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TMI Blog2006 (12) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... culture and derives income therefrom. The gross receipts during the year under consideration aggregated to Rs. 1,27,46,012 which included agricultural receipts of Rs. 16,78,905. Against the agricultural receipts, the assessee had shown direct operational expenditure of Rs. 4,47,187. The balance amount of Rs. 12,31,718 was declared as agricultural income not liable to tax. 3 In the course of the assessment proceedings, the Assessing Officer noticed that expenses pertaining to agricultural activity for the assessment year 1993-94 were to the extent of Rs. 7,58,273 against agricultural receipts of Rs. 15,58,062 while for the assessment year 1994-95, the agricultural expenses were to the extent of Rs. 4,47,187 against total receipts of Rs. 16,78,905. Thus the assessee was asked to explain the reasons for increase in the gross receipts and abnormal decrease in the agricultural expenses. In response to the same, the assessee furnished the details of agricultural land and the expenses incurred in respect of agricultural activity. The Assessing Officer noted that the assessee had only shown direct expenses but had not declared any direct expenses in respect of agricultural income. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enhancement dated March 12, 1997, for the reasons given therein, the copy of which is reproduced by the Commissioner of Income-tax (Appeals) in his order at internal pages Nos. 5 to 8. The contents of the same need not be repeated since the relevant portion, whenever needed will be referred to. The reply of such notice was given by the assessee by its letter dated March 26, 1997, copy of which is enclosed in the paper book on pages Nos. 93 to 106. The relevant contents of this letter will also be referred to as and when needed. On the basis of the statement of Chandan Singh, an employee of the assessee and the contents of the letter of the assessee dated October 9, 1996, it was observed by the Commissioner of Income-tax (Appeals) at internal page 10 of its order as under : "16.3 From the above it is clear that the land measuring 150 acres is being used for the purposes of developing such inter-cropping. The entire effect and activity of the company is devoted towards such inter-cropping and it is this inter-cropping which results in output of crops such as wheat, sugarcane, etc. This output of crop is a direct result of the efforts put in on the 150 acres land by the entire resea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 250(4) and validity of the statement of Mr. Chauhan, an employee of the assessee, recorded by the ADI in the remand proceedings. Since the Commissioner of Income-tax (Appeals) has not taken into consideration these factors, it is not necessary for us to refer to the detailed arguments of learned counsel for the assessee. So we will refer only to those arguments which are necessary for disposal of the appeal. 11 The first contention of Mr. Aggarwal was that the statement of Mr. Chandan Singh recorded by the Assessing Officer cannot be considered as an admissible evidence in view of the Supreme Court judgment in the case of Kishinchand Chellaram v. CIT [1980 125 ITR 713 inasmuch as his statement was recorded at the back of the assessee and the copy of the said statement has never been supplied till today. In this connection, he invited our attention to paragraph No. 2 of the notice of enhancement wherein it has been observed by the Commissioner of Income-tax (Appeals) that evidence proposed to be used against a person has to be disclosed to him before it can be used. Further, he says that the copy of the statement shall be supplied to the assessee at the appropriate time. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upport his contention, he relied on the Supreme Court judgment in the case of State of Orissa v. Maharaja Shri B. P. Singh Deo [1970] 76 ITR 690. 14 Proceeding further, it was also submitted that accounts of the assessee were being maintained in similar fashion right from the inception and the same were being accepted by the Department in the past. According to him, the rule of consistency must be continued to be followed in the absence of any adverse material. If the agricultural receipts could be accepted by the Revenue on the basis of accounts maintained by it then there was no justification for not accepting the expenses relating to agricultural activity. He also pointed out the factual error in the order of the Commissioner of Income-tax (Appeals) by stating that 150 acres farm was of Chandian Farm exclusively carrying on research and development activity and only 15 acres at Baghwala were used for agricultural activity. That is why only 10 per cent. of the total receipts related to agriculture. 15 He also assailed the order of the Assessing Officer by submitting that the action of the Assessing Officer in estimating the direct business expenditure at Rs. 40 lakhs was arbitr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced before us, we find sufficient force in the submission of learned counsel for the assessee. According to the well celebrated judgment of the hon'ble Supreme Court in the case of Kishinchand Chellaram [1980] 125 ITR 713, no material in the possession of the Assessing Officer can be considered as an admissible evidence unless it is confronted to the assessee and its copy is supplied to the assessee so that the assessee may rebut such material. Admittedly, in the present case, the assessee had been repeatedly asking for the copy of the statement of Mr. Chandan Singh recorded by the Commissioner of Income-tax (Appeals) on December 19, 1996. It is apparent from the letters dated February 10, 1997, and March 5, 1997, appearing at pages Nos. 87 and 88 of the paper book. At this stage, it would be useful to quote paragraph No. 2 of the notice of enhancement issued by the Commissioner of Income-tax (Appeals) as under "2. Kindly note that in accordance with principles of natural justice any evidence proposed to be used against a person has to be disclosed to him before it can be so used. However, the time and occasion when such evidence is to be disclosed is not a matter to be