2015 (12) TMI 1913 - AT - Income Tax

Order remits matter to AO to decide if nursery saplings income is agricultural and exempt u/s.10(1), impacting s.4(1) and s.115JB

Income-tax Officer, Ward -1 (1), Mysore Versus M/s. Lab Land Bio Tech P. Ltd

ITAT Bangalore set aside the lower authorities' orders and remitted the matter to the AO to determine whether the taxpayer's income from saplings and ... Computation of book profit u/s. 115JB - AO adopted the profit as per the profit and loss account appropriation account - assessee in its cross objection states that its income was agricultural in nature and exempt u/s. 10(1) - HELD THAT:- Agricultural income is exempt u/s. 10(1) of the Act which falls in Chapter III of the Act. Heading of Chapter III is “Incomes which do not form part of total income”. Thus the items of income specified in Section 10(1) of the Act or Chapter III of the Act would not be a part of total income. There cannot be a charge of tax u/s. 4(1) of the Act on anything other than total income. As per the assessee, nature of its income was agricultural. Irrespective of the fact whether assessee had preferred a claim in this regard or not, the charge of tax under the Act can only be on total income of an assessee. Exemption of agricultural income given to an assessee u/s. 10(1) of the Act is not dependent on a claim made through a return of income, since a charge of tax can only be on total income and total income cannot include therein any agricultural income. Explanation 3 to Section 2(1A) of the Act which defines agricultural income clearly states that income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. Said Explanation has been inserted by Finance Act, 2008, w.e.f. A. Y. 2009-10. Impugned assessment year being 2009-10, Explanation was squarely applicable. However, what we find is that none of the lower authorities had gone into the claim of the assessee that income from saplings and seedlings grown in a nursery was eligible for exemption u/s. 10(1) of the Act, has already been mentioned above. Question of disallowance of any expenditure may become irrelevant if income of the assessee is considered agricultural in nature. Similarly the question of computation of book profit may also not arise once income of the assessee is held to be agricultural in nature, since it would not come within the scope of total income. Nevertheless since none of the lower authorities have considered these issues, that the matter requires a fresh look by the AO. Set aside the orders of lower authorities and remit the issue regarding the claim of the assessee regarding agricultural nature of its income back to the AO for consideration in accordance with law. ISSUES PRESENTED AND CONSIDERED 1. Whether receipts from sale of saplings and seedlings grown in a nursery qualify as agricultural income exempt under Section 10(1) read with Explanation 3 to Section 2(1A), and whether such exemption can be allowed where the claim was not made by filing a revised return. 2. Whether the Assessing Officer was correct in adopting profit as per the profit and loss appropriation account (rather than profit as per profit and loss account) for computation of book profit under Section 115JB (MAT), and whether the appellate authority may or must follow precedents on this point. 3. Whether disallowances made by the AO in respect of depreciation (adjusted for subsidy) and R&D expenditure (timing/allowability) should be sustained without first deciding the agricultural-income contention. ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterisation of receipts from saplings/seedlings as agricultural income and admissibility of the claim absent a revised return Legal framework: Chapter III of the Act (Section 10(1)) exempts certain incomes from inclusion in total income; Section 4(1) charges tax only on total income. Explanation 3 to Section 2(1A) (inserted w.e.f. assessment year 2009-10) deems income from saplings/seedlings grown in a nursery to be agricultural income. Precedent treatment: The judgment in Goetze (India) Ltd. was invoked by the revenue/assessing officer to restrict admittance of such claims by the AO where not made by revised return. Appellate authorities' ability to entertain such claims was also disputed in light of that precedent. Interpretation and reasoning: The Court emphasised that the statutory charge under Section 4(1) is on 'total income' and that items falling under Section 10(1) do not form part of total income. Consequently, if receipts are agricultural in nature by virtue of Explanation 3 to Section 2(1A), they cannot be subjected to income-tax irrespective of whether a revised return was filed. The Court held that the exemption under Section 10(1) is not made conditional upon the assessee having claimed it by way of a revised return; the fundamental principle is that