEAR. THESE RECEIPTS WERE SUFFICIENT TO FI NANCE THE LOANS GIVEN TO THE I.T.A. NO. 77 /COCH/2010 5 SUBSIDIARIES AND HENCE IT CANNOT BE ALLEGED ON A GE NERALISED MANNER THAT THE ASSESSEE HAS UTILISED INTEREST BEARING FUNDS FOR MAKING ADVA NCES TO THE SUBSIDIARY COMPANIES. HE FURTHER RELIED UPON THE DECISION OF HONBLE HIG H COURT OF DELHI IN THE CASE OF COMMISSIONER OF INCOME TAX VS. BHARTI TELEVENTURES LTD (2011)(11 TAXMANN.COM 356) (DELHI) TO SUBMIT THAT THE DISALLOWANCE OF INTEREST EXPENDITURE CANNOT BE MADE WHEN THE INVESTMENTS MADE IN SUBSIDIARY COMPANIES COULD NOT BE LINKED TO THE BORROWED FUNDS. HE ALSO RELIED UPON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL DATED 28.10.2009 IN THE CASE OF M/S RPG LIFE SCIENCES LTD IN ITA NOS. 3999 TO 4001/MUM?05 AND ITA NO.612/MUM/06, WHEREIN THE TRIBUNAL, BY FOL LOWING THE BOMBAY HIGH COURTS DECISION IN THE CASE OF CIT VS. RELIANCE UTILITIES 7 POWERS LTD (313 ITR 340) HAS DELETED SIMILAR DISALLOWANCES MADE BY OBSERVING THAT THERE WAS NO NEXUS ESTABLISHED BETWEEN THE BORROWED CAPITAL AND INTEREST FREE LOANS. 9. WE HAVE HEARD THE RIVAL CONTENTIONS ON THIS ISSUE. IN PARAGRAPH 4 SUPRA, WE HAVE NARRATED THE METHODOLOGY ADOPTED BY THE AO IN WORKI NG OUT THE DISALLOWANCE OF INTEREST EXPENDITURE RELATABLE TO THE INVESTMENTS M ADE IN SUBSIDIARY COMPANIES. THE SAID METHODOLOGY SUGGESTS ABOUT NON-APPLICATION OF MIND ON THE PART OF THE AO, I.E., HE HAS MADE THE DISALLOWANCE IN A MECHANICAL MANNER WI THOUT ANALYSING WHETHER THERE WAS ANY COMMERCIAL EXPEDIENCY IN MAKING THE INVESTM ENT IN SUBSIDIARY COMPANIES OR WHETHER THE INTEREST BEARING FUNDS HAVE ACTUALLY BE EN DIVERTED. FROM THE ARGUMENTS ADVANCED BY THE ASSESSEE, WE NOTICE THAT THE ASSESS EE COMPANY IS 100% OWNER OF THE SUBSIDIARY COMPANIES VIZ., M/S HARRISONS MALAYALAM FINANCIAL SERVICES LTD, M/S HARRISONS RUBBER PRODUCTS LTD AND M/S HARRISONS AGRO PRODUCTS LTD. THE ASSESSEE HAS ALSO STATED THAT IT HAS ACQUIRED PROMOTERS INTEREST IN MANY OTH ER BODY CORPORATE BOTH LISTED AND UNLISTED, WHICH WOULD IN TURN HELP TO PROMOTE ITS B USINESS INTERESTS. IT IS THE PREVALENT PRACTICE OF BIG BUSINESS GROUPS TO PROMOTE SUCH KIN D OF SUBSIDIARY COMPANIES, WHICH WOULD IN TURN ACQUIRE BUSINESS AND PROMOTERS SHARE IN OTHER LISTED AND UNLISTED COMPANIES. THIS IS A KIND OF CORPORATE STRATEGY GE NERALLY FOLLOWED BY ALL BUSINESS GROUPS; THE PURPOSE IS CERTAINLY TO CONSOLIDATE ITS BUSINESS POSITION. ACCORDINGLY, WE FIND MERIT IN THE CONTENTION OF THE LD A.R THAT THE RE WAS COMMERCIAL EXPEDIENCY IN MAKING INTEREST FREE ADVANCES TO THE SUBSIDIARY COM PANIES. I.T.A. NO. 77 /COCH/2010 6 10. THE ASSESSEE HAS ALSO EXPLAINED ABOUT THE S OURCE OF FUNDS FOR MAKING INVESTMENTS IN THE SUBSIDIARY COMPANIES DURING THE YEAR UNDER CONSIDERATION. THE AO HIMSELF HAS WORKED OUT THE AVERAGE INVESTMENTS MADE DURING THE YEAR AT RS.13035.04 LACS. DURING THE YEAR THE ASSESSEE HAS REALIZED RS .7250 LAKHS ON SALE OF ITS RUBBER ESTATES AND RS.3748.77 LACS FROM SALE OF INVESTMENT S. BESIDES THE ABOVE THE ASSESSEE HAS MADE A TURNOVER OF RS.15267.54 LAKHS DURING THE YEAR UNDER CONSIDERATION AND WE NOTICE FROM THE PROFIT AND LOSS FILED IN THE PAPER BOOK THAT IT HAS MADE A CASH PROFIT OF RS.7305 LAKHS. THESE SOURCES GENERATED DURING THE YEAR WERE MORE THAN SUFFICIENT TO MAKE THE AVERAGE INVESTMENTS STATED ABOVE. BESIDES THE ABOVE, IT WAS ALSO STATED THAT THE ASSESSEE IS HAVING INTEREST FREE FUNDS IN THE F ORM OF SHARE CAPITAL AND RESERVES TO THE TUNE OF RS.30168.70 LAKHS, WHICH WERE MORE THAN THE INVESTMENT MADE IN SUBSIDIARIES VIZ., RS.21221.04 LAKHS. 