Commissioner of Income Tax, Kottayam v. Nilgiri Tea Estates Ltd.

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** # **PRESENT** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** **&** **THE HONOURABLE MR. JUSTICE ASHOK MENON** **MONDAY, THE 17TH DAY OF SEPTEMBER 2018 / 26TH BHADRA, 1940** **ITA.No. 213 of 2014** **AGAINST THE ORDER IN ITA NO.37/Coch/2014 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH DATED 06-06-2014** ## **APPELLANT/APPELLANT:** **THE COMMISSIONER OF INCOME TAX, KOTTAYAM.** **BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH SC FOR INCOME TAX** ## **RESPONDENT/RESPONDENT:** **M/S NILGIRI TEA ESTATES LTD., ANCHERIL BANK BUILDINGS, P.O. BOX NO. 1, BAKER JUNCTION, KOTTAYAM - 686 001.** **BY ADVS. SRI.ABRAHAM JOSEPH MARKOS SRI.BINU MATHEW SRI.ISAAC THOMAS SRI.NOBY THOMAS CYRIAC SRI.TOM THOMAS (KAKKUZHIYIL) SRI.V.ABRAHAM MARKOS** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 17.09.2018, ALONG WITH ITA.NO. 1776/2009 & CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** ITA No.1776 of 2009 and connected cases **- 2 -** **ITA Nos.1776 of 2009, 1782 of 2009, 101 of 2012, 16 of 2013 and 213 of 2014 - judgment dated 17.09.2018.** **-------------** ## **Vinod Chandran, J.** **The above appeals arise from the orders of the Income Tax Appellate Tribunal in the case of two assessees; Harrisons Malayalam Limited and Nilgiri Tea Estates Limited. Insofar as Nilgiri Tea Estate is concerned, two appeals, I.T.A.Nos.101/2012 and 213/2014, are from two assessment years 2007-08 and 2008-09.** **2. The three appeals, I.T.A.Nos. 1776/2009, 1782/2009 and 16/2013, arising from the order of the Tribunal in which Harrisons Malayalam Limited is the assessee, are from the very same assessment year, i.e. 2005-06.There were appeals filed by the Revenue and the assessee before the Tribunal. The appeals of the Revenue were dismissed and that of the assessee was allowed hence the two appeals here. There was also an appeal from the order of the Commissioner** ITA No.1776 of 2009 and connected cases **- 3 -** **under Section 263 of the Income Tax Act, 1961 ('Act' for short).** ## **ITA Nos.101 of 2012, 213 of 2014 & 1752 of 2009** **3. The common question arising in ITA Nos.101/2012 and 213/2014 as also 1782 of 2009 is as to whether in the facts and circumstances of the case, the proceeds from the sale of agricultural land and rubber trees could be deemed to be agricultural income under Section 10 of the Act and the same granted exemption from computation of income as per Section 115JB of the Act.** **4. Section 115JB is akin to Section 115JA of the Act; as held by the Honourable Supreme Court in** _**2010 (327) ITR 305(SC) [Ajanta Pharma Limited v. Commissioner of Income Tax].**_ **It was declared that Section 115JA and the successor Section 115JB are self-contained codes the application of which is notwithstanding any provisions in the Act.** ITA No.1776 of 2009 and connected cases **- 4 -** **5. The question arose before this Court; when the proceeds received out of the sale of rubber trees, for reason of the trees having become old and unyielding; whether the amounts credited in the profit and loss account could be included in the computation of book profits as per Section 115JA. The contention raised before the Division Bench of this Court was answered in** _**2011 (203) Taxmann 63 [Commissioner of Income Tax, Cochin v. Thiruvambadi Rubber Factory Limited],**_ **where it was argued that the sale of agricultural land is excluded from the computation of capital gains under Chapter-IV of the Act and in any event, it would be agricultural income. The Division Bench answered both the questions against the assessee following the judgment of the Honourable Supreme Court in** _**(2002) 255 ITR 273 [Appollo Tyres Ltd. v. Commissioner of Income Tax]**_ **. The Division Bench found that the proceeds of old and unyielding rubber trees cannot be agricultural income, especially when the assessee** ITA No.1776 of 2009 and connected cases **- 5 -** **does not have a case that the same has been returned as agricultural income before the State, which is competent to assess agricultural income tax. Rubber tree was held to be an agricultural asset from which income was derived for 20 to 25 years; the sale of which, on becoming old and unyielding, cannot give rise to agricultural