Kerala High Court

The Plantation Corporation Of ... vs The Assistant Commissioner Of ... on 28 October, 2021

                       IN THE HIGH COURT OF KERALA AT ERNAKULAM
                                       PRESENT
                         THE HONOURABLE MR.JUSTICE S.V.BHATTI
                                          &
                       THE HONOURABLE MR.JUSTICE BASANT BALAJI
              Thursday, the 28th day of October 2021 / 6th Karthika, 1943
                                   ITA NO. 37 OF 2020

ITA.NO.239/COCH/2018 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN

APPELLANT :

      THE PLANTATION CORPORATION OF KERALA LTD

      MUTTAMBALAM P.O., KOTTAYAM - 686 004




      BY SRI.RAMESH CHERIAN JOHN, Advocate for the appellant.

      BY M/S. JOSEPH MARKOS (SR) and KURYAN THOMAS, Advocates for

      the appellant (By Order).




RESPONDENTS :


1.    THE ASSISTANT COMMISSIONER OF INCOME TAX

      CIRCLE 1, O/O.THE ASSISTANT COMMISSIONER OF INCOME TAX

      PUBLIC LIBRARY BUILDING, SHASTHRI ROAD, KOTTAYAM - 686 001

1.    THE COMMISSIONER OF INCOME TAX,

      O/O.THE COMMISSIONER OF INCOME TAX, PUBLIC LIBRARY BUILDING,

      SHASTHRI ROAD, KOTTAYAM -686 001




      BY SRI.JOSE JOSEPH, Standing Counsel for Income Tax (By Order)




     This Income Tax Appeal having come up for orders on 28.10.2021, upon
perusing the petition, the court on the same day passed the following:
             S.V. BHATTI & BASANT BALAJI, JJ.

------------------------------------------ ITA Nos. 201/2013; 208/2013; 225/2013; 23/2018; 37/2018;

39/2018; 83/2018; 84/2018; 37/2020 and 71/2020

------------------------------------------

Dated: 28th October, 2021

REFERENCE ORDER

S.V.Bhatti, J

Heard learned Senior Advocate Mr Joseph Markos,

Advocates Mr Kuryan Thomas, Mr Ramesh Cheiran John for

appellants and Standing Counsel Mr Jose Joseph for

respondent.

2. The captioned appeals are at the instance of

Plantation Companies/assessees. The Commissioner of

Income Tax/Revenue is the respondent. The assessees, in

respective I.T.Appeals, challenge the individual and separate

orders of the Income Tax Appellate Tribunal (for short 'the

Tribunal'), Cochin Bench, Cochin. The Tribunal, in the

judgment under appeal, referred to and relied on the Division

Bench judgment of this Court in Rehabilitation Plantations Ltd. ITA Nos. 201; 208; 225/2013; 23; 37; 39; 83; 84/2018; 37 & 71/2020

v. Commissioner of Income Tax1 and dismissed the appeals filed by

the assessees.

2.1 The assessees, as matter of fact, either are exclusively

into rubber plantation or have rubber plantation with tea

plantation in their respective estates. The dispute centres

round the income derived from rubber plantation. Income from

rubber plantation till the Assessment Year 2002-03 was

considered purely as agricultural income and consequence

thereof being the income received from the sale of rubber was

subjected to tax under Kerala Agricultural Income Tax Act 1950

(for short 'KAIT Act'). With effect from 01.04.2002 Rule 7A was

introduced in the Income Tax Rules 1962 (for short 'the Rules')

and has been effective for the Assessment Year 2002-03. The

Rule provides that 35% of income from the rubber plantation, as

income from business, is exigible under Income Tax Act 1961

1 (2012) 251 CTR 343 (Kerala) ITA Nos. 201; 208; 225/2013; 23; 37; 39; 83; 84/2018; 37 & 71/2020

(for short 'the Act') and balance 65% continuing to be

agricultural income subjected to tax under the KAIT Act.

3. The background circumstances are that the assessees

in the subject Assessment Years under the Act in terms of Rule

7A claimed an allowance for replanting expenses of rubber

plants and a deduction for upkeep and maintenance expense of

immature rubber plants while computation of income tax

payable. Therefore, in substance, the assessees claim an

allowance for replanting rubber in the area of rubber estate

after existing rubber trees had been cut and removed and

further deduction under the head of 'upkeep and maintenance

expenditure' till the immature rubber plants in the area planted

reaches the age of 6/7 years when the plants yield raw rubber.

