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TMI Blog2020 (5) TMI 577X X X X Extracts X X X X X X X X Extracts X X X X ..... here is no question of application of Rule 7A. In such circumstances, the claim of the assessee is to be allowed. Jurisdictional High Court considered its own judgment in the case of CIT vs. Thiruvambadi Rubber Co. Ltd. [ 2011 (6) TMI 452 - KERALA HIGH COURT] Being so, the reliance placed by the CIT(A) on the judgment of the Jurisdictional High Court in the case of CIT vs. Thiruvambadi Rubber Co. Ltd. [ 2011 (6) TMI 452 - KERALA HIGH COURT] is totally misplaced. Accordingly, we hold that the sale proceeds on sale of rubber trees and timber cannot be brought to tax under Rule 7A of the I.T. Rules. Thus, this ground of appeal of the assessee is allowed. MAT computation - Diminution in the value of investment, provision for lease rent and provision for bad debts - arriving at the book profit u/s. 115JB, treating the same as a provision for an unascertained liability - HELD THAT:- We are of the opinion that the amount set aside as provision for diminution in the value of investment is to be added back to the book profit as shown in the profit and loss account in view of the retrospective amendment introduced by Finance Act No. 2, 2009 by introducing clause (i) (c) . By virtue o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri Raja Kannan, Adv. For the Revenue : Shri Mritunjaya Sharma, Sr. DR ORDER PER CHANDRA POOJARI, AM: The appeals filed by the assessee in ITA Nos. 60 61/Coch/2015 and 128/Coch/2017 are directed against different orders of the CIT(A) and pertain to the assessment year 2006-07 and 2012-13. The Revenue has also filed appeal in ITA No.133/Coch/2017 for the assessment year. 2. Since the issues involved in these appeals are common, they were heard together and are being disposed of by this common order. ITA No. 133/Coch/2017: Revenue s Appeal : AY 2012-13 3. At the time of hearing, the Ld. DR filed a letter dated 05/03/2020 stating that the tax effect in this appeal is less than the monetary limit prescribed in the CBDT s Circular No. 17/2019 vide F.No.279/Misc/14 dated 08/08/2019. Hence, the Ld. DR pleaded for withdrawal of the appeal. Accordingly, we dismiss the appeal of the Revenue as withdrawn. ITA No. 60/Coch/2015 :Assessee s Appeal : AY 2006-07 The assessee has raised the following grounds of appeal: 1. The learned Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the disallowance of Interest amounting to ₹ 18,43, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequential cash flow alongwith any identifiable bank transactions. The CIT(A) observed that the incidental administrative expenses relating to earning of income are imbedded in the indirect expenses and thus, there was a cost inbuilt into the passive investments. The CIT(A) relied on the judgment of the Punjab Haryana High Court in the case of CIT vs. Abhishek Industries Ltd. (286 ITR 1) wherein it was held that the onus to prove that there was no nexus between the borrowed funds and investment in sister concerns, was on the assessee. The CIT(A) also relied on the judgment of the Kerala High Court in the case of CIT vs. V.I. Baby Co. (254 ITR 248). The CIT(A) held that disallowance can be more than earned income by placing reliance on the CBDT Circular No. 5/2014 dated 11.02.2014 wherein it was stated that provisions of section 14Ar.w. rule 8D would be applicable even in a year in which taxpayer has not earned any exempt income. Thus, the CIT(A) confirmed the action of the Assessing Officer in invoking the provisions of section 14A r.w. Rule 8D and making disallowance of ₹ 18,43,500/-. 5. Against this, the assessee is in appeal before us. The Ld. AR submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income earned during the year under consideration. In this context, the Ld. AR relied on the following judgments: i) Joint Investments Pvt. Ltd. vs. CIT (59 taxmann.com 295) (Delhi) ii) Daga Global Chemicals Pvt. Ltd. vs. ACIT (ITA No.5592/Mum/2012 dated 01/01/2015) (Mum Trib.) 6. The Ld. DR relied on the orders of the lower authorities. 7. We have heard the rival submissions and peruse the record. In this case, the assessment year involved is 2006-07. Rule 8D was introduced with effect from 24/03/2008 which was prospective in operation and cannot be applied retrospectively as held by the Delhi High Court in the case of Maxopp Investment Ltd. vs. CIT (347 ITR 272) wherein it was held as follows: Section 14A was inserted by the Finance Act, 2001, with retrospective effect from April 1, 1962. Prior to the introduction of section 14A, the law was that when an assesses had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of the business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. However, where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) of section 14A of the Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. The requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he balance-sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed tinder section 14A of the Act. It is, therefore, clear that in terms of the rule, the amount of expenditure in relation to exempt income has two aspects- (a) direct, and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment. Section 14A even prior to the introduction of sub-sections (2) and (3) would require the Assessing Officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the Assessing Officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that Rule 7A was formulated by the Central Board of Direct Taxes (CBDT) to determine income which is derived from composite activity of manufacturing value added rubber products by the cultivator of