2009 (9) TMI 999 - AT - Income Tax

Agricultural expenses - Expenses incurred on forest, supervision of growing trees by farmers, conveyance, salary of the staff engaged - Valuation of stock taken in the books - loss claimed in the Book Profit Computation u/s 115JB - Investments in units of Mutual funds - Applicability of provisions of sec.14A - Whether loss and expenditure connote the same meaning and therefore the word expenditure used in sec.14A covers within its compass word loss - dividend income - interest and administrative expenses - HELD THAT - In our considered view growing saplings in the pots/polythene bags after plucking them from ground and planting them in such pots is an integrated activity which is in conjunction with and in continuation of growing saplings on the land and therefore, expenditure incurred there upon would be treated as agricultural expenses and therefore has to be disallowed. Accordingly, only the expenses to the extent on ₹ 53.59 lacs would be considered as agricultural expenses out of total claim of expanses at ₹ 316.12 Lacs. and would not be allowed. Against this the assessee has shown sale of agriculture produce (relatable to growing of saplings through land) at ₹ 36.42 lacs and sale of saplings not relatable to agricultural operations at ₹ 9.10 lacs. Therefore agricultural loss would be only ₹ 53.59 36.42 17.17 lacs. The sale of saplings at ₹ 9.10 lacs would be non-agricultural receipts and therefore cannot be allowed to be adjusted against agriculture expenses. So far as the depreciation of ₹ 7.69 lacs is concerned the same has been claimed on mist chambers and other assets used in growing saplings through clonal routes which has been treated as non-agricultural operation in our discussion made above. Thus the disallowance is restricted to ₹ 17.17 lacs and accordingly assessee gets relief of Rs.(278.29 17.17) 261.12 lacs Valuation of stock taken in the books - It is not known on what basis the Assessing Officer and the ld. CIT(A) have given a finding that there is a difference in terms of quantity in the stock statement submitted to the bank and what is recorded in the books. We however, restore the mater to the file of the Assessing Officer to verify the statements J-1,J-4 J-7 and any other statement which is in possession of the A.O. pointing out difference in stock in terms of quantity. If there is no such statement depicting difference in terms of quantities, no addition is called for but where there is any document in possession of the A.O. showing stock in quantity on a particular date and on comparison with the books it results in unfavorable difference against the assessee, the same will be shown to the assessee and after confronting him the difference in quantities will be worked out. Stock in terms of quantity will be compared as on the same date. There after, the difference if any will be valued at cost or market price whichever is low as per accounting policy followed by the assessee for valuation of stock. With these remarks, we set aside this ground to the file of the A.O. Disallowance of loss claimed in the Book Profit Computation u/s 115JB - it is very clear that the appellant has deliberately entered into transaction which is colourable device to defraud revenue from the very inception of the transaction. The appellant knew very well that the dividend income received would not be taxed and further it may be possible that the loss incurred can be claimed as not disallowable u/s 115JB.From the very beginning in view of the insertion of section 94(7) the appellant was aware that both the dividend income and loss incurred on the dividend stripping transaction have been viewed as a composite transaction by the legislature which has though it fit to link both of them by the logic that if dividend is not taxed then the loss incurred in the same transaction should also not give any benefit and it should be removed from the calculation of taxes. Clearly, this transaction falls within the purview of the decision of Supreme Court in the case of Mc dowell Co. 1985 (4) TMI 64 - SUPREME COURT where in the Hon ble Supreme Court has stated that the department can lift the corporate veil for going into the truth of the transaction. Therefore, the loss incurred on these transactions is expenditure in relation to the earning of dividend and hence the same has to be removed from the P L A/c. for computing the book profit in view of the provisions of clause (f) of section 115JB.In view of these reasons the disallowance made by the AO is correct and this ground of appeal is dismissed. In our considered view lowered authorities were not justified in making the addition in the book profit by the sum. The entire issues are divided in 3 segments given below - Investments in units of Mutual funds - Applicability of provisions of sec.14A - Whether loss and expenditure connote the same meaning and therefore the word expenditure used in sec.14A covers within its compass word loss - dividend income - exemption u/s 10(33) - We are of the considered view that loss and expenditure do not connote same meaning and therefore they are not replaceable. Now comes the question whether the loss incurred by the assessee in the above referred dividend stripping transactions can be disallowed u/s 14A. In our considered view firstly sec.14A does not use the word loss and it cannot be said that assessee has incurred loss for the purposes of earning dividend income. Secondly if such dividend stripping transactions and loss resulted there from could be covered by sec.14A, it would not have been necessary for the legislature to enact sec. 94(7) which specifically deals with such type of transactions. Therefore sec.14A cannot be invoked to cover such transactions. The distinction of the terms used in sec.94(7) and 14A are noticeable.Sec.94(7) uses the term loss whereas sec.14A uses the term expenditure . The distinctions clearly is made with understanding that sec.14A only covers disallowance of expenditure incurred for earning exempted income whereas sec.94(7) covers loss resulting from earning exempted income such as dividend. Finally sec.14A cannot be invoked while computing book profit u/s 115JB as computation of book profit under that section is confined to the mechanism mentioned in that section only. We have held while disposing of ground No.6(c) in the appeal for the assessment year 2002-03 that provisions of sec.14A cannot be invoked, while computing book profit u/s 115JB, to disallow any expenditure which is otherwise hit by this sec. in computation of income under normal provisions of the Act. The reasons mentioned therein would be applicable here also. In other words firstly sec.14A is not applicable for disallowing loss even in computation of income under normal provisions of the Act and even otherwise sec.14A cannot be invoked for disallowing any item of expenditure or say loss while computing book profit u/s 115JB. Whether provisions of sec. 94(7) can be invoked, as done by the ld. CIT(A) for disallowing such loss while computing book profit u/s 115JB - In our considered view sec.115JB is a complete code in itself so far as computation of book profit is concerned. As we have discussed while disposing of ground No.6(c) in the Asstt. Year 2002-03 sub-sec.5 of sec. 115JB can be invoked only for borrowing provisions in those areas of the Act which are not provided in sec.115JB.The mechanism for computation of profit is completely laid down in sec.115JB.It starts with profit as computed and certified by the Auditors as per Schedule VI of the Companies Act. To this the adjustments as provided in that sec. alone are made and the net result is treated as total income for the purposes of comparing with total income computed under normal provisions of the Act and for levy of taxes. No other adjustments while computing book profit is permissible, as held by Hon ble Supreme Court and other courts (supra).The effect of subsection 5 of sec.115JB of the Act is that provisions relating to collection and recovery, appeal and penalty as provided in other chapter of the Act can be invoked as they are not provided in sec.115JB. Sec.94(7) on which ld. DR has repeatedly emphasized relates to computation of income only and therefore it is at par in effect with other provisions of the Act which affect computation of income. Therefore in our considered view sec.94(7) also cannot be drawn to affect computation of book profit which have to be necessarily and exclusively done within the parameter laid down us/ 115JB.In other words sec.94(7) has no role to play in computing book profit u/s 115JB . As a result this ground of the assessee is allowed. Disallowance of interest and administrative expenses - No addition can be made in the book profit u/s 14A. We have held while disposing of ground No.6(c) in the assessment year 2002-03 and also while disposing of ground 7(b) for assessment year 2003-04 and Ground No.9(c) in the present assessment year that provisions of sec.14A cannot be invoked for disallowing any expenditure relatable to any exempted income if otherwise such expenditure has been debited in the profit and loss account prepared according to Schedule VI of the Companies Act and certified by the auditors. It has also been held therein that even if any disallowance is called for u/s 14A while computing income under normal provisions of the Act, no disallowance of any claim can be done beyond the adjustments provided u/s 115JB. Following the same reasoning we hold that no disallowance of any interest expenses or administrative expenses can be made u/s 115JB even if they are hit by sec.14A. As a result this ground of assessee is allowed. The appeals of the assessee for the assessment years 2002-03, 2003-04, and 2004-05 are partly allowed and partly allowed for statistical purposes. The appeal of the revenue for the assessment years 2002-03 and 2004-05 are partly allowed for statistical purposes, whereas the appeal for the assessment year 2003-04 is dismissed.