The claim of assessees for allowance towards replanting

expense, upkeep and maintenance expenditure by referring to

Rule 7A(2) of the Rules. The authorities under the Act have ITA Nos. 201; 208; 225/2013; 23; 37; 39; 83; 84/2018; 37 & 71/2020

substantially placed reliance on the judgment of this Court in

Rehabilitation Plantations Ltd. and rejected the claim of assessees

under the head of business expenditure.

3.1 The assessees contend that the re-plantation

expenses are considered as capital expenditure and the

expenses incurred by the assessee for upkeep and maintenance

of newly planted rubber trees are in the nature of revenue

expenditure, for mere plantation of rubber trees, the assessees

do not earn income, but the income is derived only from proper

upkeep and maintenance of trees. The assessees are given an

allowance under Rule 7A(2) of the Rules for the replanting

expenses incurred in the first year in lieu of depreciation. The

argument further proceeds that the assessees are entitled to

maintenance expenditure towards upkeep and maintenance

amount spent under Section 37(1) of the Act. The Supreme

Court in Travancore Rubber & Tea Co. Ltd. v. Commissioner of ITA Nos. 201; 208; 225/2013; 23; 37; 39; 83; 84/2018; 37 & 71/2020

Agricultural Income Tax2, dealing with Section 5(j) of the KAIT

Act, held that upkeep and maintenance expenses incurred by

the assessee for grooming the immature plants are allowable as

a revenue expenditure while computing the income under the

KAIT Act. The relevant portion in Travancore Rubber & Tea Co.

Ltd. is paraphrased for immediate reference hereunder:

"In our opinion the amount expended on the superintendence, weeding, etc, of the whole estate should have been allowed against the profits earned and it is no answer to the claim for a deduction that part of those expense produced no return in that year because all the trees were not yielding rubber in that year."

3.2 The Supreme Court in Karimtharuvi Tea Estates Ltd. v.

State of Kerala3, again dealing with the nature of claim arising

under Section 5(j), held that:

2 (1961) 41 ITR 751 3 (1963) 48 ITR 83 (SC) ITA Nos. 201; 208; 225/2013; 23; 37; 39; 83; 84/2018; 37 & 71/2020

"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 proviso allows deduction of the cost of replanting bushes in replacement of bushes which died or became permanently 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."

3.3 In the above background, the conundrum canvassed

by the assessees is that Rehabilitation Plantations Ltd. case was

considering the question whether re-plantation expenses of

rubber trees area is allowable under Rule 7A(2). But the

Division Bench has found that the upkeep and maintenance

expenditure of immature rubber plants are not allowable

deduction, to wit the excerpt of the relevant portion is noted ITA Nos. 201; 208; 225/2013; 23; 37; 39; 83; 84/2018; 37 & 71/2020

hereunder:

"Admittedly expenditure for new planting and for upkeep until the plants start yielding which in the case of rubber is 6 to 7 years from the year of planting is to be capitalized as there is no income from the new immature plantation against which expenditure can be set off."

In paragraph 6 of the judgment it is further observed:

"There can be no dispute that the investment in planting and development of plantation upto maturity i.e, until the plants start yielding has to be treated as capital expenditure for the development of capital assets which starts yielding after six to seven years of planting."

Finally,

"Expenditure incurred for planting and development of the plantation upto maturity has to be necessarily capitalized and is not allowable as a revenue expenditure".

ITA Nos. 201; 208; 225/2013; 23; 37; 39; 83; 84/2018; 37 & 71/2020

(emphasis supplied)

4. Learned Senior Advocate Mr Joseph Markos leading

the arguments points out that the conclusions and for that

matter, the ratio that could be discerned from Rehabilitation

Plantations Ltd. are diametrically opposite to the acceptance of

allowance or expenditure by the Supreme Court on upkeep and

maintenance of the immature tender plants. Rule 7A(2) or Rule

8(2) of the Rules, deals with an allowance for the cost of

planting rubber tree bushes in replacement of withered bushes

and the language of Rule 7A(2) or Rule 8(2) does not deal with

the expenses incurred in the upkeep and maintenance of tea

bushes or rubber plants. So to say, by referring to any portion

of these Rules the deduction towards upkeep and maintenance

expenditure could be disallowed.

