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TMI Blog2011 (6) TMI 900X X X X Extracts X X X X X X X X Extracts X X X X ..... w in holding that irrecoverable amount of ₹ 3,93,303/- in the nature of security deposits and other deposits are revenue in nature.. (2) That ld. CIT(A.) erred on facts and circumstances of the case and in law in allowing assessee s claim of disallowance of ₹ 1,02,700/- under section 14A of the Act without following the provisions of Rule 8D. (3) That ld. CIT(A.) erred on facts and circumstances of the case and in law in holding that the assessee is entitled for deduction of 100 per cent of the profit of the power undertaking at Bhadrachalam when the concerned undertaking commenced operation in FY 1997-98. (4) That ld. CIT(A.) erred on facts and circumstance of the case and in law in holding that income of ₹ 65,55,048/- from sale of Clonal Plants, coconut and Sugarcane, etc. is in the nature of agricultural income and accordingly, the same is exempted. 2. The assessee vide letter dated 14.09.2010 has also taken an additional ground, which is as under :- That on the facts and circumstances of the case the ld. CIT(Appeals) may please be directed to reexamine the ground on disallowance of proportionate management expenses with respect to earning of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .06.2010, which contains the break-up of the amount aggregating ₹ 9,00,111/- and the nature of activities undertaken by the Clubs/ Association to whom the assessee made subscriptions. We consider it prudent to state the said details, filed by the assessee, which is as under :- Sums paid towards employees welfare activities disallowed under section. 40A(9) Particulars Nature of payment Amount (in Rs.) Nature of activities undertaken by the clubs/ association ITC Staff Club Subscription 344,716 ITC Staff Club (At Chennai) was formed with the objective of providing recreational facilities to its members who are employees of the Company posted at Tiruvottityur, Chennai Tribeni Tissues Cooperative Stores Ltd. Subscription 25,800 The employees of Tribeni factory of the Company had created a cooperative stores to assist members in obtaining their requirements at reasonable rates and within proximity of the factory Tribeni Tissues Recreation Club Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eep them happy. This payment was for advertisement in the souvenir which was used for organizing drama for the employees of Tribeni factory. ITC Recreation Society Subscription 16,000 This society was formed to prove recreational facilities to the employees of Kidderpore factory which helps to promote cordial relations with the employees and maintain industrial peace. This payment was for advertisement in souvenir of the Society which was published on the occasion of the Annual Social of the Society. Total 900,111 Ld. AR submitted that in the preceding assessment years, viz. assessment years 2002-03 and 2003-04, ITAT vide its order dated 18.06.2009 in ITA Nos. 245 246/Kol./2008 restored the matter to ld. CIT(Appeals) with a direction to decide the issue afresh as per law as the assessee failed to give details and no reasons were given by the authorities below. Ld. AR submitted that in the assessment year under consideration, the assessee filed all the details of the contributions made by it and the contributions were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsons, Body of Individuals, Society registered under Societies Registration Act, 1860 (except to one contribution of ₹ 25,800/- as mentioned hereinabove), but the reimbursement is of the expenditure actually incurred for the welfare activities of the employees and their families. Hence, we are of the considered view that the Staff Recreation Club and Staff Club for which the assessee has incurred the expenses are for the welfare of its employees due to business expediency. Staff Recreation Club and Staff Club are a part and parcel of the Organization itself. Considering the earlier decision of ITAT, Kolkata in the case of Chloride Industries Ltd. (supra) and also the fact that the assessee has given the break-up of the expenses incurred/ reimbursed, as mentioned hereinabove, we are of the considered view that the provisions of section 40A(9) of the Act are not attracted for a sum of ₹ 8,74,311/- and the said expenditure is allowable under section 37(1) of the Act. Therefore, we allow Ground of appeal taken by the assessee in part by restricting the disallowance to ₹ 25,800/- and by deleting the sum of ₹ 8,74,311/- out of ₹ 9,00,111/-. 9. As mention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee are not applicable to the facts of the case. He submitted that Assessing Officer did not disallow by applying Rule 8D while considering the exempted income of the assessee. He further submitted that the assessee voluntarily did not press the above ground. He submitted that the assessee could not agitate the same issue in further appeal once, he had accepted the disallowance made by the Assessing Officer. Ld. DR submitted that if the assessee is allowed to re-agitate the same issue for which he agreed to before the lower authorities, there could be no end. 12. We have carefully considered the submissions of the ld. representatives of the parties and the orders of the authorities below. We have also considered the cases cited by ld. A.R. in support of his submission. Considering the facts of the case that the Assessing Officer made proportionate disallowance while considering the exempted income of the assessee in the assessment year under consideration for the purpose of section 14A of the Income Tax Act, he did not consider Rule 8D of the Income Tax Rule. We agree with ld. AR that Rule 8D is not applicable to the assessment year under consideration. It is also a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 3,93,303/- as capital in nature and added to the total income of the assessee. Being aggrieved, the assessee filed appeal before the first appellate authority. Ld. CIT(Appeals) had deleted the said amount stating that the issue is covered by the ITAT judgment in assessee s own case for assessment year 2002-03 in I.T.A. No. 18/Kol./2006 and for assessment year 2003-04 in ITA No. 1338/Kol./2006. Hence, the Department is in further appeal before the Tribunal. 