TaxTMI 
TaxTMI 
2014 (9) TMI 141
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....der. 2.1. The appellants-assessees own coffee and tea estates and are engaged not only in growing of tea leaves/coffee cherries (fruits) but also in manufacturing of coffee/tea as commodity ready for sale in domestic market. 2.2. The assessee/appellants - M/s.Balanoor Plantations and Industries Limited, (for short "Balanoor Plantations") has called in question the reassessment order dated 14.11.2011, passed by the Assistant Commissioner of Commercial Taxes (Audit)-13, DVO-1, Bangalore (for short "AA"), levying additional tax alongwith interest and penalty for the tax period 2005-06 and consequent demand notice. Balanoor Plantations has also challenged reassessment order of the very same date passed by the AA for the tax periods 2006-07, 2007-08 and 2008-09 and consequent demand notices. 2.3. The assessee/appellants - M/s Badra Estate and Industries Ltd. Bangalore (for short "Badra Estate") has also impugned the reassessment order dated 25-3-2011 passed by the AA for the tax period between April 2006 and March 2007 and consequent demand notices. They have also called in question the reassessment order dated 31-5-2011 passed by the very same authority for the tax period betw....
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....11-2010 held that the activity of raising or growing tea plants continues to be an agricultural activity as per Section 2(1) and the person raising or growing tea plants continues to be an agriculturist as per Section 2(2). The Commissioner while giving clarification, in exercise of the power conferred under Section 59(4) of the Act, relied upon the judgment of the Supreme Court in Travancore (supra). The clarification was made in pursuance of the application filed by M/s. Diwan Bahadur S. L. Mathias & Sons (for short "M/s.Diwan Bahadur") and so also pursuant to the direction issued by this Court while remitting their matter for consideration vide order dated 13-7-2010 rendered in Writ Petition Nos.12993-994/2010 and Writ Petition Nos.13420-422/2010. 5. The controversy that falls for our consideration has arisen in the light of the aforementioned clarification issued by the Commissioner under Section 59(4) of the Act dated 22-11-2010. The order of the AA, as a matter of fact, rests on the said clarification. It is against this backdrop, the assessees instead of filing appeals, preferred writ petitions in this court challenging the orders passed by AA, contending that in view of ....
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....ut, we made it clear to the learned counsel for the parties that we would deal with the challenge to the circular only if it is necessary and/or if the circumstances so demand. We also made it clear that we would hear the appeals on merits and our endeavour would be to decide the appeals on the basis of provisions of law and the law laid down by the Supreme Court and High Courts having bearing on the question of law framed by us. 6. We have heard learned counsel for the parties at great length and with their assistance gone through the orders of the AA and of the learned single Judge and so also the other materials, including judgments of the Supreme Court and High Courts placed before us for consideration. 6.1. Mr. Naganand, learned senior Counsel appearing for the appellants in Writ Appeal Nos.6586-6633/12, at the outset, submitted that growing of tea leaves/coffee cherries and the manufacture of tea/coffee, constitute one continuous integrated process and therefore, the assessees are entitled to input tax credit on inputs for cultivation, such as, fertilizers, pesticides, fungicides, chemicals, agricultural machinery and implements purchased from registered dealer and used....
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....ultural produce (Section 2(3)) and dealer (Section 2(12) to submit that assessees are not agriculturists and tea/coffee are not agricultural or horticultural produce for the purposes of the Act as has been rightly held by the learned single Judge in M/s.Divan Bahadur S.L. Mathias and sons (W.P.Nos.12993-94/2010 & 13420-422/2010) decided on 13th July 2010. In support of the case of the assessees, Mr.Naganand submitted the Division Bench of this Court in Income Tax - III vs. Sami Labs Limited (ITA 207/2011 decided on 21-02-2012) held that in case of herbal extract manufacturer, expenditure incurred on cultivation of coleus crop (a plant) is deductible under the Income Tax Act, 1961 for computing taxable income, as such, the expenditure is 'laid out' for its business. Relying on this proposition he submitted that even the expenditure incurred on the inputs such as fertilizers, pesticides, chemicals, etc. are deductible under the Act. 7. Government Advocate, on the other hand, at the outset, submitted that use of fertilizers, chemicals, pesticides etc., for cultivation/growing of tea/coffee plants cannot be stated to be the inputs for its (tea/ coffee) manufacturing. These goods, sh....
