APEEJAY SURRENDRA CORPORATE SERVICES LTD. (NOW KNOWN AS APEEJAY TEA LTD.),KOLKATA vs. D.C.I.T.,CIRCLE-8(1), KOLKATA

आदेश / O R D E R

Per Dr. A. L. Saini:

The captioned appeal filed by the Assessee,pertaining to assessment year 2010-11, is directed against an order passed by the learned Commissioner of Income Tax (Appeals)-11, Kolkata (in short the ld. ‘CIT(A)’], which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 ( in short the ‘Act’) dated 31.03.2013.

Apeejay Surrendra Corporate Services Ltd.( Now known as Apeejay Tea Ltd.) ITA No.1494/Kol/2015 Assessment Year:2010-11 (a) Hospital Treatment Rs.42,35,820/- (b) Insurance claim Rs. 5,69,354/- (c) Miscellaneous receipt Rs. 16,431/- Rs.48,21,605/- 2. That on the facts and in the circumstances of the case, Ld. CI.T. (A) is wrong and unjustified in upholding the action of Assessing Officer who held sundry receipts of Rs. 5,64,245/- as not relatable to tea production. 3. That on the facts and in the circumstances of the case, Ld. CI.T. (A) has erred in upholding the findings of the Assessing Officer who considered club expenses of Rs. 3,51,587/- as not incidental to business. 4. That on the facts and in the circumstances of the case, Ld. CI.T. (A) is wrong and unjustified in upholding the action of Assessing Officer who enhanced the book profit U/s 115JB of Income Tax Act, 1961 on account of cess on green leaf by Rs. 2,91,59,198/-. 5. That the appellant craves leave to add, alter, adduce or amend any ground or grounds on or before the date of hearing of the appeal.

“2. Ground Nos.1 & 3 raised by the assessee read as follows :- “1. That on the facts and in the circumstances of the case, Ld. CIT(A) is wrong and unjustified in holding receipts under following heads aggregating to Rs. 77,09,180/- as having no nexus with growing and manufacturing of tea and thereby not applying Rule 8 to those receipts: - Street Removal charges Rs. 7,93,447 Page | 2

Apeejay Surrendra Corporate Services Ltd.( Now known as Apeejay Tea Ltd.) ITA No.1494/Kol/2015 Assessment Year:2010-11 Insurance Claim Rs. 13,36,376 Rental from Generator Rs. 4,93,178 Hospital & Bazar Collection Rs. 49,85,206 Other receipts Rs. 1,00,973 Rs. 77,09,180

Apeejay Surrendra Corporate Services Ltd.( Now known as Apeejay Tea Ltd.) ITA No.1494/Kol/2015 Assessment Year:2010-11 7. Therefore, the AO held that the aforesaid sum of Rs.77,09,180/- has to be kept outside the purview of composite income 40% of which is liable to tax. He held that the entire amount of Rs.77,09,180/- was to be taxed as per regular provision without applying Rule 8. 8. Similarly the Assessee sold DEPB license entitlement during the relevant previous year and the proceeds of Rs.5,47,286/- on such sale was received by it on 10-09-2008. The AO accepted the fact that as per sec 28(iiid), the income is taxable as business receipt, but again, since it had no nexus with the business of growing and manufacturing of tea, he held that Rule 8 is not applicable on any profit out of such receipt. Hence theamount of Rs.5,47,286/- was brought to tax by the AO as income chargeable to tax as per regular tax rate as part of regular income. 9. In coming to the above conclusion, the AO placed reliance on the judgment of the Hon’ble Gauhati High Court in the case of Sookerating Co Ltd.111 ITR 457 (Gau) wherein it was held that Rule 8 was not applicable to income which had no nexus with tea business. 10. Aggrieved by the order of AO the assessee preferred an appeal before CIT(A). Before CIT(A) the Assessee submitted that all the items of income had nexus with the growing and manufacturing of tea and had to be regarded as part of the composite income before apportionment. The Assessee contended that maintaining warehouse is part and parcel of tea manufacturing business and its temporary letting out was incidental to the business activity. The rental receipts from such letting are therefore part of the composite income. Similarly, rent receipts for providing temporary generator services to Hindustan Lever were incidental to the business of the Assessee. It was argued that the Assessee provided hospital and market area for staff welfare and recovery from them for use of hospital and bazaar to sell their other products was nothing but relatable to growing and manufacture of tea and was to be regarded as part of the composite income. 11. The CIT(A) did not find force in the submission made by the Assessee he held that by no stretch of imagination, renting out of warehouse or generator sets or recovery from hospital or market area can be treated as part of the operations of growing and manufacturing of tea and that the AO has rightly held that such receipts were assessable as business income under the normal provisions of the Act. He also held that the Assessee has not explained the nature of receipts under ‘insurance claim ‘ or ‘other receipts’ to justify its claim and the assessee has failed to establish that the receipts under consideration had any direct nexus with the business or growing and manufacturing of tea. 12. Aggrieved by the order of CIT(A) the assessee has raised ground No.1 before the Tribunal. 13. At the time of hearing the ld. Counsel for the assessee brought to our notice that the order of ITAT in assessee’s own case for A.Y.2005-06 in ITA No.1406/Kol/2009 and 1233/Kol/2009 order dated 11.09.2015 wherein the Tribunal had an occasion to consider similar issue. Some of the items of income that were considered by the Tribunal in the aforesaid assessment order are Page | 4

