Case Law Details

Case Name : ACIT Vs Goodrick Group Ltd. (ITAT Kolkata)
Appeal Number : ITA Nos. 2086-2088/Kol/2016
Date of Judgement/Order : 17/08/2018
Related Assessment Year : 2009-10 to 2011-12
Courts : All ITAT (7592) ITAT Kolkata (605)

ACIT Vs Goodrick Group Ltd. (ITAT Kolkata)

Assessee paid commission on export orders to two non-resident agents. TDS under section 195 was not deducted by assessee. Revenue’s case was that assessee failed to place on record any non-deduction of TDS certificate under section 195(1).

Held by ITAT

The section 195(1) casts an obligation to deduct tax only when any sum is chargeable to tax under the provisions of the Act and this position in law was confirmed by the Hon’ble Supreme Court in GE India Technology Centre Pvt. Ltd’s case reported in 327 ITR 456. The fact that the services of the export agent were rendered outside India, they are not maintaining any permanent establishment in India, they are not engaged in any activities in India and the payments were received outside India has not been disputed by the AO. I am, therefore, of the view that section 40(a)(i) is not applicable in this case for commission paid. I, therefore, direct the AO to delete the disallowance of Rs.23,87,696/-

FULL TEXT OF THE ITAT JUDGMENT

These three Revenue’s appeals for assessment years 2009-10, 2010-11 & 2011-12 arise from the Commissioner of Income Tax (Appeals)-17, Kolkata’s separate orders; all dated 29.07.2016, passed in case No(s) 206/CIT(A)-17/Kol/15-16, 156/CIT(A)-17/Kol/15-16 & 158/CIT(A)-17/Kol/15-16; respectively, involving proceedings u/s. 143(3) of the Income Tax Act, 1961; in short ‘the Act’.

2. It emerges at the outset that Revenue’s identical first grievance in all these three cases challenges correctness of CIT(A)’s action reversing disallowance of assessee’s least rent(s) of ₹36.48 lakh, ₹40,02,936/- & ₹55,20,999/-; respectively paid to M/s Koomber Properties & Leasing Co. Pvt. Ltd. Learned Departmental Representative vehemently contends that Assessing Officer had rightly disallowed these three payments in respect of all assessment years which have been wrongly deleted in lower appellate proceedings. We find that the instant issue is already covered as per the tribunal’s different orders right from assessment year(s) 1988-89 to 1992-93 onwards regarding the very payee. The Assessing Officer’s sole reason for invoking the impugned disallowance is that Revenue’s appeals against the said tribunal’s decision(s) are pending before hon’ble jurisdictional high court. He further made it clear that the impugned disallowance is meant to protect Revenue’s interest only. The CIT(A)’s findings in para-3 page 4 make it clear that assessee has already succeeded on the very issue in case of M/s Koomber Properties & Leasing Co. Pvt. Ltd. He has therefore adopted judicial consistency in the impugned assessment year as well. We therefore find no merit in Revenue’s instant common substantive ground for lack of distinction on facts or law in these three assessment year(s). The Revenue’s first substantive grievance is therefore rejected in all three cases.

3. The Revenue’s second substantive grievance for assessment years 2009-10 and 2010-11 seeks to restore the Assessing Officer’s identical action disallowing assessee’s commission payments to non-resident export agents amounting to ₹23,87,696/- in former and ₹22,09,101/- in latter assessment year; respectively. The assessee’s payees in both these assessment years) are M/s Robertson Bois Dickson Anderson Ltd. (UK) (RBDA) and Ludwig HO Schroeder & Rudolph Hamann, Germany. It had admittedly made the impugned commission payments in lieu of their services rendered outside India in the nature of procuring export orders. The Assessing Officer invoked section 40(a)(i) of the Act on account of non deduction of TDS thereupon. He quoted Transmission Corporation of India of AP Limited 239 ITR 587 (SC) for disallowing the assessee’s instant two exports commission claims. The CIT(A)’s reverses the above assessment findings in former assessment year as follows:-

“The ARs of the assessee have submitted that the appellant had a contractual liability to pay commission to non-resident export agents appointed by it for sale of tea abroad on the basis of orders procured by them abroad. It was also submitted that according to agreements with the non-resident export agents their area of operation was outside the territories of India and their services were rendered outside India and the non-resident export agents cannot engage in any other activity in India, neither they have any permanent establishment nor any branch or liaison office in India. The appellant paid commission of Rs.23,87,696/- and details thereof was also furnished vide its letter dated 15.12.2011 to the Assessing Officer, as under:-

Robertson Bois Dickson Anderson Ltd.

