DCIT, CIRCLE-4(2), KOLKATA, KOLKATA vs. M/S. RNT PLANTATIONS LTD., KOLKATA

O R D E R

Per Dr. Arjun Lal Saini, AM:

1. On the facts and circumstances of the case, the Ld. CIT(A) has erred in law and on facts by deleting the addition of Rs.10,00,192/- on account of cess on green leaf ignoring the fact that very decisions of the ITAT Kolkata, bases on which the issue was arbitrated, has been challenged by the Revenue in the Apex Court by way of filing a SLP.

M/s. RNT Plantations Ltd. A.Y. 2009-10 2. On the facts and circumstances of the case, the Ld. CIT(A) has erred in law and on facts by deleting the addition of Rs.4,53,16,134/- out of a disallowance of Rs.4,56,16,959/- made by AO on account of Bad Debt u/s 36(1)(vii) of the Act, ignoring the fact that the assessee failed to prove that the irrecoverable advances were made in the course of the business and they had become bad and that legal actions were initiated to recover the long outstanding dues from the companies.

4. Ground No.2 and 3 raised by the Revenue relates to addition on account of bad debts of Rs.4,53,16,134/-. 4.1 The brief facts qua the issue are that during the assessment proceedings, the Ld. AO observed that assessee had written off a sum of Rs.4,56,16,958/-, under the head “debts/Loans and Advances written off”, but assessee has not proved that these irrecoverable advances made in the course of business had become bad. Moreover, money lending is not the business of the assessee company. Therefore, AO held thatassessee’s claim for bad debts is not allowable. In addition to this, the AO observed that so far bad debt due from Suraj Tea Co. and Decorea Photo Frames Ltd.,are concerned, the said companies are existing and the assessee has not taken any legal action to recover such huge amount due from these companies by way of loan and interest thereon. The advance of loans is not assessee’s business but that of cultivation and manufacturing of tea. Therefore, the Ld. AO held that assessee’s claim of Rs.4,56,16,958/- is not allowable u/s. 36 (1)(vii) of the Act. 4.2 Aggrieved by the addition made by AO, the assessee filed an appeal before the Ld. CIT(A), who has partly allowed the appeal of the assessee. The Ld. CIT(A) observed that AO has disallowed the claim of the assessee on account Page | 5 M/s. RNT Plantations Ltd. A.Y. 2009-10 of two reasons: (i) the assessee is not in the business of money lending and (ii) the assessee has not taken any legal action to recover such a huge amount of bad debt. Therefore, the Ld. AO held that assessee`s claim, aboutbad debt u/s. 36 (1)(vii) of the Act is not allowable. But the Ld. CIT(A) observed that Memorandum and Articles of Association of the assessee company in Clause ‘B’ contains the objects incidental or ancillary to the attainment of main objectives.Such objectives include lending of money to such persons and on such conditions as the company may approve subject to the Provisions of Companies Act. Therefore, the Ld. CIT(A) held that there was nothing in the Memorandum and Article of Association of the assessee company to hinder advancing of loans to various parties. The Ld. CIT(A) also observed that during the earlier years and subsequent years, the assessee had actually advanced money to earn interest income and for that the assessee submitted before the CIT(A), an analysis from Financial Year 2005-06 to 2011-12 which is as follows: Financial year Assessment year Interest Income credited to P&L A/s. through Misc. Income 2005-06 2006-07 Rs.32,09,863/- 2006-07 2007-08 Rs.34,16,538/- 2007-08 2008-09 Rs.37,02,936/- 2008-09 2009-10 Rs.7,78,502/- 2009-10 2010-11 Rs.12,77,151/- 2010-11 2011-12 Rs.16,70,969/- 2011-12 2012-13 Rs.62,68,051/- Therefore from the above chart it is clear that assessee had earned interest income in the preceding years and in subsequent years also. The assessee has been earning interest income on loan from A.Y 2006-07 onwards and the said loan has been duly disclosed in the accounts of the assessee filed with the Page | 6 M/s. RNT Plantations Ltd. A.Y. 2009-10 Income Tax Department from year to year. Therefore, to hold that the assessee was not in the business of money lending is not borne out of facts. The second objection of the AO was noted by the CIT(A) was that the assessee did not initiate any legal action to recover such a huge amount of bad debt. To address that issue, the Ld. CIT(A) had stated that presently it is sufficient to state that bad debt is written off as irrecoverable in the accounts of the assessee. That is,after 01.04.1989 to claim deduction of bad debt, it is enough if bad debt is written off as irrecoverable in the accounts of the assessee (TRF Ltd. vs. CIT(SC) 323 ITR 397). Therefore, initiation of legal proceedings cannot be the sole and deciding factor while ascertaining as to whether a debt is bad or not. But it is essential that such debt is written off in the Books of Account of the assessee. In this context, the Ld. CIT(A) has examined the report and accounts for F.Y 2008-09 wherein at Schedule ‘16(B)(11)(c)’ it is stated “an amount of Rs.2,41,42,212/- against loan and Rs.2,03,99,994/- interest thereon given to Decorea Photo Frames Ltd. and Rs.4,07,522/- against commission receivable from them has been written off during the year, as the same was not realizable due to adverse financial condition of the company.” Based on the above rationale, the Ld. CIT(A) allowed theassessee’s claim of bad debts and the same is right approach. 