AI Drafter 
TaxTMI 
TaxTMI 
2019 (8) TMI 1467
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.... "1. The order of the Ld.Commissioner of Income Tax (Appeals), Kottayam is opposed to law, facts and circumstances of the case. 2. The Ld.Commissioner of Income Tax (Appeals) has erred in sustaining the disallowance of the claim of deduction on cost of replanting, under Rule 7A of the Income Tax Rules in the sum of Rs. 6,75,49,321/-. 3. The Ld.Commissioner of Income Tax (Appeals) erred in applying the ratio of the decision of the Kerala High Court in the case of M/s.Rehabilitation Plantations as reported in 251 CTR 343. 4. The Ld.Commissioner of Income Tax (Appeals) ought to have found that the deduction claimed by the assessee is in respect of cost of replanting Rubber Plants and not infilling as held by the jurisdictional High Court. 5. For the above and other grounds that may be advanced at the time of hearing it is submitted that the order of the Commissioner of Income Tax (Appeals) be set aside." 4. The assessee has also raised an additional ground vide petition dated 02.04.2019 and the same reads as follows:- "1. The Commissioner of Income Tax (Appeals), erred in sustaining the disallowance of Rs. 6,75,49,321/- as Replanti....
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....st of replanting' has been claimed under direct expenses. 100% of the direct expenses have gone into the cost of production in factory. 35% of the income from the sale of centrifuged of the claim of Rs. 6,75,49,321/- towards the cost of replanting would translate to an addition of Rs. 2,36,42,262/- to the income offered under central income tax (Rs. 6,75,49,321/ x 100% x 35%)...... Rs. 2,36,42,262/-." 6. Aggrieved by the disallowance made by the Assessing Officer, the assessee preferred an appeal to the first appellate authority. The CIT(A), after elaborately analyzing and quoting the relevant portion of the judgment of the Hon'ble Kerala High Court in the case of M/s.Rehabilitation Plantations Ltd. (supra), decided the issue against the assessee. The relevant finding of the CIT(A) reads as follows:- "4.2.1 In the above decision, Hon'ble High Court has held in unequivocal terms that expenditure incurred for planting and development of the plantation upto maturity has to be necessarily capitalized and is not allowable as a revenue expenditure. Therefore, the decision clearly covers the case of the Assessee and the expenditure claimed for cost of replantation cannot be al....
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....cognized that the State Officers has to accept the proportionate computation as made by the Central Officers has to accept the proportionate computation as made by the Central Officers under the Income Tax Act. Year-wise cost of maintenance and replantation Year Maintenance Rs. Replantation Total (Rs.) 2005 2,07,043.00 2006 16,932.00 2007 6,84,065.00 2008 15,88,423.00 2009 11,76,602.00 2010 1,31,49,545.60 2011 84,17,325.64 2012 1,75,70,510.68 2013 4,28,10,446.92 2,47,38,874.24 6,75,49,321.16 (iii) At the outset it is submitted that the disallowance of deduction of Maintenance Expenses is clearly erroneous as Rule 7A(2) applies only to Replanting expenses and not Maintenance expenses. 4 (i) As to the issue of Replanting expense of Rs. 2,47,38,874.24, it may kindly be noted that Rule 7 A applicable to Rubber is on similar lines as Rule 8 of the Income Tax Rules, 1962 applicable to Tea under which income....
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....ess and 40% of such income is deemed to be income liable to tax under the Income Tax Act 1961 and the balance 60% is deemed to be income liable to Agricultural Income Tax. [ii] In making such computation of income from tea the Income Tax Officer grants benefit for an allowance of the cost of replanting of tea bushes under Rule 8 (2) of the Income Tax Rules which is extracted below:- "In computing such income, an allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area planted, if such area has not previously been abandoned and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which under the provisions of cl. (30) 01 section 10, is not includible in the total income." [iii) This provision is identical to the deduction granted under Rule 7 A(2) which provides for deduction in respect of replanting of rubber plants. Rule 7 A(2) is extracted below:- "In computing such income, an allowance shall be made in respect of the cost of plantinq rubber plants in replacement of plants that have died or become per....
