AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2020 (5) TMI 577
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....s than the monetary limit prescribed in the CBDT's Circular No. 17/2019 vide F.No.279/Misc/14 dated 08/08/2019. Hence, the Ld. DR pleaded for withdrawal of the appeal. Accordingly, we dismiss the appeal of the Revenue as withdrawn. ITA No. 60/Coch/2015 :Assessee's Appeal : AY 2006-07 The assessee has raised the following grounds of appeal: 1. The learned Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the disallowance of Interest amounting to Rs. 18,43,500/- under Section 14A of the Income Tax Act, 1961 r.w.r 8D of the Income Tax Rules, 1962. 2. The learned CIT (A) ought to have observed that the appellant has not incurred any expenditure to earn exempt income of Rs. 6,59,278/-. 3. The learned CIT (A) ought to have observed that the investments from which the exempt income has earned are made either before 2002 or taken over on amalgamation of erstwhile The Pullangode Rubber and Produce Company Limited, on account of amalgamation of the company with Appellant w.e.f 01.01.2006. 4. The learned CIT(A) ought to have noted that the Rule 8D is not applicable for A.Y. 2006-07, as the same was inserted vide Finance Act, 2008 and h....
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....ore than earned income by placing reliance on the CBDT Circular No. 5/2014 dated 11.02.2014 wherein it was stated that provisions of section 14Ar.w. rule 8D would be applicable even in a year in which taxpayer has not earned any exempt income. Thus, the CIT(A) confirmed the action of the Assessing Officer in invoking the provisions of section 14A r.w. Rule 8D and making disallowance of Rs. 18,43,500/-. 5. Against this, the assessee is in appeal before us. The Ld. AR submitted that the provisions of sub-section (2) and (3) of section 14A were inserted by the Finance Act, 2006 with effect from April 1, 2007. Hence, it was submitted that the provisions of sub-section (2) and (3) of section 14A of the Act are operative only from AY 2007-08. Accordingly, it was submitted that Rule 8D which has been prescribed under subsection (2) would also be applicable from AY 2007-08. In view of the above, it was submitted that Assessing Officer could not determine expenses attributable to earning of exempt income, which is governed by the provisions of sub-section (2) and (3) of section 14A, as the same were not applicable for the year in question. For this proposition, the relied on the follo....
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.... CIT (347 ITR 272) wherein it was held as follows: "Section 14A was inserted by the Finance Act, 2001, with retrospective effect from April 1, 1962. Prior to the introduction of section 14A, the law was that when an assesses had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of the business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. However, where the business was divisible, the principle of apportionment of the expenditure was applicable and the expenditure apportioned to the "exempt"income or income not exigible to tax, was not allowable as a deduction. Subsection (1) of section 14A clearly stipulates that for the purposes of computing the total income under Chapter IV, no deduction shall be allowed in respect of expenditure "incurred" by the assessee "in relation to" income which does not form part of the total income under the Act. The expression "in relation to" is, ordinarily, of wide import. In the normal course, the expression would have an expansive meaning unless, of course, the context wou....
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.... relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income, in both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribedmethod, as mentioned in sub-section (2) of section 14A of the Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of ....
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....gh the principle of apportionment. Section 14A even prior to the introduction of sub-sections (2) and (3) would require the Assessing Officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the Assessing Officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessee was free to adopt any reasonable and acceptable method. So, even for the pre-rule 8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income, the Assessing Officer will have to verify the correctness of such claim. In case, the Assessing Officer is satisfied wi....
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....should have live and direct nexus with sale of rubber manufactured from field latex obtained from rubber plants. e) The learned CIT(A) ought to have observed that Rule 7A has application only to "Revenue receipts" having "income character and not to capital receipts". Further, where a particular receipt does not have revenue character then Rule 7A cannot have any application whatsoever. f) The learned CIT(A) ought to have observed that Rule 7A has application only to income realised from sale of rubber products which are manufactured or processed from filed latex obtained from rubber plant grown by the seller in India. Rule 7A does not have any application if manufacturing and processing is not carried out by the grower of the rubber plant. g) The learned CIT(A) ought to have observed that the said Rule 7A does not have application to income derived by an assessee from sale of field latex obtained from rubber plants grown by the seller. In such case the income is purely agricultural in nature. h) The learned CIT(A) ought to have observed that if no profit can be assessed to Central Income Tax in respect of filed latex then by equal measu....
