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TMI Blog2019 (8) TMI 1467X X X X Extracts X X X X X X X X Extracts X X X X ..... ax (Appeals), Kottayam is opposed to law, facts and circumstances of the case. 2. The Ld.Commissioner of Income Tax (Appeals) has erred in sustaining the disallowance of the claim of deduction on cost of replanting, under Rule 7A of the Income Tax Rules in the sum of Rs. 6,75,49,321/-. 3. The Ld.Commissioner of Income Tax (Appeals) erred in applying the ratio of the decision of the Kerala High Court in the case of M/s.Rehabilitation Plantations as reported in 251 CTR 343. 4. The Ld.Commissioner of Income Tax (Appeals) ought to have found that the deduction claimed by the assessee is in respect of cost of replanting Rubber Plants and not infilling as held by the jurisdictional High Court. 5. For the above and other grounds that may be advanced at the time of hearing it is submitted that the order of the Commissioner of Income Tax (Appeals) be set aside." 4. The assessee has also raised an additional ground vide petition dated 02.04.2019 and the same reads as follows:- "1. The Commissioner of Income Tax (Appeals), erred in sustaining the disallowance of Rs. 6,75,49,321/- as Replanting Expenses which includes Maintenance Expenses of immature area also. 2. The Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35% of the income from the sale of centrifuged of the claim of Rs. 6,75,49,321/- towards the cost of replanting would translate to an addition of Rs. 2,36,42,262/- to the income offered under central income tax (Rs. 6,75,49,321/ x 100% x 35%)...... Rs. 2,36,42,262/-." 6. Aggrieved by the disallowance made by the Assessing Officer, the assessee preferred an appeal to the first appellate authority. The CIT(A), after elaborately analyzing and quoting the relevant portion of the judgment of the Hon'ble Kerala High Court in the case of M/s.Rehabilitation Plantations Ltd. (supra), decided the issue against the assessee. The relevant finding of the CIT(A) reads as follows:- "4.2.1 In the above decision, Hon'ble High Court has held in unequivocal terms that expenditure incurred for planting and development of the plantation upto maturity has to be necessarily capitalized and is not allowable as a revenue expenditure. Therefore, the decision clearly covers the case of the Assessee and the expenditure claimed for cost of replantation cannot be allowed as expenditure under Rule 7A of the I.T.Rules, 1962. The argument of the learned AR that certain issues have not been considered by the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs under the Income Tax Act. Year-wise cost of maintenance and replantation Year Maintenance Rs. Replantation Total (Rs.) 2005 2,07,043.00 2006 16,932.00 2007 6,84,065.00 2008 15,88,423.00 2009 11,76,602.00 2010 1,31,49,545.60 2011 84,17,325.64 2012 1,75,70,510.68 2013 4,28,10,446.92 2,47,38,874.24 6,75,49,321.16 (iii) At the outset it is submitted that the disallowance of deduction of Maintenance Expenses is clearly erroneous as Rule 7A(2) applies only to Replanting expenses and not Maintenance expenses. 4 (i) As to the issue of Replanting expense of Rs. 2,47,38,874.24, it may kindly be noted that Rule 7 A applicable to Rubber is on similar lines as Rule 8 of the Income Tax Rules, 1962 applicable to Tea under which income derived from the sale of tea grown and manufactured IS to be computed as if it were income derived from business and 40% of such income IS deemed to be income liable to tax under the Income Tax Act 1961 and the balance 60% is deemed to be income liable to Agricultural Income Tax. (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f tea bushes under Rule 8 (2) of the Income Tax Rules which is extracted below:- "In computing such income, an allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area planted, 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 cl. (30) 01 section 10, is not includible in the total income." [iii) This provision is identical to the deduction granted under Rule 7 A(2) which provides for deduction in respect of replanting of rubber plants. Rule 7 A(2) is extracted below:- "In computing such income, an allowance shall be made in respect of the cost of plantinq rubber plants in replacement of plants that have died or become permanently useless in an area planted, 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 cr. (31) of section 10, is not Includible In the total income." (iv) During this time, a controversy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elation to assessment year 1962-63 and subsequent years". Extract of 212 ITR CSt) 356 is at running page 33. The amendment makes it clear that the deduction under Rule 8(2) for Replantation Expenses is allowed in lieu of depreciation. The legislative intention is therefore clear that the entire cost of replanting is allowed as a deduction in lieu of the depreciation meaning thereby the full replantation cost is allowed to be claimed as a deduction. 