Payment of agricultural income tax cannot be allowed as deduction under section 43B

Oil Palm India Ltd. Vs DCIT (Kerala High Court)

Facts- The appellant undertakes Oil Palm cultivation and manufacture and production of crude palm oil. A controversy arose between the assessee and the revenue, with the revenue implementing Rule 7 of the Central Income Tax Rules, 1962 providing for assessment of income which is partly agricultural and partly business income.

The main ground of assessee in the subject appeals is that the assessee has paid tax under Act 1991 on the whole of its income. The tax paid under 1991 Act is paid as a permissible deduction under Section 43B of the Act, therefore is entitled to deduction in computation of net total income.

Conclusion- Agricultural income is excluded from the scope of Section 10(1) of Central Act. Therefore, agricultural income does not form part of computation under Section 14 of the Act, 1991. Further, the deduction is envisaged for the purpose of ascertaining the net income of the assessee under different heads. The agricultural income is excluded and tappering into admissible tax, a deduction would again be inconsistent with Sections 10,14 and 43B of the Act.

Clause-B of Section 43B deals with the tax payable by the assessee. The agricultural income tax paid for the apportioned agricultural income cannot overlap into the business income as tax payable by the assessee for earning business income.

FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT

Heard Mr. Anil D. Nair and Mr. PKR Menon learned counsel for parties.

2. M/s Oil Palm India Ltd., Kottayam/Assessee is the appellant. The Deputy Commissioner of Income Tax, Kottayam/Revenue is the respondent. The assessee, being aggrieved by the common order dated 1.12.2017 in ITA No.111/Coch/2014 and four other appeals, filed the subject appeals before this Court under Section 260(A) of the Income Tax Act, 1961 (for short “Central Act”). The details of the assessment year etc. till the filing of the appeals in this Court are stated hereunder:

3. The appeals raise a question of entitlement by way of deduction of Income Tax paid under the Kerala Agricultural Income Tax Act, 1991 (for short ‘Act 1991’) and under Section 43B of the Central Act.

4. The assessee is a company with the share holding held by the Governments of India and Kerala. The appellant undertakes Oil Palm cultivation and manufacture and production of crude palm oil. The assessee, till the assessment year 2005-2006, has been paying returns under Act 1991 on the 100% income derived from the agriculture and business income from manufacture/production of crude palm oil. A controversy arose between the assessee and the revenue, with the revenue implementing Rule 7 of the Central Income Tax Rules, 1962 providing for assessment of income which is partly agricultural and partly business income. The present judgment need not advert to the details in this behalf, but would be sufficient to observe that this Court in ITA No.382/2010 and Writ Petition (c) No.36862 of 2004 has drawn the cut off line for the assessee to file returns both under Act and Act 1991 dealing with respective incomes. The details stated and considered in ITA No.14 of 2018 could be referred to as representative for all the other appeals and accordingly, by this common judgment, the appeals are disposed of.

5. The assessee filed, on 31.10.2007, return for the assessment year 2007-2008. The assessee returned total income of Rs.2,63,24,480/-representing income received under ‘interest’ head. The assessee claimed that the income received from the sale of crude palm oil and related products constitutes agricultural income and is not liable for tax under the Act. The assessee objects to the proposal of revenue to apply Rule 7 principally by referring to the matters pending before the Tribunal. The Assessing Officer rejected the claim of assessee for exclusion of income from the purview of the Central Act. The applicability of Central Act is not the main ground on which the challenge to order of Tribunal is laid by the assessee. The main ground of assessee in the subject appeals is that the assessee has paid tax under Act 1991 on the whole of its income. The tax paid under 1991 Act is paid as a permissible deduction under Section 43B of the Act, therefore is entitled to deduction in computation of net total income.

S.43B Certain deductions to be only on actual payment—Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable unde this Act in respect of —

any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or]

x x x xxxx xxxx

6. The Assessing Officer rejected deduction claimed by the assessee on the ground that the assessee has paid tax under Act 1991 on the whole of its income, whereas a part of income alone is amenable to Agricultural Income Tax Act. The agricultural income is excluded from the purview of Central Act and therefore is not part of computation of income under Central Act. The assessee aggrieved by the assessment order filed appeal before the Commissioner of Income Tax and through order in Annexure-B dated 25.03.2010, the appeal filed by the assessee was dismissed. The further appeal befor ITAT resulted in dismissal through the common judgment impugned in the appeal. It is useful and convenient to excerpt the following portion of the common judgment to appreciate the substantial questions and the argument of Mr.Anil D.Nair.

