THE PLANTATION CORPORATION OF KERALA LTD,KOTTAYAM vs. THE ACIT, KOTTAYAM

Per George George K, JM :

These appeals at the instance of the assessee are directed against two orders of the CIT(A), both dated 30.10.2019. The relevant assessment years are 2012-2013 and 2013-2014.

ITA Nos.1-2/Coch/2020 2 M/s.Plantation Corporation of Kerala Ltd. 4. The brief facts of the case are that the assessee is a plantation company, which is fully owned by the Government of Kerala. The assessee undertakes processing of latex into value added forms like centrifuging latex. Income from sale of centrifuging latex, a portion of the same is liable to be taxed under the Central Income-tax. For the assessment years 2012-2013 and 2013-2014, the returns were filed by the assessee. In the said returns filed, the assessee had claimed deduction under Rule 7A(2) of the Income-tax Rules, amounting to Rs.98,62,206 and Rs.1,74,39,892 for assessment years 2012-2013 and 2013-2014, respectively. The Assessing Officer disallowed the claim of the assessee by following the judgment of the Hon’ble Kerala High Court in the case of M/s.Rehabilitation Plantations Limited v. CIT [(2012) 251 CTR 343 (Ker.)].

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figures, hence, the written submission for assessment year 2012-2013 is reproduced below:-

“Argument Notes

The only ground in this appeal relates to the disallowance of the claim of deduction on cost of replanting under Rule 7 A of the Income Tax Rules in a sum of Rs.98,62,206/-..

Replantation Allowance Rs.98.62.206/-

(i) Replanting allowance of Rs.98,62,206/- is disallowed relying on the decision of the Kerala High Court in the case of Rehabilitation Plantations Ltd. as reported in 251 CTR 343.

(ii) In reply to the proposal for assessment, the assessee had filed detailed submissions a copy of which is annexed hereto as Annexure I which is at pages 1 to 8. In the said reply it was specifically pointed out that the ground realities for the claim and allowability of replanting allowance was not considered by the Hon. High Court in the case of Rehabilitation Plantations Ltd. As such the ratio of the said decision will not be directly applicable to the facts of the assessees case.

(iii) It may kindly be noted that Rule 7 A(2) in respect of rubber plants and corresponding rules in respect of coffee and tea, as extracted in the judgment, read as follows:

7 A(2). In computing such income, an allowance shall be made in respect of the cost of planting rubber plants in replacement of plants that have died or become permanently useless in an area already planted if such area has not previously been 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 cl.(31) of section 10, is not includible in total income.

7B(2). In computing the incomes referred to in sub-rr. (1) and (1A) an allowance shall be made in respect of the cost of planting coffee plants in replacement of plants that have died or become permanently useless in an area already planted, if such area has not previously been 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 cl. (31) of section 10, is not includible in the total income.

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(a) Rule 7A(2) only provides for deduction of expenditure for infilling through replacement of dead trees or other trees that have become useless.

The rule nowhere mentions “infilling”. Instead the rule provides for –

(i) An allowance (ii) For cost of (iii) Planting of Rubber Plants (and not plant) (iv) In replacement of (v) Plants (and not plant) (vi) That have died (vii) Or (viii) Become permanently useless (ix) In an area already planted (x) If such area has not previously been abandoned.

It is a provision, both for infilling and re-plantation since the expression

(i) That have died or an area already planted, qualifies infilling and

(ii) OR

Here the word OR is significant since it qualifies two different and separate events, both of which have been understood and considered by the law makers tobe resulting in a loss of revenue, during such period of immaturity of the plants say about 7 years, eligible to be compensated by way of an allowance.

(iii) Become permanently useless in an area already planted qualifies replantation

(iv) In an area already planted, if such are has not previously been abandoned.

This clearly indicates an area which is qualified as one that was already planted i.e. to say an area which has been in use already and not a new opening. To say for example:

If a planter has 100 hectares in his ownership which is comprised as follows:

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Planted Area 75 Hectares Non Planted Area 25 Hectares Of the Planted Area

Of the Planted Area 50 Hectares

Cleared for replanting 25 Hectares (This 25 hectares would qualify as in an area already planted since it is out of the 75 Hectares of Planted area.)