income. As to the contention that the exemption to capital gains should apply in the computation of book profits under Section 115JA, the Division Bench held that what is excluded under computation of book profits is specifically provided in clauses (i) to (ix) of the Explanation to Section 115JA(2). Section 10(1) in Chapter-III though excludes agricultural income; but Capital gain is assessable under Chapter-IV of the Act and not being an item falling under Chapter-III, exclusion cannot be permitted under clause(ii) to the Explanation to Section 115JA(2) of the Act, was the finding. The decision squarely applies in the case of the assessees herein also.** ITA No.1776 of 2009 and connected cases **- 6 -** **6. On the above reasoning, following the decision of the Division Bench of this Court, the question raised has to be answered in favour of the Revenue and against the assessee.** **7. However, the learned Senior counsel appearing for the assessee in ITA Nos.101/2012 and 213/14 draws a distinction insofar as the assessee having suffered losses in the consecutive years and the sale also being necessitated due to the losses suffered. It is the contention of the assessee that the proceeds from the sale of the estate not being an income of a current or recurring nature, was shown as an exceptional item in the profit and loss account and the same adjusted against the losses of the previous years as per accounting standards. We see that the Assessing Officer had considered the aspect and ruled against the assessee. However, the Tribunal has not considered this specific issue and had merely followed the decision in Harrisons Malayalam Ltd. to grant exemption to the profit** ITA No.1776 of 2009 and connected cases **- 7 -** **received on sale of estate from computation of the book profits. In such circumstances, we are of the opinion that the aforesaid appeals have to be remanded back to the Tribunal to consider the issue afresh. We do this despite the fact that the assessee has not filed an appeal, which was not necessary since the Tribunal had allowed the appeal on a different ground which we have answered against the assessee following the Division Bench judgment of this Court.** **8. In the above circumstances, in ITA Nos.101/2012 and 213/2014 there would be a remand for consideration of the aforesaid question, which question of exemption alone arises in the two appeals filed by the Revenue before the Tribunal.** **I.T.A.No.1782 of 2009** **9. I.T.A. No.1782 of 2009, as we noticed herein above, is from the order of the Tribunal** ITA No.1776 of 2009 and connected cases **- 8 -** **to the extent it allowed the assessee's appeal. One of the questions raised on computation of book profits, including the consideration received from the sale of Boyce Estate under Section 115JB was answered by the Tribunal in favour of the assessee. The alternate question on the consideration received from the sale of Boyce Estate arises from the order of the CIT Appeals, which directed the same to be treated as capital gains under Section 50B of the Income Tax Act, [1961, for brevity, the Act] for reason of there being sale of a going concern. There was also disallowance made with respect to the claim raised under Section 36(1)(va) of the Act on the contributions made to Provident Fund and other labour welfare funds for reason of it being not within the due date of contribution as per the labour welfare statutes. The next question answered in favour of the assessee by the Tribunal is on the further direction of the CIT Appeals to treat the loss suffered on sale of** ITA No.1776 of 2009 and connected cases **- 9 -** **shares of a subsidiary Company to be treated as speculation loss and not long-term capital loss. The Tribunal, while allowing the said claim, reversed the order of the CIT appeals and also directed set off of long-term capital gains on sale of land with long-term capital loss on sale of shares. The additional questions, other than that answered herein above, thus arising in ITA No.1782 of 2009 from the order of the Tribunal are as follows:** **“(i) Whether in the facts and circumstamnces, the Tribunal was right in law in deleting the disallowance of employees' contribution to Provident Fund and Welfare Fund made under Section 36(1) (va) and Section 224(1) of the Act. (ii) Whether, on the facts and in the circumstances of the case is not the surplus arising out of sale of Boyce Estate liable to be brought to tax as capital gain under Section 50B of the** ITA No.1776 of 2009 and connected cases **- 10 -** **Income Tax Act and the Tribunal is right in law in interfering with the order of** **CIT(A) on the issue?