11. THUS, WE NOTICE THAT THE ASSESSEE HAS ESTAB LISHED THE COMMERCIAL EXPEDIENCY IN MAKING INTEREST FREE ADVANCES TO ITS SUBSIDIARY COM PANIES AND IT HAS ALSO ESTABLISHED THAT IT HAS ONLY UTILISED ONLY INTEREST FREE FUNDS FOR THE SAID PURPOSE. ACCORDINGLY, THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF S. A. BUILDERS AND THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF BHARTI TELE VENTURES LTD, REFERRED SUPRA APPLY TO THE FACTS OF THE INSTANT CASE. IN VIEW OF THE FORE GOING DISCUSSIONS, WE DO NOT FIND ANY INFIRMITY IN THE DECISION OF LD CIT(A) IN DELETING THE DISALLOWANCE OF INTEREST CLAIM. 12. THE NEXT ISSUE RELATES TO THE DISALLOWANCE OF RS.3,99,72,854/-, RS.82,068/- AND RS.64,913/- PERTAINING TO DELAYED PAYMENTS OF EMPLOY EES CONTRIBUTION TO PROVIDENT FUND, LABOUR WELFARE FUND AND EMPLOYEES STATE INSURA NCE RESPECTIVELY. THE LD CIT(A) DELETED THE SAID DISALLOWANCES WITH THE FOLLOWING O BSERVATIONS:- BEFORE ME THE A/RS OF THE APPELLANT SUBMITTED TH AT ON IDENTICAL REASONING ON ACCOUNT OF DELAYED CONTRIBUTIONS OF PROVIDENT FUND ETC. WERE DISALLOWED BY THE ASSESSING OFFICER IN THE A.Y. 2005-06 AND THE SAME WAS UPHELD BY THE CIT(A) IN HIS ORDER DATED 28.11.2008. ON FURTHER A PPEAL AT THE INSTANCE OF THE I.T.A. NO. 77 /COCH/2010 7 ASSESSEE, THE INCOME TAX APPELLATE TRIBUNAL, COCHI N BENCH IN ITS ORDER DATED 12.5.2009 IN I.T.A. NO. 54/COCH/2009 TAKING NOTE O F THE FACT THAT EMPLOYEES CONTRIBUTIONS TO P.F. ETC. WERE ALL ACTUALLY PAID PRIOR TO DUE DATE FOR FILING OF THE RETURN DELETED THE SAID DISALLOWANCE BY FOLLOWING DECISIONS IN THE CASES OF CIT VS. GEORGE WILLIAMSONS (ASSAM) LTD. (284 ITR 619), CIT VS. VINAY CEMENT LTD. (213 CTR 268). RESPECTFULLY THEREFORE FOLLOWING THE ORDER OF THE TRIBUNAL IN THE APPELLANTS OWN CASE FOR A.Y. 2005-06, THE DISALLOWANCE OF RS. 3,9 9,72,854/-, RS. 82,068/- AND RS. 64,913/- BEING DELAYED PAYMENTS OF EMPLOYEES C ONTRIBUTION TO PROVIDENT FUND, LABOUR WELFARE FUND AND EMPLOYEES STATE INSU RANCE RESPECTIVELY WHICH WERE PAID BEFORE THE DUE DATE OF FILING OF THE RETURN I S DELETED. GROUND NO. 3 IS THEREFORE ALLOWED. THE COCHIN BENCH OF THE TRIBUNAL IN THE ASSESSEES OWN CASE RELATING TO THE ASSESSMENT YEAR 2005-06, WHICH WAS RELIED UPON BY THE LD CIT(A ), HAS CONSIDERED AN IDENTICAL ISSUE AND HAS CATEGORICALLY HELD THAT THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF VINAY CEMENT LTD (213 CTR 268) IS APPLICABLE TO BOTH THE EMPLOYEES AND EMPLOYERS CONTRIBUTION, AS NO DISTINCTION HAS BEEN MADE BY TH E GAUHATI HIGH COURT IN THE CASE OF GEORGE WILLIAMSON (ASSAM) LTD. SINCE THE LD CIT(A) HAS FOLLOWED THE DECISION RENDERED BY THE TRIBUNAL ON THIS ISSUE, WE DO NOT F IND ANY INFIRMITY IN HIS DECISION. 