chargeability cannot extend to amounts which do not form part of total income. The Explanation 3 amendment was applicable to the impugned assessment year and therefore the question of whether the receipts are agricultural must be examined on merits by the AO. Ratio vs. Obiter: Ratio - the core legal proposition that agricultural income (as defined by Explanation 3 to Section 2(1A)) cannot form part of total income and therefore is outside the charge under Section 4(1), and that such exemption is not rendered ineffective merely because it was not claimed by revised return. Obiter - comments as to the scope of Goetze are explanatory; the Court did not overrule Goetze but limited its application in the circumstances by directing fresh consideration. Conclusions: The matter of whether the receipts are agricultural income is a live question of fact and law to be decided by the AO in the first instance. The Tribunal set aside the orders of lower authorities and remitted the agricultural-income claim to the AO for fresh consideration in accordance with law, holding that failure to file a revised return does not, by itself, preclude adjudication of the exemption. Issue 2: Computation of book profit under Section 115JB - profit as per profit & loss account v. profit & loss appropriation account Legal framework: Section 115JB prescribes computation of book profit for MAT; there is jurisprudence on whether profit to be taken is as per profit & loss account or profit & loss appropriation account. Precedent treatment: The CIT(A) relied on a decision (Apollo Tyres Ltd.) treating profit as shown in the profit & loss account as the basis for MAT computation. The AO had used profit as per profit & loss appropriation account. Interpretation and reasoning: The Tribunal did not decide this issue on merits because the foundational question whether the receipts are taxable at all (agricultural exemption) could render the MAT computation irrelevant. Given that none of the lower authorities had examined the agricultural-income claim on merits, the Tribunal declined to decide the book-profit point and permitted the AO to consider it afresh if necessary after resolving the exemption issue. Ratio vs. Obiter: Obiter - any observations on the correct basis for computing book profit were not binding because the Court expressly refrained from adjudicating the point; the direction to remit leaves the question open for determination by the AO taking into account applicable precedent. Conclusions: The Tribunal remitted the matter to the AO for fresh consideration; it did not pronounce a definitive rule on whether profit for Section 115JB should be taken from the P&L account or the P&L appropriation account in this case. Issue 3: Disallowances of depreciation (after adjusting subsidy) and R&D expenditure - survivability pending resolution of agricultural-income claim Legal framework: Depreciation claims may be adjusted where subsidies reduce the cost of assets; deductions under Section 35 for R&D are governed by timing and eligibility rules. Precedent treatment: The AO disallowed part of depreciation by reducing asset cost for subsidy and held certain R&D expenditures related to a different assessment year; CIT(A) upheld those disallowances. Interpretation and reasoning: The Tribunal found that if the receipts are held to be agricultural income and therefore exempt under Section 10(1), questions of disallowance of expenditure and computation of book profit would potentially become otiose. Because the agricultural-income issue had not been adjudicated by lower authorities, the Tribunal considered it appropriate to remit the entire matter to the AO, who may then examine depreciation, R&D deduction, and MAT computation in the correct factual and legal context. Ratio vs. Obiter: Obiter - the Tribunal did not finally rule on the correctness of the AO's adjustments to depreciation or the R&D disallowance; those issues were remitted for consideration contingent on the outcome of the exemption inquiry. Conclusions: The Tribunal set aside previous orders on these points and remitted the issues to the AO to be considered afresh, allowing the AO to re-examine depreciation adjustments, R&D expenditure allowability, and MAT computations after resolving the agricultural-income question. Overall Disposition The Tribunal remitted the central question of whether the receipts are agricultural income (deemed so by Explanation 3 to Section 2(1A) for the relevant year) to the Assessing Officer for fresh consideration in accordance with law, holding that the exemption's applicability is not negated merely by the absence of a revised return and that related issues (depreciation adjustment, R&D disallowance, and MAT book-profit computation) should be reconsidered by the AO in the light of the determination on agricultural income.