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.... (a) The learned CIT(A) erred in confirming the addition of Provision for Lease Rent amounting to Rs. 61.00,000/- by treating it as Provision for unascertained liability for the purposes of arriving at the book profits u/s 115 JB of the Act. (b) The learned CIT(A) ought to have observed that any liability capable of being estimated with reasonable certainty, though the actual quantification may not be possible should be allowed as an ascertained liability. (c) The learned CIT (A) ought to have observed that the provision has been made in the accounts based on lease rent demand notice received from Thahasildar, Taluk Office, Kochi based on revised rate of Lease rent. (d) The learned CIT(A) ought to have observed that merely because the appellant is disputing the lease rent at revised rates, the same cannot be construed to be unascertained liability u/s 115JB(2)(c) of the Act. The Appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For these and other grounds that may be raised at the time of hearing, it is hum....
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....e is in appeal before us. The Ld. AR submitted that Rule 7A was inserted with effect from 1st April 2002 to tax income from the manufacture of rubber. It was submitted that Rule 7A prescribes that 35% of certain income from the produce of rubber trees would be treated as income derived from business. Rule 7A provides asunder: (1) "Income derived from the sale of centrifuged latex or cenex or latex based crepes (such as pale latex crepe) or brown crepes (such as estate brown crepe, remitted crepe, smoked blanket crepe or flat bark (crepe) or technically specified block rubbers manufactured or processed from field latex or congulum obtained from rubber plants grown by the seller in India shall be computed as if it were income derived from business, and thirty-five per cent of such income shall be deemed to be income liable to tax. (2) In computing such income, an allowance shall be made in respect of the cost of planting rubber plants in replacement of plants that have died or become permanently useless in an area already 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 th....
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....elied upon by the assessee was given in an entirely different context. At that point of time income form value added rubber was never considered for Central Income Tax and the question thereon was whether any capital gains arise on sale of rubber trees. According to the Ld. DR with the amendment brought in by IT (Second Amendment) Rules, 2001 the scenario has changed and now by Rule 7a an altogether new method to arrive at the income from value added rubber products, which is assessable under Central Income Tax has been evolved. The Ld. DR submitted that in that case, income from a rubber estate as a whole was first determined and then it was apportioned in the ratio of 65:35 to arrive at the agricultural income and income taxable under Central Income Tax. Here, according to the Ld. DR, all expenditure for growing the rubber like replanting expenses, estate expenses etc. were taken into account and then, the salvage value of old and unyielding rubber trees also has to be taken into account to arrive at the correct income from the estate and then the division in the ratio 65:35 is to be made. The Ld. DR noted that this income is only a salvage value got from an exhausted stock - ....
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....hen manufactured or processed from field latex or coagulum obtained from rubber plants grown by the seller in India, i.e., when there is a combined activity of growing rubber trees and also manufacturing or processing of field latex or coagulum obtained from rubber plants, Rule 7A provides for segregation and ascertainment of agricultural income and the business income. On a plain reading of Rule 7A, we are inclined to accept the contentions of Ld A.R. Thus, the said Rule 7A does not take in its ambit the question of sale of old rubber trees and accordingly, in our view, the Ld. CIT has placed incorrect interpretation on Rule 7A and has taken the view that the said Rule 7A shall apply to the sale proceeds of old rubber trees. Hence, it cannot be said that there is incorrect application of law on the part of the AO. Accordingly, we are of the view that the Ld. CIT was not correct in assuming jurisdiction over this issue by making incorrect interpretation of law." 8.8 Further, this issue travelled to the High Court. The High Court observed in the case of Harrisons Malayalam Ltd. in 103 CCH 442 that sale of old and unyielding trees would not give rise to the exempt income. If there....
