Tax deferment schemes for plantations - some suggestions for effective use

[C.A. DEV KUMAR KOTHARI]

Relevant links:

Section 33AB of Income-tax Act, 1961.

Section 43(1), 43(3) and 43(6) of Income-tax Act, 1961.

Rule 7A of Income-tax Rules 1962.

Rule 7B of Income-tax Rules 1962.

Rule 8, of Income-tax Rules 1962.

Composite activities:

We find that there are composite activities involving agriculture and business from which agricultural and business income are derived. There are specific Rules for ascertaining income chargeable to tax by the Central Government from such composite activities. The deposit scheme which allows possibility of deferment of tax payment is intended only for those plantations which have composite activity of growing and manufacturing. This is not applicable to assessee having only plantations or only manufacturing facilities.

Tax deferment scheme:

We find that for tea, coffee, and rubber plantations with manufacturing facilities which are subject to central income tax the government has provided certain deposit schemes which allow deferment of payment of income tax. The amount deposited as per prescribed provisions is allowed in the year of deposit however, the amount is generally considered as income when the deposit is withdrawn and not used for specified purposes. Even when funds withdrawn are used for specified purposes, the corresponding expenses which are met out of withdrawal are not allowed as revenue expenses. In case capital expenses are met out of deposit withdrawn, there should not be reduction of 'actual cost' of such asset for allowing depreciation or other allowance. However, on this aspect there is no clarity and it can be disputed by revenue.

In this article we are analyzing provision as to making of deposit, withdrawal for specified purposes and treatment of withdrawal and use of funds withdrawn from deposit for specified purposes and some suggestions are also made.

Provision:

The relevant part of provision so far necessary for study of the matter is reproduced below with highlights for an analysis:

Tea development account, coffee development account and rubber development account.

33AB. (1) Where an assessee carrying on business of growing and manufacturing tea or coffee or rubber  in India has, before the expiry of six months from the end of the previous year or before [the due date of] furnishing the return of his income, [whichever is earlier,—

(a) deposited with the National Bank any amount or amounts in an account (hereafter in this section referred to as the special account) maintained by the assessee with that Bank in accordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the scheme) approved in this behalf by the Tea Board [or the Coffee Board or the Rubber Board] ; or

(b) [deposited any amount in an account (hereafter in this section referred to as the Deposit Account) opened by the assessee in accordance with, and for the purposes specified in, a scheme framed by the Tea Board or the Coffee Board or the Rubber Board, as the case may be (hereafter in this section referred to as the deposit scheme), with the previous approval of the Central Government,]

the assessee shall, subject to the provisions of this section,] be allowed a deduction (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under section 72) of—

(a) a sum equal to the amount or the aggregate of the amounts so deposited ; or

(b) a sum equal to forty per cent of the profits of such business (computed under the head "Profits and gains of business or profession" before making any deduction under this section),

whichever is less :

Provided  XXX

Provided further xxxx

 (2) xxx - related to audit compliance is under Co.'s act.

(3) Any amount standing to the credit of the assessee in the special account or the Deposit Account shall not be allowed to be withdrawn except for the purposes specified in the scheme or, as the case may be, in the deposit scheme] or in the circumstances specified below :—

xxxx

[(4) Notwithstanding anything contained in sub-section (3), where any amount standing to the credit of the assessee in the special account or in the Deposit Account is released during any previous year by the National Bank or withdrawn by the assessee from the Deposit Account, and such amount is utilised for the purchase of—

(a) any machinery or plant to be installed in any office premises or residential accommodation, including any accommodation in the nature of a guest-house;

(b) any office appliances (not being computers);

(c) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year;

(d) any new machinery or plant to be installed in an industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule,

the whole of such amount so utilised shall be deemed to be the profits and gains of business of that previous year and shall accordingly be chargeable to income-tax as the income of that previous year.]

