THE VELIMALAI RUBBER CO. LTD,KOTTAYAM vs. THE ACIT, KOTTAYAM

Per George George K, JM

These are appeals at the instance of the assessees. These appeals arise out of order of the CIT(A) dated 28.03.2018 concerning assessment year 2014-2015 in the case of M/s.The Plantation Corporation of Kerala Limited and order of the CIT(A) dated 12.06.2018 concerning assessment year 2011- 2012 in the case of M/s.The Velimalai Rubber Co. Limited.

ITA No.239 & 381/Coch/2018. 2 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd.

the facts concerning ITA No.239/Coch/2018 in the case of M/s.The Plantation Corporation of Kerala Limited.

“1. The order of the Ld.Commissioner of Income Tax (Appeals), Kottayam is opposed to law, facts and circumstances of the case. 2. The Ld.Commissioner of Income Tax (Appeals) has erred in sustaining the disallowance of the claim of deduction on cost of replanting, under Rule 7A of the Income Tax Rules in the sum of Rs.6,75,49,321/-.

“1. The Commissioner of Income Tax (Appeals), erred in sustaining the disallowance of Rs.6,75,49,321/- as Replanting Expenses which includes Maintenance Expenses of immature area also.

ITA No.239 & 381/Coch/2018. 3 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd. lines as Rule 8(2) of the Income Tax Rules, 1962, applicable to Tea in respect of allowance of cost of replanting and not for infilling. 4. For the above and other grounds already raised, it is submitted that the order of the Commissioner (Appeals) be set aside.”

“2. Allowability of claim towards cost of replanting under Rule 7A has been a persistent issue in assessee’s case for the past several years. The jurisdictional High Court in the case of M/s.Rehabilitation Plantations (251 CTR 343 (Kerala)) had considered an identical issue and had come to the conclusion that eh claim towards cost of replanting under Rule 7A cannot be entertained unless it is a case of infilling in an existing rubber plantation……………….. 3. Here, the assessee does not have a case that it has incurred any expenditure for infilling in a yielding area. The expenditure incurred is for planting in an area which had

ITA No.239 & 381/Coch/2018. 4 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd. been cleared off an existing plantation that had become unproductive. Therefore, assessee’s case clearly falls outside the ambit of the allowance as envisaged in Rule 7A(2). Hence, the deduction claimed under Rule 7A(2) to the tune of Rs.6,75,49,321/- is hereby disallowed.

“4.2.1 In the above decision, Hon’ble High Court has held in unequivocal terms that expenditure incurred for planting and development of the plantation upto maturity has to be necessarily capitalized and is not allowable as a revenue expenditure. Therefore, the decision clearly covers the case of the Assessee and the expenditure claimed for cost of replantation cannot be allowed as expenditure under Rule 7A of the I.T.Rules, 1962. The argument of the learned AR that certain issues have not been considered by the Hon’ble Court would not be of any help as the decision of the High Court is binding on the CIT(A) and merits of the said decision of High Court cannot be examined by lower authorities. Hence, it is held that there is no merit in the ground raised by the Assessee on this issue and the same is dismissed.”

ITA No.239 & 381/Coch/2018. 5 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd.

has filed an elaborate written submission and the same reads as follow:-

(ii) The case of the Officer is that the issue in the said case is identical as that of the assessee's case. It may kindly be noted that in view 01 the following submissions the issue is not exactly identical and hence the decision of the jurisdictional High Court may not quite be applicable to the facts of this case.

(ii) Rule 7 A was introduced from the year 2001-02 whereby the income from value added rubber is computed as business income as per which the income derived from the sale of such rubber is to be computed as if it were income derived from business at 35% of such income and is deemed to be income liable to tax under the Income Tax Act The balance 65% is liable to State Agrl. Income Tax. It is also judicially recognized that the State Officers has to accept the proportionate computation as made by the Central Officers has to accept the proportionate computation as made by the Central Officers under the Income Tax Act.