rubber trees. c) The learned CIT(A) ought to have observed that perusal of Rule 7A clearly shows that the said Rule is applicable for assessment of income from rubber manufactured or processed from field latex obtained from rubber plants grown by the seller in India. d) The learned CIT(A) ought to have observed that the condition precedent for invoking of Rule 7A is that the revenue receipt should have live and direct nexus with sale of rubber manufactured from field latex obtained from rubber plants. e) The learned CIT(A) ought to have observed that Rule 7A has application only to Revenue receipts having income character and not to capital receipts . Further, where a particular receipt does not have revenue character then Rule 7A cannot have any application whatsoever. f) The learned CIT(A) ought to have observed that Rule 7A has application only to income realised from sale of rubber products which are manufactured or processed from filed latex obtained from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inution in the value of asset but represents actual loss incurred in respect of a loss on account of reduction in the value of investment and accordingly the same will not fall under any of the adjustments as specified in the Explanation to Section 115JB of the Act. (c) The learned CIT(A) ought to have appreciated the substance of the transaction (i.e. loss on account of capital reduction) rather than merely concluding based on the nomenclature of the accounting entries. B. Provision for Lease Rent: ₹ 61,00,000/- (a) The learned CIT(A) erred in confirming the addition of Provision for Lease Rent amounting to ₹ 61.00,000/- by treating it as Provision for unascertained liability for the purposes of arriving at the book profits u/s 115 JB of the Act. (b) The learned CIT(A) ought to have observed that any liability capable of being estimated with reasonable certainty, though the actual quantification may not be possible should be allowed as an ascertained liability. (c) The learned CIT (A) ought to have observed that the provision has been made in the accounts based on lease rent demand notice received from Thahasildar, Taluk Office, Kochi based on revised ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r trees are not capital assets. 8.3 On appeal, the CIT(A) confirmed the addition of ₹ 17,60,000/- and ₹ 3,36,817/-on account of sale proceeds of rubber trees and timber respectively as made by the Assessing Officer. The CIT(A) placed reliance on the judgment of the Kerala High Court in the case of Thiruvambadi Rubber (ITA Nos.15,31,37 and 43 of 2010 dated 27/06/2011) which had reversed the decision of the Tribunal which held that sale value of old rubber trees is agricultural income 8.4. Against this, the assessee is in appeal before us. The Ld. AR submitted that Rule 7A was inserted with effect from 1st April 2002 to tax income from the manufacture of rubber. It was submitted that Rule 7A prescribes that 35% of certain income from the produce of rubber trees would be treated as income derived from business. Rule 7A provides asunder: (1) Income derived from the sale of centrifuged latex or cenex or latex based crepes (such as pale latex crepe) or brown crepes (such as estate brown crepe, remitted crepe, smoked blanket crepe or flat bark (crepe) or technically specified block rubbers manufactured or processed from field latex or congulum obtained from rubber pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not agricultural income. The Ld. AR relied on the judgments of various Courts in support of his contention that sale of rubber trees is capital receipt: 1) Commissioner of Agricultural Income-tax vs. Kailas Rubber Company Limited (60 ITR 435 ) (SC). 2)Kalpetta Estate Limited vs. CIT (221 ITR 601) (SC) 3) Harrisons Malayalam Limited vs. DCIT (24 taxmann.com 59) (Kochi Trib.) 4) CIT vs. Rajagiri Rubber Produce Co. Ltd. (189 ITR 182) (Ker.) 8.6 The Ld. DR submitted that decision relied upon by the assessee was given in an entirely different context. At that point of time income form value added rubber was never considered for Central Income Tax and the question thereon was whether any capital gains arise on sale of rubber trees. According to the Ld. DR with the amendment brought in by IT (Second Amendment) Rules, 2001 the scenario has changed and now by Rule 7a an altogether new method to arrive at the income from value added rubber products, which is assessable under Central Income Tax has been evolved. The Ld. DR submitted that in that case, income from a rubber estate as a whole was first determined and then it was apportioned in the ratio of 65:35 to arrive at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of such income shall be deemed to be income liable to tax . On a careful perusal of Rule 7A, we notice that the said rule talks about computation of i ncome derived from sale of centrifuged latex or cenex or latex based crepes (such as pale latex crepe) or brown crepes etc. The said rule does not talk about the taxability of income from sale of old rubber trees. According to Ld A.R, the Rule 7A provides for ascertainment of business income obtained on sale of centrifuged latex etc. when manufactured or processed from field latex or 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 and accordingly, in our view, the Ld. CIT has placed incorrect interpretation on Rule 7A and has taken the view that the said Rule 7A shall apply to the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata in the case of JCIT vs.Usha Martin Industries (104 ITD 249) held that the provision for bad debt is not liability per se, as no liability would be fastened upon the tax-payer even if the underlying debt is not recovered. The Supreme Court in the case of CIT vs. HCL Comnet systems Services Limited (305 ITR 409) held that the provision of doubtful debts is akin to the provision of diminution in value of assets. 