2009 (5) TMI 124 - AT - Income Tax

Computation of book profit u/s115JB - Various disallowances and additions - Business Expenditure - Expression going concern - assessee-company is engaged in various business activities like growing and manufacturing tea, rubber plantations, agricultural operations, executing engineering contracts, etc - CIT(A) deleted various other disallowances made by the AO relating to licence fee paid to RPG Enterprises, capital expenditure, capital gains, etc - Disallowance on employees' contribution to provident fund and labour welfare fund u/s 36(1)(va) and 2(24)(x) - case of the appellant is that the payments were made before the due date for filing the return and therefore deductions should be allowed - AO found that the contributions being employees' contribution, cannot be allowed as a deduction - CIT (A) upheld the disallowance in the light of the order of the Tribunal passed in the assessee's own case for the AY's 2001-02 to 2003-04. HELD THAT - It is true that the Tribunal has taken a view, in favour of the Revenue, in the assessee's own case for the earlier AY's, viz., 2001-02 to 2003-04. The hon'ble High Court of Kerala in the case of CIT v. South India Corporation Ltd. 1999 (10) TMI 44 - KERALA HIGH COURT has held that wherever the payments were not made within the due dates specified under the respective Acts, the deduction could not be allowed. It is in the light of that judgment that the Tribunal has taken such a view. But the Gauhati High Court in the case of CIT v. George Williamson (Assam) Ltd. 2006 (6) TMI 71 - GAUHATI HIGH COURT has held that payments made to the provident fund etc., after the close of the accounting period but before the due date for filing of the return is entitled for deduction. Therefore, we allow this ground of the assessee and direct AO to give deductions for delayed payments made by the assessee in respect of the employees' contribution to provident fund and labour welfare fund, etc. Computation of book profit u/s 115JB - AO added profit on sale of one of its rubber estate as forming part of the book profit. The contention of the assessee was that the profit arising on the sale of its Rubber Estate was agricultural income and therefore it was outside the scope and purview of the book profit u/s 115JB. But this contention was not accepted by CIT(A). HELD THAT - Obviously, the profit on sale of agricultural land is agricultural income and the court further held that standing trees also form part of the immovable property and therefore contributed to agricultural income alone. The hon'ble Supreme Court in the case of CIT v. All India Tea and Trading Co. Ltd. 1996 (3) TMI 4 - SUPREME COURT has held that the compensation received on requisition of agricultural land amounted to agricultural income. The Supreme Court again in the case of Singhai Rakesh Kumar v. Union of India 2000 (11) TMI 2 - SUPREME COURT has held that the income arising out of the transfer of such agricultural lands are not exigible to capital gains as they are in the nature of agricultural income. Assessee has sold a rubber estate with standing trees and all other paraphernalia known as Boyce Estate . There is no dispute that the said estate was in a rural area and outside the purview of any municipal limit. Therefore, in the light of the judgment of the Supreme Court and the hon'ble jurisdictional High Court in the case of CIT v. Alanickal Co. Ltd. 1986 (1) TMI 94 - KERALA HIGH COURT , it is to be held that the profits arising from the sale of the rubber estate to the assessee on transfer of the said rubber estate amounted to agricultural income as provided u/s 2(1A). It is a clear case that the profit accounted by the asses-see on sale of Boyce Estate should not be considered for the purposes of computing book profit u/s 115JB. Accordingly, AO directed to exclude the profit on sale of Boyce Estate from computing book profit for the purposes of Section 115JB. This issue is decided in favour of the assessee and ground Nos. 2 and 3 are accordingly allowed. Surplus arising on sale of its Boyce Estate - Capital gains u/s 50B - Profit arose out of slump sale of an undertaking - Expression going concern - Asset sold by the assessee was a rubber estate - It was sold in a running condition and as a going concern basis - property was agricultural land used for plantation purposes - AO accepted the contention of the assessee that the asset was not a capital asset and therefore no capital gain arose on the profit derived from the sale of the rubber estate. The meaning of the expression going concern has to be understood in the light of the peculiar nature of the property transferred in the present case. What is transferred in the present case is a rubber estate. The activities in a rubber plantation/estate is a continuous and uninterrupted one and that tapping operations have to be carried out on a regular basis and all other activities have to be carried out without any interruption. Therefore, by the nature of the activities of the rubber plantation itself, it is a going concern . Even if there is no such an expression in the agreement that the rubber estate is sold as a going concern, the nature of the asset has become a continuous asset . Even, in the absence of such a specific clause, by its nature, a rubber plantation is in the nature of a going concern . Unless and until the