2016 (10) TMI 1020 - AT - Income Tax

Addition on account of cess of green leaf - Held that - Rule 8 of the Income-tax Rules, 1962, requires that the computation is to be made as if by fiction the entire income out of the tea grown and manufactured as income assessable under the Income-tax Act, 1961 Held that entire amount paid as cess on green leaf seems to be eligible for deduction. See CIT Vs. AFT Industries Ltd 2004 (7) TMI 81 - CALCUTTA High Court Disallowance on account of notional interest on loan advanced - Held that - Keeping in view of the fact that the Tribunal has set aside the matter to the file of the AO in the preceding years we set aside the issue to the file or the AO for the year under consideration also with the direction to decide the issue afresh in the light of the peculiar facts narrated by the Id. Counsel for the assessee after giving due opportunity to the assessee of being heard as per law. Additional depreciation claim - Held that - Similar to the issue on hand was adjudicated in case M/s. Binaguri Tea Co. Pvt. Ltd., Kolkata 2013 (3) TMI 146 - ITAT KOLKATA as referring to Explanation 7 to Section 43(6)reads as under - Explanation 7 - For the purpose of this clause, where the income of an assessee is derived, in part from agriculture and in part from business chargeable to income-tax under the head profits and gain of business or profession , from computing the written down value of assets acquired before the previous year, the total amount of depreciation shall be computed as if the entire income is derived from the business of assessee under the head profits and gain of business or profession and the depreciation so computed shall be deemed to be the depreciation actually allowed under this Act . This Explanation has been inserted by Finance ( No.2) Act w.e.f 2009. It creates a deeming fiction affecting substantive computation provision determining actual tax liability. Therefore, ld. CIT(Appeals) has rightly treated it to be prospective. We, accordingly, uphold the order of ld. CIT(Appeals)to allow the claim of depreciation

Summary

Issues Involved:
1. Deletion of addition on account of cess on green leaf.
2. Deletion of disallowance of notional interest on loan advanced to Haldia Petrochemicals Ltd (HPL).
3. Allowance of claim on account of additional depreciation.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Cess on Green Leaf:

The Revenue challenged the deletion of ?50,01,369/- added by the AO on account of cess on green leaf. The AO argued that the expense related to 100% agricultural operations and should be deducted from agricultural income only, not composite income. The CIT (A) deleted the addition, relying on the Calcutta High Court decision in CIT Vs. AFT Industries Ltd (270 ITR 167), which allowed the deduction from composite income. The Supreme Court dismissed the SLP filed by the Revenue, confirming the High Court's interpretation of Rule 8 of the Income Tax Rules, 1962. Consequently, the ITAT found no infirmity in the CIT (A)'s order and dismissed the Revenue's ground.

2. Deletion of Disallowance of Notional Interest on Loan Advanced to HPL:

The AO disallowed ?71.09 lakhs of notional interest on an interest-free loan advanced to HPL, arguing it was funded from interest-bearing loans. The assessee contended the advances were made from surplus funds and were a business decision. The CIT (A) found the assessee had sufficient surplus funds and deleted the disallowance, citing several judgments supporting the view that no disallowance is warranted if interest-free loans are covered by non-interest-bearing funds. The ITAT remanded the issue to the AO for fresh examination, considering the peculiar facts and the precedent of setting aside similar issues in preceding years.

3. Allowance of Claim on Account of Additional Depreciation:

The assessee claimed additional depreciation of ?8.09 crores on the WDV of depreciable assets used in the tea business, based on the Calcutta High Court decision in CIT vs. Suman Tea & Plywood Industries Pvt. Ltd (204 ITR 719). The AO disallowed the claim, but the CIT (A) allowed it, relying on the Supreme Court's confirmation of the High Court's decision in CIT vs. Doom Dooma India Ltd (310 ITR 392). The ITAT upheld the CIT (A)'s order, noting that the Coordinate Bench had allowed similar claims in previous years and that the Explanation 7 to Section 43(6), which creates a deeming fiction, was prospective and did not affect the assessee's claim for the relevant years.

Conclusion:

The ITAT dismissed the Revenue's appeals on the issues of cess on green leaf and additional depreciation, while remanding the issue of notional interest on the loan advanced to HPL for fresh examination by the AO. The appeals for AY 2007-08 and AY 2008-09 were dismissed, and the appeal for AY 2006-07 was partly allowed for statistical purposes.