** - **(iii) Whether, on the facts and in the circumstances of the case;** - **(i) did not the Tribunal err in setting aside the enhancement order of the CIT(A) that long term capital loss suffered on sale of shares was assessable as speculation loss within the meaning of Explanation to Section 73?** - **(ii) The Tribunal is right in law in holding that the loss is in the nature of capital loss?** - **(iv) Whether, on the facts and in the** **circumstances of the case;** - **(a) did not the Tribunal err in allowing set off of long term capital gains on sale of land with long term capital loss on sale of shares;** ITA No.1776 of 2009 and connected cases **- 11 -** **(b) is not the Tribunal wrong in finding that the loss on sale of** **shares is not a speculation loss?"** **10. On the first question herein before framed, this Division Bench has answered the question against the assessee and in favour of the Revenue in** _**Popular Vehicles and Service (P) Ltd. v. Commissioner of Income Tax [2018 (406) ITR 150 (Ker)**_ **. Hence the aforesaid question has to be answered in favour of the Revenue and against the assessee.** **11. The second question arising herein before is on whether the sale of Boyce Estate has to be treated as capital gain under Section 50B of the Act. The learned Senior Standing Counsel for the Revenue admits that it cannot be treated both as being included under the Minimum Alternate Tax (MAT) and under Section 50B, but prays that the alternate contention be left open for consideration, if at all the Hon'ble Supreme Court interferes with the finding of this Court** ITA No.1776 of 2009 and connected cases **- 12 -** **that it is possible of computation under the MAT Scheme as provided in 115JB.** **12. Having gone through the order of the Tribunal, we do not think that such a question need be left open. We find that the Tribunal has elaborately considered the agreement, by which the plantation was sold. The break-up of consideration is available in the order of the** **CIT appeals, which is as follows:** ||**Land**<br>**(Rs)**|**Buildings and**<br>**other assets**<br>**(Rs)**| |---|---|---| |**Sale Proceeds**|**330000000**|**3000000**| |**Less:- Cost of**<br>**Land**|**3151357**|**---**| |**Less:-WDV of**<br>**buildings and**<br>**other assets**|**---**|**3253892**| |**Net sale proceeds**|**326848643**|**253892**| |**Profit on sale of**<br>**property as per**<br>**Profit & Loss**<br>**Account.**|**326594751**|| ## **13. On a reference to the agreement, the** **Tribunal had also noticed that the transfer specifically excluded various items being the** ITA No.1776 of 2009 and connected cases **- 13 -** **rubber manufactured, stored or in stock or in the process of manufacture upto the date of sale, the rubber tapped from the said estate prior to the date of sale, benefit of all contracts in so far as they were referable to sale or production of the rubber for the period prior to the date of sale, cash in hand and Bank balance, all unadjusted profits, all investments, all book debts, all securities, deposits and other liquid assets of Boyce Estate prior to the date of sale, all refunds and subsidies and excess payments made by Boyce Estate to any persons, Government, Revenue or public authorities or other concerns for the period up to the date of sale. The subject matter of sale was only the asset specified in the schedule and the Annexure to the agreement and did not include all the assets comprised in the Boyce Estate. Though Boyce Estate was the unit, which can be considered as a going concern, the sale as such was not of the going concern. The fact that the employees were** ITA No.1776 of 2009 and connected cases **- 14 -** **taken over by the purchasing Company was only a prudent measure to avoid any retrenchment compensation being paid, especially since the purchasing Company was intending to carry on the business of plantation as carried on by the assessee.** **14. The learned Standing Counsel for the Government of India specifically pointed out that the Tribunal decision in** _**Accelerated Freeze Drying Co. Ltd.