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TMI Blog2022 (10) TMI 851X X X X Extracts X X X X X X X X Extracts X X X X ..... s for computation of income of an assessee who is covered by the provisions of the AIT Act 1950 r/w KAIT Act, with effect from 01.04.2002 under Act 1961. In other words, up to 31.03.2002, the income from rubber plantations has been treated as agricultural income and the computation of agricultural income was by the allowances and deductions provided by Section 5 of the KAIT Act. With effect from 01.04.2002, the income derived from the manufacture of rubber is treated as income from business and 65% of the income is apportioned for agricultural income tax. Therefore, it is not a case of the Revenue, that while computing the income of an assessee under Rule 7A the provisions under the KAIT Act are also made applicable. Therefore, in the scheme of present things the assessment of income from rubber plantations is, in the first instance, made under Sections 28 to 44DB of Act 1961. Whether the rubber plantation companies, under Rule 7A(2) of Rules 1962, are entitled to an allowance towards replanting expenses? - The Revenue cannot disallow the upkeep and maintenance claim in the computation of income under Section 37 of Act 1961. The Revenue cannot compel capitalization of upkeep and ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance expenses, is incorrect. The upkeep and maintenance expenses are revenue expenditures and the assesses are entitled to claim deduction under Section 37 of Act 1961. The answers to the two facets of the question referred to the Full Bench are that: In the computation of business income under Rule 7A of the Rule 1962, the assessee under Rule 7A(2) is entitled to an allowance in respect of the cost of replacement of dead and useless rubber trees in the rubber plantation in an area not abandoned, subject to Section 10(31) of Act 1961. The upkeep and maintenance expenses incurred by the assessee till the maturity of rubber trees are revenue expenditures eligible for deduction under Section 37 of Act 1961. X X X X Extracts X X X X X X X X Extracts X X X X ..... es incurred by the assessee for the rubber plants replanted in an area of 182 acres. The allowance of deduction of the cost of replantation and the deduction towards upkeep and maintenance expenses were rejected in the assessment made under Section 143(3) of Act 1961, vide order dated 29.01.2014. As noted above, the said finding was confirmed, both by the Commissioner and the Tribunal. At this juncture, it is contextual to excerpt the view taken by the Tribunal by referring to the ratio laid down by this Court in Rehabilitation Plantations Ltd. v. Commissioner of Income Tax (2012) 251 CTR 343 (Kerala). The relevant excerpt reads thus: ""After hearing both sides, we are unable to accept the case of the assessee for more than one reason. In the first place, expenditure covered by rule 7A(2) does not cover expenditure incurred for replantation of an area. On the other hand, rule 7A(2) only provides for deduction of expenditure for infilling through replacement of dead trees or other trees that have become useless, which is not the case here. As already stated by us, rule 7A(2) is in the same line as rule 7B(2), which provides for replacement of dead or old or unyielding coffee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure could not be allowed as deduction going by the dictum laid down by the Hon'ble Kerala High Court in the case of Rehabilitation Plantations Ltd. (supra). In view of the judgment of the Hon'ble Kerala High Court (supra), we hold that the order of the CIT(A) is correct and in accordance with law and no interference is called for." Hence the appeal. As noted in the Reference Order dated 28.10.2021, the correctness of the ratio laid down in the Rehabilitation Plantations Ltd. case was canvassed leading to the present Reference. 4. The learned counsel appearing for the assessees canvass that the income derived from rubber manufacturing or rubber plantation has been treated as agricultural income under the Agricultural Income Tax Act 1950 (for short 'the AIT Act 1950') which was repealed or replaced by the Kerala Agricultural Income Tax Act 1991. Article 366 clause (1) defines 'agricultural income' to mean agricultural income as defined for the purposes of the enactment relating to Indian Income-tax. 7A and 8 of Rules 1962 come under Part II D - Special Cases. By incorporation of the said Rules, the income derived either from rubber or tea shall be treated as income from bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the expenses now claimed by the assessee towards upkeep and maintenance fall under expenditure of the nature described in Sections 30 to 36 of Act 1961, or that the expenses are like capital expenditure or personal expenses of the assessee. The expenses, from the very nature of outlay, are not creating a capital asset or substituting a capital asset but preserving the capital asset already brought into existence for the business of the assessee. In rubber plantations, slaughter tapping is one of the techniques employed before cutting the trees completely and replantation is undertaken. Therefore, the ratio in the Rehabilitation Plantations Ltd. case does not lay down the correct proposition of law and needs to be declared so; and the assessee is entitled to an allowance and a deduction for upkeep and maintenance expenses for the replanted rubber trees. All the counsel, in support of their contentions, have referred to or relied on the following judgments H.S. Shivakantappa v. Commissioner of Agricultural Income-tax (1993) 204 ITR 349 (SC); Plantation Corporation of Kerala Ltd. v. Commissioner of Agricultural Income-tax (1993) 200 ITR 27 (Ker.); Commissioner of Income-tax, Keral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t things the assessment of income from rubber plantations is, in the first instance, made under Sections 28 to 44DB of Act 1961. 