(in short RBDA)

Rs.17,86,331/-
Linton Park, Maidstone, Kent ME 174AB
Ludwig HO Schroeder & Rudolph Hamann Rs. 6,01,365/-
(in short Ludwig) Germany Rs.23,87,696/-

The A.Rs of the assessee have further stated that the disallowance made by the AO relying on the decisions in the case of Transmission Corporation of India of AP Limited (Supreme Court 239 ITR 587) and on the decision in the case of CIT ‘Vs. Samsung Electronics Co. Ltd (Karnataka High Court 320 ITR 209) was due to erroneous appreciation of the ratio of the said decisions of the respective Hon’ble Courts. The A.Rs of the assessee have submitted that the Hon’ble Karnataka High Court decision in 320 ITR 209 (supra) was overruled by the Hon’ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. Vs. CIT and Another, (327 ITR 456). In GE India Technology Centre’s case the Hon’ble Court explained the decision in 239 ITR 587 (supra) and observed that in that case the non-residents had entered into a composite contract which consists supply of plant and machinery and Equipments in India and also its installation and commission in India and admitted that the erection and commissioning of plant and machinery and Equipments gave rise to income liable to tax in India. In view thereof it was held that the payment required to be made to the non-residents included an element of income and accordingly section 195( 1) is attracted and it is necessary for the tax payer to make an application u/s 195(2) of the Act to the Income Tax Officer and obtain his permission for deducting tax at source at lower amount. The Hon’ble Supreme Court in this case also observed that the decision in Transmission Corporation case was misunderstood by the Hon’ble Kamataka High Court to mean that it is not open for the payer to content that if the amount paid by him to a non-resident is not at all chargeable to tax in India, then no tax at source is required to be deducted from such payment. The Hon’ble Supreme Court further observed that the Hon’ble Karnataka High Court completely loses sight of the plain words of section 195( I) which in clear terms lays down that tax at source is deductible from “sums chargeable” under the provisions of the Act, i.e. chargeable under sections 4, 5 and 9(1) of the IT Act. Thus the ruling of the Hon’ble Karnataka High Court in Samsung Corporation’s case that the moment there is a remittance an obligation to deduct tax at source arises was over-ruled. The A.Rs thus submitted that one of the decisions relied by the AO was overruled by the Hon’ble Supreme Court and the decision of the Hon’ble Supreme Court relied by the AO is distinguishable on facts and accordingly the disallowance so made by the AO is not justified.

The A.Rs of the appellant have further submitted that an application u/s 195(1) of the Act would attract if and only if the payment to a non-resident partakes the character of income payment and if the payment is not in the nature of income payment at all then section 195( I) of the Act does not operate as the said section says “sum chargeable under the provisions of this Act”. In this connection the A.Rs by referring to section 40(a)(i) submit that it also used the expression “sum chargeable under this Act”, which shows that the remittance got to be of a trading receipt which is liable to tax in India. As per the A.Rs if the tax is not so assessable there is no question of tax at source being deducted. In support thereof, the A.Rs referred to the decisions of the Hon’ble Supreme Court in the case of Vijay Ship Breaking Corporation and Others Vs. CIT (314 ITR 309). Section 195 casts an obligation that the tax is to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident if such payments give rise to an income chargeable to tax. Thus the said section according to the A.Rs is to be read in conformity with the charging sections i.e. sections 4,5 & 9 as because of the words “sum chargeable under the provisions of this Act”, In view thereof if the commission paid to the export agent does not contain the element of income chargeable to tax in India, the payer cannot be made liable to deduct tax u/s 195 and accordingly such payment cannot be disallowed under clause a(i) of section 40 of the Act.

