TaxTMI 
TaxTMI 
2020 (5) TMI 577
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 Accordingly, we dismiss the appeal of the Revenue as withdrawn.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 hence would apply prospectively. In this regard, reliance is placed on the decisio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 following judgments: i) Vidyut Investments Ltd. vs.ITO (10 SOT 284) (Delhi Trib.) ii) Dhanalakshmi Bank Ltd.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....troduction 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 would otherwise suggest. The context does not suggest that a narrow meaning ought to be given to the expression. The provision was inserted by virtue of the Finance Act, 2001, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the Assessing Officer is to accept the claim of the assessee in so far as the quantum of disallowance under section 14A is concern....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r, 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 measure the sale of rubber trees which were yielding agricultural produce in the form of latex cannot also fall within the mischief of Rule 7A. i) The learned CIT(A) ought to have placed reliance on the basic judicial principle laid down by supreme court in the case of Commissioner of Agricultural Income Tax vs. Kai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 humbly prayed that this appeal may be allowed. 8.1 The first ground is with regard to addition of sale proceeds of Rubber Trees amounting to Rs. 17,60,000/- and of timber amounting to Rs. 3,36,817 under Rule 7A of the Income Tax Rules.1962. 8.2 The facts of the case are that the assessee had received an amount of Rs. 17,60.000/- on sale of rubber trees which was credited directly to the rubber replantation and rehabi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....le 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 the amount of any subsidy which, under the provisions of clause (31) of section 10, is not includible in the total income. 8.5 The Ld. AR submitted that the above Rule covers incomes which are derived from the sale of certain items which are obtained from rubber plants grown. It was submitted that the above rule does not cover incomes which have been derived from the sale of the rubber plants/trees. Therefore, the Ld. AR submitted that th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 - Just like the money got on sale of empty gunny bags by a cement dealer or of empty bottles by a bar hotel. There is no point in calling the trees a capital asset. According to the Ld. DR whenever an article or thing is considered as capital, its purchase price is never allowed as a deduction in determining the income. Here, the Ld. DR submitted that the assessee itself has deducted the estate expenses and replanting expenses which shows that rubber trees are not capital assets ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 is no exempt income, then there is no question of application of Rule 7A. In such circumstances, the claim of the assessee is to be allowed. Further, The Jurisdictional High Court considered its own judgment in the case of CIT vs. Thiruvambadi Rubber Co. Ltd. (203 taxman 63). Being so, the reliance placed by the CIT(A) on the judgment of the Jurisdictional High Court in the case of CIT vs. Thiruvambadi Rubber Co. Ltd. (supra) is totally misplaced. Accordingly, we hold that the sale proceeds on sale of rub....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 have to be satisfied - There should be a 'capital asset' There should be a 'transfer' In the current case, it was submitted that the assets in question are shares of a company which are capital assets. The term 'transfer1 as defined u/s 2(47) of the Act includes, inter-alia, sale, exchange or relinquishment of the asset or extinguishment of any rights therein. 9.4.1 The Ld. AR submitted that the loss so incurred on capital reduction there is an extinguishment of rights/relinquishment in the underlying shares. In this regard, the Ld. AR....