15. During the course of hearing, ld. D.R. relied on the order of Assessing Officer. On the other hand, ld. A.R. of the assessee submitted that the amount aggregating ₹ 25,783/- was given as security deposit to Electricity Board and for supply of gas to various agencies as normal business requirement. It was submitted that it was an old amount and if litigation was initiated, its cost would be higher than recovery. He further submitted that ₹ 3,17,520/- was given as security deposit for leased godown at Chennai in 1995 and 1999. There was a dispute on fixation of rent since January, 2001. The rent was hiked to ₹ 38,580/-, but the assesseecompany disputed the same and continued to pay old rent. Ultimately, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of Ground No. 2 of the appeal taken by the Department, ld. A.R. submitted that the assessee itself disallowed a sum of ₹ 1,02,700/- under section 14A of the Income Tax Act and referred para 4 of the assessment order. He submitted that no relief has been given by ld. CIT(Appeals) in regard thereto. Ld. D.R. has not disputed the said submission of ld. A.R. 20. We also on perusal of the order of Assessing Officer agree with the contention of ld. A.R. that the assessee itself made disallowance of ₹ 1,02,700/- under section 14A of the Act while considering the exempted income shown by it and ld. CIT(Appeals) has not deleted it. Hence, Ground No. 2 of the appeal taken by the Department does not arise out of the order of ld. CIT(Appeals). Accordingly, Ground No. 2 of the appeal is rejected. 21. In respect of Ground No. 3 of the appeal taken by the Department, relevant facts are that the Power Undertaking 1 at Bhadrachalam commenced its operation on 18.07.1997, i.e. in financial year 1997-98. The assessee stated that till financial year 2000-01, i.e. assessment year 2001-02 the said Power Undertaking belonged to another Company, viz. ITC Bhadrachalam Paperboards Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above, the Assessing Officer restricted the deduction to the assessee under section 80IA of the Act to 30% of the profits of the said Undertaking being ₹ 8,42,56,800/- instead of ₹ 28,08,56,000/- as claimed by the assessee. Being aggrieved, assessee filed appeal before the first appellate authority. 23. Ld. CIT(Appeals) after considering the submission of the assessee has held that the assessee claimed deduction under section 80IA for the first time in assessment year 2002-03. Ld. CIT(Appeals) has stated that the assessee exercised its options as per the amended provisions for choosing 10 years from assessment year 2002-03 and as such, the assessee is entitled to claim deduction under section 80IA @ 100% of the profit of the said Unit for a period of five assessment years commencing from assessment year 2002-03 and accordingly, directed the Assessing Officer to allow the assessee s claim. The relevant order of ld. CIT(Appeals) is at pages 18 to 20 of the impugned order, which is as under :- In this ground the appellant is disputing the AO s action in limiting deduction under sec. 80IA of the Income Tax Act in respect of its power generation unit at Bhadrachala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter 01.04.1995 and which, due to substantial capital investment were not able to make profits in the initial year of operation. This intention has been further clarified by the CBDT in its Circular No. 14 of 2001. The unit in question having commenced operation for assessment year 1998-1999, the appellant has still assessment year 2013-2014 to exercise its option of choosing 10 consecutive years out of this period. Having made its choice the initial year of the appellant in this case will be assessment year 2002-2003 and for a period of five assessment year commencing from that initial assessment year it would be entitled to a deduction of 100% of its profit of the said unit. Therefore, I hold that the contention of the appellant is correct and accordingly direct the AO to allow the appellant s claim under sec. 80IA of the Income Tax Act in respect of Bhadrachalam Unit. This ground of appeal is allowed . Hence, Department is in further appeal before the Tribunal. 24 At the time of hearing, ld. D.R. relied on the order of Assessing Officer. However, ld. A.R. of the assessee made his submissions on the lines of the submissions made before ld. CIT(Appeals). He further submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng telecommunication services on or after 1st April, 1995 and the assessee fulfilled all other conditions stipulated under section 80IA, the Tribunal held that ld. CIT(Appeals) was not justified in holding that the assessee was not entitled to exercise option in terms of the amended provisions applicable from assessment year 2000-01 onwards. It was held that the amended provisions applicable w.e.f. 1.4.2000 allowed option even to those Undertakings, which had already started providing telecommunication services on or after 1.4.1995 and since the assessee undisputedly, did not claim deduction from assessment years 1997-98 to 1999-2000, the assessee, therefore, could not be denied benefit of the amended provisions, once it fulfilled the conditions stipulated in the relevant provisions. 