The A.Rs of the appellant also referred to a case which inter alia deals with the issue of deduction of tax at source on commission paid to non-resident agents in the case of Director of Income Tax (International Taxation) Vs. Wizcraft International Entertainment Pvt. Ltd. (364 ITR 227 – Bombay High Court). The fact involved in this case as far as it relates to payment of commission to non-resident agents was that a non- resident agent of artists in foreign countries was engaged by the resident assessee to bring foreign artists to perform in India, but the agent has no participation in the event organized in India. The agent was paid commission for his services rendered outside India. On the fact the question arose as to whether tax is required to be deducted at source from the commission paid to non-resident agent even though tax was deducted at source on the payment made to artists for performance in India. The Hon’ble Tribunal after considering the factual position of the rival contentions concluded that the non-resident agent never took part in the event organized and did not exercise any personal activities in India. All, that, the agent was concerned with the services which were rendered outside India. On the set of facts the CIT(A) and the Tribunal arrived at the conclusion that the said agent did not perform any services in India but they were rendered outside India. The commission income to the agent is not liable to tax in India and there was no obligation on the part of the assessee to deduct tax at source at the time of making the payment. The Hon’ble Court accordingly observed that the findings of fact which are eminently possible in the given facts and circumstances do not raise any substantial question of law and accordingly dismissed the appeal.

The A.Rs of the appellant also referred to the decision of the Hon ‘ble Supreme Court in the Case of CIT Vs. Toshoku Limited (125 ITR 525) and emphasized the observations of the Court at page 531 which is as under:

“In the instant case, the non-resident assessee did not carry on any business operation in the taxable territories. They act as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchaser from abroad does not amount to an operation carried out by the assessee in India as contemplated by cl. (a) of the Explanation to section 9(1)(i) of the Act. The commission amounts which were earned by the non-resident assessee for services rendered outside cannot, therefore, be deemed to be income which are either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department. “

The A.Rs of the appellant, therefore, submitted that the disallowance of commission paid to non- resident export agents for the services rendered outside India made by the AO for the reason of tax not being deducted at source is not tenable either on facts or in law.

The A.Rs of the appellant also submitted that an application u/s 195(2) was made for remittance of commission without deduction of tax at source to its non-resident export agents for subsequent years and such remittance was approved without deduction of tax at source by the Assessing Officer concerned of the International Taxation, Kolkata.

The A.Rs of the appellant also submitted that similar disallowance made in the assessment year 2007-08 was deleted by the CIT(Appeals) vide his order dated 27.02.2015 in Appeal No. 582/CIT(A)-2/14-15 wherein he has observed as under:

“I have considered the views expressed by the AO and the submissions of the company and I am of the view that the decisions in Transmissions Corporation’s case and Samsung Electronics’ case relied by the AO has no application to the facts of the present case. In the case of assessee company services had been rendered outside India and the remittance for such services was also made outside India. It is also found from the agreement that the non-resident export agents is not required to be rendered any services in India nor they have any Permanent Establishment in India. Therefore, the remittances made for the services rendered outside India do not partake the Income payments and accordingly it is not taxable in India. It is well settled that if the payments made to non-resident export agents are chargeable to tax in India only then such payments are liable to be taxed in India. Considering the case laws and circular of CBDT cited by the AIR, I am inclined to hold that the commission paid to non-resident agents is not chargeable to tax in India and the operation of section 195 does not arise. I am, therefore, of the view that the provisions of section 40(a)(i) is also not applicable in this case. A similar view was taken by the Income Tax Officer, International Taxation, Kolkata, on the application made u/s. 195(2) of the Act in subsequent years and he authorized the remittance of commission to non-resident agents without deduction of tax at source. Thus I hold that the disallowance made by the AO is liable to be deleted and accordingly I direct the AO to allow deduction of Rs. 11885513/- as claimed by the assessee company. “

Therefore, it is seen that my predecessor has taken a view in favour of the assessee. The section 195(1) casts an obligation to deduct tax only when any sum is chargeable to tax under the provisions of the Act and this position in law was confirmed by the Hon’ble Supreme Court in GE India Technology Centre Pvt. Ltd’s case reported in 327 ITR 456. The fact that the services of the export agent were rendered outside India, they are not maintaining any permanent establishment in India, they are not engaged in any activities in India and the payments were received outside India has not been disputed by the AO. I am, therefore, of the view that section 40(a)(i) is not applicable in this case for commission paid. I, therefore, direct the AO to delete the disallowance of Rs.23,87,696/-.”