13. THE NEXT ISSUE RELATES TO THE ADDITION OF A MOUNT 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 ASSESSEE CLAIMED T HE AMOUNT REALISED ON SALE OF OLD AND UNYIELDING RUBBER TREES AS NOT TAXABLE BY FOLLO WING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF KALPETTA ESTATES LTD (221 ITR 6 01). HOWEVER, THE AO TOOK THE VIEW THAT THE TAXABLE POSITION OF AMOUNT REALISED O N 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 THE 35% OF THE INCOME IS TO BE ASSESSED AS BUSINESS INCOME. A CCORDINGLY HE TOOK THE VIEW THAT THE I.T.A. NO. 77 /COCH/2010 8 SALE VALUE OF OLD AND UNYIELDING TREES IS ONLY A SA LVAGE VALUE GOT FROM AN EXHAUSTED STOCK JUST LIKE THE MONEY GOT ON SALE OF EMPTY GUNN Y BAGS BY A CEMENT DEALER OR OF EMPTY BOTTLES BY A BAR HOTEL AND HENCE THE TREES CA NNOT BE CALLED AS A CAPITAL ASSET. THE AO FURTHER TOOK THE VIEW THAT THE CAPITAL ASSET S ARE NOT ALLOWED AS A DEDUCTION UNDER THE INCOME TAX ACT. HOWEVER, IN THE INSTANT CASE, THE EXPENSES INCURRED ON ESTATE EXPENSES AND REPLANTING EXPENSES HAVE BEEN C LAIMED BY THE ASSESSEE ITSELF, WHICH SHOWS THAT THE RUBBER TREES ARE NOT CAPITAL A SSETS. ACCORDINGLY, THE AO BROUGHT TO TAX 35% OF THE AMOUNT REALISED ON SALE OF OLD AN D UNYIELDING TREES. THE LD CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY HOLDING THAT R ULE 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 SAKE OF CON VENIENCE, 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 BROWN CREPES ETC . THE SAID RULE DOES NOT TALK ABOUT THE TAXABILITY OF INCOME FROM SALE OF OLD RUBBER TR EES. ACCORDING TO LD A.R, THE RULE 7A PROVIDES FOR ASCERTAINMENT OF BUSINESS INCOME OBTAI NED 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 GROWING RUBBER TREES AND ALSO MANUFACTURING OR PROC ESSING OF FIELD LATEX OR COAGULUM OBTAINED FROM RUBBER PLANTS, RULE 7A PROVIDES FOR S EGREGATION AND ASCERTAINMENT OF I.T.A. NO. 77 /COCH/2010 9 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 RUBBER TREES. W ITH REGARD TO THE POSITION OF RUBBER TREES, THE LD CIT(A) HAS OBSERVED AS UNDER:- IN SO FAR AS SALE OF OLD AND UNYIELDING RUBBER TRE ES ARE CONCERNED, RUBBER TREES ARE GROWN BY CARRYING OUT AGRICULTURAL OPERATIONS O N LAND. AS HELD BY THE SUPREME COURT, RUBBER TREES ARE NOT GROWN FOR THE P URPOSE OF SELLING THE TREES BUT FOR GENERATING INCOME FROM THE TREES IN THE SHA PE OF LATEX. THE RUBBER TREES CONSTITUTE CAPITAL ASSET OF RUBBER ESTATE AND DOMIN ANT PURPOSE OF GROWING RUBBER TREES IS TO CREATE SOURCE FOR SUPPLY OF LIQUID LATE X. THE RUBBER TREES THEREFORE CONSTITUTE CAPITAL ASSET OF AGRICULTURAL OPERATIONS . THERE IS NO MANUFACTURING ACTIVITY INVOLVED EITHER AT THE STAGE OF CULTIVATIO N AND GROWING OF RUBBER TREE OR AT THE TIME OF ITS FELLING ON TREES BECOMING OLD AN D UNYIELDING. INCOME DERIVED FROM SALE OF OLD AND UNYIELDING TREES DO NOT INCLUD E ANY ELEMENT OF INCOME DERIVED FROM SALE OF CENTRIFUGED LATEX OR SENEX OR LATEX BASED CREPES. IN THE CIRCUMSTANCES, CONDITION PRECEDENT FOR APPLYING RUL E 7A IS ABSENT WHEN OLD AND UNYIELDING RUBBER TREES ARE SOLD AS NO MANUFACTURIN G OR PROCESSING ELEMENT IS INVOLVED IN THE ACTIVITY. IN MY OPINION THEREFORE RULE 7A OF INCOME TAX RULES HAS NO APPLICATION TO THE INCOME DERIVED ON SALE OF OLD RUBBER TREES. NO MATERIAL CHANGE HAS BEEN BROUGHT ABOUT BY INTRODUCTION OF RU LE 7A BECAUSE RULE 7A IS APPLICABLE ONLY WHEN THE GROWER OF RUBBER TREES HIM SELF CARRIES ON MANUFACTURING ACTIVITY ON LATEX OR COAGULUM SOURCED FROM RUBBER TREES GROWN BY HIM. THE JUDICIAL PRINCIPLES LAID DOWN BY THE SUPR EME COURT IN THE EARLIER DECISIONS CONTINUE TO HOLD GOOD EVEN AFTER INTRODUC TION OF RULE 7A. IN TUNE WITH THE SUPREME COURT DECISIONS IN THE CASE OF KALPETTA ESTATES LTD VS. CIT