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..... 9. We now proceed to advert to the arguments advanced on behalf of the parties and consider the relevant provisions of the Act. 10. Section 2(1) defines "agriculture". With its grammatical variations, agriculture includes horticulture, the raising of crops, grass or garden produce and grazing but does not include dairy farming, poultry farming, stock breeding and mere cutting of wood. From bare perusal of this definition, it is clear that growing of tea/coffee, is an agriculture. This definition is general in nature and does not specify any particular class of crop/s or exclude any crop or class of crop/s. 11. Sub-section (2) of Section 2 defines 'agriculturist' which means a "person" who cultivates land personally. Section 2(12) defines "dealer". If clauses (a) and (b) of Explanation 4 of Section 2 (12) are read, it is clear that the word 'person' used in the definition of 'agriculturist' also includes a company as defined under the Companies Act, 1956. Sub-section (5-A) of Section 2 defines body corporate and Sub-section (9) of Section 2 defines Company. Both mean a company as defined in the Companies Act. Thus, for the purpose of this Act, a company could also be an a....
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....ide Act No.23/83 w.e.f. 18.11.1983 and the following portion was inserted "and such produce, except coffee as has been subject to any physical, chemical or other process for being made fit for consumption and mere cleaning, grading, sorting or drying". By the third amendment vide Act No.4/99 w.e.f. 01.04.1999 the following words/produce were introduced in the definition of AP and HP: "beedi leaves, raw cashews, timber, wood, tamarind". 13.1. Thus, in the definition of "AP or HP", as it stood prior to these amendments, initially the words "except coffee" were inserted in 1989 w.e.f. 18.10.1983, and thereafter, the second amendment was made on 18.11.1983 and lastly, five aforementioned produce were inserted in the said definition by way of amendment w.e.f. 1.4.1999, and were excluded from being Agricultural Produce. The Act was introduced and brought into force from 11th day of March, 2005 also has the definition of "AP or HP" under Section 2(3) which, as stated earlier, is word to word and line to line same. In other words, it was introduced in the Act, with all that was inserted by way of the three amendments in the definition under Section 2(c) of the KST Act. 13.2. Learned ....
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....is relevant, provide that an agriculturalist who sells exclusively agricultural produce grown on land cultivated by him personally shall not be deemed to be a dealer within the meaning of Clause(a). This Clause, it appears to us, would also means an agriculturist who sells only cleaned, graded or sorted tea leaves, requires no registration as a dealer, under the provisions of the Act. In other words, apart from cleaning, grading and sorting, if tea is subjected to any physical, chemical or other process for being made fit for consumption, one would require registration as dealer for its sale under the provisions of the Act. Clause (b) of Explanation 4 speaks only about the agriculturist, which is a Company, and if the Company is selling coffee apart from other produce mentioned in the said clause, grown on land cultivated by them personally or directly or otherwise, such Company, shall be deemed be a dealer in respect of turnovers relating to the sale of coffee. Thus, 'coffee' though is not excluded from being an agricultural produce within the meaning of Section 2(3) of the Act, still the agriculturist-Company which grow and sale 'coffee' as marketable commodity needs registration....
