Thanks for unnecessary litigation by revenue about manner of allowability of green leaf cess paid by tea companies.

[C.A. DEV KUMAR KOTHARI]

Thanks for unnecessary litigation by revenue about manner of allowability of green leaf cess paid by tea companies.

A big thank for unnecessary litigation by revenue:

First of all on behalf of professional friends (CA, Advocate, CS, CWA and other tax practioners) author express a big thanks to the revenue officers who indulge in unnecessary litigation providing job opportunities to professionals. The case of green tea leaf cess is a pointer of how unnecessary litigation is preferred by revenue.

In case of tea companies earlier green leaf cess was  also allowed by Central AO while computing composite income under I.T.Act.  Green leaf cess is nothing but a part of cost of raw material which is grown by assessee himself. It is just like any other  component of cost of producing green leaf, which is used to make saleable tea. It is cost of raw material just like cost of cultivation incurred for labor, fertilizer, pesticides, irrigation, plucking cost, carrying cost, etc.

Green leaf cess is imposed by State Government. There are some other levies also like Land Revenue, Mouzdari Tax, Sales Tax, Purchase Tax , VAT, profession tax, Motor Vehicle Tax  and certain fees like Factories license fees etc. These tax, duty fees etc. though incurred in connection with green leaf are still allowed  by CAO while computing composite income.

The dispute is about green leaf cess, which CAO is not allowing. The Calcutta high Court has held that the expenses by way of green leaf cess is allowable against composite income, the department p[referred appeal by way of Special Leave before the Supreme Court and the same has been admitted and is pending. Therefore, CAO is disallowing green leaf cess, on appeal CIT(A) generally allow the same, then department appeals before the ITAT, IATAT also allow the same and the revenue prefers appeal before the high Court and large number of cases are pending before the CIT(A), ITAT and high Court. SLP is also pending the Supreme Court.

Nature of Green Leaf Cess (being ignored by authorities):

Popularly referred to as  `Green leaf cess' in the industry is in nature of tax, duty or fees imposed under different state laws. It is in fact a levy to generate revenue by the State Government. The levy is imposed with reference to quantity of green tea leaves produced or made tea produced. The levy is imposed as in nature of tax on land. Thus it is in nature of expenditure on agricultural land and is for production of green tea leaves which are used to make saleable tea (black tea).

Purely Agricultural Expenses and composite income: 

For computation of taxable income all expenses incurred for the purpose of composite activities are allowable in accordance with the applicable provisions of part 'D' of the Chapter IV of the Act and the method of accounting (S. 145 and 145A). Thus, all agricultural expenses relating to agricultural land like land revenue, land rent, local taxes, land administration and maintenance, production expenses -cultivation, irrigation, transportation, consumable tools and equipment; repairs, insurance, and depreciation etc. for agricultural implements, vehicles, equipment, wages, bonus, welfare expenses for workers engaged in tea garden are allowed while computing composite income besides all business expenses for manufacture and sale of tea are allowed against composite income. 

Judgment of Guwahati High court under Agricultural IT Act is wrongly applied:

While considering the provisions of the Assam Agricultural income tax Act, 1939  (AIT Act )the Gauhati High Court  in the case of  Jorehaut Group Ltd. V  Agricultural ITO (1997 -TMI - 17768 - GAUHATI High Court) held that green leaf cess  was allowable  against agricultural income, if and in so far it was not allowed by the CAO while computing composite income. This ruling is in the context of proviso to Section 8 of the AIT Act (which has also later on  been omitted w.e.f. 01.04.2007).

The reason given by  CAO is that Gauhati High Court has in the case of  Jorehaut Group Ltd. V  Agricultural ITO (1997 -TMI - 17768 - GAUHATI High Court) has held that green leaf cess  was allowable  against agricultural income ,therefore, it is purely agricultural expenditure and can be allowed only against agricultural income.

