2019 (8) TMI 1467 - AT - Income Tax

Replanting and Maintenance Expenses Must Be Capitalized, Not Revenue Expenditure, Clarifies Tribunal in Landmark Decision.

M/s. The Plantation Corpn of Kerala Limited, M/s. The Velimalai Rubber Co. Limited Versus The Asst. Commissioner of Income-tax, Circle – 1, Kottayam.

M/s. The Plantation Corpn of Kerala Limited, M/s. The Velimalai Rubber Co. Limited Versus The Asst. Commissioner of Income-tax, Circle – 1, Kottayam. - TMI Issues Involved:1. Disallowance of claim of deduction on cost of replanting under Rule 7A of the Income Tax Rules.2. Disallowance of maintenance expenses of immature rubber area.3. Applicability of the Kerala High Court decision in the case of M/s. Rehabilitation Plantations Ltd.Detailed Analysis:1. Disallowance of Claim of Deduction on Cost of Replanting under Rule 7A of the Income Tax Rules:The main issue in the appeals is the disallowance of the claim of deduction on the cost of replanting under Rule 7A of the Income Tax Rules. The assessee, a plantation company, claimed a deduction amounting to Rs. 6,75,49,321 for replanting and maintenance expenditure. The Assessing Officer disallowed this claim, citing the Kerala High Court judgment in the case of M/s. Rehabilitation Plantations Ltd. [(2012) 251 CTR 343 (Ker.)], which held that the cost of replanting under Rule 7A cannot be entertained unless it is a case of infilling in an existing rubber plantation. The CIT(A) upheld this disallowance, emphasizing that the expenditure for planting and development up to maturity must be capitalized and is not allowable as a revenue expenditure. The Tribunal reiterated the findings of the Kerala High Court, stating that the expenses incurred were for planting new areas of rubber and not for infilling in an already yielding area, thus falling outside the ambit of Rule 7A(2).2. Disallowance of Maintenance Expenses of Immature Rubber Area:The assessee also raised an additional ground regarding the disallowance of maintenance expenses of immature rubber areas, arguing that maintenance expenditure is an allowable expense and should not be disallowed under Rule 7A(2). They cited precedents where maintenance expenditure was treated as revenue expenditure, particularly referencing the Supreme Court's decisions in The Travancore Rubber & Tea Co. Ltd. vs. Commissioner of Agricultural Income Tax and Karimtharuvi Tea Estates vs. State of Kerala. However, the Tribunal upheld the CIT(A)'s decision, maintaining that the expenses incurred were for replanting and not for maintenance of an existing yielding area, and thus, must be capitalized as per the Kerala High Court's judgment.3. Applicability of the Kerala High Court Decision in the Case of M/s. Rehabilitation Plantations Ltd.:The assessee contended that the decision in the case of M/s. Rehabilitation Plantations Ltd. was not directly applicable to their case, arguing differences in facts and interpretations of Rule 7A(2). They argued that Rule 7A(2) should be interpreted similarly to Rule 8(2) applicable to tea plantations, which allows for the cost of replanting as a deduction. However, the Tribunal found the Kerala High Court's judgment binding, noting that the expenses were for replanting new areas and not for infilling in an existing yielding area. The Tribunal emphasized that the High Court's interpretation of Rule 7A(2) as applicable only to infilling was clear and categorical, and thus, the disallowance was justified.Conclusion:The Tribunal dismissed the appeals, affirming the disallowance of the deduction for replanting and maintenance expenses under Rule 7A(2) of the Income Tax Rules. The Tribunal upheld the Kerala High Court's interpretation that such expenses must be capitalized and are not allowable as revenue expenditure unless they pertain to infilling in an existing yielding area. The appeals filed by the assessee were dismissed, and the orders of the lower authorities were upheld.