TaxTMI 
TaxTMI 
2026 (9) TMI 1257
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....d 01-02/02.2012, the appeal was admitted for consideration of the following substantial questions of law: "[1] Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in restricting the addition made by the Assessing Officer and confirmed by the Appellate Commissioner of Rs. 78,12,884/- on account of disallowance of agricultural loss [including depreciation of Rs. 4,32,380/- to Rs. 9.43 lakh ? [2] Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in deleting disallowance made by the Assessing Officer of Rs. 1,63,85,686/ being the expenditure incurred for the purpose of agricultural activities for the purpose of computing book profit under Section 115JB of the Act, and confirmed by the Appellate Commissioner?" 3. Tax Appeal No.900/2012 is filed by the Revenue under section 260A of the Income Tax Act, 1961 (For short "the Act") against the judgment and order dated 11.05.2012 passed by the Income Tax Appellate Tribunal, "C" Bench, Ahmedabad (For short "the Tribunal") in ITA No. 128/Ahd/2010 for Assessment Year 2004-2005. By order dated 18.06.2013, the ....
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....expenses incurred on account of Social Forestry on the same basis. 9. Being aggrieved, the assessee preferred an appeal before the CIT(Appeals) who dismissed the appeals by observing as under: "9.16. I have perused the facts of the case as discussed by the Assessing Officer in his assessment order and the remand report and also carefully went through the submission as made by the A.R. before me. It is seen that in respect of narrating the nature of activity as carried out by the appellant company, saying that such activities were incidental to its business activities, such as facilitation of procurement of continuous supply of raw materials from the adjoining areas (from the farmers, who grew plantation on their land) and also to ensure the availability of good quality of raw materials in the form of Bamboo and trees, it had also relied upon various judicial decisions in support of its contention (as referred above). After the perusal of the decisions as quoted above, it is found that in such decisions, it has been laid down by the courts that the nature of income arising from a particular business activity depends upon the intention of the assessee in leasing out the a....
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.... sale of seeds and saplings was nothing but agricultural income. Besides the above referred judgments, the assessing officer also referred the findings of Hon'ble Delhi ITAT in the case of Sudisha Farm Nursery vs ITO bearing ITA No.1065/Del of 2002, wherein, the Hon'ble ITAT on similar set of facts, after relying on the findings of Hon'ble Supreme Court of India in the case of CIT vs Raja Benoy Sahas Roy (supra) held that such activities were agricultural activities and the income derived out of such agricultural operations was agricultural income. 9.18 The plea as taken by the A.R of the appellant company that its activities under its Social Forestry Division were carried out to facilitate the availability of raw materials by holding out the farmers of the adjoining areas in the form of selling of saplings to them (as grown in its farm land) at concessional rate and also by arranging finance on behalf of these farmers to help them to grow bamboo and plants and therefore, the same cannot be treated as agricultural, activity is not acceptable at all. It is an old fact where and whenever a big industry set up with various ancillary units are found set up by various other peo....
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.... operations by stretch of imagination. I, therefore, in view of the facts as discussed above and also keeping in view the judicial decisions as relied upon by the assessing officer, hold that the findings of the assessing officer that the activities as carried out by the appellant company under its division known as Social Forestry is nothing but an agricultural activity, and therefore, the addition made by the assessing officer under this head amounting to Rs. 2,78,29,039/- is hereby confirmed." 10. Being aggrieved by order passed by the CIT(Appeals), the assessee preferred an appeal before the Tribunal. The contentions of the assessee raised before the Tribunal were recorded in the order as under: "8.5.2 Against the above, the learned AR of the assessee submitted that there are two routes (Seed Route and clonal route) through which saplings are developed by the assessee. Seed route Plantation procedure in Nursery is as under: 1) Land is taken on lease 2) Seed of Eucalyptus are obtained from seed orchards. 3) Seeds are sown in Primary beds where they germinate in 5 days and are transplanted in Polybags after about 20 days from germination. ....
