IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE T.R.RAMACHANDRAN NAIR WEDNESDAY, THE 23RD JANUARY 2008 / 3RD MAGHA 1929 OTC.No. 1 of 2006() ------------------- AITA.12/2002 of COMMR.KERALA AGR.IT & STAT,TVM. .................... PETITIONER/APPELLANT. -------------------------------------- THE BRAEMORE ESTATED LTD., PATTOM PALACE P.O. TRIVANDRUM 695 004, REPRESENTED BY ITS DIRECTOR, SIVARAMAKRISHNAN SARMA. BY ADV. SRI.JOSEPH MARKOSE SRI.MITHUN MARKOS RESPONDENTS: RESPONDENTS. ------------------------- STATE OF KERALA, REPRESENTED BY THE SECRETARY (TAXES), THIRUVANANTHAPURAM. BY G.P. SRI. K.P. PRADEEP THIS OTHER TAX CASES HAVING BEEN FINALLY HEARD ON 23/01/2008, ALONG WITH OTC 2/06 AND CONNECTED CASES THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C .N. RAMACHANDRAN NAIR & T.R. RAMACHANDRAN NAIR, JJ. -------------------------------------------- O.T.C. Nos. 1 & 2 /2006, 38 to 40/2005 and STRV No. 156 OF 2004 -------------------------------------------- Dated this the 23rd day of January, 2008 C.R. JUDGMENT C.N. Ramachandran Nair,J. These Tax Revision Cases filed under Section 78 of the Agrl. Income Tax Act, 1991 against the appellate order issued by the Agrl. Income Tax Appellate Tribunal pertain to the assessments for the years 1986-87 to 1992-93 except for the year 1987-88. We have heard senior counsel Sri. Joseph Markos appearing for the petitioner and Government Pleader appearing for the respondent. 2. The first question raised is against the order of the Tribunal confirming assessment of sale proceeds of Albezia trees (shade trees) as agricultural income. Counsel for the petitioner has relied on the decision of the Supreme Court in STATE OF KERALA V. KARIMTHARUVI TEA ESTATE LTD., 60 I.T.R. 275 and the decision of this Court in TRAVANCORE TEA ESTATES CO. LTD. V. COMMISSIONER OF INCOME TAX, KERALA, 93 ITR 314 and 2 contended that sale proceeds of shade trees are assessable to capital gains under the Central Income tax Act. However, Government Pleader contended that Albezia trees are cut retaining the stem which regenerates and therefore sale proceeds of timber should be treated as agricultural income. We are unable to accept this contention because there is no evidence of periodicity at which the tree regenerates and becomes mature to treat the sale proceeds as agricultural income. Shade trees mature in the course of time and are retained for long periods for providing shade to tea bushes. It is a settled position by the above decisions that sale proceeds of shade trees should be subject to levy of tax under the head "capital gains" under the Central Income tax Act. It is seen from the evidence produced in this case that 10% of the sale proceeds is estimated and assessed to capital gains under the Central Income Tax Act. We therefore set aside the order of the Tribunal pertaining to the years 1998-89 to 1991-92 on this issue and direct the assessing officer to exclude income from sale of shade trees (albezia) in the computation of agricultural income. 3. The next issue raised is against disallowance of expenditure incurred in respect of matured rubber plantation which was not tapped 3 for several years ranging from 1989-90 to 1992-93. Counsel for the petitioner has relied on the decision of the Supreme Court in TRAVANCORE RUBBER AND TEA CO. LTD. V. COMMISSIONER OF AGRL. INCOME TAX, KERALA, 41 I.T.R. 751 and contended that entire revenue expenditure incurred for matured areas should be allowed. It is submitted that failure to tap and take yield from matured rubber trees was on account of dispute between the management and employees. We find from the Tribunal's order that details of the expenditure are not available on records. If rubber trees were not tapped on account of labour strike then probably there would not have been any expenditure incurred towards wages as employees were not working. It is not known what are the items of expenditure claimed by the petitioner. In the circumstances, we set aside the findings of the Tribunal on this issue and direct the assessing officer to verify the break-up details of expenditure claimed by the petitioner and allow such of the expenses which are incurred for the purpose of up-keep and maintenance of yielding rubber trees, no matter whether income was received during the relevant year or not. 4. The next issue raised for the assessment year 1986-87 is 4 against reallocation of overhead expenditure against income from various crops. Petitioner charged overhead expenses against income from various crops which was nsot accepted by the Officer. The assessing officer made reallocation which involved partial disallowance. The Tribunal noticed that petitioner has not debited any overhead expenditure or charges against tea income. Therefore we are unable to accept the petitioner's contention that overhead expenditure has to be charged based on income from each crop. In fact, a scientific method will be to charge overhead expenditure in proportion to the direct expenditure incurred for cultivation of each crop. Even acreage basis of allocation of overhead expenditure for yielding trees may be a scientific method. The petitioner's contention that in the computation of income from tea, no overhead expenditure is allowed by the assessing officer under the Central Income Tax Act is not a ground for excess claim against income from rubber. It is open to the assessing officer to disallow excess claim made against income from rubber no matter whether the petitioner did not claim eligible expenditure in the computation of tea income under the Central Income Tax Act. In any case petitioner's case that overhead expenses has to be allocated based 5 on positive income is absolutely untenable. Therefore we uphold the order of the Tribunal confirming disallowance. 