Summary

Issues Involved:

1. Taxation of sum u/s 41(1) of the Income-tax Act, 1961.
2. Disallowance of various expenses.
3. Deduction of liability on account of exchange fluctuation.
4. Disallowance of expenses related to agricultural activities.
5. Disallowance under Section 145A.
6. Computation of Book Profit for the purposes of Section 115JB.
7. Liability to pay interest u/s 234B.
8. Penalty proceedings u/s 271(1)(c).

Summary Issue-wise:

1. Taxation of sum u/s 41(1) of the Income-tax Act, 1961:
The assessee's ground relating to taxing a sum of Rs. 3,35,11,413 u/s 41(1) was dismissed as not pressed.

2. Disallowance of various expenses:
The Tribunal adjudicated several disallowances made by the Assessing Officer (AO) and confirmed or restored some issues for further verification. For instance, the disallowance of Rs. 8,80,315 as overdue interest was restored to the AO to verify if it was offered for taxation in earlier years. Similarly, other disallowances like discounts to debtors, audit recovery, and warehousing charges were either confirmed or restored for further verification based on the details provided.

3. Deduction of liability on account of exchange fluctuation:
The Tribunal allowed the assessee's claim for deduction of Rs. 32,80,212 on account of exchange fluctuation, holding that the assessee is entitled to this claim as per the decision in Commissioner of Income-tax Vs. Woodward Governor India P. Ltd (2009) 312 ITR 254 (SC).

4. Disallowance of expenses related to agricultural activities:
The Tribunal held that only the expenses directly related to agricultural operations over the land should be disallowed. Expenses on supervision and other activities not directly related to agricultural operations were allowed. The disallowance was restricted to Rs. 17.17 lakhs out of the total claim of Rs. 316.12 lakhs.

5. Disallowance under Section 145A:
The Tribunal upheld the addition made by the AO under Section 145A but directed that the modified value of closing stock of the current year be taken as the opening stock of the next year.

6. Computation of Book Profit for the purposes of Section 115JB:
The Tribunal held that the computation of deduction u/s 80HHC should be based on book profit as per the provisions of the Companies Act, not as per normal provisions of the I.T. Act. It also ruled that no disallowance under Section 14A can be made while computing book profit u/s 115JB. The Tribunal allowed the assessee's claim for deduction of Rs. 1,39,72,192 being the profit eligible for deduction u/s 80HHC.

7. Liability to pay interest u/s 234B:
The Tribunal held that the provisions of Section 115JB imposed liability for payment of advance tax, and the provisions of sections 234B and 234C for interest on defaults in payment of advance tax and deferment of advance tax would also be applicable to companies governed by section 115JB.

8. Penalty proceedings u/s 271(1)(c):
The ground relating to penalty proceedings u/s 271(1)(c) was not pressed and hence dismissed.

Separate Judgments:
There were no separate judgments delivered by the judges in this case.