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TMI Blog2012 (9) TMI 510X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition. Case decides in favour of assessee. Disallowance in respect of delayed payments of Employees Contribution to PF, Labour welfare fund and ESI – Payment made before the date of filing of return u/s 139(1) - Held that:- Following the order of the Tribunal in the appellant’s own case previous assessment year, the disallowance of delayed payments of Employee’s contribution to provident fund, labour welfare fund and employees state insurance respectively which were paid before the due date of filing of the return is deleted. Decision in favour of assessee Addition of amount realised on sale of old and unyielding rubber trees – AO treating it as revenue receipt under Rule 7A - Rule 7A, the income from rubber estate has to be apportioned in the ratio of 65 : 35 and the 35% of the income is to be assessed as business income - AO brought to tax 35% of the amount realised on sale of old and unyielding trees as salvage value got from an exhausted stock – Held that:- As Rule 7A applies only to a person who carries on the combined activity of growing rubber trees and also manufacturing or processing of field latex or coagulum obtained from rubber plants. Following the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee Disallowance of Provision for gratuity in computation of Book Profit u/s 115JB – Held that:- On the basis of decision in case of ILPEA Paramount (2010 (2) TMI 45) & Eastern Power Distribution Co. of AP Ltd.(2011 (3) TMI 547) held that the provision for gratuity liability cannot be added for the purpose of computation of book profit. Decision in favour of assessee Disallowance of share capital related expense – AO disallow share transfer charges and the professional charges paid to registrar and share transfer agents – Held that:- AO disallowed the above said expenses under the impression that they have been incurred in connection with the sale of shares, the capital gain of which is exempt. Therefore AO made the impugned disallowance without properly appreciating the nature of expenses. Decision in favour of assessee - I.T.A No. 77/Coch/2010 - - - Dated:- 29-6-2012 - N. R. S. Ganesan And B. R. Baskaran , JJ. Revenue by S. R. Senapati, Sr. DR Revenue by Dilip S. Damle, FCA ORDER Per B. R. Baskaran, Accountant Member: The appeal of the revenue is directed against the order dated 30.11.2009 passed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is allowable and it was so held by the Tribunal in more than one year. Hence, we are inclined to follow the view consistently taken by the Tribunal. Since the Ld CIT(A) has followed the decision of the Tribunal, we do not find any reason to interfere with his decision on this issue. 4. The next issue relates to the disallowance of proportionate interest relating to the interest free loans given to the subsidiary companies. The assessee had claimed a sum of ₹ 975.12 lakhs as interest expenditure. The AO noticed that the assessee had given interest free loans of ₹ 21221.04 lacs as on 31.3.2006 to its wholly owned subsidiary companies as against the opening balance of ₹ 4849.04 lacs. The AO worked out the average of opening and closing balances stated above at ₹ 13035.04 lacs. The ratio of interest bearing funds and interest free funds as per the Balance sheet was 9775.94 : 30168.70. By applying this ratio, the AO worked out the investment made in subsidiary companies out of interest bearing funds at ₹ 3190.16 lakhs. Accordingly, the AO calculated the proportionate interest relatable to the above amount at ₹ 3,18,21,074/- and disallowed the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest free advances to the subsidiaries as held by the Hon ble Supreme Court in the case of S.A Builders reported in 288 ITR 1. She further submitted that the economic interest projected by the assessee cannot be considered as a measure of commercial expediency. 7. On the contrary, the ld A.R submitted that the economic interest can certainly be taken as a measure of commercial expediency in making interest free advances to the subsidiary companies. He further submitted that the assessee is the whole and sole owner of these subsidiary companies and has exercised full ownership and management control over their affairs. Accordingly, the assessee is entitled to the full share of profits earned by these subsidiary companies. Being 100% holding company, the assessee had an obligation to ensure that the business activities of the subsidiaries were carried on sound economic footing. He further submitted that these subsidiary companies have been promoted by the assessee for strategic business purpose of promoting other bodies corporate and through these subsidiary companies, the assessee company has acquired promoters holding in number of listed and unlisted companies, which would, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it has acquired promoters interest in many other body corporate both listed and unlisted, which would in turn help to promote its business interests. It is the prevalent practice of big business groups to promote such kind of subsidiary companies, which would in turn acquire business and promoters share in other listed and unlisted companies. This is a kind of corporate strategy generally followed by all business groups; the purpose is certainly to consolidate its business position. Accordingly, we find merit in the contention of the Ld A.R that there was commercial expediency in making interest free advances to the subsidiary companies. 10. The assessee has also explained about the source of funds for making investments in the subsidiary companies during the year under consideration. The AO himself has worked out the average investments made during the year at ₹ 13035.04 lacs. During the year the assessee has realized ₹ 7250 lakhs on sale of its rubber estates and ₹ 3748.77 lacs from sale of investments. Besides the above the assessee has made a turnover of ₹ 15267.54 lakhs during the year under consideration and we notice from the Profit and Loss fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... state insurance respectively which were paid before the due date of filing of the return is deleted. Ground No. 3 is therefore allowed . The Cochin bench of the Tribunal in the assessee s own case relating to the assessment year 2005-06, which was relied upon by the Ld CIT(A), has considered an identical issue and has categorically held that the decision of Hon ble Supreme Court in the case of Vinay Cement Ltd (213 CTR 268) is applicable to both the employees and employers contribution, as no distinction has been made by the Gauhati High Court in the case of George Williamson (Assam) Ltd. Since the Ld CIT(A) has followed the decision rendered by the Tribunal on this issue, we do not find any infirmity in his decision. 