If, considering the same extent, the planter undertakes replanting of 35 Hectares, then 10 hectares would not be eligible as it qualifies as an area previously abandoned, “if such area has not previously been abandoned” and consequently be a capital expenditure.

(b) If the assessee's claim is allowed, so much of the portion of the agricultural income determined by the Central ITO will be in direct conflict with agricultural income assessment of the State Agricultural Income Tax Act.

This finding, it is respectfully submitted is incorrect, in so far as the provision clearly states that the income determined by the CTO will be adopted by the State Officer and to that extent there can be no conflict Kindly refer Supreme Court decision in the case of Assam Company Ltd. and Another Vs. State of Assam as reported in 248 ITR 567 and the Kerala High Court decision in the case of Tata Tea Ltd. Vs. Inspecting Assistant Commissioner as reported in (2006) 1 KLT 752.

(c) Expenditure on re-plantation of an area where from no income is derived by the assessee is not to be reckoned in computation of income from yielding area

This finding is not consistent with the decision of the Supreme Court in the case of Travancore Rubber & Tea Co. Ltd. and Karimtharuvi Tea Estates.

(d) Investment in planting and development of plantation up to maturity i.e., until the plants starts yielding has to be treated as capital expenditure for development of a capital asset.

No doubt that this is an expenditure in planting and developing of plantation upto its maturity but the Act provides for this expenditure as an allowance in computation under Rule 7 A. As submitted above this allowance is in lieu of depreciation. It is also an allowance to offset the loss of

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income or is in the form of a benefit granted to a farmer to recoup from the earnings the loss of revenue for. a period of 7 years, since the expenses on establishment remains the same irrespective of the extent under cultivation. As such the expenses upto maturity would be eligible as an. allowance for replantation. This is also supported by the decision of the Supreme Court in 41 ITR 751 and 48 ITR 83.

(e) Rule 7 A(2) does not cover expenditure incurred for re-plantation of an area but only expenditure for infilling through replacement of dead trees or trees that are become useless which is not the case here.

The wording in the Rule does not give an interpretation so as to restrict it to infilling. If it was so, the word "infilling' was not alien for the law makers and could have imposed such a restriction at the time of drafting. This can only be seen as a conscious omission to give a beneficial interpretation for the purpose of growth and development In this connection please refer to the Constitution Bench decision of the Supreme Court in 255 ITR 147 in the case of Padma Sundara Rao and Others Vs. State of Tamil Nadu. Relevant extracts annexed hereto as Annexure II which is at pages 9 to 10.

2(i) It can be seen that the expenditure of Rs.3,11,18,84Sf- includes Replanting Expenses and Maintenance Expenses.

The Replanting Expenses, mentioned above, relates to the actual cost of replanting incurred during the year which is the first year after clearing those plants that have become permanently useless. The Maintenance Expenses, on the other hand, relates to the cost incurred for maintaining the immature rubber plants in the second year to the seventh year or till such time it attains maturity. As such it can be seen that both Replanting and Maintenance Expenses and have been disallowed.

(ii) It is submitted that the disallowance of Maintenance Expenses is clearly erroneous as Rule 7 A(2) applies only to Replanting Expenses and not Maintenance Expenses. The Hon. Supreme Court in the case of the Travancore Rubber & Tea Co. Ltd. Vs. Commissioner of Agrl. Income Tax as reported in 41 ITR 751 as held that Maintenance Expenditure incurred on tending Immature rubber trees cannot be disallowed on the ground that the said trees have. not come into bearing during the year and thereby confirming that Maintenance Expenditure is a Revenue Expenditure wholly and exclusively laid out for the purpose of deriving income. Copy of the said decision is annexed hereto as Annexure III which is at pages 11 to 13. Further in the case of Karimtharuvi Tea Estates Vs.