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....hased by a dealer in the course of his business for resale or for use in the manufacture or processing or packing or storing of other goods or any other use in business. From bare look at this definition, it shows that the inputs which have direct connection/nexus with business or purchased by a dealer 'in the course of' business or for resale or for 'use in the manufacture' of other goods or 'any other use' in business, could only be treated as inputs. Unless the word 'business' is read also to mean an agriculture or agricultural activity, the inputs, such as, fertilizers, chemicals, pesticides, agricultural implements etc. used for cultivation, in our opinion, cannot be treated as inputs within the meaning of 'input' as defined by Section 2(19) of the Act. In the later part of the judgment, we would record further reasons for observing this conclusion. 16. From bare perusal of the provisions contained in Sections 2(1), 2(2), 2(3), 2(6) and 2(12), in particular, Explanation 4(a)(b) of Section 2(12), we are satisfied that tea plantation and coffee plantation are agricultural/horticultural activities and that it would not be correct to say that tea and coffee are either not agric....
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....; "13. Now the definition of "business" in section 2(d) and in most of the sales tax statutes is an inclusive definition and includes "trade or business or manufacture, etc.". This itself shows that the Legislature has recognised that the word "business" is wider than the words "trade, commerce or manufacture, etc.". The word "business" though extensively used is a word of indefinite import, in taxing statutes, it is normally used in the sense of an occupation, a profession which occupies time, attention and labour of a person, normally with a profit-motive and there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive and not for sport or pleasure (State of Andhra Pradesh v. H. Abdul Bakshi and Bros. [1964] 15 STC 644 (SC); AIR 1965 SC 531). Even if such profitmotive is statutorily excluded from the definition of "business" yet the person could be doing "business". 14. The word "carrying on business" requires something more than merely selling or buying etc. Whether a person "carries on business" in a particular commodity must depend upon the volume, frequency, continuity and regularity of tra....
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.... as trade, commerce, or manufacture, adventure or concern. The definition of agriculture as occurs in the Act with its grammatical variations includes only horticulture, the raising of crops, grass or garden produce. In view thereof, it is impossible for us to agree with the submission advanced by Mr. Naganand that agriculture is also 'business' within the meaning of the definition of business under Section 2(6) of the Act. Merely because a company is involved in any trade, commerce or manufacture, is also an agriculturist as defined by Sub-section (2) of Section 2 would not mean that the agriculture is business. They may do it as business and use AP or HP for manufacturing products, such as tea/coffee, but that by itself would not turn the agricultural activity into a business. In short, business and agricultural activity are two distinct or independent activities and have no concern whatsoever with each other except the fact that agricultural produce could be used by a company for trade, commerce or manufacture. 19. The word 'Trade' means exchange of goods for goods or goods for money or, any business carried on with a view to provide, whether manual or mercantile as distingui....
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....ry premises was treated as an activity incidental to the business of manufacturing of textiles. Wrongly applying the same analogy it was contended that in the present case, there cannot be manufacturing of tea/coffee, as a marketable product, without growing of tea leaves and coffee cherries and therefore, it is incidental and ancillary to manufacture of tea/coffee. 19.3. Clause (b) of sub-section (6) of Section 2 undoubtedly states that any transaction in connection with, or incidental or ancillary to, such trade commerce, manufacture, adventure or concern. The word 'such' in clause (b) is referable to trade, commerce, manufacture, adventure or concern referred to in Clause (a) and if there exists some trade, commerce, manufacture, adventure, or concern falling within Clause (a) any transaction in connection with or incidental or ancillary to such trade, commerce, manufacture only would constitute business, irrespective of the fact whether such transaction has characteristics of business as understood in common parlance. Whether agricultural/horticultural activity or agricultural/horticultural produce could be treated as transaction in connection with or incidental or ancillary....
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....(supra) was considering the question whether insurance company which sells insured goods in salvage steel is liable to tax, the sale being incidental ancillary to its business under Section 2(f2) of the Karnataka Sales Tax Act, 1957 after considering the definition of 'business' it was observed that it includes the ancillary and incidental transactions and it was no longer open to the petitioner therein to contend that the sale of goods was not incidental to its business. This judgment also will not help to take the assessees contention further that for growing of tea/coffee plants, use of fertilizers, chemicals, pesticides etc., is incidental or ancillary to the business of manufacturing of tea/coffee as a marketable commodity. In other words, fertilizers, chemicals, pesticides, etc. in any case cannot be said to be either ancillary or incidental to manufacturing of tea/coffee as marketable product/commodity. 20. In the present case, the assessees claim that they grow green tea leaves and also manufacture tea as marketable commodity. But to test the arguments we would like to pose a question whether an 'agriculturist' who only grows/cultivates green tea leaves personally and su....
