Case Law Details
PCIT Vs Prabhat Agri Biotech Ltd. (Telangana High Court)
In the case of PCIT Vs Prabhat Agri Biotech Ltd., the Telangana High Court addressed the method of apportioning common expenditures between agricultural and trading activities. The assessee, engaged in seed production and trading, submitted a bifurcated profit and loss account dividing expenses based on the cost of goods sold (CoGS). The Assessing Officer (AO), however, reallocated these expenses based on turnover, arguing that turnover better reflected business operations. This resulted in revised income calculations, prompting the assessee to challenge the assessment.
The Commissioner of Income Tax (Appeals) [CIT(A)] sided with the assessee, noting that CoGS offered a reasonable and consistent basis for apportionment. CIT(A) emphasized that the assessee’s method, applied consistently in previous years, accounted for the composite nature of its business operations, which included activities like sales promotion and administrative expenses common to both agricultural and non-agricultural segments. The appellate authority highlighted that any apportionment method could have inherent limitations, but the CoGS-based approach aligned with the nature of the business.
The Income Tax Appellate Tribunal (ITAT) upheld CIT(A)’s findings. It observed that the CoGS-based apportionment adequately addressed the seasonal nature of the seed business and its specific challenges, such as unsold seed returns requiring preservation and chemical treatment. ITAT noted that turnover-based allocation ignored these nuances and found no perversity in CIT(A)’s approach. The Tribunal dismissed the revenue’s appeal, emphasizing the importance of consistency in apportionment methods across years.
The Telangana High Court further affirmed the Tribunal’s decision. It ruled that the revenue’s argument did not raise a substantial question of law, as CoGS-based apportionment was reasonable given the business context. The Court noted that the provision for sales returns was neither unascertained nor unreasonable, considering the short shelf life of seeds and the seasonal nature of the business. Consequently, the High Court dismissed the appeal, reiterating that CoGS was an acceptable basis for expense allocation in such cases.
This case aligns with precedents emphasizing reasonable allocation methods, such as the Supreme Court’s decision in Commissioner of Income Tax vs. Excel Industries Ltd., where consistency and rationality in accounting methods were upheld. The judgment reaffirms that the choice of apportionment methodology depends on the specific characteristics of the business and the need for a fair representation of income.
FULL TEXT OF THE JUDGMENT/ORDER OF TELANGANA HIGH COURT
Heard Mr. J. V. Prasad, learned Standing Counsel, Income Tax Department for the appellant.
2. Revenue has filed this appeal under Section 260A of the Income fax Act. 1961 (briefly referred to herein after as ‘the Act) First the order dated 29.06.2022 passes by the Income ‘Fay Appellate Tribunal, Hyderabad Bench B’, Hyderabad referred to hereinafter as ‘the Tribunal’) in ITA No.293/11 :d/ 2019 for the assessment year 2013-14.
3. The appeal has been preferred proposing the following is substantial question of law:
Whether on the facts and in the circumstances of the care, Tribunal was justified in holding that common expenditure for own production and Bale of seeds arid trading in other seeds can be apportioned between both on the basis of Cost of Goods Sold (CoGS) as against the turnover of each for arriving at profits?
4. Respondent is an assessee under the Act having the status of a company.
5. As already pointed out above, the assessment year under consideration is 2013-14.
6. Assessee is engaged in the business of seed production, research, marketing of field and vegetable crops and .wind power generation. Assessee is deriving income from own production of seeds as well as from trading in seeds. Assessee is claiming deduction under Section 10(1) of the Act for the income arising out of own production of seeds being an agricultural income.
7. Assessing officer noted that assessee had submitted a single Profit and Loss Account for both the businesses. On request made by the assessing officer, assessee hall submitted bifurcated Profit and Loss Account for the two businesses. However, assessing officer noted that common expenditures between own production !and trading of seeds were divided based on the Cost of Goods Sold (CoGS). Accordingly, income from agricultural activity was arrived at Rs.40,29,04, 539.00 and income from trading activity was arrived at .8,3:5,06,959.00 However, assessing officer held that division of expenditure based on cost of goods sold was not accepted Hon’ble because business operations. for own production feeds are entirely different from trading in seeds. Expenditures are mostly dependent on turnover of agricultural business nd non-agricultural business but not on the cost of goods sold. After pointing out certain anomalies n the above procedure, assessing. officer re-computed the expenditure claimed by the assessee in the ratio of turnover of traded goods and sale of own production i.e., 10.73% and 89.27%. It was thereafter that total income of the asses cc was computed on the basis of the aforesaid turnover rat o. While taxable income was assessed at Rs.8,87,17,570.00, agricultural income was computed at Rs.32,05,38,505.00.
