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Income Tax Appellate Tribunal, “A” BENCH : KOLKATA
Before: Hon’ble Shri N.V. Vasudevan, JM & Shri M.Balaganesh, AM ]
This appeal by the Revenue arises out of the order of the Learned Commissioner of Income Tax (Appeals) -2, Kolkata [ in short the ld CITA] in Appeal No. 1917/CIT(A)- 2/(12-13)/14-15 dated 29.04.2015 against the orders passed by the DCIT, Circle-4(1) Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 29.12.2014 for the Assessment Year 2012-13
The first issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in deleting the disallowance of bridge and culvert repair maintenance in the sum of Rs. 5,02,763/-, in the facts and circumstances of the case.
The brief facts of this issue is that the assessee is engaged in the business of manufacturing of tea. The Ld. AO observed that the assessee claimed an amount of Rs. 5,02,763/- towards bridge and culvert repair maintenance. In course of scrutiny of the case, it was contended that the expenditure was made for the purpose of flood
2 M/s Engo Tea Company A.Yr.2012-13 protection. The assessee explained that the expenditure is on works undertaken to prevent overflow of water from the surrounding rivers during monsoons, causing damage to tea gardens and crops. The nature of expense incurred by the company is certainly revenue and not capital due to the following reasons: • The protection walls itself gets ruined and destroyed during the monsoons and therefore, the entire work is redone year after year as it becomes indispensable to safeguard the gardens and the plantation. It is regular and repetitive in nature. • The effect of the work undertaken is temporary, i.e. the benefit derived is not enduring in nature. • No asset has come into existence as result of the work undertaken nor has the value of an existing asset been increased. • This expenditure helps to maintain and protect the tea plantation. It is wholly and exclusively in connection with the business of the assessee. The ld AO however held that such an expenditure laid out for embankment of river is clearly in the nature of capital expenditure. As such, an amount of Rs. 5,02,763/- was added back to the returned income.
Before the Ld. CIT(A) the assessee apart from reiterating the submissions made before the Ld. AO placed reliance on certain decisions in support of its contentions. The Hon’ble Madras High Court in CIT vs. Ashok Leyland Limited reported in 72 ITR 137 (Mad) as affirmed by the Hon'ble Supreme Court in 86 ITR 549 (SC) has held that the word capital connotes permanency and capital expenditure is closely akin to the concept of securing something, tangible or intangible property, corporeal or incorporeal rights, so that they could be of a lasting or enduring benefit to the enterprise in issue. Revenue expenditure, on the other hand, is operational in its perspective and solely intended for the furtherance of the enterprise. The Hon’ble Allahabad High Court in Jagat Bus Service vs. CIT reported in 18 ITR 13 (All) has held that oridinarily capital means an asset of element of permanency about it and which is capable of being source of income 2
3 M/s Engo Tea Company A.Yr.2012-13 and capital expenditure must therefore generally mean an acquisition of an asset and the asset must be intended to be of lasting value, while income or revenue expenses are generally running expenses incurred in earning profit or expenses incurred with the primary objective or immediate return or acquisition of assets which are not of lasting value and are likely to get exhausted or consumed in the process of the return or a very limited number of returns. The Hon'ble Supreme Court in Bombay Steam Navigation Company vs. CIT reported in 56 ITR 52 (SC) has held that if the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. It is a settled law that expenditure incurred for maintenance of existing asset and facilitate profit making apparatus will be allowed as revenue expenditure. Hence, it was humbly submitted that the assessee be allowed deduction of Rs. 5,02,763/- on account of bridge and culvert maintenance.
The Ld. CIT(A) deleted the disallowance by making following observations: “I have examined the matter. While accepting that only repair and maintenance has taken place, the AO has still held that the expenditure is capital in nature although there is no evidence to show that new assets other than the existing once have been created. In the past also I find that the appellant has made similar claims of expenditure which have been allowed by Department. Such details are as below:
Financial year Amount (Rs. Lacs) 2011-12 5.02 2010-11 14.21 2009-10 13.55 2008-09 1.68 2007-08 3.21
From the above chart we find that the expenditure of the appellant towards maintenance and repair of bridge and embankments has actually reduced from the last 2 years. The detailed break-up of these expenses reflect that the amount has been spent on boulders, sand, GI wires and net, all of which are essential ingredients of maintenance and repair of bridges and embankments. It is evident that during the 3
4 M/s Engo Tea Company A.Yr.2012-13 months of monsoon every year there are damages to the embankments which if left unrepaired could result in extensive crop damage. Such repair and maintenance neither create a new asset for the appellant nor increase the capacity or acreage of production for the appellant. Such repair only sustains proper drainage, connectivity and maintenance of the tea estates. In my opinion, the action of the AO to hold expenses pertaining to flooding protection on a recurrent basis to sustain the plantation of the appellant as capital expenditure is unjustified. Accordingly, Grounds no. 1 & 2 of the appeal are allowed”.