REPORTED IN 221 ITR 601 AND IN THE CASE OF KAILAS RUBBER & C O. LTD REPORTED IN 60 ITR 435, I HOLD THAT NO INCOME CHARGEABLE TO TAX ACCRUE D 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., I.T.A. NO. 77 /COCH/2010 10 IT APPLIES ONLY TO A PERSON WHO CARRIES ON THE COMB INED ACTIVITY OF GROWING RUBBER TREES AND ALSO MANUFACTURING OR PROCESSING OF FIELD LATEX OR COAGULUM OBTAINED FROM RUBBER PLANTS. THE DOMINANT PURPOSE OF GROWING RUBBER TRE ES IS TO OBTAIN LIQUID LATEX FROM THEM. THE RUBBER TREES ARE NOT USED AS IT IS FOR T HE 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 OBTAINE D FROM THE EXHAUSTED STOCK. SINCE THE RUBBER TREES CONTINUE TO THE CAPITAL ASSET. AC CORDINGLY, 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 HOL DING THAT THE RUBBER TREES CONSTITUTE CAPITAL ASSETS SHALL HOLD GOOD EVEN AFTER THE INTRO DUCTION OF RULE 7A IN THE INCOME TAX RULES. IN VIEW OF THE ABOVE, WE AGREE WITH THE VIE WS EXPRESSED BY LD CIT(A) ON THIS ISSUE. 16. THE NEXT ISSUE RELATES TO THE DISALLOWANCE OF LOSS FROM PLANT TISSUE CULTURE DIVISION AND AQUA CULTURE DIVISION. THE AO DISALLO WED THE LOSS CLAIMED BY THE ASSESSEE IN THESE TWO DIVISIONS BY HOLDING THAT THEY ARE DEF UNCT UNITS AND NO BUSINESS IS CARRIED ON THEREIN AND FURTHER THERE IS NO POSSIBILITY OF R EVIVAL OF THESE UNITS. BEFORE LD CIT(A), THE ASSESSEE DEMONSTRATED THAT THESE UNITS ARE ACTU ALLY FUNCTIONING AND HAVE GENERATED INCOME ALSO. ACCORDINGLY THE LD CIT(A) DELETED THE DISALLOWANCES BY TAKING NOTE OF INCOME GENERATED BY THESE TWO UNITS. THE RELEVANT OBSERVATIONS MADE BY LD CIT(A) ON THIS ISSUE ARE EXTRACTED BELOW:- I HAVE CONSIDERED THE AOS ORDER AND THE SUBMISSI ONS OF THE A/RS. I HAVE ALSO PERUSED THE COMPUTATION OF TOTAL INCOME WITH ITS E NCLOSURES FILED WITH THE RETURN. IN CLAUSE 7B OF THE TAX AUDIT REPORT, IT HAS BEEN CERTIFIED BY THE AUDITORS THAT DURING THE PREVIOUS YEAR APPELLANTS BUSINESS INTE R ALIA INCLUDED PLANT TISSUE CULTURE AND AQUA CULTURE. FROM THE DIVISION-WISE STATEMENT OF INCOME AND EXPENDITURE FILED WITH THE COMPUTATION, I FIND THA T IN THE PLANT TISSUE CULTURE BUSINESS THE APPELLANT EARNED INCOME EXCEEDING RS. 52 LACS AND INCURRED EXPENDITURE OF RS. 56 LACS. THE APPELLANT HAD LEA SED ASSETS OF THE AQUA BUSINESS AS IN THE EARLIER YEARS AND EARNED LEASE RENTALS. IT EARNED A LEASE INCOME OF RS. I.T.A. NO. 77 /COCH/2010 11 10 LACS IN FY 2005-06 AND LOSS CLAIMED WAS PRIMARI LY ON ACCOUNT OF DEPRECIATION ON THE WRITTEN DOWN VALUE OF THE DEPRECIABLE ASSET S OF THE AQUA CULTURE DIVISION. IN THE EARLIER YEARS THE DEPRECIATION ON LEASED AS SETS OF THE AQUA CULTURE BUSINESS WAS ALLOWED AND THE LOSS FROM AQUA CULTUR E BUSINESS WAS ASSESSED UNDER THE HEAD BUSINESS. THE ASSETS OF THE AQUA BUSINESS WERE OWNED BY THE APPELLANT WHICH WERE USED FOR THE PURPOSE OF BUSIN ESS. ON THESE FACTS THEREFORE I HOLD THAT THE LOSS INCURRED BY THE ASSESSEE IN PLANT TISSUE CULTURE BUSINESS AND AQUA CULTURE BUSINESS SHOULD HAVE BEEN ASSESSED BY THE AO. THE AO IS ACCORDINGLY DIRECTED TO ALLOW THE SET-OFF OF LOSSE S INCURRED IN PLANT TISSUE CULTURE AND AQUA CULTURE BUSINESS AGAINST OTHER BUSINESS I NCOME. GROUND NO. 5 IS ACCORDINGLY ALLOWED. THUS, WE NOTICE THAT THE ASSESSEE HAS PROVED THE FA CT OF GENERATION OF INCOME FROM THESE TWO ACTIVITIES. IN OUR VIEW, THE AO HAS DISA LLOWED THE CLAIM OF LOSS FROM THESE UNITS WITHOUT PROPERLY APPRECIATING THE FACTS. SIN CE THE LD CIT(A) HAS RENDERED HIS DECISION ON THIS ISSUE BY DULY CONSIDERING THE FACT S SURROUNDING THE ISSUE, WE DO NOT FIND ANY INFIRMITY IN HIS DECISION ON THIS ISSUE. 