4.1 For convenience, we excerpt Rule 7A(2) and Rule 8(2)

of the Income Tax Act hereunder:

ITA Nos. 201; 208; 225/2013; 23; 37; 39; 83; 84/2018; 37 & 71/2020

Rule 7A(2): In computing such income, an allowance shall be made in respect of the cost of planting rubber plants in replacement of plants that have died or become permanently useless in an area already 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 clause (31) of section 10, is not includible in the total income.

Rule 8(2): 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, 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 clause (30) of section 10, is not includable in the total income."

4.2 By pointing out the consideration in Rehabilitation ITA Nos. 201; 208; 225/2013; 23; 37; 39; 83; 84/2018; 37 & 71/2020

Plantations Ltd. and the view taken by the Supreme Court in

Travancore Rubber & Tea Co. Ltd. and Karimtharuvi Tea Estates Ltd.,

it is argued that the interpretation and application of Rule 7A(2)

by the Division Bench in Rehabilitation Plantations Ltd. is in direct

conflict with the judgments of the Supreme Court in Travancore

Rubber & Tea Co. Ltd. and Karimtharuvi Tea Estates Ltd.. Section

5(j) of KAIT Act corresponds to Section 10(2)(xv) of the Income

Tax Act 1922, which again corresponds to Section 37(1) of the

Income Tax Act 1961. The language of KAIT Act in any of the

sections is not appropriate for examining the applicable Rule

7A(2) or extent to which expenses could be booked under

Section 37(1) of the Act. The amendment to KAIT Act,

subsequent to the judgments of Supreme Courts in Travancore

Rubber & Tea Co. Ltd. and Karimtharuvi Tea Estates Ltd. does not

determine the tenability of assessees' claim for deduction of

upkeep and maintenance expenses. Rehabilitation Plantations ITA Nos. 201; 208; 225/2013; 23; 37; 39; 83; 84/2018; 37 & 71/2020

Ltd. has not referred to the dictum in Travancore Rubber & Tea Co.

Ltd. and Karimtharuvi Tea Estates Ltd.. The view of the Division

Bench in Rehabilitation Plantations Ltd. is incompatible with the

language of Rule 7A(2) and precedents on the point.

5. In the above background and for the narrative made

so far, we are of the view that the decision of the Division Bench

in Rehabilitation Plantations Ltd. is contrary to the decisions of the

Supreme Court in Travancore Rubber & Tea Co. Ltd. and

Karimtharuvi Tea Estates Ltd.. We are also of the considered view

that the scope and extent of the operation of Rule 7A, which is

similar to Rule 8(2), with regard to allowance for replanting

expenses and deduction towards upkeep and maintenance

expenses of immature plants in computation of income from

rubber under the provisions of the Act and Rules need an

authoritative pronouncement from this Court. ITA Nos. 201; 208; 225/2013; 23; 37; 39; 83; 84/2018; 37 & 71/2020

5.1 The Revenue, however, argues that there is no need

or necessity for reconsideration of Rehabilitation Plantations Ltd.

case by the Full Bench, Accordingly to Revenue, it is for the

Supreme Court, if necessary, to lay down law in this behalf. We

are not persuaded with the objection stated by the Revenue.

Firstly, Rehabilitation Plantations Ltd. has not taken note of the

judgments referred to above in Travancore Rubber & Tea Co. Ltd.

and Karimtharuvi Tea Estates Ltd. Rule 7A(2) juxtaposed with

Rule 8(2) and the case law on the point under KAIT Act would

demonstrate that the applicable provisions of law and the

precedents on the point are not adverted to by the Division

Bench. The claims of assessees are rejected by referring to the

view taken in Division Bench judgment.

6. We refer the following question for consideration by

a Full Bench of this Court, subject to the orders of Hon'ble The

Chief Justice:

ITA Nos. 201; 208; 225/2013; 23; 37; 39; 83; 84/2018; 37 & 71/2020

"Whether the assessee/Plantation Companies under Rule 7A(2) of the Rules are entitled to an allowance towards replanting expenses and a further deduction towards upkeep and maintenance expenses incurred by the assessee for the immature plants till the age of maturity in the computation of income under the Act and Rules."

In our considered view the issues are of regular occurrence for

all the plantation owners and the question needs an

authoritative pronouncement from a Full Bench of this Court.

We direct the Registry to place the papers before Hon'ble

The Chief Justice for referring the question referred to above to

a Full Bench for consideration.