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2014 (9) TMI 84 - AT - Income TaxLTCG on sale of wood Sale of timber out of shade trees - Business income or not Held that - Following the decision in Tata Coffee Ltd. Versus Joint Commissioner of Income-tax, Special Range-2, Bangalore 2012 (11) TMI 512 - KARNATAKA HIGH COURT - the trees are held to be the capital asset and part of the fixed structure of a coffee or tea plantation - When the trees have been cut and removed, the capital gain has to be assessed on the basis of Section 48 but in the instant case, the cost of acquisition of the assets has not been properly examined by the authorities below - Solely on the basis of some letter written by the Officer of the Government Department, the cost of acquisition of the assets cannot be assessed. The CIT (A) while setting aside the order passed by the Assessing Authority directed the Assessing Authority to work out the market value of the assets as on 01-04-1981 after obtaining the specific notification from the office of the Conservator of Forests with regard to market value in respect of rosewood and silver oak trees as on 01-04-1981 and to work out the capital gain by working out the indexed market value - Except the letter dated 31-3-1981, no other materials has been produced before the authorities - the order passed by the ITAT in setting aside the order passed by the CIT (A) wherein the Commissioner has directed the Assessing Authority to reconsider the matter is contrary to law - The Appellate Tribunal has also not examined the market value of the assets as on 01-04-1981 the order passed by the Appellate Tribunal cannot be sustained - The matter has to be re-examined by the Assessing Authority by working out the indexed market value in respect of rosewood and silver oak trees Decided in favour of revenue. Value of timber lying with the Govt. for auction deleted Held that - The contention of the assessee is that merely transmitting the wood to the auction depot would not entitle it to recognize the income from the sale of rosewood in its book, because up to that stage it cannot claim such income has received or a right entitling it to receive has been accrued the FAA has appreciated this aspect in right perspective, because no right was accrued to the assessee by the time the wood was handed over to the Govt. Depot - Only on finalization of its auction and deposit made by the bidder, its sale can be recognized - CIT (A) has rightly deleted the addition Decided against revenue. Restriction of 50% of wood processing charges Held that - It is nowhere discernible what specific defect was noticed by him in the details of expenditure maintained by the assessee - In a very vague way, he observed that no supporting material was available - The contention of the assessee is that payments were made on the basis of the invoices raised by the Contractor - He has not directed the assessee to bring confirmation from the contractor or he himself has not directly verified from the contractor about the invoice - It is not justifiable to disallow 50% of the expenditure claimed by the assessee by making such observation Decided against Revenue. Loss claimed on supply division Held that - The FAA has erred in confirming the disallowance - The assessee has offered an income of ₹ 8.22 crores - There could not be any reason to inflate the expenses of such a small nature in one of the Division - The AO in the findings failed to assign any reason, how the claim made by the assessee is not reliable - Merely loss has occurred in such a Division, does not mean that such a loss is to be disallowed by just disbelieving the accounts Decided in favour of assessee. Marketing expenses disallowed Held that - If any expenditure which is to be incurred wholly and exclusively for the purpose of the business which is not in the nature of capital expenditure or any other expenditure provided in section 30 to 36, that can be claimed under the residuary provision of section 37 the details of expenditure are not directly relatable to each head - The AO has bifurcated the expenditure claimed by the assessee under various heads and then pointed out why expenses meant for a particular head has been debited in a different head namely other marketing expenses - The assessee failed to give any reply to this aspect - accounts under this head did not give correct picture - Some disallowance on an adhoc basis has to be made, because of unsatisfactory explanation given by the assessee - CIT (A) has restricted the disallowance at ₹ 25.00 lakhs Decided in favour of assessee. Restriction of 10% out of car hire charges Held that - The assessee has not been maintaining the log book of the vehicles, exhibiting their exclusive usage the FAA has rightly observed that possibility of users other than for business purpose cannot be ruled out - 10% disallowance out of the total expenses cannot be termed on higher side Decided against Assessee. Miscellaneous expenditure disallowed Entertainment expenses Held that - Except stating that the expenditure was incurred for the purpose of business the appellant company was unable to furnish any further details in respect of this expenditure - the AO and the addition made by the AO to the extent of ₹ 5.00 lakhs is confirmed claim of any expenditure can be allowed to an assessee, if it is proved on the record that expenditure was incurred wholly and exclusively for the purpose of the business - There is a lacuna in the claim made by the assessee - It could not substantiate all the expenses with supporting vouchers - AO has observed that during the course of hearing, defects were noticed and pointed out the order of the CIT(A) is upheld Decided against assessee.
Issues Involved:
1. Classification of income from the sale of timber (capital gain vs. business income). 2. Addition of value of timber lying with the government for auction. 3. Disallowance of wood processing charges. 4. Disallowance of losses claimed in the supply division. 5. Disallowance of marketing expenses. 6. Disallowance of car hire charges. 7. Disallowance of miscellaneous and entertainment expenses. Detailed Analysis: 1. Classification of Income from Sale of Timber: The primary issue was whether the income from the sale of timber should be treated as capital gain or business income. The assessee argued that shade trees are capital assets, and thus, the sale of timber should result in a capital gain. The Assessing Officer (AO) treated it as business income, citing the existence of a timber division. The CIT (A) accepted the assessee's claim, treating the income as long-term capital gains and directed the AO to compute the capital gain at 30% of the sale value. The Tribunal noted that the Hon'ble High Court had previously remitted the issue back to the AO for further inquiry regarding the determination of the fair market value as on 1.4.1981. Following the High Court's decision, the Tribunal set aside the issue to the AO for re-consideration in accordance with the law. 2. Addition of Value of Timber Lying with the Government for Auction: The AO added the value of timber lying with the government for auction to the assessee's income, treating it as accrued income. The CIT (A) deleted this addition, agreeing with the assessee's contention that the right to receive income accrued only upon the completion of the auction process and the receipt of payment from the government. The Tribunal upheld the CIT (A)'s decision, emphasizing that income recognition should follow the completion of the auction and receipt of payment. 3. Disallowance of Wood Processing Charges: The AO disallowed 50% of the wood processing charges claimed by the assessee, citing a lack of supporting evidence. The CIT (A) deleted this disallowance, noting that the expenses were incurred in the normal course of business and were supported by invoices. The Tribunal agreed with the CIT (A), stating that the AO had not identified specific defects in the expenditure details and had made a sweeping observation without proper verification. 4. Disallowance of Losses Claimed in the Supply Division: The AO disallowed the entire loss claimed by the assessee in the supply division, questioning the justification for incurring the loss. The CIT (A) partially allowed the claim, confirming the disallowance of Rs. 4,10,201/-. The Tribunal found that the AO had not provided specific reasons for disallowing the loss and allowed the assessee's ground, deleting the disallowance. 5. Disallowance of Marketing Expenses: The AO disallowed Rs. 50.00 lakhs out of the marketing expenses claimed by the assessee, citing a lack of satisfactory explanation for certain expenditures. The CIT (A) restricted the disallowance to Rs. 25.00 lakhs. The Tribunal upheld the CIT (A)'s decision, noting that the assessee's accounts under this head did not provide a clear picture and that some disallowance was warranted due to unsatisfactory explanations. 6. Disallowance of Car Hire Charges: The AO disallowed 50% of the car hire charges claimed by the assessee, questioning the necessity of hiring cars given the company's existing fleet. The CIT (A) restricted the disallowance to 10%, acknowledging the possibility of personal use by the management. The Tribunal agreed with the CIT (A), noting that the assessee had not maintained log books to demonstrate exclusive business use. 7. Disallowance of Miscellaneous and Entertainment Expenses: The AO disallowed Rs. 5.00 lakhs out of miscellaneous expenses and 50% of entertainment expenses, citing a lack of supporting details. The CIT (A) confirmed the disallowance of Rs. 5.00 lakhs and restricted the entertainment expense disallowance to 10%. The Tribunal upheld the CIT (A)'s decision, noting that the assessee had failed to substantiate all expenses with supporting vouchers. Conclusion: The Tribunal partly allowed both the assessee's and the Revenue's appeals, setting aside certain issues for re-examination by the AO and upholding the CIT (A)'s decisions on other disallowances. The judgment emphasized the need for proper substantiation and verification of claims made by the assessee.
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