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ASSISTANT COMMISSIONER OF INCOME-TAX Versus HARRISONS MALAYALAM LTD.

2015 (11) TMI 747 - ITAT COCHIN

Disallowance of part of interest expenditure on the ground that the assessee has diverted interest bearing funds to its subsidiary companies - Held that:- As the sources of funds that were given to each of the subsidiary companies during the relevant years under consideration requires to be examined in order to find out about the diversion of interest bearing funds. Hence, in our view, this issue requires fresh examination at the end by the Assessing Officer

Disallowance of licence fe .....

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of employees' provident fund, labour welfare fund and employees' State insurance on account of delayed remittance, i.e., beyond the date prescribed in the respective enactments - Held that:- Assessing Officer has not given the details of date of payment of the employees' provident fund/employees' State Insurance, etc., in the assessment order. The learned Commissioner of Income-tax (Appeals) has also not examined the same.Since the details of dates of payment are not available on record, we are .....

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d to above and direct the Assessing Officer to examine the same

Addition of the amount realised on sale of old and unyielding rubber trees - applicability of rule 7A of the Income-tax Rules - CIT(A) deleted the addition - Held that:- Commissioner of Income-tax (Appeals) has taken the view with regard to the application of rule 7A, which is identical with the view expressed by us in the earlier paragraph, i.e., it applies only to a person who carries on the combined activity of growin .....

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the examples of sale of old gunny bags or old bottles quoted by the Assessing Officer are not applicable to the case of rubber trees. Hence, the decision of the Supreme Court in the case of Kalpetta Estates Ltd. v. CIT [1996 (7) TMI 4 - SUPREME Court] in holding that the rubber trees constitute capital assets shall hold good even after the introduction of rule 7A in the Income-tax Rules. In view of the above, we agree with the views expressed by learned Commissioner of Income-tax (Appeals) on t .....

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he cost of acquisition could not be ascertained in a reason able manner.

Provision of gratuity cannot be added for computing book profit under section 115JA/JB of the Act.

Provision for doubtful debts/advances - Held that:- As Commissioner of Income-tax (Appeals) has deleted this disallowance without discussing anything about the same we restore this issue to the file of the Commissioner of Income-tax (Appeals) with the direction to examine the issue afresh in accordance wi .....

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late to the assessment years 2003-04, 2007-08 to 2010-11 respectively. Since most of the issues urged in these appeals are identical in nature, they were heard together and are being disposed of by this common order, for the sake of convenience. 2. We have heard the parties and perused the records. The assessee is a public limited company engaged in growing and manufacturing of tea, rubber, etc. The Revenue has filed these appeals on being aggrieved by the decision of the learned Commissioner of .....

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och/2010. For the sake of convenience, we extract below the operative portion of the order of the Tribunal referred to above : "9. We have heard the rival contentions on this issue. In paragraph 4 supra, we have narrated the methodology adopted by the Assessing Officer in working out the disallowance of interest expenditure relat able to the investments made in subsidiary companies. The said methodology suggests about non-application of mind on the part of the Assessing Officer, i.e., he ha .....

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e has also stated that it has acquired promoters inter est in many other body corporate both listed and unlisted, which would in turn help to promote its business interests. It is the prevalent practice of big business groups to promote such kind of subsidiary companies, which would in turn acquire business and promoters share in other listed and unlisted companies. This is a kind of corporate strategy generally followed by all the business groups ; the purpose is certainly to consolidate its bu .....

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has realised ₹ 7,250 lakhs on sale of its rubber estates and ₹ 3,748.77 lakhs from sale of investments. Besides the above the assessee has made a turnover of ₹ 15,267.54 lakhs during the year under consideration and we notice from the profit and loss account filed in the paper book that it has made a cash profit of ₹ 7,305 lakhs. These sources generated during the year were more than sufficient to make the average investments stated above. Besides the above, it was also .....

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n'ble Supreme Court in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) and the decision of the hon'ble Delhi High Court in the case of Bharti Televentures Ltd., referred to supra apply to the facts of the instant case. In view of the foregoing dis cussions, we do not find any infirmity in the decision of the learned Commissioner of Income-tax (Appeals) in deleting the disallowance of interest claim." 5. According to the assessee, the quantum of interest-free f .....

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t the time of hearing, the learned Departmental representative submitted a copy of the order dated August 3, 2012 passed by the hon'ble jurisdictional High Court of Kerala in the assessee's own case in I. T. A. No. 93 of 2000 relating to the assessment year 1992-93. The following observations made by the High Court would be relevant here : "10. In the instant case, it is not the case of the assessee that it had sufficient funds in its accounts to maintain interest-free loans to subs .....

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d establish a direct nexus with the borrowings made by the assessee and loans granted by the assessee . . . We are inclined to follow the Madras High Court decision in K. Somasun daram's case [1999] 238 ITR 939 (Mad), which are more apposite to the facts of the above case and the reasoning of which is acceptable to us . . . 11. We would also notice, with respect to the decision of the hon'ble Supreme Court in S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) . . . According to t .....