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....Finance Act, 2008 and 2009 w.e.f. 1.4.2001 wherein the Explanation 1, clause (c) and (i) read as under: Explanation (1) - For the purposes of this section "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2) as increased by:- (a)............. (b)............. (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liability, or (d)........... (i) the amount or amounts set aside as provision for diminution in the value of any asset. Accordingly, the CIT(A) confirmed the addition of provision for diminution in the value of investment of Rs. 1,45,18,200/-, provision for lease rent of Rs. 61,00,000/- and provision for bad debts of Rs. 36,55,248/- for the purposes of arriving at the book profits u/s. 115JB of the Act. 9.4 Against this, the assessee is in appeal before us. The Ld. AR submitted that the loss so incurred on capital reduction is a capital loss which cannot be added while computing book profits under section 115JB. In order to give rise to a capital gains / losses in India, two key ingredients ha....
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....s revision was challenged by the assessee before the High Court of Kerala. While granting stay, the Court directed the assessee to make payment of Rs. 40,00,000/-. The applicant made the said interim payment as per direction of Court. The case filed by the assessee company for the increase in rent was disposed off by the High Court of Kerala, directing the Government of Kerala to issue fresh orders after giving an opportunity of being heard. Accordingly, the Government of Kerala issued an order dated 26th April, 2013 rejecting the request of the assessee for reduction of lease rent. 10.1 The AO added back the sum of Rs. 61,00,000/- in the computation of book profit u/s 115JB, treating the same as a provision for an unascertained liability. The CIT(A) confirmed the addition of Rs. 61,00,000/- made by the AO in the computation of profit u/s 115JB, treating the same as a diminution in the value of an asset. 11. Against this, the assessee is in appeal before us. The Ld. AR submitted that the provision was made towards an ascertained liability based on the notice received by the assessee company from the Thahasildar, Taluk Office, Kochi, the provision was for Rs. 61,00,000/- only,....
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.... "For an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid; Just as receipts, though not actual receipts but accrued due are brought in for the income-tax assessment, so also liabilities accrued/due would be taken into account while working out the profits and gains of the business; A condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability; 11.2 Further, the Ld. AR relied on the judgment of the Supreme Court in the case of Calcutta Co. Ltd. v. CIT (37 ITR1) wherein it was held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future da....
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.... companies;or (e) the amount or amounts of dividends paid or proposes; or (f) the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) section 11 or section 12 apply; or (g) the amount of depreciation. (h) the amount of deferred tax and the provision therefor; (i) the amount or amounts set aside as provision for diminution in the value of any asset, (j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset. Prior to the substitution, clause (i) and the proviso read as under: (i) the amount withdrawn from any reserves or provisions, if any such amount is credited to the profit and loss account. Provided that, where this section is applicable to an assessee in any previous year(including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 2001 shall not be reduced from the book profit unless the book profit of such year has been increased by those reser....
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.... of the section for the addition or non-addition of the amount of provision for diminution in the value of any asset to the amount of net profit as shown in the profit and loss account, depending on the way in which such provision has been shown in the balance sheet. The reflection of the amount of provision for diminution in the value of investment separately on the liability side of the balance sheet or by way of reduction from the figure of investment on the asset side of balance sheet is totally alien for computing book profit. What is relevant for this purpose is to find out if any provision for diminution in the value of any asset has been debited to the profit and loss account. If it is so debited, the same will automatically stand added to the amount of net profit for working out the amount of book profit. [Para 11] Explanation 1 to section 115JB(2) in no uncertain terms states that any amount set aside as provision for diminution in the value of asset debited to the profit and loss account is to be added to the amount of net profit for the purpose of computing book profit. As the relevant condition have been fully satisfied in the instant case in terms of the asse....
