IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE B.P.RAY MONDAY, THE 27TH JUNE 2011 / 6TH ASHADHA 1933 ITA.No. 15 of 2010() -------------------- ITA.1219/COCH/2004 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT ---------------------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/APPELLANT ------------------------ THE THIRUVAMBADI RUBBER CO. LTD., MUKKOM P.O. ADV. SRI.P.RAGHUNATH SRI.PREMJIT NAGENDRAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 27/06/2011, ALONG WITH ITA Nos.31,37&43 OF 2010, THE COURT ON 27/06/2011 DELIVERED THE FOLLOWING: APPENDIX (ITA 15/2010) ANNEXURE A: COPY OF ORDER U/S.143(3) DT.20.3.2000 FOR THE ASST. YEAR 1997-98. ANNEXURE B: COPY OF ORDER DT.9.8.2004 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE C: CERTIFIED COPY OF ORDER DT.17.6.2009 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN ITA NO.1219/COCH/2004. TRUE COPY P.S. TO JUDGE C.R. C.N.RAMACHANDRAN NAIR & BHABANI PRASAD RAY, JJ. .................................................................... I.T. Appeal Nos15,31,37 & 43 of 2010 .................................................................... Dated this the 27th day of June, 2011. JUDGMENT Ramachandran Nair, J. Revenue has filed these appeals challenging the order of the Income Tax Appellate Tribunal allowing the appeals filed by the respondent-assessee for the assessment years 1997-98 to 2000-2001. Assessee, a plantation company engaged in rubber cultivation and deriving agricultural income is also liable to pay tax under the Income Tax Act on the income derived on the manufacture of rubber products. On comparing the income returned by the assessee for all the assessment years involved in these appeals with the book profit, the Assessing Officer felt that assessment has to be completed on book profit as provided under Section 115JA of the Income Tax Act (hereinafter called "the Act"). The assessee also raised no objection for the assessments made on book profit under Section 115JA of the Act. However, the claim made by the assessee in the assessment which was ITA 15/2010 & conn. 2 rejected by the Assessing Officer is exclusion of income derived on sale of old and unyielding rubber trees credited in the Profit and Loss Account prepared by the assessee under the provisions of the Companies Act, based on which block assessment under the Income Tax Act has to be made. Even though Assessing Officer adopted book profit from the Profit and Loss Account prepared by the assessee under the provisions of the Act, in the course of assessment, assessee claimed specific exclusion from book profit the income credited which was sales proceeds obtained on sale of old and unyielding rubber trees. The Assessing Officer rejected assessee's claim by holding that in the computation of book profit deductions allowable are only those provided under clauses (i) to (ix) of Explanation to Section 115JA(2) which have to be deducted from the Profit and Loss Account prepared by the assessee under the provisions of the Companies Act. The Assessing Officer accordingly completed the assessment on book profit without excluding income derived on sale of old and unyielding rubber trees credited by the assessee in the Profit and Loss Account prepared in accordance with the provisions of the Companies Act. The assessee ITA 15/2010 & conn. 3 having failed to succeed in first appeals on merit, filed second appeals before the Tribunal. Before the Tribunal the department opposed assessee's appeals by contending that the computation of book profit stands covered by decision of the Honourable Supreme Court in APPOLLO TYRES LTD. Vs. COMMISSIONER OF INCOME TAX reported in 255 ITR 273 wherein the Supreme Court held that Profit and Loss Account prepared in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act, 1956, is the basis for computation of book profit and in order to arrive at the book profit on which tax is assessable, the additions and deductions permissible are only those provided under Explanation to Section 115JA(2) of the Act. The Tribunal, however, referring to few decisions of this court, that of the Bombay High Court and the Honourable Supreme Court, which are considered in detail hereinbelow, held that sale proceeds of old and unyielding rubber trees is "agricultural income" and, therefore, it is an item to be excluded in the computation of book profit under clause (ii) of Explanation to Section 115JA(2) read with Section 10(1) of the Act. It is against these orders the Revenue has filed these common appeals ITA 15/2010 & conn. 4 raising the same question whether in the computation of book profit income derived on sale of old and unyielding rubber trees credited in the Profit and Loss Account should be excluded as held by the Tribunal. We have heard Senior counsel Sri.P.K.R.Menon appearing for the Revenue and Adv. Sri.P.Raghunath appearing for the respondent-assessee. 