Rehabilitation Plantations Ltd. v. Commissioner of Income Tax

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT** ## **THE HONOURABLE MR.JUSTICE S.V.BHATTI** **&** ## **THE HONOURABLE MR.JUSTICE BASANT BALAJI** **THURSDAY, THE 4[TH] DAY OF AUGUST 2022 / 13TH SRAVANA, 1944** ## **ITA NO. 39 OF 2018** **AGAINST THE ORDER/JUDGMENT IN ITA 105/COCH/2016 OF** **I.T.A.TRIBUNAL,COCHIN BENCH** ## **APPELLANT/S:** THE REHABILITATION PLANTATION LTD. PUNALUR, KOLLAM-691 305, REPRESENTED BY ITS COMPANY SECRETARY MS.MERENA VARGHESE. KOLLAM, PIN - 691305 BY ADVS. M.GOPIKRISHNAN NAMBIAR K.JOHN MATHAI JOSON MANAVALAN KURYAN THOMAS PAULOSE C. ABRAHAM K.SHARANYA VIJAY ## **RESPONDENT/S:** COMMISSIONER OF INCOME TAX AYAKAR BHAVAN, KOWDIAR, THIRUVANANTHAPURAM-695 003. THIRUVANANTHAPURAM, PIN - 695003 BY ADVS. CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT K.M.V.PANDALAI, INCOME TAX DEPARTMENT P.K.RAVINDRANATHA MENON (SR.) JOSE JOSEPH, SC, INCOME TAX DEPARTMENT, KERALA THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 04.08.2022, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: **ITA NO. 39 OF 2018** **-2-** ## **J U D G M E N T** ## S.V.Bhatti, J. Heard Mr Kuryan Thomas, learned counsel for the appellant and Mr P.K.R Menon learned Senior Standing Counsel for the respondent. 2. The Rehabilitation Plantation Ltd is the appellant. The Commissioner of Income Tax, Aayakar Bhavan, Thiruvananthapuram is the respondent. The present appeal arises from the order dated 22.12.2017 in ITA No.105/Coch/2016 before the Income Tax Appellate Tribunal, Cochin Bench. The subject matter of appeal relates to Assessment Year 2009-10 and the controversies relate to the allowance claimed by the assessee towards the replantation of rubber plants in an area where rubber trees were planted and have become unproductive and are not in an abandoned area as required by Rule 7A (2) of the Income Tax Rules 1962, the deduction of expenditure incurred towards upkeep and maintenance of **ITA NO. 39 OF 2018** **-3-** rubber saplings till maturity or the trees yield and the loss incurred at the Rubber Sheet Factory. 3. The Assessing Officer disallowed the claims. The assessee has been unsuccessful before the first and the second appellate authorities/Tribunal. The Tribunal while dismissing the appeal followed the Division Bench judgment of this Court in _Rehabilitation Plantations Ltd. v. Commissioner of Income Tax[1]_ case. A Division Bench of this Court referred the issues arising under Rule 7A(2) of the Income Tax Rules and also the deduction towards the upkeep and maintenance expenses by the assessee. The question referred to the Full Bench reads thus: “Whether the assessee/Plantation Companies under Rule 7A(2) of the Rules are entitled to an allowance towards replanting expenses and a further deduction towards upkeep and maintenance expenses incurred by the assessee for the immature plants till the age of maturity in the computation of income under the Act and Rules.” The Full Bench answered the question referred to it by order dated 01.08.2022 and the operative portion is excerpted for 1 (2012) 251 CTR 343 (Ker.) **ITA NO. 39 OF 2018** **-4-** ready reference. “The answers to the two facets of the question referred to the Full Bench are that: “In the computation of business income under Rule 7A of the Rule 1962, the assessee under Rule 7A(2) is entitled to an allowance in respect of the cost of replacement of dead and useless rubber trees in the rubber plantation in an area not abandoned, subject to Section 10(31) of Act 1961. The upkeep and maintenance expenses incurred by the assessee till the maturity of rubber trees are revenue expenditures eligible for deduction under Section 37 of Act 1961.” ## 4. The assessee raises the following substantial questions of law: - “i) Whether on the facts and in the circumstances of the case the Appellate Tribunal was justified in disallowing the cost of planting rubber plants in replacement of plants that have become permanently useless? - ii) Whether the interpretation given by the Appellate Tribunal to Rule 7A(2) contrary to the express provisions of the said Rule? - iii) Whether the Appellate Tribunal was right in disallowing the loss claimed by the Appellant from rubber sheet factory? - iv) Whether the Appellate Tribunal erred in not allowing the prior period expenses, paid by the appellant during the previous year relating to the Assessment Year 2008-09? **ITA NO. 39 OF 2018** **-5-** v) Is not the finding of fact by the Appellate Tribunal erroneous and perverse?” 