yielding rubber trees are usually slaughtered and once tapping is started, it always partakes of the character of a going concern . Therefore, it is to be seen that while adding an expression in the agreement that the rubber estate was transferred as a going concern, the purpose was only to refer to the state of affairs and refer to an existing fact and not to create any legal proposition in the context of the sale deed. We are of the considered view that CIT(A) has been highly carried away by the commercial expression reflected in the agreement like going concern . At the cost of repetition, we have to state that a rubber plantation is always a going concern . Even if the parties to the contract do not say so, still the estate in the nature of a rubber plantation is a going concern. Therefore, the said expression is not a test to be relied on to decide the exact nature of the transaction for the purpose of income-tax law. ITAT, Kolkata Bench D , in the case of Deputy CIT v. ICI (India) Ltd. 2008 (2) TMI 649 - ITAT KOLKATA held the same view that there cannot be a case of slump sale, if all the assets and liabilities of an undertaking have not been transferred to the vendee. The rubber estate has been sold by the assessee excluding cash in hand, stock in hand, receivables, finance, assets and liabilities. It was not a case of sale by lock, stock and barrel. The assessee-company has made conscious exclusions. The assets sold by the assessee have been listed out in different schedules and annexure. The consideration has been specifically assigned to the sale of immovable property by way of rubber estate. Separate consideration has been assigned to the sale of movable properties including vehicles and other properties. Therefore, it is not a case of slump sale for a lump sum amount of consideration where the consideration is not attributable to any particular item of asset. There is no such a statement of blanket consideration in the present case. Here, the sale of every asset is attributable to a specified sum of consideration. Therefore, we cannot say that there is a slump sale . What is reflected is only total consideration . As all the assets and liabilities have not been sold as per the agreement, this is not a slump sale as construed in Section 50B of the Act. It is a sale of several assets through a common agreement with different amounts of consideration ultimately culminating into a total consideration. Therefore, we hold that CIT(A) has erred in directing the AO to levy long-term capital gains u/s 50B on the surplus arising to the assessee on sale of its Boyce Estate . The said direction is set aside. This issue is decided in favour of the assessee. Loss suffered on sale of shares - speculation loss - long-term capital loss - HELD THAT - There is no evidence on record to show that the assessee was indulged in the business of buying and selling of shares. When the assessee-company held the shares as investments, there cannot be a case of applying the Explanation to Section 73. In the facts and circumstances of the case, the loss is very much in the nature of capital loss and therefore, there is no justification in treating the same as speculation loss. This enhancement order of CIT (A) is set aside. This issue is decided in favour of the assessee. Disallowance on set off - long-term capital gains on sale of land with the long-term capital loss on sale of shares - This ground is allowed in the light of our finding that the loss on sale of shares is not a speculation loss. The assessee is successful in its appeal filed before us. Disallowance u/s 37 - replanting expenditure - The application of Sections 37 and 14A made by AO in disallowing 10 per cent. of the replanting expenditure is an exaggerated interpretation of the statutory provisions. The replanting expenditure by itself is a separate block of expenses incurred for the business of the assessee, which is partly agricultural in nature. There is no provision to straight away disallow any part of the business expenditure only for the reason that it is attributable to agricultural operations and the assessee is equally deriving agricultural income. Therefore, order of CIT (A) is justified especially in the light of the orders of the Tribunal available on the subject. This ground of the Revenue is accordingly rejected. Disallowance on licence fee paid to RPG Ltd.- According to AO, these expenses were capital in nature. ITAT has considered the very same issue in the assessee's own case for the earlier AY's 2001-02 to 2003-04. It is on the basis of these ITAT decisions, CIT (A) has deleted the disallowances. The said findings of the Tribunal not being disputed so far. Therefore, CIT(A) is bound to follow the order of the ITAT and he is justified in doing so. This ground is also rejected. Sale of grevillea trees - brought forward capital loss - CIT (A) has rightly relied on the judgment of the jurisdictional High Court in the case of CIT v. Rajagiri Rubber and Produce Co. Ltd. 1990 (5) TMI 8 - KERALA HIGH COURT which has later been confirmed by the SC in Kalpetta Estates Ltd. v. CIT 1996 (7) TMI 4 - SUPREME COURT . The courts have categorically held that on sale of rubber trees, there cannot be a case of capital gains. This ground also fails. In result, the appeal filed by the assessee is allowed and the appeal filed by the Revenue is dismissed.

