TaxTMI 
TaxTMI 
2026 (9) TMI 1327
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....or Assessment Year 2002-2003, in ITA No.346/Ahd/2008 for Assessment Year 2004-2005 and in ITA No.578/Ahd/2007 for Assessment Year 2003-2004 respectively. 3. Since issue involved in all these tax appeals is common, substantial question of law is recorded from Tax Appeal No.292 of 2010 as under: "Whether the Tribunal was correct in law in upholding the disallowance of Rs. 17.17 lacs by treating the same as loss from agricultural activity?" 4. Brief facts of the case are that the assessee company is engaged in the manufacture and trading of Pulp and Board having two Paper Mills, one located at Songadh, Gujarat and the other at Rayagada, Orissa having its Head Office at New Delhi. 5. During the course of assessment proceedings for the Assessment Year 2004-2005, the Assessing Officer disallowed the loss incurred by the assessee in its Social Forestry Division on the ground that the activity of the assessee company in raising plant saplings was connected to basic agricultural operations connected with land and also that its activity in helping the farmers to maintain the plantations are also connected to subsequent operation on land and therefore, it was held by the Ass....
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....courts that the nature of income arising from a particular business activity depends upon the intention of the assessee in leasing out the assets. According to the A.R, in such decisions, the courts have further held that where income is derived from commercial exploitation of the assets and there is only a difference in the manner of exploitation, that is to say, instead of user of assets by the assessee itself, the assets are exploited by another person, income derived must be considered to be of the same nature "business income". But, on the other hand, if the intention in leasing out the assets is to go out of business altogether and earn rental income, the income there from would be assessable as 'income from other sources'. Thus, based on above referred findings of various courts, it has been submitted by the A.R that the intention of the appellant company in carrying out Social Forestry activity was to obtain the raw material, which was otherwise fljns2rtsnJy. According to the A.R, while carrying out such activity under the Social Forestry Division, its intention was not to derive income from sale of saplings to the farmers but rather it was towards attaining/improving the c....
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....ptable 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 people in neighboring areas to provide and supply various accessories and raw materials noted by the said company in its day to day business activities. This is an universally accepted fact and cannot be denied by any prudent man, who is aware of the procedure of setting up of big industries and its functioning. In a situation, where other independent assessees, who have set up their small industries to supply accessories or raw materials to a big company set up in the neighboring area does not mean that the activities of such small units are part of the business activity of the said big company. The company depends upon small units, which are found set up around it for procuring various useful material such as accessories, spare parts and sometimes raw materials also for carrying out its business activities but inspite of these supplies, such units are independent units. In the case of the appellant company, it is seen that it has grown saplings on the mother bed in its campus consisting of over 100 acres of land and after growing them in proper ....
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....3) Seeds are sown in Primary beds where they germinate in 5 days and are transplanted in Polybags after about 20 days from germination. 4) Thereafter the plants are in the polybags for next 6 months i.e. 180 days approx wherein they attain a height of 30 cms as per the requirement of the farmers. Clonal Route (Clones of Eucalyptus) production procedure is as under: The Coppice shoots (Small shoots which arise from Sujps of Eucalyptus trees) from Farmers fields is collected by our staff from various areas away from the Mill. These coppice shoots are of no use to the farmers and they destroy it. In the Clonal Technology these shootes are utilized by cutting the shoots in small pieces of 1.5 inches to 2 inches. These cuttings are then treated in bavistin fungicide to avoid any fungal infection. One end is then dipped in a rooting hormone and then these cuttings are placed in Root trainer blocks having an artificial medium called Vermiculite. Soil in any stage is not used. These cuttings are then placed in Mist chambers under controlled conditions of Temperature (38 degrees C) &Humidity 85%. For a period of 45 days in after which they are brought out....
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....lds of the farmers for ultimate supply to the assessee. The learned AR of the assessee submitted that the expenditure claimed by the assessee are not exclusively for growing saplings but include expenditures incurred on supervision, monitoring and procuring trees and relates expenses. Therefore, it is unreasonable to adopt the entire expenses claimed by the assessee as pertaining to growing saplings alone. Therefore, in case activities of the assessee are treated as agricultural activities then only those expenses are required to be disallowed which were specifically incurred on growing saplings and not what is incurred for monitoring and supervision for growing trees by the farmers. The learned AR of the assessee further submitted that the intention of the assessee is important in determining the nature of income. He submitted following details to buttress his argument that all the expenditure of Rs. 3,16,12,469/- incurred by the forestry division of the assessee were not incurred on growing saplings alone Particulars Saplings Forest/ Others Total Seed Route Colonal Route Total Lend Non-Land Total &....
