2018 (11) TMI 1333 - HC - Income Tax

Apportionment of the agricultural income - whether Rule 7 of the Income Tax Rules, 1962 could be applied in the case of the assessee? - Income Tax Authorities applied Rule 7 and made an apportionment of the agricultural income and treated the balance as business income assessable under the Income Tax Act, 1961 - Held that - The position is more or less same for income from crude palm oil, which is the product in the case of the assessee before it, for reason of the total income having been disclosed for assessment under the Agricultural Income Tax Act with prompt payment of tax. The Central Income Tax Authorities, though was aware of Rule 7 as stood under the rules from its inception, took proceedings for assessment under the Income Tax Act only in the year 2004. Hence, the Division Bench directed all agricultural income assessments completed from assessment year 2005-06 to stand set aside with a direction to the State Taxing Authority to modify the assessments in line with the assessments completed by the 1st respondent under the Central Income Tax. It was also directed that the agricultural income tax assessed for the assessment year 2004-05 and prior years would be treated as confirmed. The Income Tax Authorities were directed not to assess the income under Rule 7 of the Rules for the said years. For assessment years are 2005-06 and 2006-07 - direction of the First Appellate Authority to determine the income based on a formula, which the Senior Counsel for Government of India (Taxes) would submit is not a statutory formula - Held that - We find force in the contention raised by the Revenue. Since the formula evolved by the First Appellate Authority is not a statutory one, it is only appropriate that the Assessing Officer consider the issue untrammeled by such directions issued by the First Appellate Authority to apply the formula so evolved. Rule 7 in fact gives sufficient guidelines on how to apportion the income and hence there is no requirement for a formula. The Tribunal refused to interfere in the order of the First Appellate Authority finding that it is an open remand. We clarify that it is in fact an open remand and the Assessing Officer will not employ the formula as evolved by the First Appellate Authority.

Summary

Issues:
1. Applicability of Rule 7 of the Income Tax Rules, 1962 in assessing agricultural income.
2. Double taxation concerns due to the application of Rule 7.
3. Proper reopening of assessments and computation of business income.
4. Introduction of Rules 7A and 7B for rubber and coffee.
5. Validity of the formula used to determine income under Rule 7.

Issue 1: Applicability of Rule 7 of the Income Tax Rules, 1962 in assessing agricultural income:
The appeal raised the issue of whether Rule 7 of the Income Tax Rules could be applied to the assessee, a public limited company engaged in oil palm cultivation and crude palm oil production. The Income Tax Authorities applied Rule 7 from 2004-05 onwards, leading to a reassessment of the company's income. The Division Bench considered the applicability of Rule 7 and found that the market value of agricultural produce should be excluded, and only the value addition through the industrial process should be considered as business income.

Issue 2: Double taxation concerns due to the application of Rule 7:
The challenge in the Writ Petition was based on the hardship of double taxation faced by the assessee, who had already paid agricultural income tax on 100% of its income. Despite the availability of Rule 7 from the inception of the Income Tax Rules, the Income Tax Department had not applied it for years and later attempted to tax the income as business income, resulting in double taxation concerns.

Issue 3: Proper reopening of assessments and computation of business income:
The Division Bench found the reopening of assessments and the application of Rule 7 to be proper. It emphasized that the business income should be computed based on the value addition made through the industrial process, excluding the market value of the agricultural produce. The Division Bench directed the modification of assessments in line with the Central Income Tax assessments for years after 2005-06, while confirming agricultural income tax assessments for prior years.

Issue 4: Introduction of Rules 7A and 7B for rubber and coffee:
The Division Bench noted the introduction of Rules 7A and 7B for rubber and coffee in 2000. However, Circular No.5/2003 issued by the Central Board of Direct Taxes prohibited assessments under Section 147 or Section 263 for years prior to 2002-03, considering the difficulties faced by taxpayers who had already paid agricultural income tax.

Issue 5: Validity of the formula used to determine income under Rule 7:
In assessments for 2005-06 and 2006-07, the First Appellate Authority directed the determination of income based on a formula, which was challenged as non-statutory. The Court agreed with the Revenue that Rule 7 provides sufficient guidelines for income apportionment, rendering the formula unnecessary. The assessments were remanded for fresh consideration on the issue of apportionment alone, clarifying that the Assessing Officer should not be bound by the non-statutory formula.

This detailed analysis of the judgment from the Kerala High Court addresses the various issues raised in the appeal, including the applicability of Rule 7, concerns of double taxation, proper assessment procedures, introduction of related rules, and the validity of the formula used for income determination under Rule 7.