Apeejay Surrendra Corporate Services Ltd.( Now known as Apeejay Tea Ltd.) ITA No.1494/Kol/2015 Assessment Year:2010-11 similar to the items of income that are considered as normal business of the assessee by the AO in the present assessment year. The following were the observations of the tribunal :- “9.2. We have heard the rival submissions and perused the material available on record. The details of Rs.46,26,553/- are as below:- A. Discount out of packing material Rs.2,76,732/- B. Machinery break down claim Rs. 11,600/- C. Street removal charges Rs.4,2S,928/- D. Discount on warehousing charges Rs. 14,000/- E. Tea Board subsidy Rs. 1,14,975/- F. Scrap sale Rs. 41,548/- G. Storm Damage claim Rs. l,48,693 /- H. Received from IOL(Indian Oil Limited)Rs . 2,34,000/ - I. Realised from Auto Entines Rs. 81,142/- J. Bazar Rent Rs. 54,450/- K. Interest on I.T.Refund (99-2000) Rs.3,78,515/- L. Sundry receipts Rs.28,45,070/- Total Rs.46,26,553/- 9.3. From the aforesaid list it could be seen that Items A to J , were only arising out of tea business totalling to Rs.14,02,968/- and accordingly to be treated as income from business. Since no details could be filed regarding the sundry receipts before us, the same is considered as the income from other sources. Interest on income-tax refund could definitely be construed only as income from other sources. We direct the Assessing Officer to re-compute accordingly. Accordingly, Ground No. 4 of the Revenue is partly allowed.” 14. The ld. DR however supported the orders of the revenue authorities and placed reliance on the decision of the Hon’ble Supreme Court in the case of Liberty India Ltd. 317 ITR 218 (SC). 15. We have given a careful consideration to the rival submissions. In CIT Vs. Kothari Plantations & Industries Ltd. 203 ITR 547 (Cal) the Hon’ble Calcutta High Court had to examine the provisions of Rule 8 of the rules in the context of the action of the revenue in taxing receipt by an Assessee to which Rule 8 applies of a sum which fell within the description of receipts taxable u/s.41(2) of the Act. The revenue taxed the said receipt as business income without including the same in the composite income before apportionment between agricultural and business income. The Hon’ble Calcutta High Court held Rule 8 provides that the income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business and 40 per cent of such income shall be deemed to be income liable to tax under the Act. Sec. 29 provides that the business income referred to in s. 28 shall be computed in accordance with the provisions contained in ss. 30 to 43D. Accordingly the income from tea business has to be computed as provided in s. 29 in accordance with the provisions contained in ss. 30 to 43D and 40 per cent of the income so computed alone can be assessed under the Act. Sec. 41(2) falls within the scope of s. 29 and only 40 per cent of such income can be subjected to tax under the Act. There cannot be a separate computation of the income under s. 41(2). Under r. 8, tax cannot be levied on the entire sum assessed under s. 41(2). Sec. 41(2) applies in Page | 5