“We have heard the rival submissions and perused the material on record. Admittedly, the agricultural income is exempt from Central Income Tax by virtue of provisions of Section 10(1) of the Income Tax Act. When agricultural income itself is exempt from the purview of Central Income Tax, there is no reason why a payment made out of agricultural income (already exempt) should be allowed as a deduction in computing the business income under the Central Income-Tax Act. Section 43B states that “a deduction otherwise allowable under this Act” shall alone be allowed as a deduction u/s 43B(a). Since the agricultural income tax is no tax “otherwise allowable” under the Income Tax Act, payment of agricultural income tax in the respective assessment years on payment basis cannot be allowed as a deduction u/s 43B(a).

4.1 The order of the ITAT in ITA Nos.649, 650 & 651/Coch/2005 dated 30.11.2007 in assessee’s own case does not decide the issue in favour of the assessee. On the contrary, the Tribunal has only remitted back the issue to the files of the Assessing Officer to re­compute the income. The relevant finding of the Tribunal in assessee’s own case for Asst.years 1997-98, 1998-99 and 1999-2000 reads as follows:

“We have heard the learned Sr.DR for the revenue. On perusal of the order of the CIT(A), it is seent hat the CIT(A) has restored the matter to the file of the A.O. For re-consideration with certain directions as per Rule 7 of the I.T.Rules. We fail to understand why the revenue is aggrieved against the order of the CIT(A) as the directions given by the CIT(A) are not specific or in the nature of any finding on any issue. The entire matter is left open and restored to the AO. In our opinion, the revenue should not ahve any grievance. We find no merit in the appeal filed by the revenue. We, therefore, confirm the orders of the CIT(A).”

4.2 The DR as well as the AR was unable to enlighten us what has happened subsequent to the remand by the Tribunal in assessee’s own case in assessment years 1997-98, 1998-99 and 1999-2000. For our reasoning in aforesaid paragraph (Para 4 and 4.1) we hold that the agricultural income being exempt from taxation under the Central Income-tax, the agricultural income tax paid by the assessee cannot be allowed as a deduction under the Central Income Tax. Therefore, the order of the CIT(A) on this issue is reversed. It is ordered accordingly.”

Hence the appeals are filed by raising the following substantial questions of law.

i. In the facts and circumstances of the case ought not the Tribunal have called for the report of the compliance of the order passed by the Income Tax Appellate Tribunal in ITA No.649, 650, 651 of 2005, more so, when the Department has accepted the orders passed by the Commissioner of Income Tax (Appeals) and has passed modified order therein.

ii. In the facts and circumstances of the case ought not the Tribunal have dismissed the appeal filed by the Revenue, by taking note of the fact that the Department had accepted the orders passed by the Income Tax Appellate Tribunal for the assessment year 1997­98 and 1998-99 and have been following the same up to assessment year 2006-07.

iii. In the facts and circumstances of the case, ought not the Tribunal have remanded the matter back to the assessing authority in terms of the Tribunal order dated 30.11.2007 for the assessment year 1997-98, 1998-99, 1999-2000.”

7. Mr.Anil D.Nair contends that the revenue has accepted the formula decided by the Commissioner of Income Tax under Rule-7 and the Department has accepted the claim of assessee in all entirety for the preceding assessment years. Therefore, for the subject assessment years as well, the same view ought to be maintained for consistency of assessee’s tax liability under Central Act and Act 1991. In other words, the revenue is precluded or estopped from taking a different view on the issues which are accepted by the revenue. He next contends that the income tax paid by the assessee under Act 1991 ought to be deducted under Section 43B of Central Act as the tax paid by the assessee comes within the eligibility criteria set out in Section 43B of the Act. The Tribunal fell in error by reading the words “otherwise allowable in isolation of sub section (1) of Section 43B and therefore the disallowance of deduction of agricultural income tax paid under Act 1991 is illegal.