6. It may kindly be noted that it is well settled that Rule 8 which was introduced to provide the manner of assessment with respect to Income from tea, considering the composite nature of cultivation and manufacture and the difficulty in bifurcating expenses as attributable separately to cultivation and manufacture. With effect from AY 2002-03, the Income Tax Act was amended to make similar provision with respect to composite income from rubber and coffee. While introducing Rule 7 A and 7B similar deduction for cost of replantation, as is available to tea under Rule 8(2), was introduced under Rule 7 A (2) and 7B(2). The rules of interpretation therefore required that the interpretation granted to Rule 8(2) is equally applied to Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed as deduction in lieu of depreciation and since all tea assesses are getting such a deduction under Rule 8(2) for the past many years the same interpretation has to be given for Rule 7 A(2) and 7B(2) also. 9. The Assessing Officer while denying the deduction has relied upon a decision of this Honourable Court in the case of Rehabilitation Plantation reported in 251 CTR 343. In the said decision this Hounourable Court while observing that Rule 7 A(2) is in the same lines as Rule 8(2) has erroneously interpreted the said Rules as applicable only to 'infilling' of plants in the place of dead plants in an existing plantation. This court further observed that the rule making authority while incorporating Rule 7 A(2) in the same lines as Rule 8(2) was probably "unaware of the limitations in the rubber plantation" to the effect that while infilling may be possible in existing tea and coffee plantations on account of the height of the tea and coffee plants it is not possible in an existing rubber plantation because of the height of the rubber trees. The Honourable Court appears not to have considered the fact that deduction under section 8(2) has always been granted for repl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ously been abandoned" and consequently be a capital expenditure. (b) If the assessee's claim is allowed, so much of the portion of the agricultural income determined by the Central ITO will be in direct conflict with agricultural income assessment of the State Agricultural Income Tax Act. This finding is, it is respectfully submitted, not consistent with the provision, in so far as the provision clearly states that the income determined by the CTO will be adopted by the State Officer and to that extent there can be no conflict Moreover, by virtue of the Supreme Court decision referred to above there is no case of conflict The said decision was omitted to be considered there in the Kerala High Court judgment (c) Expenditure on re-plantation of an area where from no income is derived by the assessee is not to be reckoned in computation of income from yielding area This view is also inconsistent with the decision of the Supreme Court in the case of The Travancore Rubber & Tea Company and Karimtharuvi Tea Estates referred to above. Please also refer 262 ITR 388 at running pages 31 to 32 of Annexure VIII. (d) Investment in planting and development of plantation up to matur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 31 ITO 128 as held that "Rule 8(2) of the IT Rules specifically provides that in computing income from manufacture of Tea, allowance shall be made in respect of the cost of planting bushes in replacement of bushes that had died or become permanently useless in an area already planted, if such area has not previously been abandoned. Since the assessee is entitled to claim deduction in respect of Replanting Expenditure in view of Rule 8(2), we are of the opinion that the assessee is entitled for deduction. [iii] In the light of the above and, backed by the said judgments, the expression "An area already planted" has a wider meaning and possibly sufficient clarity for a different view and interpretation of Rule 7 A (2) as opposed to the findings, with due respect, in the judgment of Rehabilitation Plantations Ltd. Moreover it is not clear from the judgment whether the difference between "An area already planted" and. "an abandoned area" was considered. Since the assessee has undertaken replantation only in an area already planted and not in an abandoned area. 12. (i) It is therefore respectfully submitted that the decision in the case of Rehabilitation Plantation reported in 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certainly so much of the portion of the agricultural income determined by the Central Income Tax Officer will be in direct conflict with the Scheme of assessment of agricultural income under the State AIT Act which prohibits deduction of expenditure on replantation of an area and only an incentive is provided by way of replantation allowances under Rule 3 of the State Agricultural Income Tax Rules as stated above. We are of the view that the Tribunal rightly held that the expenditure on replantation of an area wherefrom no income is derived by the assessee is not to be reckoned or considered in the computation of income from yielding area. Expenditure incurred for planting and development of the plantation up to maturity has to be necessarily capitalised and is not allowable as a revenue expenditure. Since 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). The assessee's claim is thoroughly misconceived and the lower authorities including the Tribunal rightly he ..... X X X X Extracts X X X X X X X X Extracts X X X X
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