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State of Kerala as reported in 48 ITR 83 the Hon. Supreme Court held that the contention that "the amounts spend for the upkeep and maintenance of immature plants till they become mature is in the nature of a capital expenditure is also not sound. It is a running expenditure and not in the nature of capital expenditure." Copy of the said judgment is annexed hereto as Annexure IV which is at pages 14 to 18. The further contention that treating Maintenance Expenditure as deductible Revenue Expenditure would make the Proviso to Rule 24 of the Indian Income Tax Rules,1922 (similar to Rule 8(2) of the Income Tax Rules, 1962) redundant was also rejected. The Supreme Court held "The proviso allows deduction of the cost of replanting bushes in replacement of bushes which died or became permanently useless in an area already planted. It deals with the cost of planting bushes and not the expenses incurred in the upkeep and maintenance of bushes already planted".

The Maintenance Expenditure is therefore clearly allowable as a Revenue Expenditure under Section 37 of the IT Act and is not be considered under Rule 7 A(2)

(iii) In any event Rule 7 A applicable to Rubber is on similar lines as Rule 8 of the Income Tax Rules, 1962 applicable to Tea under which income derived from the sale of tea grown and manufactured is to be computed as if it were income derived from business and 40% of such income is deemed to be income liable to tax under the Income Tax Act 1961 and the balance 60% is deemed to be income liable to Agricultural Income Tax.

(iv) In making such computation of income from tea the Income Tax Officer grants benefit for an allowance of the cost of replanting of tea bushes under Rule 8 (2) of the Income Tax Rules which is extracted below:-

"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 area has not previously been 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.”

(v) This is similar to the deduction granted under Rule 7A(2) which provides for deduction in respect of replanting of rubber plants. Rule 7 A(2) is extracted below:-

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"In computing such income, an allowance shall be made in respect of the cost of planting rubber plants in replacement of plants that have died or become permanently useless in an area already planted, if such area has not previously been 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 (31) of section 10, is not includible in the total income".

(vi) It is pertinent to note that while most assessees having income from tea claimed deduction for cost of replantation of tea bushes under Rule 8(2) of the Income Tax Rules, some assessees started claiming depreciation also on the value of tea bushes under Section 32 of the IT Act on the ground that a "tea bush" is a 'plant', In Section 43 of the IT Act which provides definition of various terms relevant to income from business 'Plant' was defined in Section 43(3) as under:-

“'Plant' includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purpose of business or profession ".

Some High Courts allowed the claim for depreciation on tea bushes under Section 32 holding that a tea bush is also an income earning apparatus and therefore a (Plant" within the meaning of the term in Section 43(3). The legislature realizing that assessees were now getting 100% deduction of the cost of replanting under Rule 8 (2) and thereafter also getting depreciation for the same amount treating tea bushes as a plant, amended Section 43(3) by Finance Act 1995 with retrospective effect from 1-4-1962 to settle at rest the controversy as to whether tea bush is a plant Section 43 (3) was therefore amended retrospectively as under:-

“'Plant' includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purpose of business or profession but does not include tea bushes or livestock",

In the memorandum explaining the amendment (reported in 212 ITR (St) 356 it was explained as under.-

"Amendment of section 43(3) of the Income Tax Act to exclude plantations and livestock from the definition of plant:

Under subsection (3) of section 43 the term "plant" includes ships, vehicles, books, scientific apparatus

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and surgical equipment used for the purposes of business or profession.

In certain judicial pronouncements, it has been held that the term "Plant" includes tea bushes and, therefore, they would also be eligible for depreciation under section 32. Rule 8(2) of the Income Tax Rules, already provide for a deduction in respect of the expenditure incurred on replacement of old tea bushes by an assessee. The deduction under rule 8(2) is allowed in lieu of depreciation. As a result of the judicial pronouncements, double deduction is now being claimed on the tea bushes, one as replacement cost and then as depreciation allowance. "

With a view of setting at rest the aforesaid controversy, section 43(3) is being amended to provide that the term "Plant" will not include tea bushes and livestock.