17. THE NEXT ISSUE RELATES TO THE ASSESSMENT OF RS.83,65,516/- AS CAPITAL GAIN ON SALE OF GREVELIA TREES. DURING THE YEAR UNDER CONS IDERATION, THE ASSESSEE REALISED A SUM OF RS.1.19 CRORES ON SALE OF GREVELIA TREES. T HESE TREES ARE GROWN TO AFFORD SHADE TO THE TEA BUSHES. IN THE RETURN OF INCOME FILED, THE ASSESSEE ESTIMATED THE MARKET PRICE AS ON 1.4.1981 AT 30% OF THE SALE PRICE REALI SED BY IT. AFTER CLAIMING INDEXED COST OF ACQUISITION, THE ASSESSEE RETURNED A LONG TERM C APITAL LOSS OF RS.58,66,409/-. HOWEVER, THE AO TOOK THE VIEW THAT THE COST OF ACQU ISITION AS ON 1.4.1981 WOULD BE NEGLIGIBLE AS THE TREES WOULD HAVE BEEN YOUNG SAPLI NGS AT THAT POINT OF TIME. ACCORDINGLY, THE AO CONSIDERED 30% OF THE SALE PRIC E AS THE INDEXED COST OF ACQUISITION AND AFTER DEDUCTING THE SAME FROM THE SALE PRICE, T HE AO TREATED THE BALANCE AMOUNT (I.E. 70% OF SALE PRICE) AS THE LONG TERM CAPITAL G AIN. I.T.A. NO. 77 /COCH/2010 12 18. BEFORE LD CIT(A), THE ASSESSEE RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF STATE OF KERALA VS. KARIMTHARU VI TEA ESTATES LTD (60 ITR 275) TO SUBMIT THAT THE GREVELIA TREES CONSTITUTE CAPITAL A SSET AND HENCE THE AMOUNT REALISED ON ITS SALE WOULD CONSTITUTE CAPITAL RECEIPT. THE ASS ESSEE ALSO RELIED UPON THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. KANAN DEVAN HILL PRODUCE CO. LTD (200 ITR 453), WHEREIN THE COURT HAS HELD THAT THE PROFIT DERIVED FROM SALE OF OLD AND USELESS GREVELIA TREES WAS NOT TAXABLE UNDER THE CE NTRAL INCOME TAX AS THEY HAVE TO BE CONSIDERED AS PART OF AGRICULTURAL ACTIVITIES. 19. THE LD CIT(A) NOTICED THAT THE ASSESSING OF FICER HAS DISALLOWED THE CLAIM OF CAPITAL LOSS IN THE EARLIER YEARS BY APPLYING THE R ATIO OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. B.C. SREENIVASA SHETTY (128 ITR 294 ) AND ALSO THE DECISION OF JURISDICTIONAL KERALA HIGH COURT IN THE CASE OF RAJ AGIRI RUBBER & PRODUCE COMPANY LTD REPORTED IN 189 ITR 182 (CONFIRMED BY THE SUPREME C OURT IN 221 ITR 601). IN THE CASE OF RAJAGIRI RUBBER & PRODUCE COMPANY LTD, IT HAS BE EN HELD THAT THE CAPITAL GAINS COULD NOT BE CHARGED/COMPUTED U/S 45 / 48 IN RESPECT OF S ALE OF RUBBER TREES BECAUSE THE COST OF ACQUISITION OF THE TREES COULD NOT BE CONCE IVED WITH REASONABLE ACCURACY. IN THE CASE OF B.C. SREENIVASA SHETTY, IT WAS HELD THAT TH E AMOUNT REALISED ON TRANSFER OF GOOD WILL CANNOT BE CHARGED TO CAPITAL GAINS TAX, AS THE COST OF ACQUISITION OF GOOD WILL CANNOT BE ASCERTAINED WITH REASONABLE ACCURACY. A CCORDINGLY, THE AO, IN THE PRECEDING YEARS, HAD HELD THAT THE CAPITAL GAINS ON SALE OF G REVELIA TREES CANNOT BE COMPUTED AND ACCORDINGLY DISALLOWED THE CLAIM OF CAPITAL LOSS CL AIMED BY THE ASSESSEE. THE LD CIT(A) ALSO NOTICED THAT THE SAID VIEW OF THE AO WAS UPHEL D BY THE FIRST APPELLATE AUTHORITY. ACCORDINGLY, THE LD CIT(A), BY FOLLOWING HIS PREDE CESSOR ORDER, HELD THAT THE AMOUNT RECEIVED ON SALE OF GREVELIA TREES WAS CAPITAL RECE IPT AND NEITHER ANY INCOME NOR LOSS WAS ASSESSABLE IN COMPUTATION OF CENTRAL INCOME TAX . 