2014 (1) TMI 237 - AT - Income Tax

Sale of rubber tress - Agricultural income or not - Held that - Following Harrisons Malayalam Limited. Versus Assistant Commissioner Of Income-Tax 2012 (9) TMI 510 - ITAT, COCHIN - Rule 7A of Income tax Rules has no application to the income derived on sale of old rubber trees - No material change has been brought about by introduction of Rule 7A because Rule 7A is applicable only when the grower of rubber trees himself carries on manufacturing activity on latex or coagulum sourced from rubber trees grown by him - Rubber trees are not grown for the purpose of selling the trees but for generating income from the trees in the shape of latex. The rubber trees constitute capital asset of rubber estate and dominant purpose of growing rubber trees is to create source for supply of liquid latex - The rubber trees therefore constitute capital asset of agricultural operations. There is no manufacturing activity involved either at the stage of cultivation and growing of rubber tree or at the time of its felling on trees becoming old and unyielding - Income derived from sale of old and unyielding trees do not include any element of income derived from sale of centrifuged latex or senex or latex based crepes - The amount received by the assessee on sale of old rubber trees in the three years under consideration constitutes capital receipts - Decided in favour of assessee.

Summary

Issues:
Whether the assessing officer was justified in treating the sale value of old Rubber trees as agricultural income and assessing 35% of the same as taxable income in terms of Rule 7A of Income tax Rules.

Analysis:
The appeals filed by the assessee were directed against the orders passed by Ld CIT(A)-II, Kochi, relating to the assessment years 2006-07 to 2008-09. The main issue in these appeals was whether the Ld CIT(A) was correct in confirming the action of the assessing officer in treating the sale value of old Rubber trees as agricultural income and assessing 35% of it as taxable income under Rule 7A of Income tax Rules. The assessee claimed the sale proceeds as capital receipt and did not offer it for taxation. However, the assessing officer bifurcated the income of the Rubber estate into 65% as agricultural income and 35% as taxable income, citing Rule 7A. The AO argued that the sale value of old rubber trees is akin to money obtained from the sale of empty gunny bags or bottles, not a capital receipt. The Ld CIT(A) upheld the AO's view, leading to the appeal before the ITAT Cochin.

The ITAT Cochin referred to a similar case involving M/s Harrisons Malayalam Ltd, where the Tribunal decided in favor of the assessee regarding the sale of old rubber trees. The Tribunal noted that Rule 7A of the Income Tax Rules pertains to income derived from specific rubber products, not the sale of old rubber trees. The Ld CIT(A) observed that rubber trees are capital assets of agricultural operations, grown for generating income from latex, not for direct sale. The High Court also reversed a previous Tribunal decision on this matter in favor of the assessee.

Based on the precedents and interpretation of Rule 7A, the ITAT Cochin held that the amount received by the assessee on the sale of old rubber trees constitutes capital receipts, not taxable income. Therefore, the ITAT Cochin allowed all the appeals filed by the assessee, directing the assessing officer to exclude the sale value of Rubber trees from the income computation.

In conclusion, the ITAT Cochin ruled in favor of the assessee, determining that the sale value of old rubber trees should be treated as capital receipts and not taxable income under Rule 7A of the Income Tax Rules.