9.3 However, according to the CIT(A), this provision in the Act has been amended by the Finance Act, 2008 and 2009 w.e.f. 1.4.2001 wherein the Explanation 1, clause (c) and (i) read as under: Explanation (1) For the purposes of this section book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2) as increased by:- (a) . (b) . (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liability, or (d) .. (i) the amount or amounts set aside as provision for diminution in the value of any asset. Accordingly, the CIT(A) confirmed the addition of provision for diminution in the value of investment of ₹ 1,45,18,200/-, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss for the year ended on 31st March, 2006 on account of provision for lease rent. The government had unilaterally increased the lease rent of the land held by the assessee. The assessee received a demand notice amounting to ₹ 1,59,80,172/-from Thahasildar, Taluk Office, Kochi, based on revised rate of Lease rent. The provision made by the assessee was based on rent rates which prevailed before the revision made by the revenue authorities. This revision was challenged by the assessee before the High Court of Kerala. While granting stay, the Court directed the assessee to make payment of ₹ 40,00,000/-. The applicant made the said interim payment as per direction of Court. The case filed by the assessee company for the increase in rent was disposed off by the High Court of Kerala, directing the Government of Kerala to issue fresh orders after giving an opportunity of being heard. Accordingly, the Government of Kerala issued an order dated 26th April, 2013 rejecting the request of the assessee for reduction of lease rent. 10.1 The AO added back the sum of ₹ 61,00,000/- in the computation of book profit u/s 115JB, treating the same as a provision for an unasce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at a future date would not convert the nature of liability into that of contingent or unascertained so long as such liability can be quantified or estimated with reasonable certainty. In the instant case, the assessee company had quantified its liability towards lease rent based on the revised rates of rent. In this regard, the Ld. AR relied on the judgment of the Supreme Court in the case of Metal Box Co. of India Ltd. v. Workmen (73 ITR 53) wherein it was held that: For an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid; Just as receipts, though not actual receipts but accrued due are brought in for the income-tax assessment, so also liabilities accrued/due would be taken into account while working out the profits and gains of the business; A condition subsequent, the fulfilment of which may result in the reduction or even exti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -section (2), as increased by (a) the amount of income-tax paid or payable, and the provision therefor; or (b) the amounts carried to any reserves, by whatever name called (other than a reserve specified under section 33AC); or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies;or (e) the amount or amounts of dividends paid or proposes; or (f) the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) section 11 or section 12 apply; or (g) the amount of depreciation. (h) the amount of deferred tax and the provision therefor; (i) the amount or amounts set aside as provision for diminution in the value of any asset, (j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset. Prior to the substitution, clause (i) and the proviso read as under: (i) the amount withdrawn from any reserves or provisions, if any such amount is credited to the profit and loss account. Provided that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value of any asset, appears on the debit side of the profit and loss account, which implies that the amount of net profit as per profit and loss account is after the amount of such provisions, then such amount will be added back to the net profit for computing 'book profit' as per Explanation 1 to section 115JB(2). There is no other requirement in the language of the section for the addition or non-addition of the amount of provision for diminution in the value of any asset to the amount of net profit as shown in the profit and loss account, depending on the way in which such provision has been shown in the balance sheet. The reflection of the amount of provision for diminution in the value of investment separately on the liability side of the balance sheet or by way of reduction from the figure of investment on the asset side of balance sheet is totally alien for computing book profit. What is relevant for this purpose is to find out if any provision for diminution in the value of any asset has been debited to the profit and loss account. If it is so debited, the same will automatically stand added to the amount of net profit for working out the amount of book profit. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 115JB of the Act. The contention of the Ld. AR is that the assessee is following mercantile system of accounting and therefore, the provision is to be allowed, though it was crystallized in the year in which the order of the Government of Kerala in G.O. (Ms) No.162/13/RD dated 26-04-2013 was passed. We are not in agreement with this contention of the Ld. AR. Being so, we are not in agreement with the Ld. AR s contention that this ascertained liability is to be allowed in view of mercantile system of accounting followed by the assessee. In other words, the provision for lease rent is unascertained liability in the assessment year under consideration and it is to be allowed in the year of crystallization of the expenditure. This ground of appeal of the assessee is dismissed. The appeal of the assessee in ITA No.61/Coch/2015 is partly allowed. ITA No. 128/Coch/2017 :Assessee s Appeal : AY 2012-13 13. The assessee has raised the following grounds of appeal: A. The order passed by the first appellate authority, to the extent challenged hereunder, is contrary to the law, facts and circumstances of the case. The order, if allowed to continue, would occasion travesty of justic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the liability incurred by the appellant was on account of transactions entered into prior to the date of merger. Therefore, the appellant was entitled, in law and on facts to claim the interest paid on the agricultural income tax, as business loss admissible under Section 37 of the Act. D. The first appellate authority erred grossly in not considering the decisions relied on by the appellant, that if the interest is compensatory in nature, the same is an allowable deduction under Section 37 of the Act (Ref; Bhai Jaspal Singh (2011) 1 SCC 39, Consolidated Coffee Ltd. - (2001) 1 SCC 278, Prakash Cotton Mills P. Ltd.(1993) (201 ITR 684), Hoshiari Lal Kewal Krishan (2009) (311 ITR 336), and PadmavathyRaje Cotton Mills Ltd., (1999) (239 ITR 355). The decisions governing the above aspect, relied on by the appellant are highly brushed aside by the first appellate authority, and further, the first appellate authority holds that it is not clear as to whether the interest in the instant case is compensatory or not. (Ref: Page 32 Paragraph (ii)). The first appellate authority statesthat whether, the interest under AIT Act, is entirely compensatory or not is not clear. The first appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ger approved by the Hon'ble High Court of Kerala, the returns were filed, and the brought forward unabsorbed agricultural loss of PRPCL, was set off against the agricultural income generated from the rubber estate. The contention of retention of public money in the instant case, is not correct, and will not have any application. The Tribunal decision (Ahmedabad Tribunal in Shree Saras Spices Foods (P) Ltd.,), which followed East India Case, will also be not applicable, since the facts and circumstances therein are divorced from the case of the appellant. For these and other grounds and documents to be submitted at the time of hearing, it is humbly prayed that this Hon'ble Tribunal be pleased to set aside the first appellate order, to the extent impugned in this Appeal. 13.1 The facts of the case are that the assessee incurred interest expenses totaling ₹ 94,00,179/- on delayed payments of Agricultural Income Tax (AIT) demanded by the Kerala AIT Department (and paid by the assessee in the impugned F.Y. 2011-12) owing to non-allowance of set-offs of losses brought forward from the earlier A.Y s 2006-07 to 2009-10 relating to the business of the erstwhile Pull ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being banks and financial institutions) for the income tax amounts that were paid out of funds borrowed from such third parties. The CIT(A) observed that the moment the borrowed funds entered the financial system of the assessee, as per the judgment of the Supreme Court (supra), they were effectively public funds since the intent to borrow very clearly stated such to be the purpose. In that case, the amounts were borrowed because the assessee did not possess the necessary funds to make the payments of the statutory dues being income taxes and the intention thereafter stood authenticated and proved by the assessee actually making the payments of the income taxes. Therefore, in the case of East India Pharmaceutical Works Ltd. (supra), the CIT(A) observed that the amounts borrowed and the interest accruals thereupon constituted public moneys from the date of such borrowals. However, in the instant case, the CIT(A) observed that the assessee held on to moneys that were liable to be paid as AIT and therefore, constituted and represented public funds from the dates from which such liabilities statutorily commenced and benefitted from such retention through the returns generated that can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val submissions and perused the material on record. In the present case assessee is claiming the payment of interest for delay in payment of agricultural income tax as a deduction while computing the income of assessee under Income Tax Act. It cannot be said that it has any connection with the business income of the assessee on which the assessee is liable to pay income tax under Income tax Act. If agricultural income tax is not a permissible deduction under section 37 of the Income Tax Act, any amount payable for default committed by the assessee in discharging its statutory obligation under Agricultural Income Tax cannot be allowed as a deduction while computing income under Income Tax Act. The Ld. AR submitted thatthe payment of interest under the AIT Act had arisen on account of the scheme of amalgamation approved by the High Court of Kerala vide order dated 16.11.2006, wherein The Pullengode Rubber and Produce Company Ltd. (PRPCL) along with some other Companies were amalgamated with the assessee. The approval of amalgamation by High Court can not lead to conclusion that disallowable expenditure under Income Tax Act is allowable as a deduction and it won t confer any entitlem ..... X X X X Extracts X X X X X X X X Extracts X X X X
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