20. WE HAVE CAREFULLY GONE THROUGH THE DECISION RENDERED BY LD CIT(A) ON THIS ISSUE. THE LD CIT(A) HAS NOTICED THAT THE ASSESSIN G OFFICER WAS TAKING CONSISTENT STAND IN THE EARLIER YEARS THAT NO CAPITAL GAIN OR CAPITA L LOSS CAN BE COMPUTED ON SALE OF GREVELIA TREES, AS THE COST OF ACQUISITION COULD NO T BE ASCERTAINED IN A REASONABLE I.T.A. NO. 77 /COCH/2010 13 MANNER. TO SUPPORT HIS VIEW, THE AO HAS TAKEN THE HELP OF THE JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF RAJAGIRI RUBBER & PRODUCE C OMPANY LTD, REFERRED SUPRA, WHICH WAS ALSO CONFIRMED BY THE SUPREME COURT IN THE CASE OF KALPETTA ESTATES LTD, REFERRED SUPRA. THE AO HAS ALSO TAKEN SUPPORT FROM THE DECI SION OF THE HONBLE APEX COURT IN THE CASE OF B.C. SREENIVASA SHETTY. HAVING TAKEN S UCH A CONSISTENT STAND OVER THE YEARS, THE AO HAS CHANGED HIS STAND IN THE INSTANT YEAR AND HAS PROCEEDED TO ASSESS THE CAPITAL GAIN ON SALE OF GREVELIA TREES. IN OUR VIEW, THE LEGAL POSITION WITH REGARD TO THE TAXABILITY OF THE OLD GREVELIA TREES, WHICH WAS DISCUSSED AT LENGTH IN THE EARLIER ASSESSMENT ORDERS, CANNOT BE CHANGED IN THE YEAR UN DER CONSIDERATION, MERELY BECAUSE THE PRESENT ASSESSING OFFICER HAS A DIFFERENT VIEW. IT IS PERTINENT TO NOTE THAT THE AO HAS NOT BROUGHT ON RECORD ANY NEW FACT OR ANY NEW L EGAL VIEW WHICH WOULD COMPEL HIM TO CHANGE THE VIEW THAT WAS CONSISTENTLY TAKEN IN T HE EARLIER YEARS. ACCORDINGLY WE ARE OF THE VIEW THAT THE LD CIT(A) WAS RIGHT IN ADHERIN G TO THE VIEW TAKEN BY THE TAX AUTHORITIES IN THE PRECEDING YEARS. ACCORDINGLY, W E UPHOLD HIS ORDER ON THIS ISSUE. 21 THE NEXT ISSUE RELATES TO THE ASSESSMENT OF RS.71.63 CRORES AS CAPITAL GAINS ON SLUMP SALE U/S 50B OF THE ACT IN RESPECT OF PROCEED S REALISED ON SALE OF CHERUVALLI ESTATE AND THENMALA DIVISION OF NAGAMALLAY ESTATE. THE ASSESSEE DID NOT RETURN ANY CAPITAL GAIN INCOME ON THE SALE OF THE TWO ESTATES CITED ABOVE ON THE GROUND THAT THESE ESTATES ARE AGRICULTURAL LANDS AND HENCE THEIR TRAN SFER IS NOT LIABLE TO TAX. HOWEVER, THE AO TOOK THE VIEW THAT THE TRANSFER HAS BEEN MADE ON GOING CONCERN BASIS FOR A LUMP SUM CONSIDERATION THOUGH ATTEMPT WAS MADE TO BIFURC ATE THE SALES VALUE INTO VARIOUS ASSETS. THE AO TOOK THE SUPPORT OF THE DECISION OF LD CIT(A) RENDERED FOR THE ASSESSMENT YEAR 2005-06 IN THE ASSESSEEES OWN CASE , WHEREIN THE FIRST APPELLATE AUTHORITY HAD HELD THAT THE SALE OF A RUBBER ESTATE NAMED BOYCE RUBBER ESTATE WAS SOLD AS A GOING CONCERN AND THEREFORE PROFIT WAS AS SESSABLE U/S 50B OF THE ACT. THE AO OBSERVED THAT THE FINDING OF LD CIT(A) IN RESPECT O F SALE OF BOYCE RUBBER ESTATE SHALL APPLY MUTATIS MUTANDIS TO THE SALE OF TWO ESTATES R EFERRED SUPRA. 22. HOWEVER, THE LD CIT(A) IN THE INSTANT YEAR NOTICED THAT THE ASSESSEE HAD CHALLENGED THE DECISION RENDERED BY THE LD CIT(A) I N ASSESSMENT YEAR 2005-06 BEFORE I.T.A. NO. 77 /COCH/2010 14 THE TRIBUNAL AND THE ITAT, IN ITS ORDER DATED 12.5. 