Year-wise cost of maintenance and replantation Year Maintenance Rs. Replantation Total

ITA No.239 & 381/Coch/2018. 6 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd.

(Rs.) 2005 2,07,043.00 2006 16,932.00 2007 6,84,065.00 2008 15,88,423.00 2009 11,76,602.00 2010 1,31,49,545.60 2011 84,17,325.64 2012 1,75,70,510.68 2013 4,28,10,446.92 2,47,38,874.24 6,75,49,321.16

(iii) At the outset it is submitted that the disallowance of deduction of Maintenance Expenses is clearly erroneous as Rule 7A(2) applies only to Replanting expenses and not Maintenance expenses.

4 (i) As to the issue of Replanting expense of Rs.2,47,38,874.24, it may kindly be noted that 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) The Hon'ble Supreme Court in The Travancore Rubber & Tea Co. Ltd. vs. Commissioner of Agricultural Income Tax reported in AIR 1961 SC 604 or 41 ITR 751 has held that maintenance expenditure incurred on tending of immature rubber trees cannot be disallowed on the ground that the immature rubber trees have not come into bearing during the year and thereby confirming that the maintenance expenditure is a revenue expenditure wholly and exclusively laid out for the purpose of deriving income. Copy of the judgment is at running pages 5 to 7 of Annexure II. Likewise in Karimtharuvi Tea Estates vs. State of Kerala reported in AIR 1963 SC 760 or 48 ITR 83 the Hon'ble Supreme Court held "The contention that the amount spent for the upkeep and maintenance of the 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 of the nature of capital expenditure". 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

ITA No.239 & 381/Coch/2018. 7 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd.

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". Copy of the judgment is at running pages 8 to 12 of Annexure III.

The maintenance expenditure of Rs.4,28,10,446.92 is therefore clearly allowable as a revenue expenditure under section 37 of the IT Act and is not to be considered under Rule 7 A (2).

4 (i) As to the issue of Replanting expense of Rs.2,47,38,874.24, it may kindly be noted that 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.

[ii] 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 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. (30) 01 section 10, is not includible in the total income."

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

"In computing such income, an allowance shall be made in respect of the cost of plantinq rubber plants in replacement of plants that have died or become permanently useless in an area 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 cr. (31) of section 10, is not Includible In the total income."

ITA No.239 & 381/Coch/2018. 8 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd.

(iv) During this time, a controversy arose when some assessee's, in addition to claiming deduction for replantation as per Rule 8(2), also claimed depreciation on the value of Tea bushes under section 32 of the IT Act on the ground that (tea bush' is a (plant'. This was, apparently, based on the definition of 'plant' as per section 43(3) which reads:

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

Since some High Courts gave judicial recognition to such claim, the legislature realizing that assesses 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 and does not include tea bushes or livestock".

(v) 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 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.

ITA No.239 & 381/Coch/2018. 9 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd.

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".

Extract of 212 ITR CSt) 356 is at running page 33.

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.

"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

ITA No.239 & 381/Coch/2018. 10 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd.

Central Government may, by notification in the Official Gazette, specify".

(ii) It is thus further clear that by linking Rule 7A(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.

ITA No.239 & 381/Coch/2018. 11 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd.

section 43(3) where the Legislature has accepted that the entire cost of replanting is fully allowed as a deduction in lieu of depreciation. Replantation Expenses were disallowed only where the Replantation was undertaken in an abandoned area. Kindly refer to 262 ITR 388 which is at running pages 31 to 32 of this argument note. Please see para D.

(a) Rule 7A(2) only provides for deduction of expenditure for infilling through replacement of dead trees or other trees that have become useless (please see running page 4 of para 8 of Annexure I).

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 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:

ITA No.239 & 381/Coch/2018. 12 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd.