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....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 income from agricultural activities and related expenditure is disallowable, then the expenditure incurred by the appellant subsequent to the sale of the saplings cannot be disallowed as the same does not relate to sale of saplings but to the procurement of trees by the appellant and forms a part of the raw material cost. Similarly, the cost incurred by the appellant on the procurement of seeds for growing saplings to the extent the same are distributed free of cost to the farmers cannot be said to be expenditure incurred on agricultural operations by the appellant and, thus, cannot be disallowed under section 14A of the Act as agricultural loss. 8.5.6 The learned AR of the assessee submitted that one contention of the Assessing Officer is that the expenses claimed by the appellant on account of social forestry should have been shown as work-in-progress in the Profit & Loss Account as the trees from the saplings supplied by the appellant to the farmers would be available for use by the appellant only after the expiry of 5 to 7 y....
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....hase of trees from them. Seeds are distributed to the farmers also in addition to sale of saplings. Total expenditure incurred on distribution of seeds to the farmers and on supervision of growing trees by the farmers was worked out at Rs.249.13 lakhs. On the other hand total expenditure incurred on in-house growing of saplings amounted to Rs.66.99 lakhs only. The learned AR of the assessee then submitted that saplings grown through clonal rout does not require any operation on the land. The small shoots, called coppice shoots, which arise from stamps of Eucalyptus trees in farmers' field, are collected by the staff of the company from various areas. These shoots are of no use to the farmers and are generally destroyed by them. The staff of the Company after collecting these shoots cut them into small pieces. These cuttings are then treated in bavistin fungicide to avoid any fungal infection. One end is then dipped in a rooting hormone and then these cuttings are placed in Root trainer blocks having an artificial medium called Vermiculite. These coppices are then placed in Mist chambers under controlled conditions of Temperature (38 degrees C) & Humidity 85% for about 45 days in wh....
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....R 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 materials to be used in the business of manufacturing and sale of paper and board, we are of the view that the principle of business integrity, exigencies and prudence would come into operation only when income generated comes within the statutory provisions. If any expenditure is otherwise allowable under the I.T. Act,, only then those principles will come into play. Agricultural income and agricultural expenses are outside the purview of the I.T. Act. Business urgency or justification in carrying out farming or growing saplings is not the answer to the constitutional definition of subject between Union and State Legislature." 12. The Tribunal thereafter referred to the decision of ITAT Kochi in case of Kancor Flavours and Extracts Ltd. v. Deputy Commissioner of Income Tax reported in 312 ITR (AT) 148 (ITAT, Cochin) and held as under: "...Thus expenditure incurred on cost of seeds, labour charges, purchase of manure, pesticide, tilling, weeding, labour and other expenses for the purpose of growing spice to stan....
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....s 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 agriculture income. 8.8.10. On the basis of discussion made above when we apply above principles we find that the expenses of Rs.249.13 lakhs being expenses incurred on forest, supervision of growing trees by farmers, conveyance, salary of the staff engaged in that purpose could not be treated as expenditure on agricultural operation and therefore should be allowed as business expenses. Similarly expenditure of Rs.13.40 lakhs incurred by the assessee on growing coppice seeds without using the land by primary operation cannot be disallowed. The only expenditure which can be considered for disallowance is the sum of Rs. 53.59 lakhs which included a sum of Rs.8.03 lakhs incurred on growing saplings on land and Rs. 45.56 lakhs incurred on operations on growing saplings after their removal from the land. In our considered view growing saplings in the pots/polythene bags after plucking them from ground and planting them in such pots is an integrated activity which is in conjunction with and in continuation of growing sapl....
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.... 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 18.94 62.01 80.95 -Sapping Sale 0.86 4.86 5.72 1.42 7.14 - 7.14 -Net 1.41 8.02 9.43 2.37 11.80 62.01 73.81 Expenditure -Depreciation - - - 4.32 4.32 - 4.32 -Grand Total 1.41 8.02 9.43 6.69 16.12 62.01 78.13 Notes:- • Expenses incurred in Seed Route Saplings, Keeping in view number of days seeds remain in primary beds, 15% of total expenditure has been allocated to land related expenditure. • Sapling sale- 80% has been considered as developed through Seed route and balance 20% through Clonal route (mist Chambers) 28.2. Following our order for the assessment year 2002-03 only the expenses to the extent on Rs. 15.15 lacs would be considered as agricultural expenses out of total claim of expanses at Rs. 80.95 Lacs. and would not be allowed. Against this the assessee has shown sale of agriculture produce (rel....
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....g 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 Act. 10.3.8 The only argument raised by the revenue in this regard is that Sub Section-5 or Section 115JB provides the applicability of all the provisions of the Act and therefore provision of Section 14A would also apply and consequently expenditure relating to exempted income would be required to be added to the book profit. In our considered view, this argument is not tenable. Sub Section 5 starts with "save as otherwise provided in the Section ......" It means that wherever Section 115JB has provided and other provisions of the Act also provide on the same point then what is provided in Section 115JB would be applicable and not the other provisions of the Act. In our considered view Section 115JB is a complete code in itself for the purposes of computing book profit. No additional item of adjustment is required to be borrowed even if it is so provided in other provisions of the Act. For the purposes of computing book profit only thos....