4. Needless to say, the CIT(A) has adopted the very analogy in assessment year 2010-11 as well. The Revenue’s case before us is that the assessee had failed to place on record any non-deduction of TDS certificate u/s. 195(1) of the Act. We find no merit in the instant argument. The fact remains that there is no material on record indicating the assessee’s payees to have rendered any service in India so as to be assessable in India. Hon’ble Madras high court in case CIT vs. Faizan Shoes Pvt. Ltd., (2014) 367 ITR 155 (Mad) holds that section 9(1)(i) r.w.s section 9(1)(vii) of the Act does not apply in absence of any services rendered in India. Hon’ble apex court’s decision in GE India Technology Centre Pvt. Ltd. Vs. CIT and Another 327 ITR 456 (SC) settles the law that Chapter XVII of the Act applies only in case the payments in issue are taxable in the hands of overseas recipients’ hands in India and not otherwise. The assessee has also succeeded on the very issue in preceding assessment year 2007-08 as well. We therefore decline Revenue’s instant substantive grounds in both of these captioned appeals.

5. The Revenue’s third substantive ground identical in assessment year 2009-10 and 2010-11 seeks to revive the Assessing Officer’s action disallowing assessee’s stores and spares consumption claims of ₹31,53,42,998/- and ₹58,,51,350/-; respectively as deleted in the course of lower appellate proceedings. Learned Departmental Representative takes us to CIT(A)’s detailed discussion in the above former assessment year 2009-10 discussing the entire issue as follows:-

“I have considered the views expressed by the AO and the submissions of the ARs along with the remand report and comment thereon by the ARs. It is a fact that the appellant has 17 tea gardens – 2 in Upper Assam, 3 in the hilly regions of Darjeeling and 12 in the terians of Dooars in Jalpaiguri and Alipurduar District of West Bengal.

During the appellate proceedings the ARs of the appellant have urged that bringing documentary evidence of Consumption of stores and spare parts are voluminous and the transportation thereof would involve considerable time and cumbersome as the gardens are located far fledged remote areas of upper Assam, hilly regions of Darjeeling and the terrians of Dooars in Jalpaiguri district. The requisitions for issue of stores and spare parts would be approximately 1000 in a month per garden.

Smilarly the ARs submitted that it has a labour force of approximately 23000 employed in 17 gardens. The wage payment, benefits under the Plantation Labour Act such as subsidized ration, free medical treatment, uniform, hospital expenditure, crèche, play grounds etc. Of the 23000 workforce were maintained in the gardens in the form of Wage register, Attendance register, Weighment register, Plucking register etc and these records are subject to verification by the Factory Inspectors and other Government officials from time to time to satisfy themselves whether the assessee company complies with the Plantation Labour Act, Factories Act etc. Non-compliance thereof was subject to imposition of fine and penalty. Thus it was contended that the payment reflected under the Staff Welfare Expenses were fully supported by the documentary evidences which were subject to scrutiny by various Government authorities.

It was also urged at the hearing that the details of miscellaneous expenses at gardens were submitted. The expenditure so debited in the miscellaneous expenses was verified not only by the company’s internal auditors but also by the statutory auditors with reference to the supporting documents. It was also urged that where such expenditure were not supported with documents an adverse report was made and incorporated in the Audit Reports, but no such adverse remark was made against the said expenditure in the Audited Reports.

The AO did not dispute the aforesaid facts in his Remand Report, but stated among other things that the supporting vouchers with reference to the said expenditure if produced should not be taken into consideration while disposing of the appeal.