5. The learned counsel appearing for the parties state that question nos. (i) and (ii) are covered by the Full Bench order dated 01.08.2022 in I.T.A No.201/2013. Hence, the questions are answered in favour of the assessee and against the Revenue for statistical purposes and the matter is remitted to the Assessing Officer for assessment afresh by keeping in view the order of the Full Bench. Substantial Question No. (iii) 6. The assessee has an in-house rubber sheet factory. From the said rubber sheet factory, the assessee computed and claimed a loss of Rs.3,54,189/- and claimed set-off from the business income instead of restricting it to 35%. The case of the assessee is that for manufacturing rubber sheets the products covered by Rule 7A of the Income Tax Act viz. _sale of centrifuged latex or cenex or latex-based crepes (such as pale latex crepe) or brown_ **ITA NO. 39 OF 2018** **-6-** _crepes (such as estate brown crepe, remilled crepes, smoked blanket crepe or flat bark crepe) or technically specified block rubbers manufactured or processed from field latex or coagulum obtained from rubber plants grown by the seller in India_ alone are not sufficient and are not sold in the same form. The assessee subjects the raw material of field latex through a process whereby a new product as a rubber sheet is derived and sold. The permissions are obtained both from the Rubber Board and also other statutory authorities for the unit manufacturing rubber sheets. The assessee invites our attention to the permission granted by the Rubber Board and also with a flow chart of the process of manufacturing or producing rubber sheets to contend that the rubber sheet derived from the unit established by the assessee in the plantation is not an incidental agricultural activity. The Assessing Officer rejected the said claim and recorded a finding as follows: “10. The assessee has computed the loss from Rubber Sheeting Factory at Rs.3,54,189/- treating it as a separate business without restricting to 35% as specified **ITA NO. 39 OF 2018** **-7-** in Rule 7A. Since the raw material used for production is the field latex procured from assessee's own estate and the activity of Rubber Sheet Factory is an activity incidental to agricultural activity carried on by the assessee the provisions of Rule 7A are to be applied. The assessee has objected to the proposal. According to the assessee, the conversion of field latex into solid crepe or brown crepe or technical specified block rubber processed from field latex or coalgum obtained from Rubber Plants shall only be taxed under Rule 7A. The processing of manufacturing done in the rubber sheeting factory involves a different process. The assessee has elaborated the process and has explained that the activities undertaken at the Rubber Sheeting Factory is a manufacturing process and a new product is obtained from the process, that it is a pure commercial activity and not any process continuation of agricultural operation in order to make the product marketable. The assessee therefore contends that the loss/profit arising out of the activities of the Rubber Sheeting Factory is a normal business loss/profit as claimed in the Return of Income filed and is to be allowed in full. The contentions raised have been considered. As mentioned earlier, the activity of rubber factory is an activity incidental to the agricultural activity of producing rubber and making the products fit to be taken to market. Hence the provisions of Rule 7A (2) are to be applied to the profit/loss of the Rubber Sheeting factory. The contentions are therefore rejected.” The said view was confirmed by the Commissioner of Appeals and also the Tribunal. For our purpose it is sufficient to refer to the finding recorded by the Tribunal which reads as under: “16. Having heard both the sides, we find no merit in the arguments of the assessee for the reason that the process **ITA NO. 39 OF 2018** **-8-** involved in the rubber sheet factory is merely conversion of latex collected from rubber plants into a rubber sheet which cannot be considered as manufacture process which derives a new product. We further notice that the activity undertaken by the assessee is an extension of the agricultural operation incidental to production of rubber from rubber plantations. Therefore, we are of the considered view that the Assessing Officer was right in treating loss from the rubber sheet factory under Rule 7A(2). The CIT(A), after considering the relevant facts and submissions, upheld the additions made by the Assessing Officer, and therefore, we find no error in the order of the CIT(A). Hence, we are inclined to uphold the findings of the CIT(A) and reject the grounds raised by the assessee.” 