**_ **case relied on, was overturned by a Division Bench of this Court in** _**Accelerated Freeze Drying Co. Ltd. v. International Creative Foods (P) Ltd. [(2011) 337 ITR 440 (Ker)]**_ **. However, on a reading of the said decision, we find that therein also the consideration agreed was the aggregate value for the land, building, machinery and all equipment with liability specifically mentioned in the agreement entered into between the parties. The facts are quite distinct in this case. The liabilities were not sold and the sale agreement did not include** ITA No.1776 of 2009 and connected cases **- 15 -** **investments and deposits was the clear finding of the Tribunal. All the investments, deposits, receivables, stock and such other current assets in the form of financial and other assets remained with the assessee Company along with the liabilities. Only those assets enumerated in the Schedules and Annexure were sold to the vendee. The consideration had also been specifically assigned to the sale of immovable property and separate consideration has been assigned to the sale of movable properties including vehicles, buildings and so on and so forth. We do not find any reason to interfere with the finding of fact by the Tribunal that there is no case of slump sale for a lumpsum consideration. However, the consideration is not attributable to any particular item of asset. We hence decline to answer the question framed for reason of the findings of facts being unassailable raising no question of law.** ITA No.1776 of 2009 and connected cases **- 16 -** **15. The next question is on the speculation loss found by the CIT appeals, which was overturned by the Tribunal in its order. The assessee had purchased shares in one M/s.Harison Universal Flowers Limited [HUFL] by way of direct subscription; which was a subsidiary of the assessee Company. The direct subscription of shares was carried out in the accounting periods from 1995-1996 to 1998-1999. In the subject year, ie.2005-2006, there was a sale of share effected, on which a loss was suffered, which was returned by the assessee under the head long-term capital gains. The Assessing Officer assessed it as capital gains, while the CIT appeals directed it to be treated as speculation loss. The Tribunal found that the assessee had held the shares as an investment and not as a stock in trade. The loss arising out of the sale of shares would hence be in the nature of capital loss and not in the nature of speculation loss, was the clear finding. There was also no evidence on record to** ITA No.1776 of 2009 and connected cases **- 17 -** **show that the assessee was indulging in the business of buying and selling of shares. The shares held by the assessee Company were clearly investments and on finding no dispute on facts, the Tribunal directed it to be treated as capital gains. Again, we refuse to answer the third question raised for reason of the Tribunal having answered it on facts and there arising no question of law. When the third question is thus answered in favour of the assessee, necessarily the fourth question also, in the matter of set off, has to be answered in favour of the assessee and against the Revenue.** **We hence partly allow ITA No.1782 of 2009. I.T.A.No.1776 of 2009** **16. This is an appeal from the order of the Tribunal to the extent it rejected the Revenue's appeal. One of the issues raised is with respect to disallowance allowed to RPG Enterprises, which, the learned Senior Counsel appearing for the Revenue submits, the Revenue is** ITA No.1776 of 2009 and connected cases **- 18 -** **not pressing. We, hence, uphold the order of the Tribunal to that extent.** **17. The next question raised is whether the Tribunal was correct in having confirmed the order of the CIT (Appeals) deleting the addition made by the AO invoking the provisions of Sections 37 and 14A of the IT Act, being re-plantation expenses. The AO found that the expenditure was dis-allowable under Section 14A of the Act. In this context, the decision of the Hon'ble Supreme Court in** _**Commissioner of Income Tax v. Essar Teleholdings Ltd.**_ **[(2018) 401 ITR 445], which held that the applicability of Section 14A can only be from the assessment year 2007-08 has to be noticed. We, hence, answer the question in favour of the assessee and against the Revenue, upholding the order of the Tribunal.