The proposed amendments will take effect, retrospectively, from 1st April, 1962 and will accordingly, apply in relation to assessment year 1962- 63 and subsequent years. "

(vii) The amendment makes it clear that the deduction under Rule 8(2) for Replantation Expenses is allowed in lieu of depreciation. The legislative intention is therefore clear that the entire cost of replanting is allowed as a deduction in lieu of the depreciation meaning thereby the full replantation cost is allowed to be claimed as a deduction.

(viii) It is to be noted that it is well settled that Rule 8 which was introduced to provide the manner of assessment with respect to income from tea, considering the composite nature of cultivation and manufacture and the difficulty in bifurcating expenses as attributable separately to cultivation and manufacture. With effect from AY 2002-03, the Income Tax Act was amended to make similar provision with respect to composite income from rubber and coffee. While introducing Rule A and 7B similar deduction for cost of replantation, as is available to tea under Rule 8(2), was introduced under Rule 7 A (2) and 7B(2). The rules of interpretation therefore required that the interpretation granted to Rule 8(2) is equally applied to Rule 7 A (2) and 7B(2).

(ix) It is also to be noted that though subsidy given by the Tea Board for replantation or replacement of tea bushes. is exempt under Section 10(30) of the IT Act Rule 8(2) provides that the said subsidy is not required to be deducted from the

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cost of replantation. Likewise, Rule 7 A(2) also provides that similar subsidy given for replantation of rubber plants though exempt under section 10(31) is not required to be reduced from the costofre plantation. Section 10(31) reads as under:

"In the case of an assessee who carries on the business of growing and manufacturing rubber, coffee, cardamom or such other commodity in India, as the Central Government may, by notification in the Official Gazette, specify in this behalf, the amount of any subsidy received from or through the concerned Board under any such scheme for re-plantation or replacement of rubber plants, coffee plants, cardamom plants or plants for the growing of such other commodity or for rejuvenation or consolidation of areas used for cultivation of rubber, coffee, cardamom or such other commodity as the Central Government may, by notification in the Official Gazette, specify".

(x) It is thus further clear that by linking Rule 7 A(2) with section 10(31), the legislature wanted to give full deduction of cost of re-plantation of rubber under Rule 7 A(2), even though subsidy itself is not taxable.

(xi) It is thus clear that Rule 7 A(2) of the Income Tax Rules 1962 provides for 100% deduction in respect of the expenditure incurred on cost of replanting rubber plants in replacement of plants that have died or become permanently useless in an area already planted and this deduction is allowed in lieu of depreciation. The only condition is that replanting of new rubber plants should be in replacement of old rubber plants in an area already planted and such area has not been previously abandoned. When the rubber trees standing in an area becomes old and unyielding after giving yield for several years together, the same should necessarily be replaced with new plants to continue the plantation. The use of the words "if such area has not previously been abandoned" makes it clear that the deduction is allowed with respect to replanting in an area earlier planted and not for infilling a few plants in place of damaged plants. The total replanting expenditure in this regard is allowed as deduction in lieu of depreciation and since all tea assesses are getting such a deduction under Rule 8(2) for the past many years the same interpretation has to be given for Rule 7 A(2) and 7B(2) also.

Hence it is submitted that Replanting Expenses is also allowable as a Revenue Expenditure.

(xii) As submitted above, reliance placed on the decision in the

ITA Nos.1-2/Coch/2020 11 M/s.Plantation Corporation of Kerala Ltd. case of Rehabilitation Plantations Ltd is not sustainable. In the said decision the Hon. Kerala High Court while observing that Rule 7 A(2) is in the same lines as Rule 8(2) has erroneously interpreted the said Rules as applicable only to 'infilling' of plants in the place of dead plants in an existing plantation. This Court further observed that the rule making authority while incorporating Rule 7 A(2) in the same lines as Rule 8(2) was probably "unaware of the limitations in the rubber plantation" to the effect that while infilling may be possible in existing tea and coffee plantations on account of the height of the tea and coffee plants it is not possible in an existing rubber plantation because of the height of the rubber trees. This Honourable Court has not considered the fact that deduction under Section 8(2) has always been granted for replacement of useless tea bushes in an entire tea area and not just for infilling and this has always been accepted by the Department, the explanation given for amendment under Section 43 (3) where the Legislature has accepted that the entire cost of replanting is fully allowed as a deduction in lieu of depreciation. It is therefore respectfully submitted that the decision of the Kerala High Court is not applicable to the facts of the case. It is also submitted that though SLP filed against the decision was dismissed by the Honourable Supreme Court, it is settled law that a mere dismissal of SLP does not declare any law nor does it approve the decision appealed against It is also submitted that this Hon. Bench has dismissed the appeal for the assessment years 2011-12 and 2014-15 in ITA No.381/COCH/2018 and ITA No.239/COCH/2018 as per order dated 01-08-2019. Copy of the said order is annexed hereto as Annexure V which is at pages 19 to 35.” 7. The learned Departmental Representative supported the orders passed by the Income-tax authorities.