X X X X Extracts X X X X
X X X X Extracts X X X X
....O 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, which according to the assessee would be the reasonable amount to cover the liability, even though the demand was for a higher amount as per the notice. The provision so made was not on an estimated basis and was towards an ascertained liability being lease rental payment. The Ld. AR referred to the term 'ascertained' which has not been defined under the Act. As per the Webster's II New Riverside University Dictionary, the term "ascertained' means 'to make certain'. In this connection, the Ld. AR drew our attention to the judgment of the Supreme Court in the case of Bharat Earth Mo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one. Thus, it was submitted tat merely because the assessee had filed an appeal before the High Court against the order received for increase in rent, the liability would not become a liability which is unascertained. Considering the above, the assessee prayed that the provision made for lease rent not be treated as an unascertained liability. 11.3 The Ld. AR submitted that if it is held that the provision made in the year under consideration be added to the book profits, the same may be allowed a deduct....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., 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 reserves or provisions (out of which the said amount was withdrawn) under that Explanation or be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to section 115JA as the case may be. 11.6 On going through the above provisions, we are of the opinion that the amount set aside as provision for diminution in the value of investment is to be added back to the book profit as shown in the profit and loss account in view of the retrospective amendment introduced by Finance Act No. 2, 2009 by introducing clause (i) (c) . By virtue of the said amendment the amount set ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 assessee debiting provision for diminution in the value of investment to its profit and loss account, the same was required to be added for determining book profit. [Para 12] The Legislature has employed the expression 'provision for diminution in the value of any asset' in clause (i) to Explanation 1 to section 115JB(2). The expression 'diminution in the value of any asset' has not been defined in this section. In common parlance the word 'diminution' indicates the state of reduction. The meaning of the word 'diminution' in the value of any asset has to be construed as reduction from its original value which may still be a positive value or nil. If the reduced value happens to be cipher, the diminution will be the original....
X X X X Extracts X X X X
X X X X Extracts X X X X
....owed 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 High Court of Kerala, all the liabilities existing in respect of the merged Companies were to be borne by the appellant. At the time of merger, PRPCL had returned a brought forward unabsorbed Agricultural Loss of Rs. 4,89,30,939/-, up to 31.12.2005 (A.Y 2006-07). Consequent to the date of merger, the appellant started filing returns from 01.01.2006 onwards, declaring agricultural income earned from the estate previously owned by PRPCL, after setting off the said unabsorbed brought forward loss. The authorities under the AIT Act, disallowed the set off of unabsorbed loss, under the AIT Act, and therefore, the appellant was mulcted with the liability to pay agricultural income tax and interest thereon. The appellant has remitted all the AIT demand along with interest up to the AY....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsatory 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, then the benefit of doubt should yield in favour of the appellant. E. The decision relied on by the first appellate authority is divorced of the facts and circumstances of the case of the appellant, and very well distinguished by the appellant before the first appellate authority. There is no infraction of law, as stated by the first appellate authority. With reference to the decision in East India Pharmaceutical Works Ltd. (cited supra), the appellant would submit that the said decision was rendered based on the particular conspectus of the facts and circumstances arising therefrom. The said decision cannot have a universal application, especially in cases where the facts and circumstances stand on a different footing, as in the instant case. It goes against the settled legal principle ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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 the impugned interest. The expenses totaling Rs. 94,00,179/-as above were added by the AO to the composite (business-cum-agricultural) income and 35% of that (under Rule 7A) computed at Rs. 32,90,063/- was added back and assessed in the hands of the assessee. According to the Assessing Officer, the interest amounts as above that was claimed as deduction by the assessee cannot be allowed as wholly and exclusively incurred for the purposes of the assessee's business. The AO's arguments are based on the position that any income tax, penalty or interest amounts paid could not be allowed as deduction under the Central Income-tax and the Kerala Agricultural Income Tax. The Assessing Officer was of the view that as the interest amounts paid as above were due to the delay in paying the Agricultural Income Tax to the Government ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 case in making deductible claim of the payments of interest amounts that do not belong to it and never belonged from the dates of their generation/accrual. Accordingly, he upheld the disallowance made by the Assessing Officer. 13.3 Against this, the assessee is in appeal before us. The Ld. AR submitted that the payment of interest under the AIT Act had arisen on account of the scheme of amalgamation approved by the High Court of Kerala vide order dated 16.11.2006, wherein "The Pullengode Rubber and Produce Company Ltd. (PRPCL)" along with some other Companies were amalgamated with the assessee. The Ld. AR submitted that as per the approved scheme, all liabilities of PRPCL became the liabilities of the assessee and the assessee in the returns filed, declared income earned by PRPCL and availed set off of the unabsorbed brought forw....