25. At the time of hearing, ld. A.R. submitted that the above decision of ITAT, Ahmedabad Bench (supra) squarely applies to the case of the assessee and as such the initial assessment year in the case of the assessee for claiming deduction under section 80IA was assessment year 2002-03, which would be available for next ten years i.e. upto assessment year 2011-12. He submitted that the order of ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, i.e. upto assessment year 2011-12. However, the Assessing Officer has stated that pre-amended provisions of section 80IA would be applicable and whereas ld. CIT(Appeals) has agreed with the contention of the assessee. We observe that similar issue had been considered by ITAT, Ahmedabad Bench in the case of Vodafone Essar Gujarat Limited (supra) and the relevant part of the said order reads as under :- We are of the opinion that the assessee was justified in exercising option in terms of the amended provisions, especially when the provisions of section 80-IA(4)(ii) clearly stipulate that the option is available even to those undertakings which had started providing telecommunication services on or after 1.4.1995. Therefore, when the assessee fulfilled all other stipulated conditions in terms of the relevant provisions of section 80-IA of the Act, the ld. CIT(A.) was not justified in holding that the benefit of substituted provisions was available only to those undertakings which were granted a license after 1.4.1995 and could not start operations until 1.4.2002. We are of the option that such an restrictive interpretation does not emerge from the amended provisions. The ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant is not something similar or commonly accepted income from agricultural activities. Assessing Officer observed that the assessee is engaged in these new dimensions of bio-technological research, testing and developing its tools, technology and product thereof. It is all part of agro-business of the assessee-company and cannot qualify for exemption. Hence, the assessing Officer added the said income of ₹ 65,55,048/- to the total income of the assessee and treated it as business income. Being aggrieved, assessee filed appeal before the first appellate authority. 28. Ld. CIT(Appeals) after considering the submission of the assessee and also considering the amendment made by Finance Act, 2008 incorporated in section 2(1A) Explanation 3 and also considering CBDT Circular No. 1 of 2009 dated 27.03.2009 directed the Assessing Officer to allow exemption to the assessee under section 10(1) of the Income Tax Act as per assessee s claim. The relevant part of the order of ld. CIT(Appeals) reads as under :- In this ground, the appellant is disputing the AO s action in not allowing exemption under sec. 10(1) of the Income Tax Act on income claimed by it to be agricultural income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sowing of seeds, plan ting, etc. After a certain stage the best responsive plant is earmarked as the mother seed. These activities undertaken for growing the seedlings are agricultural activities. Thereafter, the laboratories maintained by the nurseries come into operation. The DNA of the mother clone is collected from the mother plant/ seedling and the same is implanted into other seeds. In other words, a fair degree of bio-technological input goes into preparation of clones of the best plant in order to achieve the best genetic growth patterns. The said seeds are once again planted by the nurseries thereby developing clonal plants and seedlings. The nurseries undertakes all the activities like preparing of land, leveling, preparation of beds, sowing of seeds, planting etc., which tantamount to agricultural activities. These saplings are then sold to the local farmers. In other words, the nurseries undertake basic operations in land once for identifying the mother clone and thereafter to cultivate clonal saplings fit for market. The activities undertaken in both the stages require human labour and skill in preparing the land fit for plantation of the seeds and raising the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduce from the land, operations which are to be performed after the produce sprouts from the land, e.g. wedding, digging the soil around the growth, removal of undesirable undergrowth, and all operations which foster the growth and preservation of the same not only from insets and pests but also from depradation from outside, tending, pruning, cutting, harvesting and rendering the produce fit for the market, would all be agricultural operations when taken in conjunction with the basic operations Only if this integrated activity which constitutes agriculture is undertaken and performed in regard to any land the income derived therefrom be said to be agricultural income . It is also relevant to state the following extracts from the decision of the Hon ble Madras High Court in the case of Soundarya Nursery (supra), wherein it was held that income from sale of plants and seedlings grown in nurseries is agricultural income, which reads as under :- All the products of the land which have some utility either for some consumption or for trade or commerce if they are based on land would be agricultural products. If the plants sold in pots were the result of basic operatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsery is maintained by carrying out basic operations on land and subsequent operations are carried out in continuation of the basic operations, then income from such nursery would be agricultural income not liable to tax under section 10. However, if the nursery is maintained independently without resorting to basic operations on land, then income from such nursery would not be agricultural income and would be liable to be included in the total income. 4.2. With a view to giving finality to the issue, an explanation in section 2 of the Income Tax Act, has been inserted providing that income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. Accordingly, irrespective of whether the basic operations have been carried out on land, such income will be treated as agricultural income, thus qualifying for exemption under sub-section (1) of section 10 of the Act . 33. On perusal of above CBDT Circular, it is evident that the amendment has been made by inserting Explanation 3 by Finance Act, 2008 is to settle the controversy which has arisen because of the judicial pronouncements. Therefore, we agree with ld. AR that the said amendment is ..... 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