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d the loans advanced to the subsidiary companies were from the receipts of the assessee's business. The assessee, hence, clearly distinguishes the loans granted to subsidiary companies from its business expenses and hence such advances to subsidiary companies cannot at all be treated as a measure of commercial expediency." 7. A careful reading of the order of the hon'ble jurisdictional High Court would show that the High Court has expressed the view that the diversion of funds to su .....

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y company, the sources of funds available with the assessee to make the payment etc., are not available on record. For example, if any part of the loan funds meant for business purposes is diverted to the subsidiary companies interest-free, then the same would attract disallowance, in view of the decision of the jurisdictional High Court, referred to above. We notice that the Assessing Officer has not analysed the transactions made with the subsidiary companies and the assessee has also not furn .....

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e given to each of the subsidiary companies during the relevant years under consideration requires to be examined in order to find out about the diversion of interest bearing funds. Hence, in our view, this issue requires fresh examination at the end by the Assessing Officer in the light of the decision rendered by the hon'ble jurisdictional High Court referred to supra. Accordingly, we set aside the orders of the learned Commissioner of Income-tax (Appeals) on this issue in all the relevant .....

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rprises. The Assessing Officer disallowed the said claim by holding that the Department has disallowed the identical claims made in the earlier years. The learned Commissioner of Income-tax (Appeals), however, by following the decision of the Tribunal rendered in the assessee's own case in earlier years, deleted the disallowance. 9. Both parties agreed that this issue is covered by the decision of the co- ordinate Benches rendered in the assessee's own case in the earlier years. For the .....

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Income-tax (Appeals) and then to the Tribunal. The Cochin Bench of the Tribunal in its appellate order dated May 11, 2007 in I. T. A. Nos. 104 to 106 of 2005 relating to the assessment years 2001-02 to 2003- 04 has held that the licence fee paid to M/s. RPG Enterprises was an allowable expenditure. The said view was reiterated by the Tribunal in its order dated May 12, 2009 relating to the assessment year 2005-06 in I. T. A. No. 60/Coch/2009. We further notice that the learned Commissioner of I .....

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rcial expediency in respect of this payment. There cannot be any dispute that the question of existence of commercial expediency has to be decided on the facts prevailing in each case. In the instant case, the co-ordinate Bench of the Tribunal has examined this payment and has taken the view that this expenditure is allowable and it was so held by the Tribunal in more than one year. Hence, we are inclined to follow the view consistently taken by the Tribunal. Since the learned Commissioner of In .....

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s, since the learned Commissioner of Income-tax (Appeals) has followed the decision rendered by the co-ordinate Bench, we do not find any reason to interfere with his order on this issue. 11. The next common issue urged in the assessment years 2007-08 to 2010- 11 relates to the disallowance of employees' provident fund, labour welfare fund and employees' State insurance on account of delayed remittance, i.e., beyond the date prescribed in the respective enactments. The submission of the .....

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d by the hon'ble Delhi High Court in the case of CIT v. AIMIL Ltd. [2010] 321 ITR 508 (Delhi) and also the decision of the hon'ble Supreme Court rendered in the case of CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306 (SC) in deciding this issue in favour of the assessee. 12. However, we notice that the Assessing Officer has not given the details of date of payment of the employees' provident fund/employees' State Insurance, etc., in the assessment order. The learned Commissioner o .....

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rescribed under section 139(1) of the Act for filing return of income, no disallowance is required to be made. Otherwise, the disallowance should be made in respect of the amounts paid after the due date prescribed under section 139(1) of the Act. Accordingly, we set aside the order of the learned Commissioner of Income-tax (Appeals) on this issue in all the years referred to above and direct the Assessing Officer to examine the same in the light of discussions made supra. 13. The next common is .....

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l order. For the sake of convenience, we extract below the paragraphs referred to above : "13. The next issue relates to the addition of amount realised on sale of old and unyielding rubber trees amounting to ₹ 5,12,84,878 as revenue receipt under rule 7A of the Income-tax Rules. The asses see claimed the amount realised on sale of old and unyielding rubber trees as not taxable by following the decision of the hon'ble Supreme Court in the case of Kalpetta Estates Ltd. v. CIT [1996 .....

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tock just like the money got on sale of empty gunny bags by a cement dealer or of empty bottles by a bar hotel and hence the trees cannot be called as a capital asset. The Assessing Officer further took the view that the capital assets are not allowed as a deduction under the Income-tax Act. However, in the instant case, the expenses incurred on estate expenses and replanting expenses have been claimed by the assessee itself, which shows that the rubber trees are not capital assets. Accordingly, .....

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e extract the same below : '7A. Income from the manufacture of rubber.-(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, remilled crepe, smoked blanket crepe or flat bark crepe) or technically specified block rubbers manufactured or processed from field latex or coagulum obtained from rubber plants grown by the seller in India shall be computed as if it were income derived from business .....