7. Now let us refer to a few decisions and the circumstances leading to amendment by way of Explanation to Section 5(2)(o) of the AIT Act 1950 which is repositioned as clause (v) in KAIT Act 1991 as excerpted above. Travancore Rubber & Tea Co. Ltd v. Commissioner of Agricultural Income Tax (supra) 7.1 The assessees under the Travancore-Cochin Agricultural Income Tax Act claimed deduction of expenses incurred towards upkeep and maintenance of replanted rubber trees. A Division Bench of this Court considered the following question: "Whether under the Travancore-Cochin yield Agricultural Income Tax Act, 1950, in calculating the assessable agricultural income of a rubber estate already planted and containing both mature yielding rubber trees and also immature rubber plants which have not come into bearing, the annual expenses incurred for the upkeep and maintenance of such rubber plants, are not a permissible deduction, and if so, whether the sum of I. Rs. 42,660-4-1 expended by the assessee in the relevant accounting year 1952, under this head may be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question, of whether the estate duty paid by the resident Company as assessee incorporated outside India on behalf of the members not domiciled in India is deductible from its profits in computing its assessable income? Supreme Court interpreted the expressions 'for the purpose of the business' and in contrast the expression 'for the purpose of earning profits' and held thus: "The expression" for the purpose of the business" is wider in scope than the expression for the purpose of earning profits". Its range is wide; it may take in not only the day to day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a rubber tree to yield is 6 to 7 years. The non-productive or sterile rubber trees are given on slotter cutting or cut and removed and rubber plants are replanted for continuing to produce centrifuged latex or cenex or latex based crepes etc. The replantation expenses of rubber saplings, according to the assessee, are allowable deduction under Rule 7A(2) of Rules 1962, for immediate reference Rule 7A(2) is reproduced hereunder" " 7A (1) *** 7A(2): In computing such income, an allowance shall be made in respect of the cost of planting rubber plants in replacement of plants that have died or become permanently useless in an area already 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 clause (31) of Section 10, is not includible in the total income. 9.2 The assessees argue, on the correctness of the ratio laid down in Rehabilitation Plantations Ltd. case, that the interpretation of Rule7A(2) is contrary to the canons applied to the interpretation of taxing Statutes. The counsel point out that the ratio is based on the practical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substance of the matter." 11.2. The principle formulated in Commissioner of Sales Tax v. Modi Sugar Mills Ltd 1961 AIR 1047 is apt and contextual to our purpose and lays down that: "In interpreting a taxing Statutes, equitable considerations are entirely out of place. Nor can taxing statutes be interpreted on any presumption or assumptions. The Court must look squarely at the words of the Statute and interpret them. It must interpret a taxing statute in the light of what is clearly expressed; it cannot imply anything which is not expressed; it cannot import provisions in the Statute so as to supply any assumed deficiency." (emphasis supplied) 12. We are dealing with a provision of law that, by operation of Article 366 (1) of the Constitution of India, 'agricultural income' read with Rule 7A(1) is determined. Rule 7A(1) refers to income derived from the sale of centrifuged latex or Cenex or latex-based crepes etc shall be computed as if it were income derived from business and thirty-five per cent of such income shall be deemed to be income i.e., under Act 1961 liable to tax. Sub-Rule (2) of Rule 7A of Rules 1962 deals with the computation of income for tax under Act 1961. Sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of replantation costs. The concept of infilling is not attracted to the nature of allowance. In interpreting the instant Sub-Rule, we take note that in the computation of business income, allowance of replantation expenses has been granted. Any other view or interpretation would lead to denial of an allowance which is extended by Rule 7A, which now treats a percentage of income from rubber manufacture as business income. Therefore, from the above discussion we hold and declare that: "Under Rule 7A of Rules 1962 in computing the income to tax under Act 1961, the allowance shall be made in respect of the cost of replanting rubber plants that died or become permanently useless in an area already planted if the area has not been abandoned. In determining the cost of replanting/replacement, no deduction of the amount of any subsidy under provisions of clause (31) of Section 10 is includable in the total income." 15. Now we shall consider the second facet referred to the Full Bench, namely: "…… a further deduction towards upkeep and maintenance expenses incurred by the assessee for the immature plants till the age of maturity in the computation of income under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enance expenses in the computation of income for tax under Act 1961. 16. The argument of the Revenue is twofold: (i) the expenditure is not available or allowable expenditure from the very nature of spending, (ii) Section 37 of Act 1961 cannot be interpreted to cover expenses which are not incurred for earning an income. The claim for a deduction of upkeep and maintenance of replanted trees, under the AIT Act was examined by the Supreme Court in Travancore Rubber & Tea Co. Ltd case (supra). The relevant portion from the reported judgment is already excerpted and what is contextual is the view expressed by the Apex Court as follows: "In our opinion the High Court has taken an erroneous view of the relevant provision. It is not denied that the expenditure claimed as a deduction was wholly and exclusively laid out for the purpose of deriving income ……" 17. The next reported judgment viz Karimtharuvi Tea Estates Ltd. case (supra) rejected the contention that the amount spent for the upkeep and maintenance of the immature plants till they become mature is like capital expenditure, as not sound. It is a running expenditure and not of the nature of capital expenditure. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party whether the origin of the agency is voluntary or statutory." 18.1 Section 37 of Act 1961 reads thus: S.37. General. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Explanation 1. *** *** *** Expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ep and maintenance expenditure claimed by the owner of rubber plantation/ assessee merits consideration as revenue expenditure. 19.2 The question paused for our consideration since is arising under Section 37, which, as already noted, is a residuary provision, we keep in our perspective that in determining whether a particular item of expenditure is, or is not, deductible in computing the business profits, it is necessary first to enquire whether the deduction is expressly prohibited under any other provision or an expenditure described in Sections 30 to 36 of Act 1961. Therefore, in tax parlance, the computation of income from rubber plantations is treated as business income. In computing business income, Sections 28 to 44DB are kept in view. 19.3 Section 37 deals with what is known as residuary provision. The upkeep and maintenance expenses are incurred by the assessee till the rubber tree earns income. The test we would like to apply is whether the upkeep and maintenance expenditure is resulting in a new capital asset or an addition to the existing capital asset. The answer is no. The outlay brings into existence a new capital asset, then, from any point of view, such expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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