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2022 (10) TMI 851 - HC - Income TaxAgricultural income - Allowance of deduction of the cost of replantation and the deduction towards upkeep and maintenance expenses - Assessee/Plantation Companies under Rule 7A(2) of the Rules - Scope of Income Tax Act 1961, the Income Tax Rules 1962 and the Kerala Agricultural Income Tax Act 1991 - 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. - allowance for the cost of replanting expenses incurred over an extent of 48 acres and a further deduction towards maintenance and upkeep expenses incurred by the assessee for the rubber plants replanted in an area of 182 acres HELD THAT - Neither there is a controversy nor a debatable question on the applicable principles for computation of income of an assessee who is covered by the provisions of the AIT Act 1950 r/w KAIT Act, with effect from 01.04.2002 under Act 1961. In other words, up to 31.03.2002, the income from rubber plantations has been treated as agricultural income and the computation of agricultural income was by the allowances and deductions provided by Section 5 of the KAIT Act. With effect from 01.04.2002, the income derived from the manufacture of rubber is treated as income from business and 65% of the income is apportioned for agricultural income tax. Therefore, it is not a case of the Revenue, that while computing the income of an assessee under Rule 7A the provisions under the KAIT Act are also made applicable. Therefore, in the scheme of present things the assessment of income from rubber plantations is, in the first instance, made under Sections 28 to 44DB of Act 1961. Whether the rubber plantation companies, under Rule 7A(2) of Rules 1962, are entitled to an allowance towards replanting expenses? - The Revenue cannot disallow the upkeep and maintenance claim in the computation of income under Section 37 of Act 1961. The Revenue cannot compel capitalization of upkeep and maintenance expenses and claim depreciation on the capitalized asset. The assessee/plantation owners to continue the business must lay out these expenses as revenue expenses to protect the rubber plants till the yield period. The upkeep and maintenance expenses do not result in bringing into existence a new capital asset or substituting a capital asset. This expenditure upkeeps and maintains a capital asset and over years enables the capital asset to generate business income. Therefore, inversely and conversely in the application of Section 37 of Act 1961 the assessees are entitled to claim the deduction of upkeep and maintenance expenses in the computation of income for tax under Act 1961. Section 37 deals with what is known as residuary provision. The upkeep and maintenance expenses are incurred by the assessee till the rubber tree earns income. The test we would like to apply is whether the upkeep and maintenance expenditure is resulting in a new capital asset or an addition to the existing capital asset. The answer is no. The outlay brings into existence a new capital asset, then, from any point of view, such expenditure is nothing but capital expenditure. Take a case and examine where maintenance of a capital asset is necessary for deriving income from the asset, and whether such maintenance expenses of the asset would become capital expenditure. The expenditure is incurred by the assessee every year. The agricultural income is deemed as business income from the sale of rubber. Therefore, the available and allowable expenses are deducted in the computation of the business income of the assessee. The question paused for our consideration since is arising under Section 37, which, as already noted, is a residuary provision, we keep in our perspective that in determining whether a particular item of expenditure is, or is not, deductible in computing the business profits, it is necessary first to enquire whether the deduction is expressly prohibited under any other provision or an expenditure described in Sections 30 to 36 of Act 1961. Therefore, in tax parlance, the computation of income from rubber plantations is treated as business income. In computing business income, Sections 28 to 44DB are kept in view. We are convinced that the ratio in Rehabilitation Plantations Ltd. 2021 (10) TMI 1371 - KERALA HIGH COURT case both on allowance and upkeep and maintenance expenses, is incorrect. The upkeep and maintenance expenses are revenue expenditures and the assesses are entitled to claim deduction under Section 37 of Act 1961. The answers to the two facets of the question referred to the Full Bench are that In the computation of business income under Rule 7A of the Rule 1962, the assessee under Rule 7A(2) is entitled to an allowance in respect of the cost of replacement of dead and useless rubber trees in the rubber plantation in an area not abandoned, subject to Section 10(31) of Act 1961. The upkeep and maintenance expenses incurred by the assessee till the maturity of rubber trees are revenue expenditures eligible for deduction under Section 37 of Act 1961.
Issues Involved:
1. Entitlement to allowance towards replanting expenses under Rule 7A(2) of the Income Tax Rules 1962. 2. Deduction towards upkeep and maintenance expenses for immature plants till maturity in the computation of income under the Income Tax Act 1961 and Rules 1962. Detailed Analysis: 1. Entitlement to Allowance Towards Replanting Expenses: The primary issue was whether the assessee, a plantation company, could claim an allowance for replanting expenses under Rule 7A(2) of the Income Tax Rules 1962. The assessee argued that replanting expenses should be deductible as they are necessary for the continuity of the plantation business. The court examined Rule 7A(2), which allows for the deduction of costs related to planting rubber plants in place of those that have died or become permanently useless, provided the area has not been abandoned. The court emphasized the principle of strict construction of taxing statutes, stating that no tax can be imposed without clear words showing an intention to lay the burden. The court concluded that the replanting allowance is a statutory provision meant to ensure the continuity of rubber plantations. Therefore, the court held that under Rule 7A(2), the assessee is entitled to an allowance for the cost of replanting rubber plants that have died or become permanently useless in an area already planted, provided the area has not been abandoned. 2. Deduction Towards Upkeep and Maintenance Expenses: The second issue was whether the expenses incurred for the upkeep and maintenance of immature rubber plants until they reach maturity could be deducted under Section 37 of the Income Tax Act 1961. The assessee contended that these expenses are necessary for the business and should be considered revenue expenditures. The court referenced several precedents, including the Supreme Court's rulings in Travancore Rubber & Tea Co. Ltd. and Karimtharuvi Tea Estates Ltd., which held that such expenses are revenue in nature and not capital expenditures. The court noted that Section 37 is a residuary provision allowing for the deduction of any expenditure not covered by Sections 30 to 36, provided it is not capital or personal in nature and is incurred wholly and exclusively for the business. The court found that upkeep and maintenance expenses do not create a new capital asset but are necessary for preserving the existing asset until it becomes productive. Therefore, these expenses qualify as revenue expenditures. The court concluded that the upkeep and maintenance expenses incurred by the assessee until the rubber trees reach maturity are revenue expenditures and are eligible for deduction under Section 37 of the Income Tax Act 1961. Conclusion: The court held that: 1. Under Rule 7A(2) of the Income Tax Rules 1962, the assessee is entitled to an allowance for the cost of replanting rubber plants that have died or become permanently useless in an area already planted, provided the area has not been abandoned. 2. The upkeep and maintenance expenses incurred by the assessee until the rubber trees reach maturity are revenue expenditures eligible for deduction under Section 37 of the Income Tax Act 1961. The court directed the Registry to post the ITAs before the Division Bench having a roster to decide the cases on merits.
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