7. Mr Kuryan Thomas argues that the rubber sheet manufactured by the assessee is not covered by the product detail or commercial use by any of the descriptions viz. _sale of centrifuged latex or cenex or latex-based crepes (such as pale latex crepe) or brown crepes (such as estate brown crepe, remilled crepes,_ _smoked blanket crepe or flat bark crepe) or technically specified block_ _rubbers manufactured or processed from field latex or coagulum obtained from rubber plants grown by the seller in India_ referred under rule 7A of the Income-Tax Rules 1962. In commercial parlance, there is difference between the sale of abovesaid products and the sale of rubber sheets to the end manufacturers **ITA NO. 39 OF 2018** **-9-** of footwear etc. The Assessing Officer treated the rubber sheet manufacturing as incidental to the agricultural activity of producing rubber and making the products fit to be taken to the market. The finding that the manufacturing activity is incidental to the agricultural activity of producing rubber is _ipse dixit._ The grievance of the assessee is that the said finding is affirmed both by the Commissioner of Income Tax (Appeals) and the Tribunal without independent examination. What is sought to be canvassed from the above narrative is that products specifically not covered by Rule 7A are treated as rubber sheet manufacturing activity under Rule 7A and when the activity is an independent and stand-alone activity where a few processes are involved, value additions take place, and by virtue of these two operations and additions, the product sold as rubber sheet cannot be treated as a product derived from rubber manufacturing. He argues that there is difference between rubber manufacturing and rubber sheet manufacturing. **ITA NO. 39 OF 2018** **-10-** 8. Learned counsel appearing for the Revenue contends that the assessee did not establish, from commercial parlance or from the nature of the activity undertaken by the assessee, to treat the loss as business loss. He invited our attention to the consideration of the paragraphs which are excerpted above. 9. From the above narrative, what falls for our consideration is whether the activity viz. rubber sheet manufacturing undertaken by the assessee is an incidental activity to the agricultural activity of producing rubber or not. The finding recorded by the Assessing officer, no doubt, records the said activity as incidental to agricultural activity undertaken by the assessee. What begs the question by the said conclusion is that it has not referred to any of the stages either value addition or process claimed by the assessee as employed for deriving the rubber sheet. Such consideration makes all the difference for arriving at a finding whether the rubber sheet manufacturing is _per se_ agricultural activity or incidental **ITA NO. 39 OF 2018** **-11-** agricultural activity, or separate business and commercial activity undertaken by the assessee. The Tribunal more or less adopted the view recorded by the Assessing Officer. We are not convinced with the view recorded by the Assessing Officer as one rendered without proper appreciation of the circumstances relevant in this behalf. Therefore, the findings recorded in this behalf are set aside and the matter remitted to the Assessing Officer for consideration and disposal afresh. The assessee is given liberty to file additional material now placed before this Court or such other material in support of its claim as commercial/ business activity of the assessee. The question is answered in favour of the assessee and against the Revenue for statistical purposes and the matter is remitted to the Assessing Officer for consideration and disposal afresh. Substantial question Nos.(iv) and (v) Assailing the findings of fact recorded by the Tribunal, we do not consider the said questions as falling within the scope of **ITA NO. 39 OF 2018** **-12-** Section 260A of the Act. The questions are answered in favour of the Revenue and against the assessee. Appeal is allowed in part as indicated above. No order as to costs. **S.V.BHATTI JUDGE** **BASANT BALAJI JUDGE** JS **ITA NO. 39 OF 2018** **-13-** ## **APPENDIX OF ITA 39/2018** ## **PETITIONER’S ANNEXURES** ## **ANNEXURE A** **A TRUE COPY OF ASSESSMENT ORDER DATED 28.12.2011 FOR THE ASSESSMENT YEAR 2009-10 PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1, KOLLAM.** ## **ANNEXURE B** **A TRUE COPY OF THE ORDER DATED 18.12.2015 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS), THIRUVANANTHAPURAM.** ## **ANNEXURE C** **A TRUE COPY OF THE APPEAL MEMORANDUM DATED 24.02.2016, ALONG WITH ANNEXURES.** ## **ANNEXURE D** **THE TRUE COPY OF THE COMMON ORDER DATED 22.12.2017 IN ITA NOS. 104 & 105/COCH/2016 ISSUED BY THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN.** ## **ANNEXURE E** **THE DOCUMENTS EVIDENCING THE CRYSTALLIZATION OF THE PRIOR PERIOD EXPENSES DURING THE FINANCIAL YEAR 2009-10.**