13. The next issue relates to the addition of amount realised on sale of old and unyielding rubber trees amounting to ₹ 5,12,84,878/- as revenue receipt under Rule 7A of the Income tax Rules. The assessee claimed the amount realised on sale of old and unyielding rubber trees as not taxable by following the decision of Hon ble Supreme Court in the case of Kalpetta Estates Ltd (221 ITR 601). However, the AO took the view that the taxable position of am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coagulum obtained from rubber plants grown by the seller in India, i.e., when there is a combined activity of growing rubber trees and also manufacturing or processing of field latex or coagulum obtained from rubber plants, Rule 7A provides for segregation and ascertainment of agricultural income and the business income. On a plain reading of Rule 7A, we are inclined to accept the contentions of Ld A.R. Thus, the said Rule 7A does not take in its ambit the question of sale of old rubber trees. With regard to the position of rubber trees, the Ld CIT(A) has observed as under:- In so far as sale of old and unyielding rubber trees are concerned, rubber trees are grown by carrying out agricultural operations on land. As held by the Supreme Court, rubber trees are not grown for the purpose of selling the trees but for generating income from the trees in the shape of latex. The rubber trees constitute capital asset of rubber estate and dominant purpose of growing rubber trees is to create source for supply of liquid latex. The rubber trees therefore constitute capital asset of agricultural operations. There is no manufacturing activity involved either at the stage of cultivation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss from Plant tissue culture division and Aqua culture division. The AO disallowed the loss claimed by the assessee in these two divisions by holding that they are defunct units and no business is carried on therein and further there is no possibility of revival of these units. Before Ld CIT(A), the assessee demonstrated that these units are actually functioning and have generated income also. Accordingly the Ld CIT(A) deleted the disallowances by taking note of income generated by these two units. The relevant observations made by Ld CIT(A) on this issue are extracted below:- I have considered the AO s order and the submissions of the A/Rs. I have also perused the computation of total income with its enclosures filed with the return. In Clause 7B of the tax audit report, it has been certified by the auditors that during the previous year appellant s business inter alia included Plant Tissue Culture and Aqua Culture. From the division-wise statement of income and expenditure filed with the computation, I find that in the plant tissue culture business the appellant earned income exceeding ₹ 52 lacs and incurred expenditure of ₹ 56 lacs. The appellant had leased ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (60 ITR 275) to submit that the Grevelia trees constitute capital asset and hence the amount realised on its sale would constitute capital receipt. The assessee also relied upon the decision of Hon ble Calcutta High Court in the case of CIT Vs. Kanan Devan Hill Produce Co. Ltd (200 ITR 453), wherein the Court has held that the profit derived from sale of old and useless Grevelia trees was not taxable under the Central Income tax as they have to be considered as part of agricultural activities. 19. The Ld CIT(A) noticed that the assessing officer has disallowed the claim of capital loss in the earlier years by applying the ratio of Hon ble Supreme Court in the case of CIT Vs. B.C. Sreenivasa Shetty (128 ITR 294) and also the decision of jurisdictional Kerala High Court in the case of Rajagiri Rubber Produce Company Ltd reported in 189 ITR 182 (confirmed by the Supreme Court in 221 ITR 601). In the case of Rajagiri Rubber Produce Company Ltd, it has been held that the capital gains could not be charged/computed u/s 45 / 48 in respect of sale of rubber trees because the cost of acquisition of the trees could not be conceived with reasonable accuracy. In the case of B.C. Sreen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of proceeds realised on sale of Cheruvalli Estate and Thenmala Division of Nagamallay Estate. The assessee did not return any capital gain income on the sale of the two estates cited above on the ground that these estates are agricultural lands and hence their transfer is not liable to tax. However, the AO took the view that the transfer has been made on going concern basis for a lump sum consideration though attempt was made to bifurcate the sales value into various assets. The AO took the support of the decision of Ld CIT(A) rendered for the assessment year 2005-06 in the assesseee s own case, wherein the first appellate authority had held that the sale of a rubber estate named Boyce Rubber Estate was sold as a going concern and therefore profit was assessable u/s 50B of the Act. The AO observed that the finding of Ld CIT(A) in respect of sale of Boyce Rubber estate shall apply mutatis mutandis to the sale of two estates referred supra. 22. However, the Ld CIT(A) in the instant year noticed that the assessee had challenged the decision rendered by the Ld CIT(A) in assessment year 2005-06 before the Tribunal and the ITAT, in its order dated 12.5.2009 in ITA No.54/C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluded the profit on sale of two estates in the Book profit computed u/s 115JB of the Act. In the preceding assessment year also, the AO had included the profit on sale of Boyce Rubber estate in computing the book profit. However, the Tribunal, in its order dated 12.5.2009, had held that the profit realised on sale of Boyce Estate is agricultural income and hence it is not required to be included in computing the book profit u/s 115JB of the Act as the agricultural income is exempt u/s 10 of the Act. The Ld CIT(A) excluded the profit on sale of two estates cited above by following the Tribunal s order referred above. Since the Ld CIT(A) has followed the decision rendered by the Tribunal on identical set of facts, we do not find any infirmity in his decision on this issue. 25. The next issue relates to the addition of Provision for gratuity liability amounting to ₹ 5.58 crores while computing the book profit by treating the same as unascertained liability. The Ld CIT(A) directed the AO to delete the said addition by following the decision of Hon ble Supreme Court in the case of Metal Box Co of India Ltd Vs. Their workmen (73 ITR 53) and also the decision rendered in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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