Aggrieved the Revenue is in appeal before us on the following grounds: 1. That on the facts and circumstances of the case, the Ld. CIT(A) erred in facts as well as in law in holding that expenses of Rs. 5,02,763/- incurred on account of flood prevention was an allowable expenditure, ignoring the fact that the same is of permanent nature gives enduring benefit and as such, capital in nature.
We have heard the rival submission and perused the material available on record. The Ld. DR relied on the order of the Ld. AO. In response to this , the Ld. AR vehemently relied on the order of the Ld. CIT(A). We find that the assessee had given the details of expenditure incurred towards bridge and culvert repair maintenance which are in the nature of repetitive repairs and maintenance carried out by the assessee to prevent overflow of water from the surrounding rivers during the monsoons, and in order to prevent the damage that would not be caused to the tea gardens and crops. We are convinced that no enduring benefit in the capital field arises to the assessee pursuant to incurrence of this expenditure. Hence, by no stretch of imagination, the same could be construed as capital in nature. The decisions relied upon by the assessee before the Ld. CIT(A) are squarely applicable to the point under dispute and the principles laid down thereon would be squarely applicable to the assessee and the same are not reiterated herein for the sake of brevity. We find that the Ld. CIT(A) had rightly appreciated the contentions of the assessee and deleted the disallowance and hence we do not find any justifiable reason to interfere in the said order. Accordingly, ground no. 1 raised by the Revenue is dismissed.
5 M/s Engo Tea Company A.Yr.2012-13 8. The last ground to be decided in this appeal is as to whether the Ld. CIT(A) was justified in deleting the disallowance of expenditure incurred on account of replantation in the sum of Rs. 1,14,59,125/-, in the facts and circumstances of the case.
The brief facts of this issue is that the assessee claimed an amount of Rs. 1,14,59,125/- as replanting expenses. The assessee relied on the provision of Rule 8(2) of the I.T. Rules and claimed that the expenses were laid out for uprooting old bushes and preparation of soil for planting new plants. However, it remained unsubstantiated as to whether the activity was conducted in an already abandoned area or in an area of existing plantation. The ld AO observed that it was interesting to note that in the immediately preceding year ending on 31.03.2011, the assessee claimed an amount of Rs. 1,03,99,828/- on this account. In the year ended 31.03.2010 & 31.03.2009 the claims made on this account were Rs. 86,08,396/- & Rs. 47,71,685/- respectively. He observed that such a repetitive exercise every year on account of replantation is contrary to the normal trend in the growing of tea, as a tea plant is generally proved to have a life expectancy of around 35 years for clone plantation and 60-70 years for seed plantation, unless there is destruction of plant on account of extreme natural calamity or extreme fungal diseases. He finally concluded that in the circumstances, the entire expenditure of Rs. 1,14,59,125/- seems to be laid out for extension of cultivation and accordingly disallowed the same.
Before the Ld. CIT(A) the assessee submitted that it was engaged in the business of growing and manufacturing of tea having garden at New Jalpaiguri since more than 5 decades. It was the usual practice to uproot/replant the dead tea bushes every year and for the same, revenue expenditure on shade trees cutting, uprooting, irrigation, chemicals etc is incurred in the usual course of business. It was submitted that Rule 8(1) provides that 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 forty per cent 5
6 M/s Engo Tea Company A.Yr.2012-13 of such income shall be deemed to be income liable to tax. Rule 8(2) provides that 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. Rule 8(2) specifically provides for allowance in respect of cost of planting bushes, in replacement of bushes that have died or become permanently useless in an area already planted. The case of the assessee strictly falls under Rule 8(2) and therefore, it was humbly submitted that the replantation expenses be allowed as a deduction. Reliance was also placed on the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. Tasati Tea Ltd. reported in 262 ITR 388 (Cal) which held as under:- “If the plants are raised and maintained in a nursery for being utilized for the purpose of replantation without any expansion of the plantation area or replantation in an abandoned area, then it cannot be said to be a capital expenditure. Capital expenditure involves an investment increasing the capital for higher profit. The expansion means extension of plantation to an additional area. An area already abandoned, if replanted would be an expansion of the area under cultivation for the previous year concerned. The maintenance of an area already under cultivation cannot be treated to be an expansion of the plantation nor can it be treated to be an investment or expansion adding to the capital already invested. On the other hand, it would be a maintenance of the plantation itself and, therefore, is a revenue expenditure. Further, the nature and character of the expenditure and the purposes for which the nursery is being maintained, is definitely a revenue expenditure for the maintenance of the plantation for the purpose of carrying on the business itself. It is not an investment of fresh capital unless it is utilized for the purpose of expanding the plantation.”