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....e but if purpose is not agriculture then income or loss could not be of agriculture nature. In the case of the assessee sapling production is not for the purpose of carrying out agricultural activity but it is a part of overall activities undertaken by the assessee to ensure uninterrupted supply of raw material for the purpose of business. The assessee only provides assistance to the farmers for plantation of good saplings. Thus the use of the land is not for the purpose of agriculture but with the ultimate objective to procure raw material like bamboo and hardwood. The activities of agriculture are only incidental to the attainment of ultimate objective of the assessee for running its manufacturing uninterrupted. The income derived from the sale of saplings only reduces the cost of raw material and therefore it should not be viewed independent of other activities of procuring raw materials for its manufacturing activities. The intention of the assessee is not to derive income from such sale but to ensure commitment to grow the trees in the fields of the farmers for ultimate supply to the assessee. The learned AR of the assessee submitted that the expenditure claimed by the assesse....
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....incurred by the appellant subsequent to the sale of saplings. However, the assessing officer has misinterpreted the object of the incurrence of the expenditure by the appellant in holding that the appellant may be making profit from plant nursery activity. In fact it has made an overall loss due to its commitment to farmers in maintenance of plantation. It is submitted that the aforesaid observation of the assessing officer is misconceived in as much as incurring forestry expenses is not prompted by any commitment to help the farmers in maintenance of plantation but with the sole object to get the desired quality and quantity of raw material necessary for the production of paper and board in which the appellant is engaged. The amount disallowed by the assessing officer is not a loss incurred in carrying out any agricultural activity but is an expenditure incurred with the sole object of ensuring the timely supply of adequate quality and quantity of raw material necessary for the production of paper and board, which is otherwise not available in adequate quantity. 8.5.5 In the alternative it was submitted that if the sale of saplings is considered by the Revenue to be incom....
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.... this regard it was submitted that in the clonal route production there is no use of soil and therefore, the expenditure incurred in clonal production should not be considered as agricultural related expenses. Mist Chambers are used in clonal route production and therefore, the depreciation on assets in the Mist Chambers amounting to Rs.768675 (forming part of total disallowance of Rs. 2,78,29,039) disallowed in the assessment order needs to be excluded besides the expenditure incurred in clonal route production of saplings. 8.5.8. After making the above submissions, the learned AR of the assessee pointed out that the entire expenditure of Rs.316.12 lakhs was not incurred on agricultural activities. Part of it was incurred on growing seeds on land, transferring the small saplings into plastic bags and then on supervision under controlled conditions for allowing the saplings to grow up to 30 cms before sales. In addition, these expenses also included expenses on supervision of trees grown by the farmers till the time of purchase of trees from them. Seeds are distributed to the farmers also in addition to sale of saplings. Total expenditure incurred on distribution of seeds ....
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....e farmers, carrying out chemical process and growing them under controlled conditions. There is no use of land for the purpose of growing these coppice shoots. (iii) The assessee has also spent money on distributing the seeds, conveyance, salaries of the staff etc., for the purpose of supervision of growing of trees by the farmers. No basic operation over the land is carried out by the assessee." 12. After considering the above analysis, the Tribunal referred to and relied upon the decision of the Hon'ble Supreme Court in case of CIT v. Raja Benoy Kumar Sahas Roy reported in (1957) 32 ITR 466 (SC) as well as decision of Hon'ble Supreme Court in case of Commissioner of Income Tax, Bihar and Orissa v. Ramakrishna Deo reported in (1959) 35 ITR 312 (SC) and decision of Hon'ble Supreme Court in case of Commissioner of Income tax v. Jyotikana Chowadhurani reported in (1957) 32 ITR 705(SC) and decisions of other High Courts to arrive at the following conclusion: "8.8.8. Regarding the argument of the learned AR of the assessee that growing saplings, nursing them and selling to farmers for growing trees is an integral part of business of the assessee for procuring raw m....