Therefore, it is clear that the nature of expenditure as PRODUCTION EXPENDITURE is being ignored. Furthermore CAO also  ignore the fact that under Assam Agricultural Income Tax Act, 1939 as per second proviso to section 8 of the Assam Agricultural I.T.Act what is allowable is only such admissible items of expenses which have not been allowed by central AO under the Income Tax Act. It may be that due to some reason like application of section 43B the central A.O. has not allowed green leaf cess in case of Jorehaut Group,  in such cases only the assessee can claim the same under the Assam Agricultural Income Tax Act.

It is worth to mention that Prior to judgement of Guahati High Court (supra) the C.A.O.'s used to allow green leaf cess, education cess, rural employment cess etc. levied on green tea leaves  while computing composite income. The judgment rendered under specific provision of AAIT Act is wrongly applied and unnecessary litigation is going on.

Composite income of tea companies Tea Income:

Income derived from composite activity of cultivation, manufacture and sale of tea is popularly called composite income. In this write-up the expression `tea income' means income derived from `sale of tea cultivated and manufactured by the assessee. The activity consists of (a) agricultural operations to cultivate land and grow green tea leaves, (b) process green tea leaves to manufacture tea (black / green tea) and (c) selling the tea manufactured from green tea leaves cultivated and processed  by the assessee himself.  Under Rule 8(1) of the Income-tax Rules 1962 (The Rule), it is provided that income from such composite activity shall be computed as if it were business income after allowing certain types of replantation expenses as per Rule 8(2) and then 40% of such composite income shall be taxable under the Income- Tax Act, 1961 (the Act).

Other composite income - Rubber and Coffee:

From assessment year 2002-03 in the Rules Rule 7A and 7B have been inserted regarding computation of composite income and taxability of specified percentage of such composite income in case of manufacture of Rubber and Coffee respectively. It is likely that similar problems may arise in case of Rubber and Coffee as well. These Rules are principally similar to Rule 8.

 ITAT Order:

Perhaps the ITAT, 'D' Bench, Kolkata, has in the case of Bishnauth Tea Co. Ltd V JCIT (2002) 77 TTJ (Cal) 45 was first published decision in which ITAT  has held that the green leaf cess is allowable as expenditure while computing composite income under Rule 8. The Tribunal has interalia considered Rule 8, provisions of Income Tax Act, provisions of Assam Agricultural income Tax Act, judgement of Guahati High Court in case of Jorhat Group (supra.), and also the decisions of the Supreme Court on the aspects of the provisions under the Indian Constitutions vis a vis Income Tax Act and Agricultural Income Tax Act of few states reported as Tata Tea Ltd V State of West Bengal (1988 -TMI - 5257 - SUPREME Court), Assam Company Ltd V State of Assam (2001 -TMI - 40294 - SUPREME Court ) etc.

The case before the Tribunal was in respect to green leaf cess paid / payable under the Assam Taxation (on specified lands) Act, 1990 which is payable at specified rate on every kilogram of tea produced. Tribunal held that it is expenditure incurred wholly and exclusively in carrying out the business of growing, manufacturing and selling of tea.   

Although the matter involved is very simple if it is considered in right perspective. However, unfortunately it has been made complex and the department has started litigation. During course of discussions it has been learnt that the Revenue is likely to file appeal against the order of ITAT, Calcutta.

On consideration of all facts as discussed above it is hoped that the department shall not appeal against the order of the ITAT and follow the same. To reduce unnecessary  litigation, it is desirable that the Board may issue instructions in this regard to allow green leaf cess and similar items while computing composite income and not to file appeal on similar issues.

The decision of ITAT was followed in other cases also.