A comparative analysis of the preceding three previous years of the ‘Consumption of stores and spares’ per kg of saleable production, ‘workmen and staff welfare expenses’ per kg of saleable production and ‘Miscellaneous expenses’ as % age of gross sales were filed for substantiating the appellant’s contention that there was no wide variance of these expenditure as compared to last three years. The said statement is as under:

Consumption of stores & spare parts of 3 preceding years:

Year ended Assmt. Year Saleable production Consumption of stores & spares Consumption of stores & spares per kg of saleable
production
(Kg) (Rs) (Rs)
31.03.06 06-07 18,228,797 235.000.615 12.89
31.03.07 07-08 19,575.505 237,161,851 12.12
31.03.08 08-09 20,949.531 257,191,786 12.28
31.03.09 09-10 21,504,140 273,125,105 12.70

Workmen & Staff welfare expenses of 3 preceding years

Year ended Assmt. Year Saleable production Workmen & staff welfare expenses Workmen & staff welfare expenses per kg of saleable production
(kg) (Rs) (Rs)
31.03.06 06-07 18,228.797 112,541,059 6.18
31.03.07 07-08 19,575.505 126,487,325 6.46
31.03.08 08-09 20,949,531 143,186,899 6.83
31.03.09 09-10 21,504,140 134,385,070 6.25

Miscellaneous expenses of 3 preceding years

Year ended Assmt. Year Gross sales Miscellaneous expenses % of Misc expenses to gross sales
(Rs) (Rs)
31.03.06 06-07 2,098,933.736 86,658,434 4.13
31.03.07 07-08 2,210,328,576 91,411,580 4.14
31.03.08 08-09 2,352,889,724 94,235,066 4.01
31.03.09 09-10 3,076,851,031 119,176,327 3.87

I have perused the comparative analysis as shown in the above tables and also the remand report of the AO. The proportion of the expenses has remained more or less same as in the earlier years as can be seen from the tables above. It is not the case of the AO that the expense claimed is non-genuine.

I have considered the submission made by the ARs in its behalf in respect of the aforesaid expenditure together with AO‘s remand report and came to the conclusion that on the facts of the case the appellant did maintain all necessary records and documents at its gardens in respect of the stated expenditure especially when those records are under scrutiny by different Government authorities and auditors of the company. I have also noticed that in estimating 20% of such expenditure there is no specified finding of the AO related to the expenditure which he considered as inflated by the assessee from details filed. The that the aforesaid expenditure was inflated to reduce profit was not borne out by evidences. Thus taking into account all the facts I am of the considered view that the disallowance made by the AO is not justified. The expenditure so incurred by the assessee company was all related to the business and deductible u/s. 37(1) of the Act. The observation of the Hon’ble Supreme Court in the case of Ganapathy & Co. Vs. CIT, reported in 381 ITR 363, at page 372, 1st para, 5th line, is that the main ingredients to be satisfied by the assessee for claiming the deduction u/s. 37(1) is that the expenditure laid out or expended is exclusively for the purpose of business. From the facts submitted by the ARs and seen from the details furnished at the hearing of the assessment, I am of the view that the expenses disallowed by the AO were wholly laid out and expended exclusively for the purposes of the business. The ARs also brought to my notice the decision of the Hon’ble Delhi High Court in the case of Friends Clear Agency (P) Ltd vs. CIT, reported in 332 ITR 269. In this case disallowance of business expenditure on estimate basis was considered where similar expenses were allowed in totality in previous years is to be followed in subsequent years. These expenses have always been allowed prior to AYr. 2009-10 and also have been allowed in AYrs 2011-12 and subsequent assessment years. In view of the above judicial pronouncements and also on the facts of the case the disallowance of Rs.3,53,42,998/- made by the AO in the assessment is hereby deleted. The assessee company gets relief of Rs.3,5342,998/-.

6. We have heard the Revenue seeking to revive the impugned disallowance. Both case files perused. Suffice to say, the CIT(A) has followed his above extracted detailed findings mutatis mutandis in latter assessment year (2010-11) as well. It emerges that the assessee has been consistently succeeding on the very issue since preceding assessment years regarding its claim of consumption of stores and spares comprising of various facilities offered to workmen in all of its tea estates. There is no rebuttal forthcoming to the clinching figures of comparison qua the impugned expenditure vis-a-vis the three preceding assessment years hereinabove. The Assessing Officer appears to have conducted remand proceedings wherein he could not find out even a single irregularity in assessee’s books of account as well as all other details produced. We therefore uphold the CIT(A)’s finding under the challenge in this instant common issue in these two assessment years. The Revenue’s appeal ITA No.2087/Kol/2016 raising the above three substantive grounds fails therefore.