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.... we are not in agreement with the Ld. AR's contention that this ascertained liability is to be allowed in view of mercantile system of accounting followed by the assessee. In other words, the provision for lease rent is unascertained liability in the assessment year under consideration and it is to be allowed in the year of crystallization of the expenditure. This ground of appeal of the assessee is dismissed. The appeal of the assessee in ITA No.61/Coch/2015 is partly allowed. ITA No. 128/Coch/2017 :Assessee's Appeal : AY 2012-13 13. The assessee has raised the following grounds of appeal: A. The order passed by the first appellate authority, to the extent challenged hereunder, is contrary to the law, facts and circumstances of the case. The order, if allowed to continue, would occasion travesty of justice and cause irreparable loss and hardship to the appellant. B. The appellant would submit that, based on the order dated 16.11.2006 passed by the Hon'ble High Court of Kerala, erstwhile "The Pullangode Rubber and Produce Company Ltd. (PRPCL)," along with other Group Companies, got merged with the appellant. As per the scheme approved by the Hon'ble ....
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....sidering the decisions relied on by the appellant, that if the interest is compensatory in nature, the same is an allowable deduction under Section 37 of the Act (Ref; Bhai Jaspal Singh (2011) 1 SCC 39, Consolidated Coffee Ltd. - (2001) 1 SCC 278, Prakash Cotton Mills P. Ltd.(1993) (201 ITR 684), Hoshiari Lal Kewal Krishan (2009) (311 ITR 336), and PadmavathyRaje Cotton Mills Ltd., (1999) (239 ITR 355). The decisions governing the above aspect, relied on by the appellant are highly brushed aside by the first appellate authority, and further, the first appellate authority holds that it is not clear as to whether the interest in the instant case is compensatory or not. (Ref: Page 32 Paragraph (ii)). The first appellate authority statesthat whether, the interest under AIT Act, is entirely compensatory or not is not clear. The first appellate authority' erred in not considering the phraseology under the AIT Act, relating to the levy of interest. (Ref; Section 39 read with Section 37(4) of AIT Act). When the language of the provision is clear and unambiguous, the first appellate authority ought not to have stated that there is lack of clarity. Furthermore, if there was any ambiguity....
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.... The Tribunal decision (Ahmedabad Tribunal in Shree Saras Spices & Foods (P) Ltd.,), which followed East India Case, will also be not applicable, since the facts and circumstances therein are divorced from the case of the appellant. For these and other grounds and documents to be submitted at the time of hearing, it is humbly prayed that this Hon'ble Tribunal be pleased to set aside the first appellate order, to the extent impugned in this Appeal. 13.1 The facts of the case are that the assessee incurred interest expenses totaling Rs. 94,00,179/- on delayed payments of Agricultural Income Tax (AIT) demanded by the Kerala AIT Department (and paid by the assessee in the impugned F.Y. 2011-12) owing to non-allowance of set-offs of losses brought forward from the earlier A.Y's 2006-07 to 2009-10 relating to the business of the erstwhile Pullangode Rubber and Produce Company Limited (PRPCL) which was subsequently taken over by the assessee. At the time of merger with ACL, PRPCL had brought forward unabsorbed Agricultural losses of Rs. 4,89,30,939/- up to 31.12.2005 (viz. A.Y. 2006-07) that were disallowed from being set off by the Kerala AIT Department who levied ....
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....w very clearly stated such to be the purpose. In that case, the amounts were borrowed because the assessee did not possess the necessary funds to make the payments of the statutory dues being income taxes and the intention thereafter stood authenticated and proved by the assessee actually making the payments of the income taxes. Therefore, in the case of East India Pharmaceutical Works Ltd. (supra), the CIT(A) observed that the amounts borrowed and the interest accruals thereupon constituted public moneys from the date of such borrowals. However, in the instant case, the CIT(A) observed that the assessee held on to moneys that were liable to be paid as AIT and therefore, constituted and represented public funds from the dates from which such liabilities statutorily commenced and benefitted from such retention through the returns generated that can be readily computed on the basis of financial time-value-for-money principle. According to the CIT(A), the returns manifested in the form of interest payments due to the AIT authorities should be offered to tax through the instrument of their disallowance and assessment u/s. 37 of the Act. Thus, the CIT(A) held that the assessee has no....