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me 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 th .....

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ating income from the trees in the shape of latex. The rubber trees constitute capital asset of rubber estate and dominant purpose of growing rubber trees is to create source for supply of liquid latex. The rubber trees therefore constitute capital asset of agricultural operations. There is no manu facturing activity involved either at the stage of cultivation and growing of rubber tree or at the time of its felling on trees becoming old and unyielding. Income derived from sale of old and unyiel .....

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7A because rule 7A is applicable only when the grower of rubber trees himself carries on manufacturing activity on latex or coagulum sourced from rubber trees grown by him. The judicial principles laid down by the Supreme Court in the earlier decisions continue to hold good even after introduction of rule 7A. In tune with the Supreme Court decisions in the case of Kalpetta Estates Ltd. v. CIT reported in [1996] 221 ITR 601 (SC) and in the case of Commissioner of Agricultural Income-tax v. Kaila .....

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d latex or coagulum obtained from rubber plants. The dominant purpose of growing rubber trees is to obtain liquid latex from them. The rubber trees are not used as it is for the purpose of manufacturing or processing, but only the latex obtained from them. Hence, the sale value of old rubber trees cannot be considered as salvage value obtained from the exhausted stock. Since the rubber trees continue to be the capital asset. Accordingly, the examples of sale of old gunny bags or old bottles quot .....

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the assessment year 2006-07. Before us, the learned Departmental representative could not furnish any material/order to show that the order passed by the Tribunal on the abovesaid issue in the earlier years has been reversed by the hon'ble High Court. Hence, we do not find any reason to interfere with the order of the learned Commissioner of Income-tax (Appeals) on this issue. 16. The next common issue urged in the assessment years 2007-08 to 2010- 11 relates to the assessment of sale of Gre .....

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r 2006-07 : "17. The next issue relates to the assessment of ₹ 83,65,516 as capital gain on sale of Grevelia trees. During the year under consid eration, the assessee realised a sum of ₹ 1.19 crores on sale of Grevelia trees. These trees are grown to afford shade to the tea bushes. In the return of income filed, the assessee estimated the market price as on April 1, 1981 at 30 per cent. of the sale price realised by it. After claiming indexed cost of acquisition, the assessee re .....

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pital gains. 18. Before the learned Commissioner of Income-tax (Appeals), the assessee relied upon the decision of the hon'ble Supreme Court in the case of State of Kerala v. Karimtharuvi Tea Estate Ltd. [1966] 60 ITR 275 (SC) to submit that the Grevelia trees constitute capital asset and hence the amount realised on its sale would constitute capital receipt. The assessee also relied upon the decision of hon'ble Calcutta High Court in the case of CIT v. Kanan Devan Hills Produce Company .....

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294 (SC) and also the decision of jurisdictional Kerala High Court in the case of CIT v. Rajagiri Rubber and Produce Co. Ltd. reported in [1991] 189 ITR 182 (Ker) (confirmed by the Supreme Court in Kalpetta Estates Ltd. v. CIT [1996] 221 ITR 601 (SC)). In the case of Rajagiri Rubber and Produce Co. Ltd., it has been held that the capital gains could not be charged/computed under section 45/48 in respect of sale of rubber trees because the cost of acquisition of the trees could not be con ceived .....

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he learned Commissioner of Income-tax (Appeals) also noticed that the said view of the Assessing Officer was upheld by the first appellate authority. Accordingly, the learned Com missioner of Income-tax (Appeals), by following his predecessor order, held that the amount received on sale of Grevelia trees was capital receipt and neither any income nor loss was assessable in computation of Central Income-tax. 20. We have carefully gone through the decision rendered by the learned Commissioner of I .....

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89 ITR 182 (Ker), which was also confirmed by the Supreme Court in the case of Kalpetta Estates Ltd. v. CIT [1996] 221 ITR 601 (SC). The Assessing Officer has also taken support from the decision of the hon'ble apex court in the case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC). Having taken such a consistent stand over the years, the Assessing Officer has changed his stand in the instant year and has proceeded to assess the capital gain on sale of Grevelia trees. In our view, the .....

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learned Commissioner of Income-tax (Appeals) was right in adhering to the view taken by the tax authorities in the preceding years. Accordingly, we uphold his order on this issue." 18. Before us, the learned Departmental representative could not furnish any material/order to show that the order passed by the Tribunal on the abovesaid issue in the earlier years has been reversed by the hon'ble High Court. Since the learned Commissioner of Income-tax (Appeals) has followed the decision o .....

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as made the following observations on this issue : "25. The next issue relates to the addition of provision for gratuity liability amounting to ₹ 5.58 crores while computing the book profit by treating the same as unascertained liability. The learned Commis sioner of Income-tax (Appeals) directed the Assessing Officer to delete the said addition by following the decision of the hon'ble Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 ( .....

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