7. We now advert to Revenue’s fourth and last grievance in assessment year 2009-10 challenging correctness of CIT(A)’s findings deleting nursery expenditure of ₹1,13,48,486/- made by the Assessing Officer in assessment order. There is no dispute that this assessee is growing manufacturing and selling tea. It claimed the impugned nursery expenditure of ₹1,13,48,486/-relating to initial budding of tea. The Assessing Officer disallowed the same on the ground that this nursery head of expenditures gave enduring advantage spread over to number of years not to be forming a revenue expenditure claims. The CIT(A) accepts assessee’s argument as follows:-

“The ARs of the appellant have filed a detailed submission explaining the nature of expenses and the method of accounting followed in respect of nursery expenses. The ARs have cited decision reported in 262 ITR 388 (Calcutta High Court) in the case of CIT Vs. Tasati Tea Company Ltd. The submissions of the appellant are reproduced as under:-

‘The appellant maintains nursery in its gardens for the purpose of replanting and planting of tea bushes in an area where the tea bushes are dead or became useless or in an area previously abandoned and also for extensions planting. The total expenditure incurred on account of maintenance of plants in the nursery was Rs.2,72,80,342/-. The garden-wise expenditure incurred for maintenance and upkeep of the nursery treated as revenue and debited to Profit and Loss A/c was furnished to the Assessing Officer vide letter dated 15.12.2011. The appellant in compliance with the Assessing Officer’s query regarding the accounting of nursery expenses the same was explained to him in the said letter. The expenditure incurred on tea bushes used for replanting and replacement of the tea bushes which have died or become useless in an area already planted during the year was Rs.1,13,48,486/- and the said expenditure was charged to the Profit and Loss A/c and claimed it as a deductible expenditure. The Assessing Officer, however, disallowed the said expenditure stating that it was “related to the initial budding of tea which gives advantage to the assessee for number of years.” The Assessing Officer in disallowing the said expenditure relied on the ruling of the Hon’ble Calcutta High Court in CIT Vs Tasati Tea Ltd. (262 ITR 388)’

The appellant submits that the Assessing Officer misdirected himself in relying on the ratio of thee Hon’ble Calcutta High Court in 262 ITR 388 (supra) and it was due to an erroneous appreciation of the facts and explanation furnished to him in support of the said claim as a deduction. The nursery expenses of Rs.1,13,48,486/- debited to the Profit and Loss A/c was an yearly recurring revenue expenditure and the method of accounting regularly followed by the appellant in respect thereof was also explained to the Assessing Officer at the hearing as follows:

Opening stock of plant in the nursery as on 01.04.2008 1,63,97,003
Add: Cost of plants debited to Profit and Loss A/c 1,07,31,904
Total cost of nursery plants excluding the cost of plants used for extension planting 2,71,28,907
Less: Cost of plants utilized during the year for replanting of tea bushes in a planted area not for expansion and planting in a previously abandoned area 1,13,48,486
Stock of plants as at 31.03.2009 1,57,80,421

The cost of tea plants in the nursery utilized for extension planting during the year and debited under the head ‘ Estates and Development’ and the movement of cost of nursery plants during the year was as under:

Cost of stock of plant in nursery as on 01.04.2008
Add: Cost of plants raised during the year
1,63,97,003

1,08,83,339

Less: Cost of plants utilized for refilling and replantation in an existing planted area during the year 1,13,48,486 2,72,80,342
Less: Cost of plants used for extension planting during the year 1,51,435 1,14,99,921
Cost of stock of plants in nursery as at 31.03.2009 1,57,80,421

The method of accounting consistently followed by the appellant in regard to the accounting of nursery expenditure debited to the Profit and Loss A/c is only the cost of maintenance and upkeep of tea plants in the nursery used during the year for replantation or replacement of tea bushes in an area already planted without any expansion or plantation of area which was previously abandoned. Thus the Assessing Officer’s disallowance of the said nursery expenditure cannot be justified either on facts or in law. Thus the entire expenditure disallowed by the Assessing Officer be deleted.

