M/S APEEJAY TEA LIMITED(MARGED WITH APEEJAY SURRENDRA CORPORATE SERVICES LTD.),KOLKATA vs. D.C.I.T CC - III,KOLKATA, KOLKATA

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 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 3. That on the facts and in the circumstances of the case, Ld. CIT(A) erred in holding sale consideration of Rs. 5,47,286/ - in respect of DEPB license as having no nexus with the business of growing and manufacturing of tea and thereby not applying Rule 8 thereon.”

For A.Y.2009-10 M/s. Apeejay Tea Ltd filed return of income on 29.09.2009. Consequent to an order of the Hon’ble Guwahati High Court dated 22.12.2009 M/s. Apeejay Typhoo Tea Ltd got amalgamated with M/.s. Apeejay Tea Ltd. Thereafter the asessee filed revised returns on 20.09.2010 and 27.09.2010 to give effect to the merger. Subsequently M/s. Apeejay Tea Ltd got merged with M/s. Apeejay Surrendra Corporate Services Pvt. Ltd., Viz., the assessee in this appeal.

The AO noticed that the Assessee had treated Rs.1,27,24,061/- which was sundry receipts as part of the composite income from growing and manufacturing of tea and only 40% of such composite income was liable to tax. The break-up of such receipt was as follows – Particulars Amount (Rs.) 1) Discount received 1,24,330/- 2) Street Removal Charges 7,93,447/- 3) Sale of Sample Tea 56,000/- 4) Tea Waste Sale 48,34,521/- 5) Insurance Claim 13,36,376/- 2

The AO was of the view that the aforesaid items of income had no direct nexus with the operation of growing & manufacturing of Tea at the gardens of the assessee and he traced the source of these receipts as follows: – (a) Street Removal Charges 7,93,447/- [rent received from outsiders for use of warehouse] (b) Insurance Claim 13,36,376/-[received other than for loss of Stock] (c) Rental Income from Generator to Hindustan Lever 4,93,178 [not related to tea growing or Manufacturing] (d) Hospital Recovery & Bazar Collection 49,85,206 [not related to tea growing or Manufacturing] (e) Others 1,00,973/- 77,09,180/-

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.

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 the 3

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.

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.

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 that the Assessee has failed to establish that the receipts 4

Aggrieved by the order of CIT(A) the assessee has raised ground No.1 before the Tribunal.

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 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 Rs.2,76,732/- packing material B. Machinery break Rs. 11,600/- down claim C. Street removal Rs.4,2S,928/- charges D. Discount on Rs. 14,000/- warehousing charges E. Tea Board subsidy Rs. l,14,975/- F. Scrap sale Rs. 41,548/- G. Storm Damage Rs. l,48,693 /- claim H. Received from IOL Rs . 2,34,000/ - (Indian Oil Limited) Realised from Auto Rs. 81,142/- Entines J. Bazar Rent Rs. 54,450/- K. Interest on I.T. Rs.3,78,515/- Refund (99-2000) L. Sundry receipts Rs.28,45,070/- Total Rs.46,26,553/- 5

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).

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 respect of assets which were used for the purposes of tea business and on sale whereof, the amount in excess of

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 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. 8

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.

Ground No.2 raised by the assessee reads as follows :-

As part of development of North-East India, the Central Govt. gives a subsidy @ 3% of the interest on working capital for ten years from the date of substantial 9

On appeal by the assessee the CIT(A) was of the view that the AO has given elaborate reasons in his assessment order for holding that the interest subsidy could not be considered as part of the composite income from tea business as there was no nexus with the business of growing and manufacturing of tea and that the Assessee could produce no material on record in support of its contentions. The CIT(A) also held that there was no denying the fact that the receipts are business receipts, but then, they have been assessed as such by the AO but he was in agreement with the AO that these receipts cannot be treated as part of the composite income from tea business for the purposes of Rule 8. Aggrieved by the order of the CIT(A), the Assessee has raised Gr.No.2 before the Tribunal.

We have considered the rival submissions. The ld. Counsel for the assessee submitted that the subsidy in question is relatable to the business of the Asessee of growing as well as manufacturing of tea and therefore it had to be included in the 10

We have given a very careful consideration. The reasoning given while deciding Gr.No.1 & 3 in the earlier part of this order will equally apply to this ground also. As far as this ground of appeal is concerned, we also find that the CIT(A) has observed that the income in question was assessed as business income. In such circumstances, there is no reason why this income should not be considered as part of the composite income before apportionment between income from agriculture and income from non- agricultural income. We therefore direct the AO to consider the aforesaid receipt also as part of the composite income. Gr.No.2 raised by the Assessee is accordingly allowed. 24. Ground no.4 raised by the assessee reads as follows :- “4. That on the facts and in the circumstances of the case, Ld. CIT(A) is wrong and unjustified in upholding the order of Assessing Officer to disallow expenses of Rs. 17,97,238/ - U/s. 14A of I.T. Act, 1961 after application of Rule 8 of I.T. Rules, 1962. “ 25. The AO disallowed a sum of Rs.17,97,238/- as expenditure which is relatable to the business income which does not form part of the total income under the Act. The disallowance was made by invoking the provisions of section 14A of the Act on the aforesaid action of the AO. The assessee filed an appeal before CIT(A). Before CIT(A), the Assessee pointed out that the assessee has itself made disallowance of Rs.17,97,238/- under section 14A of the Act out of the composite income from the business of growing and manufacturing tea. The AO taxed the disallowance u/s.14A of the Act separately as taxable income which results in double taxation. The CIT(A) however confirmed the order of the AO by observing that by its very definition, the disallowance u/s 14A is related to the income which was not includible in the total income and so, the same cannot be treated as part of the composite income from tea business. Aggrieved by the order of the CIT(A), the Assessee has raised Gr.No.4 before the Tribunal.

We have given a very careful consideration to the rival submissions. The computation of composite income and income to be taxed separately under the head “Income from Business” as done by the AO in the order of assessment is as follows: “INCOME FROM BUSINESS (Apeejay Tea Ltd.) Composite Business Income as per Computation Filed with the Revised return 9,21,97,316(1) Add: As discussed- Cess on Green Leaf 1,77,55,774(2) Balance total 10,99,53,090(3) Less: (i) Addition made by the Assessee u/s.14A in its computation of composite business income, since this disallowance is to be made from expenditures not related to business of growing and manufacturing of tea 17,97,238 (ii) Interest Subsidy (to be taxed fully) 22,64,023 (iii) Other receipts (to be taxed fully) 77,09,180 (iv) Sale proceeds of DEPB Scheme 5,47,286 1,23,17,727(4) Total of (i) to (iv)