(5) xxx

(6) Where any amount standing to the credit of the assessee in the special account [or in the [***] Deposit Account] is utilised by the assessee for the purposes of any expenditure in connection with such business in accordance with the scheme ¹⁸[or the deposit scheme], such expenditure shall not be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

(7) Where any amount, standing to the credit of the assessee in the special account [or in the [***] Deposit Account], which is released during any previous year by the National Bank [or which is withdrawn by the assessee from the [***] Deposit Account] for being utilised by the assessee for the purposes of such business in accordance with the scheme [or the deposit scheme] is not so utilised, either wholly or in part, within that previous year, the whole of such amount or, as the case may be, part thereof which is not so utilised shall be deemed to be profits and gains of business and accordingly chargeable to income-tax as the income of that previous year :

Provided that this sub-section shall not apply in a case where such amount is released during any previous year at the closure of the account in circumstances specified in clauses (b), (c) and (e) of sub-section (3).

(8) Where any asset acquired in accordance with the scheme [or the deposit scheme] is sold or otherwise transferred in any previous year by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired, such part of the cost of such asset as is relatable to the deduction allowed under sub-section (1) shall be deemed to be the profits and gains of business or profession of the previous year in which the asset is sold or otherwise transferred and shall accordingly be chargeable to income-tax as the income of that previous year :

Provided xxxx

Explanation.—xxx

(9)  xxxxx discontinuation by the Central Government,.

Explanation.—In this section,—

[(a) "Coffee Board" means the Coffee Board constituted under section 4 of the Coffee Act, 1942 (7 of 1942);

(aa) "National Bank" means the National Bank for Agriculture and Rural Development established under section 3 of the National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981);

(ab) "Rubber Board" means the Rubber Board constituted under sub-section (1) of section 4 of the Rubber Act, 1947 (24 of 1947);]

(b) "Tea Board" means the Tea Board established under section 4 of the Tea Act, 1953 (29 of 1953).]

Other relevant provision concerning the theme of article:

Definitions of certain terms relevant to income from profits and gains of business or profession.

43. In sections 28 to 41 and in this section, unless the context otherwise requires—

(1) "actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority:

[Explanation 8.— For the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset.]

Explanation 9.— For the removal of doubts, it is hereby declared that where an asset is or has been acquired on or after the 1st day of March, 1994 by an assessee, the actual cost of asset shall be reduced by the amount of duty of excise or the additional duty leviable under section 3 of the Customs Tariff Act, 1975 (51 of 1975) in respect of which a claim of credit has been made and allowed under the Central Excise Rules, 1944.]

[Explanation 10.— Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee :

Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.]  

Certain aspects for better use of the deposit facility:

Revenue expenses or allowable expenses:

There is no doubt that expenditure on uprooting, drainage, maintenance of young tea, are revenue expenditure incurred for carrying existing business of cultivation, manufacture and sale of tea.

Re plantation:

Expenses for re-plantation is a capital expenditure incurred to replace old plantation. However, it is allowed as an allowance under specific provision of Rule 8(2). 

Replacement and extension plantation:

Expenses on replacement planting and extension planting will be capital expenditure up to the stage of planting such expenses are not allowable as they are capital expenses and depreciation or other amortization is not allowed under any provision. After planting maintenance expenses will be revenue expenses.

Disallowance on withdrawal of deposit with NABARD:

Section 33AB is in fact a provision which allow deferment of tax liability on deposit made as per provisions. Withdrawal from such deposit in some situation is considered as income, or go to reduce allowable expenditure financed out of withdrawals.

Withdrawal is allowed, as per scheme for permitted purposes.

Withdrawals are allowed as per the scheme to meet certain prescribed revenue expenses and capital expenses both.

There is also a negative list given in sub-section (4) - if deposit is used to meet the expenses covered by sub-section (4), then the amount so utilized is treated as business income. Therefore it is advisable not to utilize withdrawals for such purposes.

The main issue for discussion about utilization for other permissible purposes. This is covered by sub-section (6) which reads as follows:

"(6) Where any amount standing to the credit of the assessee in the special account or in the Deposit Account is utilised by the assessee for the purposes of any expenditure in connection with such business in accordance with the scheme or the deposit scheme, such expenditure shall not be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

We find that the expressions used are "any expenditure in connection with such business" and "such expenditure shall not be allowed".

Under the scheme withdrawal is allowed for permitted purposes to meet capital expenses and revenue expenses both. The revenue expenses are allowed if the same is allowable as per applicable provisions thus revenue expenses in nature of infilling, maintenance of young plants, maintenance of drainage system, etc. are allowed as an expenditure properly chargeable to the P & L account.