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.... (3) Subject to input tax restrictions specified in Sections 11, 12, 14, 17, 18 and 19, the net tax payable by a registered dealer in respect of each tax period shall be the amount of output tax payable by him in that period less the input tax deductible by him as may be prescribed in that period and shall be accounted for in accordance with the provisions of this Act. (4) ............................... (5) ................................" 21.1. Sub-section (1) of Section 10 speaks about output tax. Sub-section (2) speak about input tax, which, in short, means the tax collected or payable under this Act on the sale to him of any goods for use in the course of his business, and includes the tax on the sale of goods to his agent who purchases such goods on his behalf subject to the manner as may be prescribed to claim input tax in such cases. Sub-section (3) provides for net tax payable which means the difference between output and input tax payable by the dealer. 21.2. From bare perusal of the provisions contained in Section 10 read with definition of 'input' and the definition of 'business', it appears to us t....
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....nputs such as fertilizers, chemicals, pesticides etc. These items are necessary for cultivation and growth of tea/coffee plants. There is no direct relationship, as observed by the Supreme Court in Travancore Tea Estate, between use of fertilizers, pesticides etc. and manufacturing process in respect of tea/coffee meant for sale. 23. At this stage, it would be relevant to consider the judgment of the Supreme Court in The Travancore Tea Estates Co. Ltd. (supra). The relevant observations read thus: "In J. K. Cotton Spinning & Weaving Mills Co. Ltd. (supra) the appellant manufactured for sale cotton textiles, tiles and other commodities. Certain items of goods in the certificate of registration of the appellant were deleted by the sales tax authorities on the ground that they had been earlier erroneously included in the certificate. This Court in that context dealt with the scope and ambit of section 8(3) (b) of the Act read with rule 13. It was held that the expression "in the manufacture of goods" in section 8(3)(b) should normally encompass the entire process carried on by the dealer of converting raw materials into finished goods. Where any particular pro....
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....s something distinct and separate from the manufacturing process to which those leaves are subjected in the factories for turning them into tea meant for sale. Income which is realised by sale of tea by a tea company which grows tea on its land and thereafter subjects it to manufacturing process in its factory is an integrated income. Such income consists of two elements or components. One element or component consists of the agricultural income which is yielded in the form of green leaves purely by the land over which tea plants are grown. The second element or component consists of non-agricultural income which is the result of subjecting green leaves which are plucked from the tea plants grown on the land to a particular manufacturing process in the factory of the tea company. Rule 24 of the Income-tax Rules, 1922 and rule 8 of the Income-tax Rules, 1962, prescribe the formula which should be adopted for apportioning the income realised as a result of the sale of tea after it is grown and subjected to the manufacturing process in the factory. Sixty per cent is taken to be agricultural income and the same consists of the first element or component, while 40 per cent represents no....
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.... of financial accommodation to the farmers or expenses incurred in supplying seedling, fertilizers and for other cultivation expenses, then it would be in the nature of revenue expenditure. It is incurred by the Assessee for a commercial expediency. It was incurred wholly and exclusively for the purpose of business and the Assessee would be entitled for allowance of the said cultivation expenses as revenue expenditure. 10. In the instant case, material on record disclose, the Assessee is in the business of manufacture and export of standardized herbal extracts as well as in the manufacture of fine chemicals. In order to carry on their business, they were in need of herbal coleus plants, they thought of roping the farmers for growing said herbal plant. They provided seedlings, fertiliser and financial assistance to the farmers with an agreement to deduct the expenses out of the cost of the plant sold by the farmers. But, even the farmers could not grow the said herbal plant. Consequently, they sustained loss and in turn the assessee sustained loss. The said cultivation expenses was Rs. 90.64 Lakhs. Therefore, the assessee claimed the said amount as revenue expe....
