2012 (2) TMI 490 - HC - Income Tax

Cultivating expenses incurred - nature of expenditure - allowable business expenditure - Held that - In the instant case, material on record disclose, the Assessee is in the business of manufacture and export of standardized herbal extracts as well as in the manufacture of fine chemicals. In order to carry on their business they were in need of herbal coleus plants, they thought of roping the farmers for growing said herbal plant. They provided seeding, fertilizer and financial assistance to the farmers with an agreement to deduct the expenses out of the cost of the plant sold by the farmers. But, even the farmers could not grow the said herbal plant. Consequently they sustained loss and in turn the assessee sustained loss. The said cultivation expenses was ₹ 90.64 Lakhs. Therefore the assessee claimed the said amount as revenue expenditure as the said expenditure was incurred to facilitate its business and due commercial expediency. As such the loss are primarily attributable to the business which the Assessee is carrying on and the said expenses are wholly and exclusively for the purpose of business. The said cultivation expenses incurred by the Assessee is in the nature of revenue expenditure in the course of business and the Assess is entitled to deduction of the same as business expenditure. Therefore the Tribunal is justified in uploading such claim granting relief to the assessee.

Summary

Issues:
- Whether cultivation expenses incurred by the Assessee are in the nature of revenue or capital expenditure?
- Whether the Assessee is entitled to claim deduction for cultivation expenses under Section 10-B of the Income Tax Act, 1961?

Analysis:

1. Issue 1: Cultivation Expenses Classification
The Tribunal held that the cultivation expenses of &8377; 90.64 Lakhs incurred by the Assessee were for commercial expediency and wholly and exclusively for the purpose of its business. The Revenue contended that the expenses were related to a separate agricultural activity and not connected to the business. The Tribunal relied on Circular No. 06/2007, stating that such expenses for commercial expediency are allowable as revenue expenditure. The Apex Court precedent highlighted the distinction between capital and revenue expenditure, emphasizing that if the money spent is for the benefit of the business and not for acquiring an enduring asset, it qualifies as revenue expenditure.

2. Issue 2: Deduction Under Section 10-B
The Assessee, engaged in the manufacture and export of herbal extracts, filed for deduction under Section 10-B of the Income Tax Act for the year 2004-2005. The Assessing Authority disallowed the cultivation expenses, leading to a series of appeals. The Tribunal found that the Assessee did not generate agricultural income but incurred cultivation expenses to facilitate its business. The Assessee's actions, such as providing seeding and financial assistance to farmers, were for commercial expediency. The Tribunal upheld the claim, stating that the expenses were wholly and exclusively for the purpose of business. Consequently, the Tribunal dismissed the Revenue's appeal, affirming the deduction of cultivation expenses as business expenditure.

In conclusion, the judgment clarified that the cultivation expenses incurred by the Assessee were revenue expenditure, essential for the business's commercial expediency. The Assessee was rightfully entitled to claim deduction for these expenses under Section 10-B of the Income Tax Act. The decision emphasized the distinction between capital and revenue expenditure, emphasizing the need for expenses to be wholly and exclusively for business purposes to qualify for deduction.