decided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t find any reason for not accepting the books with reference to the expenditure. Page No. 24 of the paper book shows that the assessee had been maintaining the record with respect to direct expenses relating to agricultural activity such as fertilizer, irrigation, high speed diesel, repair and maintenance, tractor expenses, wages, transportation etc. According to learned counsel for the assessee, all these expenses are fully vouched and are still available. No specific defect has been found either by the Assessing Officer or by the Commissioner of Income-tax (Appeals) in this regard. It is not the case of the Department that these expenses are not vouched, as contended by the assessee. Therefore, we are unable to uphold the finding of the Commissioner of Income- tax (Appeals) that no separate accounts of expenses were maintained by the assessee. Rather the assessee has been showing such expenses in the uniform manner in the last ten years and such accounts were being accepted as such by the Department. Therefore, there is no reason to depart from such system maintained by the assessee. Consequently, the books of account maintained by the assessee are to be accepted. As a result the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the activity of income which does not form part of the total income. That means where the expenditure is directly related to an activity whose income is tax-free then such expenditure cannot be allowed as a deduction. But this definition cannot be extended further. Therefore, in our view, the head office expenses which are not directly related to agricultural operations cannot be apportioned between business activity and agricultural activity. It is apparent from the facts of the case that 87 per cent. of the income is derived from business activity. Further the activity of research and development as well as activity of agriculture are part of the same business. The expenditure incurred at head office are primarily for carrying on the business activity and they had to be incurred irrespective of the agricultural operations. The main object of the assessee-company is the research and development activity whose income is taxable. The expenses at head office like rent of the premises, electricity and telephone expenses, staff expenses have no direct connection with agricultural operations. The remote connection is not enough for disallowing such expenses. The decision of the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee." 29 The perusal of above observations clearly shows that the rule of apportionment would apply only where two activities under the same head do not constitute one indivisible business. Since in the present case, both the activities are interconnected, no apportionment can be made except in the circumstances falling under section 14A. 30 The other decision of the Supreme Court is in the case of Consolidated Coffee Ltd. v. State of Karnataka [2001] 248 ITR 432. In that case, the assessment was under the Karnataka Agricultural Income-tax Act, 1957, rule 7 of the Rules made thereunder provided that deduction admissible under the Act shall be the actual amount related to the income derived from agricultural operations and proved by accounts or other evidence, where no such accounts or evidence is produced, the Assessing Officer shall proceed to assess the income to the best of his judgment. Since books of account were maintained by the assessee in the manner that expenses related to agricultural income and non income could not be identified, the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income-tax (Appeals) is, therefore, set aside on this issue and the disallowance made or sustained by him is hereby deleted. 33 In the result, the appeal of the assessee is allowed. 34 R. S. SYAL (Accountant Member).--I have meticulously perused the draft order of my learned Brother in which he has allowed the assessee's claim in total by holding that the indirect agricultural expenses do not fall within the ambit of section 14A. I find myself unable to concur with the conclusion regarding the allocation of expenses to agricultural activity vis-a-vis the restricted application of section 14A. Despite the discussion I could not convince him on my line of reasoning. As such I am constrained to write my dissent note. The facts of the case and the arguments have been noted by him in paragraphs Nos. 1 to 17 (pages 220 to 225) of his order, which need not be repeated. However the necessary facts and submissions which have not been considered would be discussed at the relevant page. 35 Very briefly the facts of the case are that the assessee owned 165 acres of land; 150 acres at Chandian Farm and 15 acres at Baghwala. 15 acres at Baghwala were being used exclusively for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year and no order under section 250(4) was passed by the Commissioner of Income-tax (Appeals). Later on the Commissioner of Income-tax (Appeals) issued enhancement notice on the assessee stating therein that as the assessee had not furnished the necessary information to the Assessing Officer as desired by him for the disposal of appeal, therefore, he was proceeding to draw adverse inference against the assessee. In response to this notice, the assessee filed reply on March 26, 1997, placed at page Nos. 93 to 106 of the paper book and also furnished details of expenses by way of annexures A, B and C. The assessee conceded before the Commissioner of Income-tax (Appeals) through its letter dated November 7, 1996, placed at pages Nos. 83 to 86 of the paper book that the agricultural operations were being looked after by one supervisor named Shri chandan Singh to whom total salary paid was to the tune of Rs. 41,091 and such salary was not included in the agricultural expenses shown by it. A further letter dated March 26, 1997, relevant portion at page No. 105 of the paper book is an admission that the amount of salary paid to Shri Chandan Singh may also be included in the agricu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee had not at any stage allowed the Assessing Officer to examine the details of expenses so as to determine the total expenses relatable to the agricultural activity. At the same time it is also palpable that the detail of agricultural expenses submitted by the assessee was not correct inasmuch as some expenses directly relatable to agricultural operations were not finding place in such detail as is evident from the assessee's admission itself. The Commissioner of Income-tax (Appeals) to the effect that salary to Shri Chandan Singh was not included in detail of agricultural expense and the further fact that no indirect expenses were included by the assessee in agricultural expenses. It was under these circumstances that the revenue authorities proceeded to determine net agricultural income by estimating the amount of agricultural expenses included in the total expenses. 