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....self may consists of several processes. The different processes are integrally connected which results in the production of a commercially different article. If a commercially different article or commodity results after processing then it would be a manufacturing activity. The assessee after processing the raw berries converts them into coffee beans which is a commercially different commodity. Conversion of the raw berry into coffee beans would be a manufacturing activity." (emphasis supplied) 26. In Chowgule & Co. (supra), the Supreme Court was dealing with a dealer who was engaged both in mining operation as also in processing the mined ore for sale. The test for determining, according to the Supreme Court in the said case, whether manufacture can be said to have taken place is whether the commodity was subjected to process of manufacture can no longer be regarded as original commodity, but it is recognized in trade as a new and distinct commodity. There, the Supreme Court held that such operation would amount to processing of commodity and that the nature and extent of the change is not material. The question is not whether there was manual application ....
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.... contend that physical presence of inputs such as fertilizers, chemicals, pesticides etc in final finished goods, such as, tea/coffee is not a pre-requisite for claiming input tax credit under other comparable statutes which provide for tax credit. 29. Even the judgment of the Supreme Court in Reliance Industries Limited and in National Aluminum Company Ltd are also of no avail to the assessees to take their case further and claim input tax credit on fertilizers, chemicals, pesticides, etc. 30. For the reasons recorded in the foregoing paragraphs, the judgments in Jawahar Mills Ltd. (supra) and Rajasthan Spinning & Weaving Mills Ltd. (supra) would also not help the assessees to claim input tax credit on capital goods such as agricultural machinery and implements. In Jawahar Mills Ltd., the Supreme Court was considering the issue regarding availing of MODVAT credit in respect of certain items by the manufacturers treating those items as capital goods in terms of Rule 57-Q of the Central Excise Rules. The controversy before the Supreme Court was whether those items were capital goods within the meaning of Rule 57-Q. Similarly, in Rajasthan Spinning and Weaving Mills Ltd. the qu....
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....urt in Bharat Engineering and Foundry Works v. U.P.Government [1963] 14 STC 262 and quoted with approval the following observations from the said judgment : "Cane crushers and boiling pans are used only in the manufacture of gur from sugarcane. Sugarcane is an agricultural produce and the process which results in the production of sugarcane is undoubtedly agriculture, but the production of gur from sugarcane is a manufacturing process and not an agricultural process. The agricultural process comes to an end with the production of sugarcane and when gur is subsequently being prepared it is manufacturing process that commences. Merely because sugarcane is an agricultural produce anything that is done to it after it is produced is not necessarily a continuation of the agricultural process. It cannot be doubted that agricultural produce can be subjected to a manufacturing process; merely because gur is produced out of sugarcane which is an agricultural produce, the process of preparing gur does not become an agricultural process............ An agricultural implement is an implement that is used in agriculture; any implemen....
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....tax Rules, 1962, and section 8 of the 1944 Act provide how the mixed income from the growing tea leaves and tea manufacturing can be taxed. "Mixed income" means the income derived by an assessee from the combined activities, i.e., growing of tea leaves and manufacturing of tea. Therefore, for purpose of computation of income under the 1961 Act, it should be the mixed income from "tea grown and manufactured" by the assessee." 34. In the light of discussions made in the foregoing paragraphs, in our opinion, the following conclusions emerge on the questions of law and the facts: i) 'Tea', (green tea leaves) though basically is an agricultural produce, the moment it is subjected to any physical, chemical or other process for being made fit for consumption, ceases to be an agricultural produce. ii) 'Coffee', even after it is subjected to any physical, chemical or other process for being made ready for consumption/sale, for the purpose of this Act, is not excluded from being AP/HP under Section 2(3), of the Act. An agriculturist-company, which grow and sale coffee as a marketable commodity, however, needs registration as dealer under the Act....