** **18. The further question raised is on the justification in treating the consideration received on sale of shade trees as long term capital loss entitled to be carried forward from** ITA No.1776 of 2009 and connected cases **- 19 -** **the earlier years. We see that the Tribunal had considered the facts and had held that the order of the CIT (Appeals) directing deletion of such deduction in the capital gains has to be set aside, on facts. The Tribunal has also held that it being long term capital loss,is entitled to be carried forward. We do not see any question of law arising from the order of the Tribunal and, hence, uphold the order to that extent.** **19. Accordingly, I.T.A.No.1776 of 2009 is rejected.** **I.T.A.No.16 of 2013** **20. This appeal arises from the order of the Tribunal, which interfered with Annexure-B order of the Commissioner under Section 263 of the IT Act. The issues dealt with under Section 263 were (i) the income from the sale of old rubber trees, (ii) indexation allowed in the case of sale proceeds of Grevellea trees, (iii) proportionate interest paid relatable to the** ITA No.1776 of 2009 and connected cases **- 20 -** **investment in subsidiary companies dis-allowable under Section 14A and (iv) dis-allowance of expenses claimed under the head "share transfer expenses".** **21. As far as income from the sale of old rubber trees, the decision to treat it as subjected to Central Income Tax would go contrary to the findings of a Division Bench of this Court in** _**CIT v. Thiruvambadi Rubber Company**_ **[(2011) 203 Taxmann 63]. We, hence, do not think that any interference can be caused to the order of the Tribunal on that count.** **22. With respect to the issue of** **indexation allowed of sale proceeds of Grevellea trees, the Tribunal has found that the said issue was the subject matter of an appeal before the CIT (Appeals) and then before the Tribunal. Under Clause (c) of Explanation to Section 263(1) since the issue was subject matter of appeal, there could not have been any** _**suo motu**_ **power exercised by the Commissioner under Section 263. We are in** ITA No.1776 of 2009 and connected cases **- 21 -** **agreement with the findings of the Tribunal and we answer the question of law against the Revenue and in favour of the assessee.** **23. On the disallowance under Section 14A, we have already held, following the decision of the Hon'ble Supreme Court in** _**Essar Teleholdings Ltd.**_ **, that the same would be applicable only from 2007-08. We, hence, answer the said issue in favour of the assessee and against the Revenue.** **24. The last question is of expenditure incurred of a sum of Rs.1,24,664/- in connection with the transfer of shares. The Tribunal has found that as a matter of fact the said expenses have been incurred in connection with the maintenance of share-holders' register. The Tribunal has relied on the instructions issued by the CBDT, vide F.No.10/25/63-IT(A.a) dated 18.06.1964, wherein it was clarified that "** _**the remuneration paid by the Company to its Registrar for performing duties in connection with the**_ ITA No.1776 of 2009 and connected cases **- 22 -** _**Company's legal obligations to be discharged under the Company Law, should be regarded as revenue expenditure**_ **". We do not think that the finding on the said issue also calls for any interference.** **25. On the aforesaid findings, we reject I.T.A.No.16 of 2013 upholding the order of the Tribunal.** **Ordered accordingly. Parties are left to suffer their respective costs.** **Sd/-** **K. VINOD CHANDRAN JUDGE Sd/-** **ASHOK MENON** **JUDGE //True Copy//** **P.A to Judge.** jg/sp/vku/19/09/2018 ITA No.1776 of 2009 and connected cases **- 23 -** ## **APPENDIX** ## **' - PETITIONER S EXHIBITS:** |**ANNEXURE A:**|**COPY OF THE ASSESSMENT ORDER UNDER SECTION**| |---|---| ||**143(3) INCOME TAX ACT 1961 DATED 31.12.2010.**| |**ANNEXURE B:**|**COPY OF CIT (A)'S ORDER IN ITA-**| ||**54/KTM/CIT(A)-IV/10-11 DATED 06.11.2013.**| |**ANNEXURE C:**|**COPY OF ITAT'S ORDER IN ITA NO.37/COCH/2014**| ||**DATED 06.06.2014.**| |**ANNEXURE D:**|**COPY OF THE ORDER OF THE ITAT, HYDERABAD**| ||**BENCH IN (2013) 37 TAXMANN.COM 241.**| **RESPONDENT'S EXHIBITS:- NIL**