39 The claim of the assessee is that the higher research officers of the company were not engaged in the agricultural operations in any manner and it was left for the labourers to decide as to which crop should be grown in a particular season. It is clear from the facts that the nursery was in the are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were maintained by the assessee. Rather a common set of books was kept in which both transactions relating to the agriculture and taxable business were recorded. From the above discussion it is clear that the share of agriculture in common expenses was not adequately reflected by the assessee in its list of agricultural expenses. Under these circumstances it is necessary to make a bifurcation of the total expenses and determine the amount of direct and indirect expenses relatable to the agricultural activity. 43 Although my learned brother agrees in principle that direct agricultural expenses are deductible to compute the net agricultural income but he has proceeded to allow the assessee's claim in total by allowing deduction of only such expenses as have been declared by the assessee at Rs. 4.47 lakhs from the gross agricultural receipts. The assessee's admission before the Commissioner of Income-tax (Appeals) as regards non-inclusion of certain direct agricultural expenses in the expenses shown by it and also the share of agriculture expenses in common direct expenses, which have been claimed as deduction from taxable income in entirety have not been found to be deductible by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rious provisions of the Act. There have been cases where deduction have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act." (emphasis supplied) 46 A bare perusal of it reveals that only those expenses can be claimed as deduction from taxable income which are incurred in relation to earning taxable income. The use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Karnataka [2001] 248 ITR 432 (SC), in the context of agricultural income-tax has approved the method of apportionment of expenses on the basis of gross receipts of agricultural and non-agricultural activities where the account books did not clearly supply bifurcation of such expenses. This judgment, though not rendered in the context of section 14A of the Income-tax Act, 1961, but has approved the method of apportionment of common expenses between the exempt and taxable sources of income on the basis of gross receipts of these two sources. In my opinion this judgment gives guidance for the adoption of a method for apportioning common expenses. 48 Coming back to the facts of the present case it is noted that in the absence of necessary details furnished before the Assessing Officer, he determined total agricultural expenses by holding a sum of Rs. 40 lakhs out of total direct operational cost at Rs. 73.62 lakhs as exclusively relatable to the taxable income and then computed the share of agriculture in common expenses on the basis of gross receipts of both the sources. On the other hand the Commissioner of Income-tax (Appeals) determined the net agricultural income at nil. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refrained by the Members on January 30, 2003, has been referred to me under section 255(4) of the Income-tax Act, 1961 "Whether on the facts and in law, any expenditure (other than the expenditure apportioned by the assessee itself against agricultural receipts) incurred by the assessee could be apportioned against agricultural receipts ? If yes, to what extent ?" 53 The brief facts as can be gathered from the orders passed by the learned Members are as follows 54 The assessee is a company engaged in the business of providing consultancy services in the field of agricultural forestry plants. The services were provided to M/s. Wimco Limited in terms of an agreement dated September 1, 1984. The assessee owned 150 acres of land at Chandian Farm and 15 acres at Baghwala. The land at Baghwala was being exclusively used for research and development activities, administrative functions and also housed the guest house. Field trials of nursery plants for research purposes were carried out at Chandian Farm in about 20 acres by growing trees in order to develop plants. It was done in such a way that inter-cropping was possible. The remaining 130 acres of land in Chandian was used for agric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 605. How this figure has been arrived at has been explained in paragraphs Nos. 3 and 4 (pages 220 and 221) of the order of the learned Judicial Member. As the assessee had shown net agricultural income of Rs. 12,31,718, this resulted in an addition of Rs. 5,48,113 to the business income of the assessee, the figure being the difference between the net agricultural income of Rs. 12,31,718 shown by the assessee and Rs. 6,83,605 determined by the Assessing Officer. 