8. Being aggrieved by the above, assessee preferred appeal before the Commissioner of Income Tax (Appeals) 4, Hyderabad i.e., (briefly referred to hereinafter as ‘CIT(A)). By the appellate order dated 21.12.2018, CIT(A) disagreed with the views expressed by the assessing officer. He opined that the method adopted by the assessee is acceptable for the following reasons:
“(i) It is to be understood that the activity of selling hybrid seeds is a composite activity. The sale of hybrid seeds comprises of seeds produced on own and seeds purchased from outside. All the activities of sales promotion, administration, etc. are incurred jointly for both the segments. Hence, it is necessary that a reasonable basis should be adopted to apportion the expenses between the two segments. For all the earlier years. the appellant company adopted the basis of Cost of Goods Sold as a reasonable method of apportionment, which was accepted by the Department in the earlier years.
(ii) As the appellant follows certain uniform procedures of allowing discounts to customers. The expenditure on personnel consists of salaries and other benefits to production and sales manpower. Stair benefits sales personnel is predominant in the total persona cost. T to cost of goods sold represents the cost of deduction as adjusted to the opening awl closing cock of seeds. En other words it reflects The quantity of les at cost price As against selling price which consists of a margin on the cost, he ice, the expenditure allocated between agricultural and non-agricultural based on cost of goods sold reflects a impropriate allocation of common cost.
(iii) Every methodology of estimation stare –s from limitation. Such limitations causing variations f any ant smoothened on consistent application of same principle.”
9. It view of the above, CET(A) directed the assessing officer to accept the appellant’s method o’ apportionment of common expenditure whereafter assessing officer’s computation of income from agricultural activity and income from trading activity was modified.
10. Assailing the aforesaid order of toe CITA) dated 21.12.2018, revenue filed appeal before the Tribunal which was heard al trig with two other appeals filed by the revenue on the same issue pertaining to two other assesm ant years.
11. At the outset, Tribunal observed that any of the methodology, be it either on the basis of cost of goods sold or on the turnover of different activities would suffer certain limitations. Each method will have its own variance of the estimate. It was thereafter Tribunal held as follows:
” 11 We have perused the impugned order. It is a fact that the assessee supplies seeds to its distributors located in the states of Kerala, Andhra Pradesh and Karnataka and after the season is complete the sales distributors identify the stock of seeds of various varieties which are not sold by the end of Ruby season of plantation. As a matter of fact Ld. CIT(A) noted that the distributors how to return the unsold stock after the end of the season and if such receipts are to be sold subsequently they need appropriate preservation and chemical treatment to sustain its utility; and that the stock of seeds is subsequently received in April, May, June and July; that at the time of receipt of the stock the seeds are taken into stock with appropriate adjustment to the customers/sales distributors outstanding balance and such a practice is part of the said business and is driven more by the seasonal nature of the business and also on account of short shelf life of the seeds. In the circumstances Ld. CIT(A) satisfied that, inasmuch as all the sales returns are subsequently taken into stock in the books of the assessee, the provision for sales return cannot he treated as an asset and liability.
12. We do not find anything perversity in the findings of the Ld. CIT(A). In view of the seasonal nature of the business and also :he short shelf life of the seeds, it is imperative for the assessee to take into account the quantity of unsold seats at the end if the year and the need to revalidate their further utility and to take them into stock in the next season. In the circumstances it cannot be said that the provision for sales returns is unascertained or unreasonable. With this view of the matter we allow the contentions of the Assessee and upholds the findings of the Ld. CIT(A). Accordingly ITA No. 294/Hyd/2019 is also dismissed.
13. It the result, all the appeals of the Revenue are dismissed ..”
12. Thus from the above it is seen that according to the Tribunal, view taken by CIT(A) was a restorable one and cannot be termed as perverse. More so, in vie w of the seasonal nature of the business carried cut be assessee and the shot shelf life of the seeds. Tribunal hay, held that it is imperatrix e for the assessee to take into Account the quantity of insole seeds at the end of the year and the need to revalidate their further utility and to take the –n into stock for the next season. Therefore, it cannot said that the provision for sales returns is unascertained or unreasonable. Affirming the findings written by CIT(A), Tribunal dismissed the appeal o– the revenue.
13. On due consideration, we do not find any error or infirmity in the view taken by the Tribunal. The question proposed by the revenue in our opinion cannot be termed to be a question of law, much less a substantial question of law.
14. In the circumstances, we are not inclined to entertain the appeal.
15. Appeal is accordingly dismissed. However, there shall be no order as to costs.
16. As a sequel, miscellaneous applications pending, if any, in this Appeal, shall stand closed.
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