Apeejay Surrendra Corporate Services Ltd.( Now known as Apeejay Tea Ltd.) ITA No.1494/Kol/2015 Assessment Year:2010-11 respect of assets which were used for the purposes of tea business and on sale whereof, the amount in excess of the written down value is realised. Sec. 41(2) is a deeming provision. It fictionally treats a capital receipt as a business receipt. The Expln. to s. 41(2) provides that, where the moneys payable in respect of the building, machinery, plant or furniture become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provisions of the said sub-section shall apply as if the business or profession is in existence in the previous year. The fiction provided under s. 41(2) thus treats the business in which the asset in question had been used as in existence and provides that any amount realised in excess of the written down value not exceeding the actual cost is to be charged to income-tax as income of the business of the previous year in which such moneys become payable. The effect of s. 41(2) r/w the Explanation is that the excess over the written down value is deemed to be the income of the tea business and has to be accordingly computed with reference to r. 8. The contention of the IT authorities that such income does not arise out of cultivation of tea leaves and/or manufacture of tea is not correct in view of the statutory fiction created under s. 41(2) r/w the Explanation thereto and the provisions of s. 29. To sum up, by virtue of the fiction under s. 41(2), profit, though in the nature of a capital gains, is treated as income of the business, though not in existence, where profit arises on sale of depreciable assets of the business after being used for the purpose of the business. The business in the present case being business of growing and manufacturing tea, the fictional profit of the business so arising under s. 41(2) cannot but be a profit of the same composite business. Thus, the apportionment of the prescribed percentage as between growing tea and manufacturing tea under r. 8(1) is unavoidable. The statute as also the rules framed there under consistently accept the business of growing tea and the business of manufacturing tea as one indivisible composite business calling for apportionment of its income under all circumstances. Secondly, depreciation of the assets, even though used exclusively for manufacturing tea, also gets sliced down to 40 per cent by the operation of the said r. 8(1). It is illogical to say that the same rule of apportionment shall not apply to the fictional profit arising under the circumstances described under s. 41(2). The fiction is that the capital profit under s. 41(2) is to be treated as profit of the pre-existing business of growing and manufacturing tea. 16. In McLeod Russel India Ltd. Vs. CIT (2013) 260 CTR 0337 (Gau), the Hon’ble Gauhati High Court had an occasion to examine similar claim by an Assessee who received (a) profits on sale of licence, granted under Customs and Central Excise Duties Drawback Rules, 1971, (b) Sale of Scrap and (c) Misc. Garden Income, and (d) Excise duty remission, whether should be considered as part of the composite income before apportionment between agricultural and non agricultural income. The Hon’ble Gauhati High Court held that as per Rule 8 income which is derived from sale of tea grown and manufactured by seller shall be treated as if it were 'income derived from the business' and 40 percent of such income shall be deemed to be income chargeable under Income Tax Act, 1961. The Hon’ble Court held that as per Section 28 (iii a), profits on sale of licence, granted under Customs and Central Excise Duties Drawback Rules, 1971, are to be treated as income derived from business which in the case of the Assessee was from sale of tea grown and manufactured. Similarly sum claimed as receipt from excise duty was composite income under Section 28 (iii c) before apportionment thereof under Rule 8 of Rules. Sum claimed as receipt from sale of scraps forms Page | 6