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.... planting or sowing seeds, etc., 3. Only for the reason that there is a business expediency and business prudence ; and there is a close connection of farming operation with the business of the assessee; Or that product is closely related with the land; or that ultimate source of the product is land or operation on the land. 4. Where plants are grown in a nursery and sold after the use of the earth, but without carrying out any basic operation on land. 5. Where operations are carried out without conjunction with and in continuation of the basic operations. The subsequent operations divorced from the basic operations cannot constitute by themselves agricultural operations. B. Expenses incurred will be agricultural expenses and income earned from the sale of produce will be agricultural income if --- 1. Basic operations on the land are carried out and in conjunction and continuation, subsequent operations are also carried out. 2. If in addition to caretaking of spontaneous growth the assessee in between such spontaneous growth uses the land for sowing the seeds after tilling, then income from such basic operations alone will be ag....
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....8.1. This relates to disallowance of Rs. 78,12,884/- including depreciation of Rs. 4,32,380/-incurred on agricultural operations, growing saplings and supervision of trees grown by farmers. Similar issue has arisen before us in the assessment year 02-03. This year also we have heard Ld. A.R. and Ld. D.R on this issue. We notice that facts and circumstances for the issue are the same as in earlier year. The details of expenditure incurred on various activities as given by the assessee are as under: Particulars Saplings Forest/ Others Total Seed Route Colonal Route Total Lend Non-Land Total 1 2 3(1+2) 4 5(3+4) 6 7(5+6) -Labour/ Seeding cost 0.85 4.79 5.64 1.41 7.05 26.42 33.47 -Supervison 0.15 0.88 1.03 0.26 1.29 7.12 8.41 -Material 0.92 5.21 6.13 1.53 7.66 0.13 7.79 -Salary 0.17 0.95 1.11 0.28 1.39 14.01 15.40 -Conveyance 0.06 0.31 0.37 0.09 0.46 3.65 4.11 -Miscellaneous 0.13 0.74 0.87 0.22 1.09 10.68 11.17 -Total 2.27 12.88 15.15 3.79 ....
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.... into account the accounting policies, accounting standards and method and rates for calculating the depreciation provided therein. Such book profit, being net profit as per profit and loss account would be adjusted by several items as provided in Explanation which is enumerated above in the section. The expenditure relating to exempted income as provided in section 10, 11 and 12, if debited in profit and loss account, are required to be added by virtue of clause-f to Explanation. This clause does not mention section 14A though it also relates to disallowance of expenditure relating to exempted income. If legislature had intended to increase the profit by the expenditure relating to exempted income as provided in Section 14A, they would have so provided in clause 'f' to explanation. The fact that Section 10, 11 and 12 are mentioned in clause-f of Explanation, but not Section 14A even though they deal with similar type of expenditure i.e. relating to exempted income, gives clear indication that legislatures have not intended to disallow and consequently add to the book profit, expenditure relating to exempted income, and debited in profit and loss account prepared as per Companies A....
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....n case of adopting adjusted book profit as total income. Therefore, disallowance of expenditure relating to exempted income as per section 14A, even though debited by the assessee in the profit and loss account, but auditors have certified it as for business purposes cannot be made. 10.3.9 In view of above, we are of the considered view that expenditure relating to growing of saplings, and supervision of growing trees by the farmers and debited by the assessee in the profit and loss account and a part of which has been considered as relating to agriculture operations in our discussions above cannot be added back while computing book profit under section 115JB." 16. For the year under consideration i.e, Assessment Year 2004-2005, the Tribunal applied the aforesaid reasoning as under: "35.2.1 This ground relates to upholding the action of the A.O. in not allowing deduction of Rs. 1,63,85,686/- amortized in the accounts by the assessee and claimed as deduction in computing book profit. The A.O. disallowed the claim while computing book profit u/ s 115JB on the ground that this expenditure related to exempted income. This expenditure related to social forestry and ....
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....e farmers. 18. It was therefore, submitted that expenditure incurred on cost of seeds, labour charges, purchase of manure, pesticide, tilling, weeding, labour and other expenses for the purpose of growing saplings to standard quality and debited to the Profit and Loss account have been rightly disallowed by the Tribunal but the Tribunal has committed an error while considering the expenses incurred by the assessee for subsequent operation carried out by the farmers on behalf of the assessee as business expenditure. 19. It was therefore, submitted that the findings of the CIT(Appeals) on facts of the case are required to be restored by treating the operation of social forestry division of the assessee as an agricultural operation. It was submitted that CIT(Appeals) has rightly held that merely because agricultural activities carried out by the assessee has been named as social forestry, would not make any difference, as giving a particular nomenclature/name to an activity does not alter its characteristic and entire activity as carried out by the assessee company for sowing and growing of saplings and selling the same to outside parties and thereafter supervising the growth of....