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....deduction is now being claimed on the tea bushes, one as replacement cost and then as depreciation allowance." With a view of setting at rest the aforesaid controversy, section 43(3) is being amended to provide that the term "Plant will not include tea bushes and livestock. The proposed amendments will take effect, retrospectively, from 1st April, 1962 and will accordingly, apply in relation to assessment year 1962-63 and subsequent years". Extract of 212 ITR CSt) 356 is at running page 33. The amendment makes it clear that the deduction under Rule 8(2) for Replantation Expenses is allowed in lieu of depreciation. The legislative intention is therefore clear that the entire cost of replanting is allowed as a deduction in lieu of the depreciation meaning thereby the full replantation cost is allowed to be claimed as a deduction. 6. It may kindly be noted that it is well settled that Rule 8 which was introduced to provide the manner of assessment with respect to Income from tea, considering the composite nature of cultivation and manufacture and the difficulty in bifurcating expenses as attributable separately to cultivation and manufactur....
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....in an area becomes old and unyielding after giving yield for several years together, the same should necessarily be replaced with new plants to continue the plantation. The use of the words "if such area has not previously been abandoned" makes it clear that the deduction is allowed with respect to replanting in an area earlier planted and not for infilling a few plants in place of damaged plants. The total replanting expenditure in this regard is allowed as deduction in lieu of depreciation and since all tea assesses are getting such a deduction under Rule 8(2) for the past many years the same interpretation has to be given for Rule 7 A(2) and 7B(2) also. 9. The Assessing Officer while denying the deduction has relied upon a decision of this Honourable Court in the case of Rehabilitation Plantation reported in 251 CTR 343. In the said decision this Hounourable Court while observing that Rule 7 A(2) is in the same lines as Rule 8(2) has erroneously interpreted the said Rules as applicable only to 'infilling' of plants in the place of dead plants in an existing plantation. This court further observed that the rule making authority while incorporating Rule 7 A(2) in ....
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....f a planter has 100 hectares in his ownership which is comprised as follows: Planted Area 75 Hectares Non Planted Area (Reserved Area / Unopened Area) 25 Hectares Of the Planted Area Yielding Area 50 Hectares Cleared for replanting 25 Hectares (This 25 hectares would qualify as in an area already planted since it is out of the 75 Hectares of Planted area.) If, considering the same extent, the planter undertakes replanting of 35 Hectares, then 10 hectares would be from Non Planted area and not be eligible as it qualifies as an area previously abandoned, "if such area has not previously been abandoned" and consequently be a capital expenditure. (b) If the assessee's claim is allowed, so much of the portion of the agricultural income determined by the Central ITO will be in direct conflict with agricultural income assessment of the State Agricultural Income Tax Act. This finding is, it is respectfully submitted, not consistent with the provision, in so far as the provision clearly states that the income determined by the CTO will be adopted by the State Officer and to that extent there can be no conflict Moreover, b....
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....running pages 31 to 32 of Annexure VII. The High Court, in this case, was deciding the issue whether maintenance of nursery for the purpose of replantation would amount to a capital or revenue expenditure. The High Court found that maintenance of nursery cannot be extended to come under Rule 8(2) and hence cannot be extended to a stage prior to actual replacement or re-plantation but also found that such plants utilized for the purpose of re-plantation without any expansion of the plantation area or re-plantation in an abandoned area cannot be said to be a capital expenditure. (ii) This Honourable Tribunal, in the case of Mahavir Plantations Pvt Ltd. Vs. Income Tax Officer, as reported in 31 ITO 128 as held that "Rule 8(2) of the IT Rules specifically provides that in computing income from manufacture of Tea, allowance shall be made in respect of the cost of planting bushes in replacement of bushes that had died or become permanently useless in an area already planted, if such area has not previously been abandoned. Since the assessee is entitled to claim deduction in respect of Replanting Expenditure in view of Rule 8(2), we are of the opinion that the assessee is entitle....
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....lantation. Yielding healthy rubber plantation does not admit replacement of dead plants within such area as new saplings cannot grow under shade and is never done by any planter. So much so, expenditure for replantation of an area is not covered by Rule 7A(2) and in our view the lower authorities including the Tribunal rightly rejected the claim. We also feel that the Central Income Tax Officer while determining income in the nature of agricultural as well as business income under Rule 7A should keep in mind the principles of computation of agricultural income under the State AIT Act and as far as possible, assessment should be made without violating the provisions of the State AIT Act. If the appellant's claim is allowed, certainly so much of the portion of the agricultural income determined by the Central Income Tax Officer will be in direct conflict with the Scheme of assessment of agricultural income under the State AIT Act which prohibits deduction of expenditure on replantation of an area and only an incentive is provided by way of replantation allowances under Rule 3 of the State Agricultural Income Tax Rules as stated above. We are of the view that the Tribunal rightly ....