57 The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals) who issued a notice of enhancement proposing to enhance the addition by reducing the agricultural expenses to be adjusted against the agricultural receipts. The basis of the enhancement notice issued by the Commissioner of Income-tax (Appeals) was the view taken by him that the entire research and development staff and establishment at Baghwala did put in efforts in relation to the inter-cropping carried out in 150 acres in Baghwala and, therefore, a part of the expenditure on the staff of the research and development and establishment has to be adjusted against the agricultural receipts. He further found that there was no evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich are not directly related to agricultural operations can be apportioned between the agricultural activity and business activity. He noted that the activities of agriculture and research and development are part of the same business and that the expenditure incurred at the head office was primarily for carrying on the business and had to be incurred irrespective of the agricultural operations. He noted that the expenses at head office, such as, rent of the premises, electricity and telephone, staff expenses etc. are not connected with the agricultural operations and for the purpose of section 14A any remote or indirect connection with the tax-free income is not sufficient to bring it under the section. The learned Judicial Member took the view that section 14A is restricted to direct expenses attributable to agricultural activity or any other activity giving rise to tax-free income. After referring to the judgments of the Supreme Court in the cases of Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452, Rajasthan State Warehousing Corporation [2000] 242 ITR 450 and Consolidated Coffee Ltd. [2001] 248 ITR 432, the learned Judicial Member took the view that the rule of apportionment wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idated Coffee Ltd. [2001] 248 ITR 432 (SC) in which the apportionment of common expenses on the basis of gross receipts of agricultural and non agricultural activities was applied. Having thus approved in principle the stand of the departmental authorities, the learned Accountant Member found that the necessary details were absent. He, therefore, set aside the order of the Commissioner of Income-tax (Appeals) for fresh adjudication by the Assessing Officer, directing the Assessing Officer to examine the books of account and other necessary material to determine the net agricultural income afresh after giving reasonable opportunity of being heard to the assessee. He gave certain guidelines to the Assessing Officer and allowed the appeal of the assessee for statistical purposes. 61 It is in the above background that the point of difference has been referred to me for decision. 62 I have heard the rival submissions. There was some preliminary discussion as to the framing of the point of difference. The apprehension was that the question closes the option of sending back the case to the Assessing Officer which was the course adopted by the learned Accountant Member. Learned counsel f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra). The proposition laid down in those decisions is that where there is both activity which brings in taxable income and activity which brings in tax-free income and both activities constitute an indivisible business, then the expenditure incurred by the assessee for the purposes of the indivisible business cannot be artificially broken up to identify and disallow expenditure which is supposed to have been incurred for the purpose of earning the exempted income. It was this proposition that is sought to be nuffified by section 14A as rightly held by the learned Accountant Member. However, while applying the section there is no authority conferred by the section upon the Assessing Officer to deem or assume certain expenditure to have been incurred in relation to the tax-free income. Common expenditure incurred at the head office cannot be broken up artificially to attribute or apportion a part thereof to the earning of the tax-free income on the assumption that such part of the common expenditure was incurred in relation to the tax free income. Not only the incurring of the expenditure but also its relationship to the exempted income must be clear and must be capable of being asce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure. Sub-section (3) clinches the position by saying that the Assessing Officer can determine the amount of expenditure incurred in relation to exempted income on the prescribed basis even where the assessee claims that no such expenditure was incurred by him as a matter of fact. 66 In the light of the above position, which is also the view taken by the learned Judicial Member albeit without reference to sub-sections (2) and (3) of section 14A inserted with effect from April 1, 2007, I will now proceed to examine the facts of the present case. At page No. 24 of the paper book, the assessee has placed the details of the total agricultural expenses. A reference to this is found in paragraph 10 of the order of the learned Judicial Member. The total expenses on the agricultural activities carried out in Chandian Farm has already been noticed to be Rs. 4,47,187. Details of this figure are available in page No. 24 of the paper book. It is not clear, in the light of the above details furnished by the assessee, as to how the learned Accountant Member says that the necessary details were not furnished before the Assessing Officer (paragraph No. 15 of his order). The entire case appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page No. 24 of the paper book in which details of the agricultural expenditure have been given before the Assessing Officer is not sacrosanct and pointed out that Chandan Singh's salary which is claimed to be exclusively for agricultural activities does not find a place there. I think there is some con fusion here. It is the view of the Commissioner of Income-tax (Appeals) that Chandan Singh was looking after the entire research and development and agriculture activity and, therefore, his remuneration should be deducted from the agricultural receipts. This view is based on the assessee's claim before the Commissioner of Income-tax (Appeals), made for the first time, that the agricultural operations were being supervised and managed by Chandan Singh. However, since the statement of Chandan Singh is not to be admitted in evidence, the view taken by the Commissioner of Income-tax (Appeals), even though based on the claim made by the assessee that Chandan Singh was directly looking after the agricultural activity and his remuneration should be adjusted against agricultural receipt cannot be upheld as has been decided by the learned Judicial Member. 68 It now remains for me to conside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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