2. There is no controversy on the facts in this case in as much as assessee is assessable on book profit for all the four years above stated and in the Profit and Loss Account prepared by the assessee under Part II and Part III of Schedule VI to the Companies Act referred to in Section 115JA(2) of the Act based on which book profit assessment has been made, assessee has credited sale proceeds of old and unyielding rubber trees as income. The Honourable Supreme Court has settled the procedure for book profit assessment in the decision in APPOLLO TYRES by holding that additions and deductions permissible from the Profit and Loss Account prepared under the Companies Act for the purpose of determining book profit are those specifically stated in Explanation to Section 115JA(2) of the Act. We ITA 15/2010 & conn. 5 notice that the Tribunal has considered the decision of this court in COMMISSIONER OF INCOME TAX VS. RAJAGIRI RUBBER & PRODUCE CO. LTD. reported in 189 ITR 182 wherein this court held that there can be no capital gain on sale of old and unyielding rubber trees and this view taken by this court is confirmed by Supreme Court in the case of KELPETA ESTATES LTD. Vs. COMMISSIONER OF INCOME TAX reported in 221 ITR 601. It may be noticed that capital gain is determined by deducting from the sale proceeds the market value or cost of acquisition with cost of improvement as on the base year. This court held that base year value of the rubber tree has to be determined by taking into account future yield from the rubber tree until it becomes old and unyielding and if so taken, base year value will be more than the sale proceeds of old and unyielding tree sold as wood. It is only by applying this principle this court held that there can be no capital gain on sale of old and unyielding rubber trees. Counsel for the assessee relied on these decisions before us also and contended that no capital gain is assessable on the sale of rubber trees and according to him, what is not taxable in the regular assessment cannot be brought to ITA 15/2010 & conn. 6 tax in the course of assessment on book profit. Senior counsel appearing for the Revenue on the other hand contended that in the course of assessment on book profit, there is no scope for considering exemption, deductions and rebate available under other provisions of the Act which have to be followed in the normal computation of business income as provided under Section 29 of the Income Tax Act. We feel after the decision of the Supreme Court in APPOLLO TYES Case above referred this issue is academic in as much as book profit assessment has to be strictly made in accordance with the provisions of Section 115JA of the Act which is the provision relevant for all the assessment years involved in this case and additions and deductions to arrive at the book profit has to be made strictly in accordance with the Explanation to Section 115JA(2) of the Act. The only question, therefore, to be considered is whether the sale proceeds of old and unyielding rubber trees credited by the assessee in the Profit and Loss Account prepared under the provisions of the Companies Act above referred is an item covered by clause (ii) of Explanation to Section 115JA(2) of the Act. For easy reference we extract hereunder the ITA 15/2010 & conn. 7 relevant provisions of the Act: “Deemed income relating to certain companies. 115JA. (1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 but before the 1st day of April, 2001 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (2) Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956): ............. ............. Explanation:- For the purposes of this section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub- section(2), as increased by-- ............. if any amount referred to in clauses (a) to (g) is debited to the profit and loss account, and as reduced by,-- (i) the amount withdrawn from any reserves or ITA 15/2010 & conn. 8 provisions if any such amount is credited to the profit and loss account: ............ (ii) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit and loss account; or .............” In deciding the case in favour of the assessee the Tribunal has followed the decision of the Bombay High Court in COMMISSIONER OF INCOME TAX Vs. M/S.AKSHAY TEXTILES TRADING & AGENCIES P. LTD. reported in 203 Taxation 303 (Bom) wherein the Bombay High Court held that capital gains cannot be considered as part of book profit for the purpose of assessment under Section 115JA of the Act. However, the clear finding of the Tribunal is that sale proceeds of old and unyielding rubber trees is "agricultural income" which to our mind is very strange and unacceptable because assessee itself has no case that sale proceeds of old and unyielding rubber trees is agricultural income because if such a claim is advanced, assessee which is regularly exigible to agricultural income tax will have to pay ITA 15/2010 & conn. 9 agricultural income tax which assessee has not admittedly paid. Besides this, the finding of the Tribunal is exactly contrary to the decision of the Honourable Supreme Court in KAILAS RUBBER COMPANY's case reported in 60 ITR 435 wherein the Honourable Supreme Court held that rubber tree is a capital asset. Any one familiar with rubber cultivation very well knows that rubber tree takes 6 to 7 years for maturity and on maturity, tapping starts to take yield in the form of latex from the tree and the tree can be economically tapped for 20-25 years and thereafter when the yield is very low and the tree becomes old, it is sold for use as wood. Therefore, rubber tree is the agricultural asset from which yield is derived for 20 to 25 years and we do not know how the agricultural asset from which income is derived can also be treated as income when it is sold on becoming old and unyielding. In order to arrive at this decision, the Tribunal relied on decision of the Supreme Court in COMMISSIONER OF INCOME TAX Vs. RAJA BENOYKUMAR SAHAS ROY reported in 32 ITR 466. Even though counsel for the assessee also tried to justify the decision of the Tribunal, we do not think there is any scope for us to ITA 15/2010 & conn. 10 consider the position canvassed which is exactly contrary to what the Honourable Supreme Court has held in KAILAS RUBBER COMPANY's case. We do not find any provision in clauses (i) to (ix) of Explanation to Section 115JA(2) to exclude capital gains in the computation of book profit. In fact, what clause (ii) says is that income exempt from tax under Chapter III of the Income Tax Act only are excludable from Profit and Loss Account in computing the book profit. Though Section 10(1) in Chapter III excludes agricultural income, going by the above decisions of the Honourable Supreme Court we are unable to uphold the finding of the Tribunal that sale proceeds of old and unyielding rubber trees is also agricultural income which position assessee itself does not canvass because if the assessee take such a position, assessee should have paid huge amount of agricultural income tax which would be more than the tax payable on book profit under the Central Act. Capital gain is assessable under Chapter IV of the Income Tax Act and is not an item falling under Chapter III to permit exclusion under clause (ii) to Explanation to Section 115JA(2) of the Act as held by the Tribunal. Since we do not find any provision in clauses (i) to ITA 15/2010 & conn. 11 (ix) of Explanation to Section 115JA(2) to exclude capital gain from Profit and Loss Account, we cannot uphold the order of the Tribunal allowing deduction in computation of book profit. In our view, it is immaterial whether capital gain included in the Profit and Loss Account prepared under the Companies Act is otherwise assessable to income tax or not for the purpose of book profit. Since the assessee has included the sale proceeds of assets as income in the Profit and Loss Account prepared under Part II and Part III of Schedule VI to the Companies Act for the purpose of assessment of book profit under Section 115JA(2), the assessee has no escape but to pay tax on the book profit including such income. We, therefore, allow the appeals filed by the Revenue by reversing the orders of the Tribunal and by restoring the assessments. Even though some of the appeals decided by the Tribunal were against the orders of the CIT (Appeals) against rectified orders issued by the Assessing Officer under Section 154 of the Act, such an issue is not specifically raised or decided by the Tribunal. However, for the sake of finality, we hold that if book profit assessment originally made were not in accordance with the statutory ITA 15/2010 & conn. 12 provision, then the Assessing Officer was certainly free to rectify the assessment to make it in compliance with statutory provisions which exhaustively deals with the scheme of book profit assessment. We, therefore, allow the appeals by reversing the orders of the Tribunal and by restoring the assessments, whether original or rectified under Section 154 of the Act. Sd/- C.N.RAMACHANDRAN NAIR Judge Sd/- BHABANI PRASAD RAY Judge True copy P.S. to Judge pms