It was submitted that the ld AO never contradicted or pointed out any infirmities in the details or explanation submitted and unilaterally came to the conclusion that it remained unsubstantiated as to whether that the activity was conducted in an abandoned area or existing plantation. The assessee had specifically pointed out that the same has been incurred for planting bushes in replacement of bushes that has died or has become permanently useless in an area already planted. The ld AO has stated in his order the details of expenditure incurred by assessee in past and its life expectancy and theoretically came to conclusion that replanting exercise is contrary to normal trend in growing of tea. He never considered the quantum of area under plantation while coming 6
7 M/s Engo Tea Company A.Yr.2012-13 to the conclusion. He has also failed to consider the orders passed u/s 143(3) of Income Tax Act, 1961 by his predecessors for A.Y. 2010-11 & A.Y. 2011-12 which have also considered the expenditure incurred and allowed the same as deduction to assessee.
The Ld. CIT(A) deleted the disallowance by making the following observations: “I have examined the assessment order and the submissions made by the AR of the appellant. In the assessment order the AO has argued that the appellant has not substantiated as to whether the activity of replantation was conducted in an abandoned area or whether in an area of existing plantation the old and diseased bushes were uprooted and replanted with healthy tea bushes. Therefore, during the appellate proceedings, the AR of the appellant was specifically required to produce relevant documents to substantiate the activity of replantation. It was argued by the AR before me that the appellant gets replantation assistance from the Tea Board and such supporting papers were examined by me. I have examined the application form in Part A & B made by the appellant for financial year 2011-12 before the Tea Board to seek financial assistance on account of replanting/replacement/rejuvenation of tea bushes. The application is dated 28.02.2011 and the total area under plucking is reflected at 585.16 Ha. Upon the receipt of such application, the Tea Board sends an Inspecting Officer who has to certify the total area under plucking. The report of the Assistant Director of Tea Board, Jalpaiguri dated 18.07.2013 reflects that the total area under plucking continues to be more or less same i.e 584 to 585 Ha. Therefore, from the documents made available with me, I find that the area under plantation in case of the appellant has not changed and therefore this is not a case of Capital Expenditure on account of extension or expansion of plantation to new areas/abandoned areas. The acreage under cultivation being at the same level over the years suggests that the appellant has been undertaking only replantation/replacement/rejuvenation of the existing area under cultivation. Such being the case of the appellant, I agree with the AR of the appellant that going by the decision of the jurisdictional High Court of Kolkata in the case of CIT vs. Tasati Tea Ltd. 262 ITR 288, replantation expenses should be treated as revenue expenses and allowed accordingly, Grounds No. 3 & 4 of the appeal are allowed” .
Aggrieved the Revenue is in appeal before us on the following ground: 2. That on the facts and circumstances of the case, the Ld. CIT(A) on facts as well as in law in holding that expenses of Rs. 1,14,59,125/- incurred on account of replantation is allowable expenses, ignoring the fact that the assessee could not substantiate whether the replantation activity was confined to the existing area of plantation or spread out to adjoining abandoned area.
The Ld. DR vehemently relied on the order of the Ld. AO. He also raised an objection that inspection carried out by the Inspecting Officer of Tea Board certifying 7
8 M/s Engo Tea Company A.Yr.2012-13 that the replantation had happened in the same area were made known by the assessee before the Ld. CIT(A) for the first time and documents to that effect were not filed before the Ld.AO. Accordingly, he prayed for setting aside of the assessee to the file of Ld. AO. In response to this, the Ld. AR vehemently relied on the order of the Ld. CIT(A) and also argued that the Revenue had not raised any ground for violation of Rule 46A of the I.T. Rules and hence, the objection raised by the Ld. DR does not hold any water.
We have heard the rival submissions and perused the materials available on record. We find that the Ld. CIT(A) had observed that the Inspecting Officer from Tea Board had visited tea garden and had also examined the plantation area and after such due examination only, he had certified that tea has not been cultivated in any new area; and that the replantation had happened only in the existing area allotted to the assessee. We find that the Ld. CIT(A) had examined the report of the Assistant Director of Tea Board, Jalpaiguri dated 18.07.2013 in this regard. We are in agreement with the argument advanced by the Ld. AR that the Revenue had not raised any ground for violation of Rule 46 A of the I.T. Rules before us. We find that the Ld. CIT(A) had given a categorical finding that area under plantation in case of the assessee has not changed and therefore, this is not a case of capital expenditure on account of extension or expansion or of plantation to new areas/abandoned areas. He has also given a finding that the acreage under cultivation being at the same level over the years and thereby the assessee has been undertaking only replantation/replacement, rejuvenation of the existing area under cultivation. These facts were not disputed by the Ld. DR before us. Hence, in the absence of any contrary facts to this effect, the findings of the Ld. CIT(A) and the decisions of Hon’ble Jurisdictional High Court relied upon by the Ld. CIT(A) in the case of CIT vs. Tasati Tea Ltd. reported in 262 ITR 388 (Cal) comes to the assistance of the assessee. Hence, we do not find any infirmity of the order of the Ld. CIT(A) in this regard. Accordingly, Ground No. 2 raised by the Revenue is dismissed. 8
Ground No. 3 raised by the Revenue is general in nature and does not require any specific adjudication.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the Court on 04.08.2017