4.3. The Ld. DR for the Revenue has submitted before us that AO had made the addition on account of Bad Debt u/s 36(1)(vii) which is as per the provisions of the Act. The assessee failed to prove that they have become bad debt. The assessee had also failed to prove that any legal actions were initiated to recover Page | 7 M/s. RNT Plantations Ltd. A.Y. 2009-10 the long outstanding dues from the various customers. The Ld. DR for the revenue has submitted that it is not the business of the assessee to lend the money. The assessee is not in the business of money lending, the assessee is in the business of only manufacturing and growing tea bushes. In addition to this, the assessee has not taken any legal action to recover such a huge amount of bad debt. It is not the company’s main object to lend the money and earn the interest. Therefore, the interest on loan given and the bad debt written off by the assessee company should be disallowed. 4.4On the other hand, the Ld. Counsel for the assessee has submitted that memorandum and article of association of Assessee Company contains the ancillary objective to lend money to such persons and on such conditions as the company may approve subject to the Provisions of Companies Act. There is nothing in the memorandum and article of association of the assessee company to hinder advancing of loan to various parties. The Counsel also submitted that the assessee has been in the business of advancing money since along and, in fact, the assessee has been advancing the money since A.Y 2006-07. The assessee has advanced money in previous years and earned interest and interest has been credited to Profit & Loss Account through miscellaneous income. The interest earned by the assessee has been duly disclosed in the account of the assessee filed with the Department from year to year and the Department has been accepting the accounts of the assessee and therefore, it is a practice constantly followed by the company since along. Hence the constant policy followed by the company Page | 8 M/s. RNT Plantations Ltd. A.Y. 2009-10 and allowed in the previous years should not be objected by the AO in the assessment under consideration. It is a matter of consistency which the assessee has been following. The assessee has been showing bad debts and the interest income in the Income Tax returns filed with the Department and assessment u/s 143(3) has been completed in the previous years. The ld Counsel pointed out that it is sufficient to state, after 1st April 1989 to claim deduction of bad debt, that bad debt is written off as irrecoverable in the accounts of assessee [ TRF Limited v. CIT vide No.323 ITR 397]. Therefore, the Ld. Counsel has submitted that initiation of legal proceedings cannot be the sole deciding factor for ascertaining as to whether a debt is bad or not. But it is essential that such debt is written off in the books of accounts of the assessee. 4.5. Having heard the rival submission and perused the materials available on record, we are of the view that bad debt claimed by the assessee is within the provisions of the Act. The assessee has been credited interest received on such advances in the Profit and Loss Account and the Department has completed assessments u/s 143(3) of the Act in previous years. The assessee has been following this practice constantly since along and we are of the view that presently it is sufficient to state that bad debt has written off as irrecoverable in the account of the assessee, as per judgment of the Hon’ble Supreme Court in TRF Limited v. CIT, 323 ITR 397 (supra).We also note that the Department has been consistently accepting the assessee`s return of income in scrutiny proceedings, and therefore, we uphold the order of the ld. CIT(A) following the Rule of consistency. For that we rely on the order of the Hon’ble Supreme Court M/s. RNT Plantations Ltd. A.Y. 2009-10 in RadhasoamiSatsang vs. CIT 193 ITR 321 (SC). So, we uphold the order of the ld. CIT(A) and dismiss the appeal of the Revenue. 4.6 In the result, the appeal filed by the Revenue on (Ground NO.2 and 3),are dismissed.