Apeejay Surrendra Corporate Services Ltd.( Now known as Apeejay Tea Ltd.) ITA No.1494/Kol/2015 Assessment Year:2010-11 part of composite income of assesse. Claim of miscellaneous garden income was part of composite income of assesse. The Hon’ble Court observed that when statutory provisions have been made in form of Clause (iii a) and Clause (iii c) of Section 28, as and when an income shall be chargeable to income tax under heads of profits and gains derived of business, it would be wholly impermissible for AO to treat income, which fell within ambit of Clause (iii a) and Clause (iii c) of Section 28 as income, which was not composite income. Receipts claimed by assesse as composite income before apportionment had direct nexus with assessee activities of growing, manufacturing and selling of tea. 17. It is clear from the ratio laid down in the aforesaid decisions that rule making authority has prescribed that income, which is derived from sale of tea grown and manufactured by seller, shall be treated as if it were 'income derived from the business'. Therefore whatever income is taxed as business income in the absence of any other source of income except growing and manufacturing of tea has to be regarded as part of composite income. In fact the AO has also taxed these items of income as business income only but has not considered them as part of the composite income. 18. In the light of the law as laid down in the aforesaid decisions and in the light of the decision of the Tribunal rendered in Assessee’s own case, we shall now examine each of the items of income that were regarded by the Revenue as not forming part of the composite income. All incomes (including DEPB receipts ) excluded by the AO from the composite income but taxed as Income from business separately have to be regarded as part of business income u/s.28 to 44 of the Act. We are also of the view that in the light of interpretation of Rule 8 as laid down in the aforesaid decisions, the ratio laid down by the Hon’ble Supreme Court in the case of Liberty India (supra) which was rendered in the context of Sec.80IA which speaks of a direct nexus with the eligible business cannot be applied. As already observed, the tests to be applied while computing composite income under Rule 8, is to see whether the receipts fall within the ambit of receipts under Sec.28 to 44 of the Act. We therefore hold that income set out in Ground No. 1 & 3 have to be included as part of the composite income. Thus ground No.1 and Gr.No.3 are allowed.”

Apeejay Surrendra Corporate Services Ltd.( Now known as Apeejay Tea Ltd.) ITA No.1494/Kol/2015 Assessment Year:2010-11 8. The brief facts qua the issue are that as per the Tax Audit Report, Club entrance Fees of Rs.3,51,587/- was incurred by the assessee company during the year under consideration. However,AO noted that in absence of details and justifications furnished by the assessee company, it could not ascertained whether such expenditure was incurred for the purpose of business. Therefore, AO disallowed the same.

Apeejay Surrendra Corporate Services Ltd.( Now known as Apeejay Tea Ltd.) ITA No.1494/Kol/2015 Assessment Year:2010-11 12. Ground no. 4 raised by the assessee relates to addition in book profit u/s 115JB on account of cess on green leaf by Rs. 2,91,59,198/-.

We note that down below the above explanation 1, of Sub-section (2) of section 115JB, nothing has mentioned about the “Cess on Green Leaf”, therefore, book profit under section 115JB should not be increased on account of “Cess on Green Leaf”. The minimum alternate tax (MAT) and the computation thereof u/s 115JB of the Act, overrides the other provisions of Act therefore, we note that the Page | 9

Apeejay Surrendra Corporate Services Ltd.( Now known as Apeejay Tea Ltd.) ITA No.1494/Kol/2015 Assessment Year:2010-11 addition made by the Assessing Officer and sustained by the Ld. CIT(A) is highly arbitrarily and needs to be deleted. Hence, based on the factual position explained above and considering the provisions of section 115JB, which is a code itself, we delete the addition of Rs.2,91,59,198/- made by AO in the book profit of the assessee company.

Order pronounced in the Court on 29.03.2019

Sd/- Sd/- (A.T.VARKEY) (A.L.SAINI) �या�यकसद�य / JUDICIAL MEMBER लेखासद�य / ACCOUNTANT MEMBER कोलकाता /Kolkata; �दनांक/ Date: 29/03/2019 (SB, Sr.PS) Copy of the order forwarded to: 1. Apeejay Surrendra Corporate Services Ltd.( Now known as Apeejay Tea Ltd.) 2. DCIT, Circle-8(1), Kolkata 3. C.I.T(A)- 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata. 6. Guard File.