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expenditure. The relevant finding of the Hon’ble High Court reads as follows:-

“After hearing both sides, we are unable to accept the case of the assessee for more than one reason. In the first place, expenditure covered by Rule 7A(2) does not cover expenditure incurred for replantation of an area. On the other hand, Rule 7A(2) only provides for deduction of expenditure for infilling through replacement of dead trees or other trees that have become useless, which is not the case here. As already stated by us, Rule 7A(2) is in the same line as Rule 7B(2), which provides for replacement of dead or old or unyielding coffee plants in yielding coffee plantation, and Rule8(2) which provides for replacement of dead or useless tea bushes in tea plantation. Yielding healthy rubber plantation does not admit replacement of dead plants within such area as new saplings cannot grow under shade and is never done by any planter. So much so, expenditure for replantation of an area is not covered by Rule 7A(2) and in our view the lower authorities including the Tribunal rightly rejected the claim. We also feel that the Central Income Tax Officer while determining income in the nature of agricultural as well as business income under Rule 7A should keep in mind the principles of computation of agricultural income under the State AIT Act and as far as possible, assessment should be made without violating the provisions of the State AIT Act. If the appellant's claim is allowed, certainly so much of the portion of the agricultural income determined by the Central Income Tax Officer will be in direct conflict with the Scheme of assessment of agricultural income under the State AIT Act which prohibits deduction of expenditure on replantation of an area and only an incentive is provided by way of replantation allowances under Rule 3 of the State Agricultural Income Tax Rules as stated above. We are of the view that the Tribunal rightly held that the expenditure on replantation of an area wherefrom no income is derived by the assessee is not to be reckoned or considered in the computation of income from yielding area. Expenditure incurred for planting and development of the plantation up to maturity has to be necessarily capitalised and is not allowable as a revenue expenditure. Since the assessee has no case that they have incurred any expenditure for infilling the yielding area and the expenditure incurred is only for replantation after cutting and removing old plantation, there is no question of considering or allowing the claim under Rule 7A(2). The assessee's claim is thoroughly misconceived and the lower authorities including the Tribunal rightly held so. Consequently, we dismiss all the appeals.”

ITA Nos.1-2/Coch/2020 13 M/s.Plantation Corporation of Kerala Ltd. 8.1 The assessee does not have a case that the expenses incurred under the head replanting and maintenance are for infilling through replacement of dead trees or other trees that have become useless. On the contrary, it is an admitted position that the replanting expenses and maintenance expenses are incurred for planting new area of rubber and not an area already planted with yielding rubber. The finding of the Hon’ble Kerala High Court being very clear and categorical, the judgment is binding on the lower authorities. Hence, the appeal filed by the assessee in ITA No.1/Coch/ 2020 is dismissed.

ITA No.2/Coch/2020

Order pronounced on this 02nd day of March, 2020.

Sd/- Sd/- (Chandra Poojari) (George George K.) ACCOUNTANT MEMBER JUDICIAL MEMBER

Cochin ; Dated : 02nd March, 2020. Devadas G*

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Copy of the Order forwarded to : 1. The Appellant. 2. The Respondent. 3. The CIT(A)-Kottayam. 4. The Pr.CIT, Kottayam. 5. DR, ITAT, Cochin 6. Guard file. BY ORDER,

(Asstt. Registrar) ITAT, Cochin