Calcutta high Court:

Calcutta high Court in case of  CIT Vs. A.F.T. industries ltd. (2004 - TMI - 10894 - CALCUTTA).

 allowed  green leaf cess by confirming decision of ITAT. The high Court held as follows (with highlights provided by author for analysis):

 "Having regard to the provisions contained in rule 8 with which we had occasion to deal in Union of India v. Warren Tea Ltd. (2004 - TMI - 11296 - CALCUTTA), A.P.O. No. 792 of 1999, disposed of by us on January 15, 2004, it appears that in respect of computation of income of tea grown and manufactured, a fiction has been created under which both the agricultural component and the business component of the income would be assessed together for the purpose of computing the income under the Act and only after the computation of the total income, the apportionment is to be made determining 60 per cent, as agricultural income and 40 per cent, as exigible to tax under the Act. During the process of the computation, all deductions allowable at the time of computation are to be allowed and that was rightly allowed. Inasmuch as if the income for tea grown was assessed under the agricultural income-tax, in that event, the same cess paid of green leaf would have been eligible for deduction at the time of computation of the agricultural income. But when by fiction in respect of tea grown and manufactured, the agricultural component of the income out of the tea grown is also computed under the Income-tax Act along with the income out of the tea manufactured from the tea grown. When by fiction the income as computed as an income under the Act, all deductions as are available both for the agricultural component and for the business component of the income are to be allowed as a natural corollary to the fiction so created. Such deductions, which are allowed in order to arrive at the total income exigible to tax, are to be allowed and the apportionment of the total income so computed is to be made. If the agricultural part of the deductions is made applicable for deduction from the 60 per cent, of the total income so computed, in that event, this 60 per cent, would be again made assessable under the Agricultural Income-tax Act which is not permissible. In that event, the purpose of creating fiction would stand frustrated. It would then be a concept completely foreign to the fiction so created. Therefore, the entire amount paid as cess on green leaf seems to be eligible for deduction with regard to which we do not find any confusion.

 For the aforesaid reasons, we do not find any substantial question of law involved in this case. The petition is, therefore, dismissed."

SLP was admitted- a case for withdrawal or not pressing the SLP:

It appears that the SLP has been admitted by the Supreme Court and is still pending. It may be that the Counsels have perhaps not placed the matter properly, may be that a wrong impression has been created in the minds of counsels and so conveyed before the Supreme court, that there is difference of opinion between the Guwahati High Court and the Calcutta high Court on the same or similar subject,  and it may be due to this reason that  the Supreme Court has admitted the SLP after condoning delay in filing of SLP. 

If that be the case,  or even otherwise, it is desirable that the SLP of the revenue can either be withdrawn by the revenue or the counsels of revenue may not press the same, as it is to seek a decision which is contrary to settled legal position that all allowable expenses including depreciation which are  incurred from stage of cultivation of tea plant to the final step of selling tea are allowed while computing composite income from sale of tea cultivated and manufactured by assessee. 

When fertilizer expenses or irrigation expenses are allowed while computing composite income, then why the revenue is disputing that green leaf cess will not be allowed by treating it as purely agricultural expenditure?

Circular is desirable:

The purpose of this write-up is basically to draw attention of the Board and to request the Board (CBDT) to issue circular directing the departmental authorities to allow `green leaf cess' as production expenses while making computation of composite income from cultivation, manufacture and sale of tea. At present many Assessing Officers are disallowing the same. In some cases even Commissioner has disallowed such expenses in revision proceedings in many cases reassessments have been done to disallow green leaf cess.

In case such circular is not issued similar problems are likely to arise even in respect of computation of composite income from cultivation and manufacture of Rubber under Rule 7A and cultivation and manufacture of Coffee under Rules 7B of the Rules.    

To reduce litigation the Board is also requested to direct the lower authorities to allow such expenses as business expenses against composite income in assessment / rectification proceedings and to withdraw departmental appeals filed against orders of CIT (A)  or ITAT or High Court in which green leaf cess has been allowed and also to drop reassessment proceedings and revision proceedings on similar issues. This will reduce unnecessary litigation.

The circular may provide for general guidelines to cover computation of composite income under Rules 7A (for Rubber), 7B (for Coffee) and 8 (for Tea).