8. Senior Adv.Mr.PKR Menon argues to sustain the findings recorded by the Tribunal and the authorities under the Central Act viz. that the deduction claimed is an import arising as an obligation under Act 1991 to the assessee. Act 1991 deals with agricultural income payable by an assessee to whom the provisions of Act 1991 are attracted. As per the decisions of this Court in ITA No.382/2010 and Writ Petition (c) No.36862 of 2004, the assessee undertakes composite activities; one agriculture and another manufacturing. These two activities are separately governed by Central Act and Act 1991. Income from agriculture is completely exempt from computation under Central Act by operation of Section 10(1). The tax paid under Act 1991 is in respect of agricultural income which does not form part of computation under Central Act. The argument of assessee suffers from self contradiction, for according to him, agricultural income is excluded but the tax paid under Act 1991 alone has to be brought for the purpose of computation under Section 14 r/w Section 43B of the Central Act. The emphasis on the words “otherwise allowable under this Act” cannot be understood to include agricultural income/tax paid under Act 1991. By reading the findings recorded, he argues that the logic of the assessee is unavailable and beyond the scheme of respective enactments.

9. Replying to the argument of assessee that revenue for the preceding assessment years in respect of assessee’s own returns accepted the computation of agricultural income or tax paid thereunder, is without merit and the non-filing of appeal in the previous years does not bar the department from enforcing the provisions of law in subsequent years. For the said proposition, he relies on the judgment reported in C.K.Gangadharan and another v Commissioner of Income Tax1 .

“If the assessee takes the stand that the Revenue acted malafide in not preferring appeal in one case and filing the appeal in other case, it has to establish mala fides. As a matter of fact, as rightly contended by the learned counsel for the revenue, there may be certain cases where because of the small amount of revenue involved, no appeal is filed. Policy decisions have been taken not to prefer appeal where the revenue involved is below a cer-tain amount. Similarly, where the effect of the decision is revenue neutral there may not be any need for preferring the appeal. All these certainly provide the foundation for making a departure. In answering the reference, we hold that merely because in some cases, The Revenue has not preferred appeal that does not operate as a bar for the Revenue to prefer an appeal in another case where there is just cause for doing so or it is in public interest to do so or for a pronouncement by the higher court when divergent views are expressed by the Tribunals or theHigh Courts. The matter shall be placed before the concerned Bench for disposal of the appeals.”

10. We have taken note of the submissions and perused the record. We have called upon the counsel for assessee to place before us the separate returns filed by the assessee for the subject assessment years under Central Act and Act 1991 to appreciate the movement or flow of Agricultural Income under Act 1991 and the basis for claiming deduction under Section 43B of Central Act.

11. Let us first examine the obligation of assessee to file separate returns under Central Act and Act 1991. The judgment of this Court in ITA No.382/2010 and Writ Petition (c) No.36862 of 2004 has laid down the applicable law in this behalf. The assessee, by applying the apportionment principle, is under obligation to file returns under both the enactments. Agricultural income is excluded from the scope of Section 10(1) of Central Act. Therefore agricultural income does not form part of computation under Section 14 of the Act, 1991. Further, the deduction is envisaged for the purpose of ascertaining the net income of the assessee under different heads. The agricultural income is excluded and tappering into admissible tax, a deduction would again be inconsistent with Sections 10,14 and 43B of the Act. Clause-B of Section 43B deals with the tax payable by the assessee. Main fault under any law for the time being in force means tax payable by the assessee for earning the income for which the computation is carried out. The agricultural income tax paid for the apportioned agricultural income cannot overlap into the business income as tax payable by the assessee for earning business income. No reported judgment on this aspect of the matter is brought to our notice. Therefore from a plain and literal meaning of applicable clause, we are of the view that the argument that the tax paid under Act 1991, enures for deduction is unsustainable and accordingly rejected.

12. The next objection is that the revenue has accepted the return of the assessee for the preceding assessment years and the departure now in the subject assessment years is illegal. The judgment relied on by the revenue provides a complete answer in this behalf and by following the ratio of the Apex Court in Gangadharan’s case, the said objection of the assessee is also rejected.

For the above reasons and discussion, we are of the view that the gist of the questions framed by the assessee is canvassed in the manner referred to above and we have, after taking note of the liability under respective enactments are satisfied that the Tribunal has recorded a valid, legal and correct finding on the claim of assessee for deduction of agricultural tax paid under Act 1991 as not available.

By following the aforementioned reasons and discussion, the questions in the instant appeals are answered against the assessee and in favour of revenue. Appeals dismissed. No order as to costs.