2009 IN ITA NO.54/COCH/2009, DID NOT AGREE WITH THE DECISION OF LD CIT(A) AND HELD T HAT THE ASSESSEE DID NOT CONDUCT ANY SLUMP SALE OF AN UNDERTAKING EVEN THOUGH IN THE SAL E DEED IT WAS STATED THAT THE SALE OF RUBBER ESTATE WAS MADE ON GOING CONCERN BASIS. ACC ORDINGLY, BY FOLLOWING THE TRIBUNALS ORDER REFERRED SUPRA, THE LD CIT(A) HELD THAT THE SALES OF CHERUVALLI TEA ESTATE AND THENMALA DIVISION OF NAGAMALLAY RUBBER EST ATE WERE NOT IN THE NATURE OF SLUMP SALE AS DEFINED U/S 2(42C) OF THE ACT AND T HEREFORE CAPITAL GAIN WAS NOT ASSESSABLE U/S 50B OF THE ACT. 23. THUS, WE NOTICE THAT THE AO HAS CLEARLY OBS ERVED THAT THE FACTS PREVAILING THE BOYCE RUBBER ESTATE, WHICH WAS SOLD IN THE YEAR RELE VANT TO THE ASSESSMENT YEAR 2005- 06 AND THE DECISION RENDERED BY LD CIT(A) ON THE SA ID SALE SHALL APPLY MUTATIS MUTANDIS TO THE SALE TRANSACTION OF CHERUVALLI ESTAT E AND THE THENMALA DIVISION OF NAGAMALLAY ESTATE CARRIED OUT DURING THE INSTANT YE AR. IT IS ALSO A FACT THAT THE DECISION RENDERED BY LD CIT(A) IN RESPECT OF THE BO YCE RUBBER ESTATE IN THE ASSESSMENT YEAR 2005-06 BY HOLDING THAT THE SAID SALE WAS IN THE NATURE OF SLUMP SALE HAS SINCE BEEN REVERED BY THE TRIBUNAL, VIDE ITS ORDER DATED 12.5.2009 REFERRED SUPRA. WE FURTHER NOTICE THAT THE LD CIT(A) HAS FOLLOWED THE ABOVE CITED DECISION OF THE TRIBUNAL IN HOLDING THAT THE SALE OF TWO ESTATES IN THE YEAR UNDER CONSIDERATION CANNOT BE TERMED AS SLUMP SALE. THE DEPARTMENT DID NOT BRING ON R ECORD ANY DIFFERENCE IN THE FACTS PERTAINING TO BOYCE RUBBER ESTATE SOLD IN THE PRECED ING YEAR AND THE TWO ESTATES SOLD DURING THE YEAR UNDER CONSIDERATION. UNDER THESE C IRCUMSTANCES, THE DECISION RENDERED BY THE TRIBUNAL IN THE CASE OF SALE OF BOYCE RUBBER ESTATE SHALL APPLY TO THE SALE OF TWO ESTATES REFERRED SUPRA. SINCE, THE LD CIT(A) HAS R ENDERED HIS DECISION BY FOLLOWING THE ORDER OF THE TRIBUNAL, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE SAME. 24. THE NEXT ISSUE RELATES TO THE INCLUSION OF PROFIT ON SALE OF CHERUVALLI ESTATE AND THENMALA DIVISION OF NAGMALLAY ESTATE FOR THE PURPO SE OF COMPUTATION OF BOOK PROFIT U/S 115JB OF THE ACT. THE ASSESSEE CLAIMED THE PRO FIT ON SALE OF THE TWO ESTATES AS AGRICULTURAL INCOME AND ACCORDINGLY DID NOT INCLUDE THE SAME WHILE COMPUTING THE BOOK PROFIT U/S 115JB OF THE ACT. HOWEVER, THE AO DID N OT ACCEPT THE SAID CLAIM, AS HE TOOK I.T.A. NO. 77 /COCH/2010 15 THE VIEW THAT IT WAS A CASE OF SLUMP SALE. ACCORDI NGLY HE INCLUDED THE PROFIT ON SALE OF TWO ESTATES IN THE BOOK PROFIT COMPUTED U/S 115JB O F THE ACT. IN THE PRECEDING ASSESSMENT YEAR ALSO, THE AO HAD INCLUDED THE PROFI T ON SALE OF BOYCE RUBBER ESTATE IN COMPUTING THE BOOK PROFIT. HOWEVER, THE TRIBUNAL, IN ITS ORDER DATED 12.5.2009, HAD HELD THAT THE PROFIT REALISED ON SALE OF BOYCE ESTAT E IS AGRICULTURAL INCOME AND HENCE IT IS NOT REQUIRED TO BE INCLUDED IN COMPUTING THE BOO K PROFIT U/S 115JB OF THE ACT AS THE AGRICULTURAL INCOME IS EXEMPT U/S 10 OF THE ACT. T HE LD CIT(A) EXCLUDED THE PROFIT ON SALE OF TWO ESTATES CITED ABOVE BY FOLLOWING THE TR IBUNALS ORDER REFERRED ABOVE. SINCE THE LD CIT(A) HAS FOLLOWED THE DECISION RENDERED BY THE TRIBUNAL ON IDENTICAL SET OF FACTS, WE DO NOT FIND ANY INFIRMITY IN HIS DECISION ON THIS ISSUE. 25. THE NEXT ISSUE RELATES TO THE ADDITION OF PROVISION FOR GRATUITY LIABILITY AMOUNTING TO RS.5.58 CRORES WHILE COMPUTING THE BOOK PROFIT B Y TREATING THE SAME AS UNASCERTAINED LIABILITY. THE LD CIT(A) DIRECTED TH E AO TO DELETE THE SAID ADDITION BY FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF METAL BOX CO OF INDIA LTD VS. THEIR WORKMEN (73 ITR 53) AND ALSO THE DECI SION RENDERED IN THE CASE OF BHARAT EARTH MOVERS LTD VS. CIT (245 ITR 428). 