2011 (2) TMI 1291 - AT - Income Tax

Tribunal decision: Deduction denied for old machinery, but cultivation expenses allowed for business purposes

The Tribunal upheld the denial of deduction under section 10-B for the Kunigal Unit due to the non-satisfaction of eligibility criteria regarding the ... Business expenditure Issues Involved:1. Eligibility of Kunigal Unit for deduction under section 10-B of the Income Tax Act.2. Disallowance of cultivation expenses amounting to Rs. 90.64 lakhs.Issue-wise Detailed Analysis:1. Eligibility of Kunigal Unit for Deduction Under Section 10-B:The primary contention was whether the Kunigal Unit was eligible for deduction under section 10-B of the Income Tax Act. The CIT(A) concluded that the Kunigal Unit did not satisfy one of the conditions laid down in section 10B(2)(iii), specifically that the plant and machinery acquired were old and already used. This decision was in line with the Tribunal's earlier rulings for the assessment years 2001-02 and 2002-03 in the assessee's own case, where it was held that a substantial portion of machinery used in the eligible undertaking was previously used, thus failing to meet the eligibility criteria.The Tribunal noted that the jurisdictional High Court, in the case of Nippon Electronics, had held that the eligibility criteria must be satisfied in the first year of formation of the undertaking and subsequent investment in new machinery does not suffice. Consequently, the Tribunal upheld the CIT(A)'s decision, denying the deduction under section 10-B for the Kunigal Unit.2. Disallowance of Cultivation Expenses of Rs. 90.64 Lakhs:The second issue was the disallowance of cultivation expenses amounting to Rs. 90.64 lakhs. The CIT(A) upheld the disallowance on the grounds that these were agricultural expenses and should be carried forward for set-off against future agricultural income. However, the CIT(A) also directed the Assessing Officer to verify and reduce the disallowance to the extent of any recovery made from the contract farmers.The assessee argued that the cultivation expenses were integral to its business of manufacturing and exporting herbal products. These expenses were incurred to induce farmers to grow medicinal plants and for research and development activities. The assessee contended that no agricultural income was generated from this cultivation as the produce was used for research and as raw material for industrial products. The assessee relied on the Board's Circular No. 6/2007, which allows such expenses as they are incurred for commercial expediency and are wholly and exclusively for the purpose of business.The Tribunal, after considering the submissions and the facts, found merit in the assessee's argument. It noted that the expenses were incurred to ensure a steady supply of coleus plants, essential for the assessee's research and development activities. The Tribunal held that these expenses were for commercial expediency and were wholly and exclusively for the purpose of business. Therefore, the Tribunal allowed the cultivation expenses of Rs. 90.64 lakhs.Conclusion:The Tribunal upheld the CIT(A)'s decision to deny the deduction under section 10-B for the Kunigal Unit but overturned the disallowance of cultivation expenses, allowing the assessee's claim of Rs. 90.64 lakhs. Consequently, the alternative plea for a proportionate higher deduction under section 10B became redundant.Result:The appeal was partly allowed.