Thus the explanation provided to the Assessing Officer was to the effect that the nursery expenses claimed as a revenue expenditure was related to the cost of maintenance and upkeep of immature plants in the nursery used for infilling and replanting of an area already under cultivation during the year where the tea plant are either dead or became permanently useless. It was further explained that in a case where the nursery plants are used for extension planting or in an area previously abandoned such expenditure are treated as capital expenditure under the accounts head “Estates and Development.” Thus on the stated facts the decision in 262 ITR 388 (supra) relied by the Assessing Officer in disallowing the nursery expenses was in favour of the appellant’s claim of deduction of such expenses.

‘The ruling of the Hon’ble Calcutta High Court in 262 ITR 388 (supra) was to the effect that:

“…… if the plants are raised and maintained in a nursery for being utilized for the purpose of replantation without any expansion of the plantation area or replantation in an abandoned area, then it cannot be said to be a capital expenditure. Capital expenditure involves an investment increasing the capital for higher profit. The expansion means extension of plantation to an additional area. An area already abandoned, if replanted would be an expansion of the area under cultivation for the previous year concerned. The maintenance of an area already under cultivation cannot be treated to be an expansion of the plantation nor can it be treated to be an investment or expansion adding to the capital already invested. On the other hand, it would be maintenance of plantation itself and, therefore, revenue expenditure.”

From the above quote it is clear that if the plants raised and maintained in a nursery are to be utilized for replantation of dead or useless bushes within the plantation area, it would not come under rule 8(2) of the Rules. However, if the plants raised and maintained in a nursery are utilized during the year for the purpose of replantation without expansion of the plantation area such expenditure is revenue expenditure.

It is to be noted from the order of the Assessing Officer that in disallowing the said expenditure he has not given any reason for holding this expenditure as capital expenditure except saying that it is “initial budding of tea which gives advantage to the assessee for number of years.”. The Assessing Officer’s such assertion was not supported by any materials on record. The appellant submitted that from the nature and character of the expenditure and the purpose for which nursery is being maintained and the expenditure debited to the Profit and Loss A/c it is clear that it is a revenue expenditure for maintenance of plantation for the purpose of its business. Thus in fact the ruling of the Calcutta High Court in 262 ITR 388 (supra) supports appellant’s contention that the expenditure claimed was revenue expenditure.

The appellant further submits that the maintenance and upkeep of nursery for the purpose of raising tea bushes for utilization of it in future for replantation of dead or useless bushes was not debited to the Profit and Loss A/c, but it was shown as stock of tea plants in the Balance Sheet under the Account head “Advance”. Thus the claim of nursery expenditure as revenue expenditure during the year would come within the scope and ambit of rule 8(2) of the Rules. Further the expenditure on plants raised in the nursery for expansion of the planted area is treated as capital expenditure.

It was well settled that upkeep and maintenance expenditure of plants till its bearing is deductible business expenditure. In support there of the following decisions of the Hon’ble Supreme Court are cited:

1. Karim Tharuvi Vs. State of Kerla 48 ITR 83

2. Travancore Rubber and Tea Co. Ltd. Vs. Commissioner of AGIT 41 ITR 751”

I have considered the views expressed by the AO and the submissions of the A/R of the appellant. The method of accounting of nursery expenses is also not in dispute. The assessee has been consistently following the said method of accounting. The nursery expenses claimed as a deduction is actually the cost of maintenance and upkeep of immature plants which are used for replanting or infilling, areas where the tea plants are either dead or become permanently useless. There is no expansion or cultivation in a anew area. Accordingly, the nursery expenses have been debited to the P/L Account. The decision of the Hon’ble Calcutta High Court in Tasati Tea Ltd’ case reported in 262 ITR 388 is squarely application to the facts of the case. Respectfully following the decision of the Hon’ble Kolkata High Court in case of Tasati Tea Ltd, I direct the AO to delete the disallowance of Rs.1,13,48,486/- on account of ‘Nursery expenses’.

