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TMI Blog2012 (6) TMI 570X X X X Extracts X X X X X X X X Extracts X X X X ..... er Rule 3 of the State Agricultural Income Tax Rules - the assessee has no case that they have incurred any expenditure for infilling the yielding area and the expenditure incurred is only for replantation after cutting and removing old plantation, there is no question of considering or allowing the claim under Rule 7A(2) - against assessee. - ITA.No. 126 of 2011 - - - Dated:- 21-2-2012 - MR.JUSTICE C.N.RAMACHANDRAN NAIR, MR. JUSTICE BABU MATHEW P.JOSEPH, JJ. For Appellant: SRI.A.K.JAYASANKER, SRI.E.K.NANDAKUMAR, SRI.K.JOHN MATHAI, SRI.P.BENNY THOMAS, SRI.P.GOPINATH, SRI.KURYAN THOMAS, SMT.PREETHA S.NAIR For Respondent: MR.JOSE JOSEPH, STANDING COUNSEL J U D G M E N T Ramachandran Nair, J. Agricultural income is not liable to be assessed under the Central Income Tax Act by virtue of the exemption specifically provided under Section 10 of the Act. However when planters process or manufacture agricultural produce converting it into intermediary or final products for sale in the market, the income attributable to processing or manufacture becomes business income that attracts tax under the Central Income Tax Act (hereinafter referred to as the Central A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pitalized as there is no income from the new immature plantation against which expenditure can be set off. Until the Central Income Tax Department started assessment under Rule 7A of the Income Tax Rules from 2002-03 onwards, the appellant was being assessed under the State AIT Act treating the entire income from rubber as 100% agricultural income against which the appellant could not claim deduction of the entire expenditure incurred in replantation and for maintenance of immature plants, which was treated as capital expenditure. Even though the State AIT Act prohibits deduction of expenditure incurred on replantation and maintenance of immature area, the Agricultural Income Tax Rules in Kerala provides an incentive in Rule 3 thereof, which provides for deduction of replantation allowance subject to a ceiling of a certain percentage of income from plantation. In fact under Rule 3 of the Agricultural Income Tax Rules, the deduction provided for replantation by rubber planters is up to 2.5% of the agricultural income from rubber. This is only by way of incentive for planters to keep on replacing old and unyielding trees with new plantation. Obviously in order to avail the incentive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Central Act probably was unaware of the limitations in the rubber plantation, and therefore, they have made Rule 7A(2) in same lines as Rules 7B(2) and 8(2), which provide for deduction of expenditure incurred for replacement of plants in coffee as well as tea estates. 6. For easy reference we extract hereunder Rule 7A(2) and the corresponding provisions applicable for coffee and tea plantations, namely Rules 7B(2) and Rule 8(2) of the Income Tax Rules. "7A(2) In computing such income, an allowance shall be made in respect of the cost of planting rubber plants in replacement of plants that have died or becomes permanently useless in an area already plated, 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 (31) of section 10, is not includible in total income. 7B(2) In computing the incomes referred to in sub- rule (1) and (1A), an allowance shall be made in respect of the cost of planting coffee plants in replacement of plants that have died or become permanently useless in an area already planted, if such area has not prev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous decisions of the Supreme Court in the context of assessment of tea income under Rule 8, wherein the Supreme Court held that assessment of the income partly as agricultural and partly as business income by the Central Income Tax Officer is binding on the AIT Officer for assessment under the AIT Act. Learned Standing Counsel appearing for the Revenue also did not oppose the legal position but he supported the assessment confirmed in two level appeals by contending that Rule 7A(2) does not authorise deduction of replantation expenditure for replanting an area, which is capital in nature. There can be no dispute that the investment in planting and development of plantation up to maturity i.e. until the plants start yielding has to be treated as capital expenditure for development of a capital asset which starts yielding after 6 to 7 years of planting. The assessee's counsel submitted that there is no difference between infilling in an yielding plantation and replantation of an area because expenditure in both cases are of the same nature i.e. for planting and maintaining immature trees up to 7 years. He therefore contended that the Central Act overrides the State AIT Act, and so mu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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