5. Ground No. 4 and 5 raised by the Revenue relates to addition on account of sale of shade trees amounting to Rs.38,85,250/-. 5.1 The brief facts qua the issue are that during the assessment proceedings,the AO observed that assessee has claimed agricultural income on sale of shade tree and claimed exemption on this amount. The AO noted thatno specific document on such sale could be produced by the assessee. The Shade trees are planted in tea gardens for giving shades to the tree bushes as part and parcel of the plantation. The shade trees are uprooted only when there are abandonment of some portion in the tea gardens. Otherwise, this will severely affect the tea plantation. Therefore, in absence of documentary proof, the Ld. AO made the addition of Rs.38,85,250/-. 5.2The Ld. CIT(A) after taking the remand report from AO observed that in respect of addition on account of sale of shade tree, the Apex Court as well as the Madras High Court had,( reported in 241 ITR 428) clearly held that whenever trees are removed and no stump is to be left, the question of any further generation does not arise and the sale proceeds of such uprooted tree is Page | 10 M/s. RNT Plantations Ltd. A.Y. 2009-10 of capital agricultural receipts. The ratio established by the Apex Court may pertain to Agricultural Income tax but when facts and circumstances are identical, the same ratio will hold for Central Income Tax too. Therefore, in view of this, Ld. CIT(A) deleted the addition made by the AO on account of sale of shade trees. 5.3 The Ld. DR for the Revenue has submitted that shade trees are not growing spontaneously. They are grown by the human being and uprooted by the human being therefore, income by sale of shade trees are revenue income. The Ld. DR for the revenue has submitted that the assessee did not submit any specific document on such sale of shade trees. The shade trees are uprooted only when there are abandonment on some portion in the tea gardens. Otherwise, this will severely affect the tea plantation. Moreover, the Ld. AO held that it is customary practice in the tea gardens to give one bundle of shade tree branches to tea garden workers for firewood every week as learnt by the AO during his visit to more than 20 tea gardens. 5.4 On the other hand, the Ld. Counsel for the assessee has stated that those shade trees are planted in the tea estates to provide shade for the tea bushes. This is a normal activity in any plantation. Whenever the trees are pest rotten, has outlived their life, cannot provide shade, the same are uprooted and sold. In this case, the assessee entered into three agreements for sale of shade trees at Dalgoan and Dalmoni Tea Estates in the Dooars, West Bengal. It will be seen from the agreement that the buyers have to uproot the standing trees from the root and remove all stumps at its own cost. The buyers have to leave the Page | 11 M/s. RNT Plantations Ltd. A.Y. 2009-10 branches to be retained by the assessee and use for its garden firewood purposes. Before carrying out the above operation of uprooting etc., the buyer has to comply with all necessary legal formalities/legal procedures and permissions to be obtained from all concerned government authorities specified in the agreement. The assessee claimed that the above evidence conclusively proves that the sale proceeds are not liable to Central Income Tax as has been held by Hon`ble Supreme Court in Karimtharuvi Tea Estates Ltd., 60 ITR 275 ( SC), that there is no controversy about the fact that the owners of tea estates plant,grevelia trees, not for the purpose of deriving any income therefrom but solely for the purpose of providing shade for the tea plants and that such shade is essential for the proper cultivation of tea. The trees were cut down and sold after they had become useless by efflux of time. The grevelia trees in the tea estate constituted, capital assets and the proceeds derived therefrom by sale as firewood would not constitute agricultural income under the Act. It has been also held by the Hon`ble apex Court in the case of A.T.K.H. VisnudattaAntharjanam vs. Commr. Agrl. IT (1970) 78 ITR 58 (SC) : TC 38R.801, that the sale of trees by removing the roots results in the removal of the sources from which fresh growth of trees would take place and the receipts from the sale of trees after uprooting would constitute a capital receipt. It was also held by Hon`ble Supreme Court in the case of A.K.T.K.M. VISHNUDATTA ANTHARJANAM (1970) 78 ITR 0058 (SC), that profit motive is not decisive of the question whether a Page | 12 M/s. RNT Plantations Ltd. A.Y. 2009-10 particular receipt is capital or income. An accretion to capital does not become taxable income merely because an asset is acquired in the hope that it may be sold at a profit. It must also be remembered that trees so long as they are uncut form a part of the land. If they are cut with roots once and for all a part of the assets is disposed of. The sale proceeds on account of their disposal cannot constitute revenue because by removing the roots the source from which fresh growth of trees can take place is also removed. The sale of such trees thus affects capital structure and cannot give rise to a revenue receipt. Therefore the amount of Rs.38,85,250/- received on sale of shade trees is not liable to Income Tax and the same is agricultural capital receipts.The Counsel also stated that the decision of the ld CIT(A) was not in contrary to the remand report sent by assessing officer.The CIT(A) had considered the remand report of the AO. 5.5 Having heard the rival submissions and perused the materials available on record, we are of the view that sale of trees by removing roots result in removal of the source from which fresh growth of trees could take place and the receipts from the sale of trees after uprooting would constitute capital receipt as held by the Hon’ble Supreme Court in the caseof A.T.K.H. VisnudattaAntharjanam vs. Commr. Agrl. IT (1970) 78 ITR 58 (SC) (supra), that the sale of trees by removing the roots results in the removal of the sources from which fresh growth of trees would take place and the receipts from the sale of trees after uprooting would constitute a capital Page | 13