Expenses for acquisition of capital assets like buildings, plant and machinery, extension of plantation etc. are 'cost of acquisition' or 'actual cost' of capital assets. Such costs are not allowed as expenditure incurred for the purpose of business. However, there are certain provisions according to which they are amortized over a period of time and as per specific method of amortization.

It is clear that capital expenses whether met from amount withdrawn from deposit or other sources are not allowed as expenditure while computing the income.

The amount allowed as a deduction by way of permissible allowance either as deduction by way of depreciation or amortization by way of spreading expenses over a period of time or by way of  replacement allowance cannot be called 'expenses allowable' within the scheme of the Income-tax Act. In the Act we find two types of deductions namely expenditure and allowances. There are different schemes and provisions for computation of allowable amount as expenditure and allowance. 

We need to read the two expressions used in sub-section (6) together. On reading of second expression to the effect that "such expenditure shall not be allowed" in computing the income chargeable under the head "Profits and gains of business or profession", it is clear that the provision for disallowance relates only to the expenses which are allowable as expenses and not by way of amortization, deprecation or special allowances.

Actual cost in relation to capital assets:

Furthermore, in this regard meaning of 'actual cost' as prescribed in S. 43(1) is important. The relevant portion of which is reproduced below:

43. In sections 28 to 41 and in this section, unless the context otherwise requires—

(1) "actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority:

There are various explanations and proviso to the above meaning but they are not relevant for the purpose in hand. According to the above meaning "actual cost" means the actual cost to assessee as reduced by that portion of cost which is met directly or indirectly by any other person or authority.

The expression "actual cost" has relevance in relation to certain deductions including 'depreciation allowance', investment allowance, amortizable amount etc. In the meaning of written down value, vide S. 43(6) this expression is used. It is stated therein that 'written down value' means the 'actual cost of asset' in the first year.

When a withdrawal is made from NABARD deposit, the assessee withdraw his own funds. It is not that NABARD has met any part of cost of asset, to the extent of deposit withdrawn. Just like when a loan is taken from NABARD, bank or any other person, to meet cost of asset, it is not a case that a part of 'actual cost' is met by the money lender. In case of withdrawal of deposit, the deposit is reduced, and in case of loan liabilities are increased. Thus in place of cost of asset added in assets side, there is reduction of assets in form of reduced deposit or there is increase in liability by increase of loan taken. In both cases the amount of net assets or net worth remain the same.

Therefore, the amount withdrawn from NABARD deposit shall not go to reduce the 'actual cost' of depreciable asset acquired though it is financed from the amount withdrawn.

Case of depreciation u/s 32:

Deprecation is also allowed as a deduction or an allowance (and not as an expenditure) in respect of depreciation of eligible assets. The depreciation is allowed with reference to actual cost in first year and then with reference to written down value in subsequent years. Therefore, depreciation allowance cannot be considered as an expenditure covered by S. 33AB(6).

Allowance for re plantation:

While amending the meaning of 'plant' u/s 43(3) it was stated in the reasons for amendment that In some judicial pronouncements it has been held that the term 'plant' includes tea bushes and The deduction under rule 8(2) is allowed in lieu of depreciation - From (212 ITR 356 (St.) and notes on clauses (212 ITR 298, 299 (St.)

Activity of re-plantation also result into creation of a new asset. As a result of re plantation useless or economically unviable tea bushes are replaced with new more productive tea bushes. The expenses are capital expenses. Some companies have policy to write off cost or book value of plants uprooted and capitalize the cost of re plantation. In those cases also cost of re-plantation is allowed by way of a special allowance under Rule 8(2), the said Rule reads as follows:

"(2) In computing such income an allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area already planted, if such area has not previously been abandoned, and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of clause (30) of section 10, is not includible in the total income."

From reading of the above rule we find that the expressions used are "an allowance shall be made" and "cost of planting". In determining cost of planting deduction for the subsidy is also not made.

Thus, what is contemplated in the above rule is a special allowance which is allowed for gross cost of planting. It is not like any business expenditure which is allowed on basis of net of recoveries while computing business income.  