Heard Learned Departmental Representative strongly seeking to revive the Assessing Officer’s action treating the impugned nursery expenditure as capital in nature. Relevant findings perused. The Revenue’s only argument is that such nursery expenditure as the one in hand before us ought not to have been treated as a revenue item of claim in the lower appellate proceedings. Coming to enduring advantage spread over number of years hon’ble apex court’s decision in Taparia Tools Ltd. Vs. JCIT (2015) 372 ITR 605 (SC) rejects Revenue’s similar reasoning in concluding that such an approach does not form a justifiable ground to reject a claim of revenue expenditure. We further reiterate that hon’ble jurisdictional high court’s decision in CIT vs.Tasati Tea Ltd (2003) 263 ITR 388 (Cal) also holds similar expenditure to be revenue in nature as discussed in the CIT(A)s adjudication hereinabove. We thus decline Revenue’s instant substantive ground as well as main appeal ITA 2086/Kol/2016 for assessment year 2009-10.

8. This leaves us with this Revenue’s appeal 2088/Kol/2016 for AY 2011-12 raising the latter ground in seeking to revive sales promotion expenditure disallowance of ₹9,48,411/- made by the assessing officer and deleted in course of lower appellate proceedings as follows:-

“Ground Nos. 3 is against the disallowance of ‘Sales Promotion Expenses’ amounting to Rs.9,48,411/-.

The Assessing Officer on page 2 of the assessment order has stated as under:-

‘The assessee claimed sales promotion expenses of Rs.15,41,48,965/- which includes an amount of Rs.12,36,81,695/- under the sub-head ‘trade promotional schemes’. In course of hearing of the case, details were called for and to the extent of Rs.9,48,411/-, the A/R could not file supporting evidence and coined the same as ‘other small parties’. In absence of supporting evidence addition of Rs.9,48,411/- is made for trade promotional expenses’

The ARs of the appellant submitted the breakup of ‘Sales promotion expenses’ amounting to Rs.15,41,48,965/- during the assessment proceedings as under:

Consumer offers Rs.2,76,25,561/-
Sales Agents expenses Rs. 28,41,709/-
Trade promotional schemes Rs.12,36,81,695/-
Total Rs.15,41,48,965/-

They further submitted that the Assessing Officer called for party-wise details with PAN of the Trade promotional schemes which wre filed. The ARs have also submitted that an aggregate sum of Rs.9,48,411/- which was shown as ‘other small parties’ and it was explained to the Assessing Officer that the said amount represents the total of small amounts paid to various vendors. It was also submitted by the A/Rs of the appellant that there had been no disallowance of ‘Sales promotion expenses’ in the past assessment years. The ARs have submitted that there were about 130 odd parties where payments were made from Rs.4,000 to R.9,000 and it constitute 0.767% of the Trade promotional schemes.

I have considered the findings of the AO and the submissions of the ARs of the appellant. Out of the expenses of Rs.12,36,81,695/- part-wise break up of Rs.9,48,411/-, which Is very nominal could not be made available, due to the numbers of parties being about 130. The aggregate amount of Rs.9,48,41/- was the payment made to about 130 parties towards sales promotion expenses where the payment ranged from Rs.4000 to Rs.9000. These payments had been categorized as having been made to other small parties. When the total sales promotion expenses is Rs.15.41 crores an details have been furnished to the AO than I do not see any reason for disallowing sales promotion expenses to the extent of Rs.9,48,411/-. The AO has not doubted the veracity or genuineness of these expenses. I, therefore, direct the AO to delete the disallowance of Rs,9,48,411/-.”

9. Heard Learned Departmental Representative vehemently contending that the CIT(A) has erred in law as well as on facts in reversing the impugned disallowance. He fails to dispute the fact that the impugned sum of 29,48,411/-forms a minuscule percentage of the total claim amounting to 215,41,48,965/-i.e. less than 1% of the total figure. The relevant payees’ count is more than 100 involving corresponding sums of 24,000/- to 29,000/-. The assessee has categorized all of them as small parties. The fact also remains that the assessee has also not been able to file all the relevant details of regarding these alleged small parties. We therefore conclude in larger interest of justice that a lump sum disallowance of 200 lakh out of the impugned figure of 29,48,411/-would be just and proper in the given facts and circumstances with a rider that the same shall not be treated as a precedent in preceding or succeeding assessment year. We partly accept Revenue’s instant appeal ITA No.2088/Kol/2016 therefore.

10. The Revenue’s former two appeals ITA No.2086/Kol/2016 & 2087/Kol/2016 are dismissed whereas its last appeal ITA 2088/Kol/2016 is partly allowed.

Order pronounced in the open court  17/08/2018

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