Planted Area 75 Hectares Non Planted Area 25 Hectares (Reserved Area / Unopened Area)

Of the Planted Area Yielding 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 be from Non Planted area and 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 is, it is respectfully submitted, not consistent with the provision, 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 Moreover, by virtue of the Supreme Court decision referred to above there is no case of conflict The said decision was omitted to be considered there in the Kerala High Court judgment

(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 view is also inconsistent with the decision of the Supreme Court in the case of The Travancore Rubber & Tea Company and Karimtharuvi Tea Estates referred to above. Please also refer 262 ITR 388 at running pages 31 to 32 of Annexure VIII.

(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.

ITA No.239 & 381/Coch/2018. 13 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd.

This observation is also clearly inconsistent with the decision of the Supreme Court referred to above and hence cannot be applied.

(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 we refer to the decision of the Supreme Court in 255 ITR 147. Copy of the judgment is at running pages 13 to 18 of Annexure IV. Moreover it is not the function of the Court to supply a supposed omission, which can only be done by the Parliament (2013) 180 Company Cases 311. Copy of the judgment is at running pages 19 to 26 of Annexure V.

11.(i) The Income Tax Appellate Tribunal, Kolkatta in the case of ACIT Vs. Gillanders Arbuthnot & Co. Ltd. has observed that so far as there is no expansion of plantation to an additional area adding to the capital already invested the re-plantation expenses would be in revenue nature. Copy of the judgment is at running pages 27 to 30 of Annexure VI. This decision is based on an earlier decision of the Calcutta High Court in the case of CIT Vs. Tasati Tea Ltd. as reported in 262 ITR 388. Copy of the judgment is at running pages 31 to 32 of Annexure VII. The High Court, in this case, was deciding the issue whether maintenance of nursery for the purpose of re- plantation would amount to a capital or revenue expenditure. The High Court found that maintenance of nursery cannot be extended to come under Rule 8(2) and hence cannot be extended to a stage prior to actual replacement or re-plantation but also found that such plants utilized for the purpose of re-plantation without any expansion of the plantation area or re-plantation in an abandoned area cannot be said to be a capital expenditure.

(ii) This Honourable Tribunal, in the case of Mahavir Plantations Pvt Ltd. Vs. Income Tax Officer, as reported in 31 ITO 128 as held that "Rule 8(2) of the IT Rules

ITA No.239 & 381/Coch/2018. 14 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd. specifically provides that in computing income from manufacture of Tea, allowance shall be made in respect of the cost of planting bushes in replacement of bushes that had died or become permanently useless in an area already planted, if such area has not previously been abandoned. Since the assessee is entitled to claim deduction in respect of Replanting Expenditure in view of Rule 8(2), we are of the opinion that the assessee is entitled for deduction.

[iii] In the light of the above and, backed by the said judgments, the expression "An area already planted" has a wider meaning and possibly sufficient clarity for a different view and interpretation of Rule 7 A (2) as opposed to the findings, with due respect, in the judgment of Rehabilitation Plantations Ltd. Moreover it is not clear from the judgment whether the difference between "An area already planted" and. "an abandoned area" was considered. Since the assessee has undertaken replantation only in an area already planted and not in an abandoned area.

(ii) 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. Hence the disallowance of Maintenance expenditure of Rs.4,28,10,446.92 and Replantation expenditure of Rs.2,47,38,874.24 totaling to Rs.6.75.49.321.16 may be directed to be allowed.”

ITA No.239 & 381/Coch/2018. 15 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd.

capitalized and it cannot be allowed as revenue 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 No.239 & 381/Coch/2018. 16 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd.

9.1 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.239/Coch/ 2018 is dismissed.

ITA No.381/Coch/2018

Order pronounced on this 01st day of August, 2019.

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

Cochin ; Dated : 01st August, 2019. Devdas*

ITA No.239 & 381/Coch/2018. 17 M/s.The Plantation Corpn. Of Kerala Ltd. & M/s.The Velimalai Rubber Co.Ltd.

Copy of the Order forwarded to : 1. The Appellants 2. The Respondent. 3. The CIT (Appeals) Kottayam. 4. The Pr.CIT Kottayam. 5. DR, ITAT, Cochin 6. Guard file.

BY ORDER,

(Asstt. Registrar) ITAT, Cochin