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....tention raised by the assessee, disallowed the loss of Rs. 9.43 lacs for the year under consideration while adopting the reasoning which was assigned for Assessment Year 2002-2003 wherein in similar facts, loss of Rs.17.17 lacs was disallowed by the Tribunal from the total income. 24. The Tribunal has after applying the decision of the Hon'ble Supreme Court in case of CIT v. Raja Benoy Kumar Sahas Roy (supra) which was followed by Hon'ble Supreme Court and other High Courts held that if forestry is spontaneously grown and sold, then income derived from the sale of such trees would not be an agricultural income. In facts of the case, the Tribunal has held that the assessee had sold saplings and thereafter the farmers have carried out the agricultural activity and therefore, the expenditure incurred by the assessee for supervision, salary, etc. cannot be considered as an agricultural activity as the same would fall under the business activity of the assessee and accordingly, the expenses incurred on forest, supervision of growing trees by farmers, conveyance, salary of the staff engaged for that purpose has rightly not been considered as expenditure on agricultural operation. 2....
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.... in the return of income. In the light of these facts, now we examine the applicability of this judgement of Hon'ble Delhi High Court cited by the Ld. A.R. being the judgment rendered in the case of Nalva Sons Investments Ltd. (supra). As per the facts of this case, original return of income was filed by the assessee declaring loss of Rs.43.47 crores and thereafter, revised return was filed showing income at Rs. 3,86,82,128/- under the provisions of Section 115JB of the Income tax Act, 1961. The assessment was completed by the A.O. u/s 143(3) at a loss of Rs. 36.95 crores as per the normal provisions and at book profit was computed at Rs. 40163180/-u/s 115JB of the Income tax Act, 1961. This goes to show that in that case, addition was made by the A.O. for computation of income as per the normal provisions of the Income tax Act, 1961 and also for computing book profit u/s 115JB of the Income tax Act, 1961. For the additions made by the A.O., penalty was levied by him u/s 271(1)(c) of the Act. Under these facts, it was held by the Hon'ble Delhi High Court in that case that when the income computed in accordance with normal provisions is less than the income determined by the legal f....
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....ides that for the purpose of clause 3 of the said sub-section, the expression "amount of tax sought to be avoided" means the difference between tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished. It is in the context of such penalty provisions we have to examine the view of the Tribunal bearing in mind the facts of the case. If, therefore, even after the concealment is unearthed or the assessee's act of supplying inaccurate particulars comes to light, the tax liability before or after such concealment or providing of inaccurate particulars remains the same ; by virtue of clause (c) of Explanation 4 to section 271(1) of the Act there would be no penalty imposable. This is so because the penalty is to be computed in terms of the amount of tax sought to be avoided, such expression "amount of tax sought to be avoided" is explained in Explanation 4. We have noticed that clause (c) thereof when applied to such a case, the amount of tax sought to be avoided would be 'nil'. If this is so, the penal....
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....profit under section 115JB of the Act could have been made. The Commissioner in order to come to such conclusion relied on the decision of the Supreme Court in the case of Apollo Tyres Ltd. v. CIT reported in [2002] 255 ITR 273 (SC) and Malayala Manorama Co. Ltd. v. CIT reported in [2008] 300 ITR 251 (SC), in which it is held that it is not open for the Assessing Officer to rescrutinise the accounts and satisfy that the accounts have been maintained under the provisions of the Companies Act. While computing the income of a company under the provision for minimum alternative tax, the Assessing Officer has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided in the Explanation to such provision. 12. To this proposition of the Commissioner, we have serious doubt. In a case like this, when the assessee concealed certain income not only for the purpose of avoiding excise duty but also Income-tax, we wonder whether the provisions of section 115J....