26. BEFORE US, THE LD A.R RELIED ON FOLLOWING T WO DECISIONS WHICH ARE DIRECT ON THE ISSUE UNDER CONSIDERATION. (A) CIT VS. ILPEA PARAMOUNT (P) LTD (2010)(192 TA XMAN 65)(DELHI) (B) EASTERN POWER DISTRIBUTION CO. OF AP LTD. VS. ACIT (132 ITD 568) (VIZAG) IN THESE TWO DECISIONS, IT HAS BEEN HELD THAT THE P ROVISION FOR GRATUITY LIABILITY CANNOT BE ADDED FOR THE PURPOSE OF COMPUTATION OF BOOK PROFIT . SINCE THE DECISION RENDERED BY LD CIT(A) IS IN ACCORDANCE WITH THE TWO DECISIONS REFE RRED SUPRA, WE UPHOLD HIS DECISION ON THIS ISSUE. 27. THE LAST ISSUE RELATES TO THE DISALLOWANCE OF SHARE TRANSFER CHARGES AND THE PROFESSIONAL CHARGES PAID TO REGISTRAR AND SHARE TR ANSFER AGENTS. THE AO DISALLOWED THE ABOVE SAID EXPENSES UNDER THE IMPRESSION THAT T HEY HAVE BEEN INCURRED IN I.T.A. NO. 77 /COCH/2010 16 CONNECTION WITH THE SALE OF SHARES, THE CAPITAL GAI N OF WHICH IS EXEMPT. THE AO ALSO OBSERVED THAT THESE EXPENSES WERE NOT INCURRED FOR EARNING THE TEA INCOME OR RUBBER INCOME. THE LD CIT(A) APPRECIATED THE FACT THAT TH ESE EXPENSES WERE INCURRED IN CONNECTION WITH THE MAINTENANCE OF SHARE HOLDERS RE GISTERS OF THE ASSESSEE COMPANY AS REQUIRED UNDER THE COMPANIES ACT AND SUCH EXPENSES ARE ALLOWABLE AS REVENUE EXPENSES AS PER THE CBDT INSTRUCTION F NO.10/25/63- IT(A-1) DATED 18-06-1964. THE CBDT, IN THE ABOVE SAID INSTRUCTION, HAS CLARIFIED THAT THE EXPENDITURE ON PROFESSIONAL CHARGES PAID TO THE REGISTRARS FOR COMPLYING WITH C OMPANY LAW OBLIGATION IS AN ALLOWABLE BUSINESS EXPENDITURE. ACCORDINGLY, HE DE LETED THE DISALLOWANCE WITH THE FOLLOWING OBSERVATION: THE AO WAS INCORRECT IN STATING THAT THE EXPENDIT URE WAS INCURRED IN RELATION TO CAPITAL GAINS INCOME WHICH ACCRUED ON TRANSFER OF S HARES. IT APPEARS THAT THE AO DID NOT CORRECTLY UNDERSTAND THE TRUE NATURE OF THE EXPENDITURE. THE APPELLANT IS A COMPANY IN WHICH PUBLIC ARE SUBSTANTIALLY INTERES TED AS ITS SHARES ARE LISTED ON RECOGNIZED STOCK EXCHANGES. CONSEQUENTLY, THE ASSE SSEE IS REQUIRED TO COMPLY WITH THE STATUTORY PROVISIONS OF THE COMPANIES ACT WITH REGARD TO THE LISTING OF SHARES FOR THIS REASON, ASSESSEE INCURRED EXPENDITU RE OF PAYING PROFESSIONAL CHARGES. THE EXPENDITURE INCURRED FOR COMPLYING WI TH STATUTORY REQUIREMENTS WAS THEREFORE ALLOWABLE BUSINESS EXPENDITURE. THE CBDT IN ITS INSTRUCTION F NO. 10/25/63-IT(A-1) DATED 18.6.1964 HAS ALSO HELD THAT THE CHARGES PAID TO THE REGISTRARS PERFORMING DUTIES IN CONNECTION WITH COM PANYS LEGAL OBLIGATION SHOULD BE REGARDED AS REVENUE EXPENDITURE. I THEREFORE HO LD THAT THE AO WAS NOT JUSTIFIED IN DISALLOWING THE SAME WE NOTICE THAT THE AO MADE THE IMPUGNED DISALLOWANC E WITHOUT PROPERLY APPRECIATING THE NATURE OF EXPENSES. THE LD CIT(A) HAS CORRECTL Y EXPLAINED THE NATURE OF SHARE TRANSFER CHARGES AND PROFESSIONAL CHARGES PAID TO T HE SHARE TRANSFER AGENTS. THE ORDER OF LD CIT(A) ON THIS ISSUE IS SELF EXPLANATORY AND REQUIRES NO INTERFERENCE. I.T.A. NO. 77 /COCH/2010 17 28. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED. PRONOUNCED ACCORDINGLY ON 29-06-2012 SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 29TH JUNE, 2012 GJ COPY TO: 1. M/S. HARRISON MALAYALAM LTD., BRISTOW ROAD, WILL INGDON ISLAND, KOCHI-3. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1( 1), ERNAKULAM 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-II, KOC HI. 4. THE COMMISSIONER OF INCOME-TAX, KOCHI 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE.