2016 (7) TMI 1098 - HC - Income Tax

Nature of expenditure - revenue or capital - cultivation expenses to be set-off against other business incomes - commercial expediency - Held that - In the instant case, material on record disclose, the Assessee is in the business of manufacture and export of standardized herbal extracts as well as in the manufacture of fine chemicals. In order to carry on their business, they were in need of herbal coleus plants. they thought of roping the farmers for growing said herbal plant. They provided seedlings, fertiliser and financial assistance to the farmers with an agreement to deduct the expenses out of the cost of the plaint sold by the farmers. But, even the farmers could not grow the said herbal plant. Consequently, they sustained loss and in turn the assessee sustained loss. The said cultivation expenses was ₹ 90.64 Lakhs. Therefore, the assessee claimed the said amount as revenue expenditure as the said expenditure was incurred to facilitate its business and due commercial expediency. As such the loss are primarily attributable to the business which the Assessee is carrying on and the said expenses are wholly and exclusively for the purpose of business. The said cultivation expenses incurred by the Assessee is in the nature of revenue expenditure in the course of business and the Assessee is entitled to deduction of the same as business expenditure. Therefore, the Tribunal is justified in upholding such claim and granting relief to the assessee. - Decided in favour of assessee.

Summary

Issues:
1. Allowance of cultivation expenses against other business incomes.
2. Setting off losses claimed by assessee based on a previous court decision.

Issue 1: Allowance of cultivation expenses against other business incomes

The appellants-Revenue challenged the Tribunal's decision to allow cultivation expenses to be set-off against other business incomes. The Tribunal justified this by considering the cultivation expenses as incurred due to commercial expediency. The Tribunal's decision was based on the assessee's involvement in contract farming activities. The Tribunal held that the cultivation expenses were for commercial expediency and wholly and exclusively for the purpose of business. The Revenue contended that the cultivation activities were separate from the business and thus not eligible for deduction under revenue expenditure. The assessee's cultivation of coleus plants was aimed at facilitating its business of manufacturing and exporting herbal extracts. The Tribunal relied on Circular No.6/2007, emphasizing that expenses for commercial expediency are allowable. The Tribunal's decision was consistent with the distinction between capital expenditure and revenue expenditure as established in legal precedents. The Tribunal concluded that the cultivation expenses were revenue expenditure necessary for the business, hence allowing the deduction.

Issue 2: Setting off losses claimed by assessee based on a previous court decision

The Tribunal also allowed the setting off of losses claimed by the assessee based on a previous court decision involving the same assessee for the assessment year 2004-05. The Tribunal referred to a decision of the High Court where it was observed that the assessee's cultivation expenses were in the nature of expenditure in the course of business, entitling the assessee to claim a deduction for such expenses. The Revenue contended that the assessee was involved in agricultural activities by advancing money to farmers for growing coleus crops. However, the Tribunal found that the cultivation expenses were incurred for commercial expediency and were integral to the business operations of the assessee. The Tribunal analyzed the nature of the expenses, including supplying planting materials and farm inputs to farmers, to support the cultivation of coleus plants. The Tribunal concluded that the expenses were revenue expenditure necessary for the business and allowed the setting off of losses claimed by the assessee. The Tribunal's decision was in line with established legal principles regarding revenue expenditure in the course of business operations.

Conclusion:
The High Court dismissed the appeal, stating that the questions raised were already covered by previous court decisions. The Court found no substantial questions of law for consideration, as the issues regarding the allowance of cultivation expenses and setting off losses had been adequately addressed in previous judgments. The Court upheld the Tribunal's decision to allow the deduction of cultivation expenses and setting off of losses, emphasizing the commercial expediency and business necessity of the expenses incurred by the assessee.