Summary

Issues Involved:
1. Disallowance of employees' contribution to provident fund and labour welfare fund.
2. Computation of book profit under Section 115JB.
3. Assessment of profits on sale of "Boyce Estate" as capital gains under Section 50B.
4. Treatment of long-term capital loss on sale of shares as speculation loss.
5. Set-off of long-term capital gains on sale of land with long-term capital loss on sale of shares.
6. Disallowance of replanting expenditure.
7. Disallowance of license fee paid to RPG Ltd.
8. Treatment of brought forward capital loss on sale of grevillea trees.

Detailed Analysis:

1. Disallowance of Employees' Contribution to Provident Fund and Labour Welfare Fund:
The assessee contended that the payments were made before the due date for filing the return and should be allowed as deductions. The Tribunal referred to the Supreme Court judgment in Vinay Cement Ltd., which upheld that payments made to provident fund and employees' state insurance scheme before the due date for filing the return are to be allowed as deductions. The Tribunal concluded that both employees' and employer's contributions should be allowed if paid before the due date, and directed the Assessing Officer to allow these deductions. This ground was allowed in favor of the assessee.

2. Computation of Book Profit under Section 115JB:
The assessee argued that the profit from the sale of "Boyce Estate" should not be included in the book profit as it was agricultural income. The Tribunal cited various judicial pronouncements, including the Supreme Court and Kerala High Court, which held that profits from the sale of agricultural land are agricultural income and should not be included in the total income. Consequently, the Tribunal directed the Assessing Officer to exclude the profit from the sale of "Boyce Estate" from the book profit computation under Section 115JB. This issue was decided in favor of the assessee.

3. Assessment of Profits on Sale of "Boyce Estate" as Capital Gains under Section 50B:
The Commissioner of Income-tax (Appeals) treated the sale as a slump sale under Section 50B, subjecting it to long-term capital gains tax. The Tribunal analyzed the agreement and found that specific values were assigned to different assets, and liabilities were not transferred, indicating it was not a slump sale. The Tribunal referred to various judgments, including those from the ITAT Bangalore and Mumbai Benches, which supported the view that the sale was not a slump sale. The Tribunal concluded that the sale was a split sale, not subject to Section 50B, and set aside the Commissioner's direction. This issue was decided in favor of the assessee.

4. Treatment of Long-term Capital Loss on Sale of Shares as Speculation Loss:
The Commissioner of Income-tax (Appeals) had treated the loss on the sale of shares as speculation loss. The Tribunal noted that the shares were held as long-term investments and not as stock-in-trade, and the assessee was not engaged in the business of buying and selling shares. Citing the Tribunal's decision in Jindal Exports Ltd., it was held that the loss was a capital loss, not a speculation loss. This enhancement order was set aside, and the issue was decided in favor of the assessee.

5. Set-off of Long-term Capital Gains on Sale of Land with Long-term Capital Loss on Sale of Shares:
Given the Tribunal's finding that the loss on the sale of shares was not speculation loss, the set-off of long-term capital gains with the long-term capital loss was allowed. This ground was decided in favor of the assessee.

6. Disallowance of Replanting Expenditure:
The Assessing Officer disallowed 10% of replanting expenditure under Sections 37 and 14A. The Tribunal, following its earlier decisions, found that the replanting expenditure was a legitimate business expense and should not be disallowed. The Commissioner of Income-tax (Appeals)'s deletion of the disallowance was upheld, and this ground of the Revenue was rejected.

7. Disallowance of License Fee Paid to RPG Ltd.:
The Assessing Officer treated the license fee as a capital expense. The Tribunal, referencing its earlier decisions in the assessee's own case, upheld the Commissioner of Income-tax (Appeals)'s deletion of the disallowance, as the Tribunal's findings were not disputed. This ground of the Revenue was rejected.

8. Treatment of Brought Forward Capital Loss on Sale of Grevillea Trees:
The Commissioner of Income-tax (Appeals) relied on the Kerala High Court and Supreme Court judgments, which held that the sale of rubber trees does not result in capital gains. The Tribunal upheld this view, rejecting the Revenue's ground.

Conclusion:
The assessee's appeal was allowed, and the Revenue's appeal was dismissed.