5. The next question raised pertains to estimation of income from minor crop like pepper, cloves, etc., for the year 1998-89. It is conceded that area under minor crop cultivation was leased out to third parties for upkeep and for taking yield. Therefore the contention of the petitioner is that income from lease agreement should be accepted. However, in this case it is seen that lease agreement was not in stamp paper and therefore the assessing officer declined to accept the same. The petitioner, being a company, cannot be expected to enter into a formal agreement other than on a stamp paper. Therefore there is nothing wrong in the assessing officer treating the agreement as not genuine and probably it would have been made later. In any case, we do not find any question of law arising from the estimation of income from minor crop for want of accounts. We therefore reject the petitioner's challenge against finding of Tribunal confirming the estimation of income from minor crop. 6. The next question raised is against disallowance of provision for interest for the loan availed. It is seen that petitioner did not 6 produce any evidence to substantiate that the loan was for agricultural purposes and there is a clear cut finding to that effect by the first appellate authority while confirming disallowance. Even before the Tribunal, petitioner did not produce details of the loan availed and the interest charged by the Bank or financial institution. We do not find any ground to interfere with disallowance confirmed by the Tribunal. However, we make it clear that if details are available, and if petitioner proves that the loan so availed was for agricultural purposes, petitioner can claim interest either under mercantile system when charged by the financial institution or under cash basis while paying interest in later years. 7. The next issue raised is against the assessing officer's refusal to accept actual loss computed by the Central Income Tax Officer while making assessment of income from tea. It is seen that the assessing officer has adopted tea income from the Central Income tax assessment. However, if there is later modification in the Central Income tax assessment, the Officer is bound to adopt the final figure computed by the Income-tax Officer. We dispose of this objection against Tribunal's order with direction to the Officer to rectify the assessment adopting 7 actual income determined by the Central Income Tax Officer based on latest assessment order. 8. The estimation of income from each minor crop for 1990-91 at Rs. 4 lakhs which was confirmed by the Tribunal is the next dispute raised by the petitioner. It is seen that petitioner has returned income of Rs. 2.45 lakhs from minor crop. However, no accounts or lease agreement was produced, which led to estimation. It is admitted and it is clear from the connected cases that petitioner was in the habit of leasing out area under minor crop cultivation for taking yield. Strangely for this year, petitioner did not produce any accounts or lease agreement pertaining to minor crop. Therefore the Officer was left with no option but to estimate the income. So far as the amount involved is concerned, we find that having regard to the income returned, estimation is not excessive or arbitrary. Therefore we do not find any ground to interfere with the order of the Tribunal on this issue. 9. For the assessment years, 1988-89, 1990-91 and 1992-93, the petitioner has raised objection against estimation of value of crop retruned to the petitioner under lease agreement. The lease rentals payable by the lessees for taking usufructus from minor crop 8 cultivation was net amount after providing for value of crop returned to the petitioner. Therefore the assessing officer has rightly estimated the value of returned crop as income of the assessee, which is seen confirmed by the Tribunal. We do not find any ground to interfere with the estimation of income on this issue by the assessing officer and confirmed by the Tribunal. 10. The next item of disallowance is the provision for plantation tax. It is not clear from the orders of the Tribunal as to the basis of provision. In fact tax liability should have been reflected in the return filed, in the assessment orders issued under the Plantation Tax Act and tax paid thereafter. Even though provision for tax liability can be allowed under the mercantile system, it was for the assessee to establish that tax liability is determined on the basis of the statute. Petitioner is given an opportunity to produce returns filed, and assessment notice issued under the Plantation Tax Act and the details of payment before the Assessing Officer to verify whether provision was made consistent with statutory liability and if so to allow the claim to the extent eligible. 11. The next ground of challenge against Tribunal's order is disallowance of bonus stated to have been paid during 1989-90 to 9 1991-92. Petitioner is entitled to allowance of bonus provided details are furnished. Neither before the Tribunal, nor in this Court, petitioner has produced details of bonus paid and claimed in the assessment. However, we feel one more opportunity can be given to the petitioner to furnish details of bonus paid before the assessing officer for him to examine the correctness of the claim and if found eligible the Officer will allow the same. 12. The next ground raised pertains to disallowance of legal charges of Rs. 10,000/- for the year 1991-92. We allow the claim because the issue is covered in favour of the assessee and against the department vide decision of this Court in 169 I.T.R. 38. 13. Petitioner has objected to limiting the claim of expenditure on minor crop to one-fourth of the claim. We find no reason to allow this claim because under the lease agreement, the lessee has to meet the expenditure for upkeep, maintenance, manuring etc. In the circumstances, there is nothing wrong in the assessing officer limiting the allowance to one-fourth of the claim. We therefore reject the petitioner's contention on this issue and confirm the order of the Tribunal. 10 The other issues raised are disallowance of certain items of expenditure from which no question of law arises. We therefore dispose of these Tax Revision Cases with directions above given. The assessing officer is directed to give an opportunity to the petitioner and modify the assessments wherever required in terms of the directions above issued within three months from the date of production of a copy of this judgement. (C.N.RAMACHANDRAN NAIR) Judge. (T.R.RAMACHANDRAN NAIR) Judge. kk 11