Furthermore, as noted earlier, the meaning of 'plant' under section 43(3) was also amended as view taken was that deduction under Rule 8(2) is allowed in lieu of depreciation allowance. Therefore, it is clear that what is allowed under Rule 8(2) is an allowance of a special nature and not an expenditure of revenue nature.

Therefore, the amount withdrawn from NABARD deposit and used to meet cost of planting as referred to in Rule 8(2) is not to be deducted from the cost allowable under Rule 8(2) because deduction allowed under Rule 8(2) is a special allowance and not a deduction of revenue expenditure.

The expression 'cost of planting bushes' as used in Rule 8(2) is similar to 'actual cost' we can consider it as 'actual cost of planting bushes'. As discussed under heading 'actual cost' as defined in S. 43(1), it cannot be said that the amount withdrawn from NABARD and used for re-plantation is in nature of any part of cost met by any other person.

Therefore, the amount withdrawn from NABARD deposit shall not go to reduce the 'actual cost of planting' allowable as a special allowance under Rule 8(2).

In view of the above discussions the following are possible views:

In view of S. 43(1) the 'actual cost' of any depreciable asset shall not be reduced by the amount withdrawn from NABARD deposit, for the purpose of computing deprecation allowance including initial deprecation.

In view of S. 43(1) the 'cost of plantation' or 'actual cost of plantation' which is allowable under Rule 8(2) shall not be reduced by the amount withdrawn from NABARD deposit, for the purpose of computing special allowance allowable under Rule 8(2). Furthermore, as specifically mentioned in Rule 8(2), the subsidy, if any, received which is not taxable in view of s. 10(30), shall also not be deducted from the cost of plantation allowable under Rule 8(2).

Besides the applicability provisions of S. 43(1) I am also of view that 'actual cost' of any asset which is capital cost not allowable as an expenditure is not covered by S. 33AB(6). As discussed earlier the deduction of depreciation u/s 32 and deduction of re-plantation cost are not allowed as any expenditure but are allowed as allowances or deductions. The cost of plantation allowed under Rule 8(2) is also in lieu of depreciation allowance. Therefore, S. 33AB(6) is not applicable.

S. 33AB(6) shall apply to other expenses which are allowed as a normal revenue expenditure.

Likely disputes and litigation:

As usual, when an industry earn super profits, the revenue also try to maximize tax collection from such industry. In any case the function of revenue authorities is to maximize revenue collection. Therefore, disputes may arise. The AO can take a view that the expression "any expenditure" u/s 33AB, covers capital expenditure, and capital expenditure is allowed over a period of time  therefore, the amount withdrawn and used for acquisition of depreciable capital asset  or cost of planting should go reduce 'capital expenditure' eligible for deduction u/s 32 or rule 8(2) as well. He can say that the definition of 'actual cost' as given in S. 43(1) is subject to the context and in his view context require that the amount withdrawn from NABARD should go to increase taxable income.

Suggestions:

The following practical suggestions can be implemented:

Withdraw from NABARD deposit, for such expenses which are not allowed as revenue expenses or by way of amortization e.g. extension and replacement plantations.

Withdraw from NABARD deposit, for such capital expenses which are amortized at lower rate of depreciation. (This is to reduce impact and extensiveness of risks about litigation, in case the AO reduces cost of capital expenses also.)

Instead of withdrawing from NABARD, loan from NABARD or other money lenders can be obtained in the year of super profit. Withdrawal from deposit can be planned in future. We need to examine the impact of additional cost of finance by way of difference between rate of interest received on deposit and rate of interest payable on loan.

About Coffee and Rubber plantations:

The discussions about deposit and utilization are made with reference to composite activity of selling tea cultivated and manufactured by assessee. The provisions relating to Coffee and Rubber are also on similar lines, but different ratio of taxable income are prescribed in relevant Rules.

One more difference is that in case of tea 'tea bushes' are excluded from definition of 'plant', however, coffee plants and rubber plants are not excluded from the meaning of 'plant', and therefore, they can be considered as 'plant' for the  purpose of depreciation allowance.

Therefore, discussions as made with specific reference to tea plantations will be generally applicable to coffee and rubber plantations also.