Income Tax Appellate Tribunal - Cochin
Kannan Devan Hills Planatations Co P ... vs Assessee on 19 September, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
COCHIN BENCH, COCHIN
BEFORE S/SHRI N.R.S.GANESAN, JM and CHANDRA POOJARI, AM
I.T.A. No.157/Coch/2014
Assessment Year : 2008-09
M/s. Kannan Devan Hills Vs. The Assistant Commissioner of
Plantation Co. Pvt. Ltd., Income-tax,Circle-1(2),
KDHP House, Ernakulam.
Munnar-685 612.
[PAN: AACCK 5399M]
(Assessee -Appellant) (Revenue-Respondent)
Assessee by Shri Abraham Joseph Markos, Adv.
Revenue by Shri M. Anil Kumar, CIT(DR)
Date of hearing 26/08/2014
Date of pronouncement 19/09/2014
ORDER
Per CHANDRA POOJARI, Accountant Member:
This appeal filed by the assessee is directed against the order dated 15-01-2014 passed by the Ld. CIT(A)-II, Kochi for the assessment year 2008-09.
2. The brief facts of the issue are that the assessee is engaged in the business of growing, manufacturing and sale of tea. The assessee has claimed deduction u/s. 80IA amounting to Rs.58,91,000/- u/s. 80IA(4)(iv)(c) of the I.T. Act. The Assessing officer disallowed the same 2 I.T.A. No.157/Coch/2014 on the reason that the assessee has not complied with the provisions of sec. 80IA(4)(iv)(c) with the following observations:
"The assessee has claimed deduction u/s. 80IA of the Income Tax Act, 1961 on account of the income generated from the electricity it distributed which in turn it received from the KSEB. On an enquiry the AR submitted that the assessee company has acquired with effect from 1st April 2005, certain tea estates at Munnar, as a going concern, including erstwhile Devikulam Estate from 1st July 2005, from Tata Global Beverages Limited (The Tata Tea Ltd - lessor). by lease of land and sale/transfer of other assets, including building and machineries and liabilities to the aforesaid estate.
The above mentioned plant and machinery includes the plant and machinery for which it claim the deduction u/s. 80IA and which is using for distribution and transmission of electricity. The erstwhile Tata Tea Ltd. has been using for this plant machinery for long time. It is noted that as a wind fall gain the assessee company received the above plant and machinery and claimed to have renovated and modernized the transmission line and claimed deduction u/s. 80IA. It is submitted by the AR that the assessee company has done substantial renovation after 01-04-2004.
A plain reading of sub-section (4), clause (iv) makes it clear that deduction u/s. 80IA will be available under clause (iv) to an "undertaking which fulfills all the three conditions laid out in sub-clause
(a), (b) and (c) of the clause, i.e. the undertaking must have been set up for the generation or generation and distribution of power during the specified period; it should have started transmission or distribution by laying network of new lines during the specified period;
and it must undertake substantial renovation and modernization of the existing network of transmission or distribution lines during the specified period.
In the instant case, the assessee company was incorporated for Growing, Manufacturing and sale of tea. Incidental business is non tea operations such as growing, trading and sale of spices etc. and letting out of Bungalows. Power related business is not among the main or ancillary business of the assessee company. The assessee is purchasing power from KSEB and distributing the same. To be eligible for deduction under this clause, the assessee must be an undertaking 3 I.T.A. No.157/Coch/2014 which has been set up for the generation or generation and distribution of power, satisfying all the clauses. Mere distribution of power does not make it an eligible undertaking within the meaning of section 80IA(4). Since the assessee does not satisfy all the conditions laid out in clause (iv) of sub-section (4), in that it is not an undertaking set up for the \generation or generation and distribution of power, it is not an eligible business within the meaning of section 80IA(4). Hence the claim of 80IA(4)(iv) is not allowed."
3. On appeal, the CIT(A) confirmed the order of the Assessing officer by observing that conditions as laid down in section 80IA are to be fulfilled. The CIT(A) observed that in the case of assessee, the assessee company is not a new industrial undertaking and the business of electricity distribution was transferred to the assessee as an integral part of whole business by Tata Tea Ltd. Under these circumstances, according to the CIT(A), the business of the assessee became an old business and therefore, the assessee does not fulfill all the conditions of being a "New Industrial Undertaking" as laid down in sec. 80IA(3) of the Act. As it is formed by reconstruction of business already in existence, and as Tata Tea Ltd. has established the said plant and machinery for transmission and distribution of electricity long back, the Ld. CIT(A) held that the assessee is not eligible for deduction u/s. 80IA. According to the CIT(A) the machinery and plant used by the assessee was previously used by Tata Tea Ltd. and the plant and machinery being part of the business of Tata Tea Ltd. which has been splitted up and acquired by the assessee, hence, on this ground also the assessee is not eligible for deduction u/s. 80IA. 4 I.T.A. No.157/Coch/2014
4. According to the CIT(A) if the assessee's claim u/s. 80IA(4)(iv)(c) is considered, the requirement for being eligible for such benefit is to "substantially renovate and modernize" the existing network of transmission or distribution lines at any time during the period beginning on the 1st day of April, 2004 and ending on the 31st day of March, 2010. The further requirement and condition of this clause is stated in the explanation to this sub-clause wherein it is laid down that "substantial renovation and modernization" means an increase in the plant and machinery in the network of transmission or distribution lines by at least fifty per cent of the book value of such plant and machinery as on the 1st day of April, 2004. The CIT(A) stated that although the assessee has claimed to have done substantial renovation after 1.4.2004, however the assessee has not been able to satisfy conditions laid down in explanation to sec.80IA(4)(iv) as the amount spent for renovation and modernization is not shown to be more by 50% of the book value of such plant and machinery as on 1.4.2004. Since the assessee has not been able to show that it has spent such amount on the renovation and modernization, the CIT(A) held that the assessee is not entitled for deduction u/s. 80IA and accordingly confirmed the addition of Rs.58,91,000/- made by the Assessing officer. Against this the assessee is in appeal before us. 5 I.T.A. No.157/Coch/2014
5. The Ld. AR submitted that the CIT(A) erred in confirming the disallowance of deduction u/s. 80IA amounting to Rs.58,91,00/- since the assessee has fulfilled all the conditions laid down in sec. 80IA(3) of the Act. In the nature of the location of the assessee's estate, it was evident that the Government of Kerala sold electricity to the assessee in bulk and directed the assessee to also provide the same to the inhabitants in and around the area of its business operations. The Ld. AR submitted that electricity distribution remains an integral part of the tea operation and accordingly it is to be considered as part of the operation from tea. If the deduction u/s. 80IA is not be allowed, the adding back of any amount can only be to the income from Tea grown and manufactured. According to the Ld. AR, the condition laid down in sec. 80IA(4)(iv)(c) need not be applied cumulatively and if the assessee has fulfilled any one of the conditions laid down in section 80IA(4)(iv)(b), the assessee is entitled for deduction u/s. 80IA(4)(iv)(c) of the I.T. Act. According to him the lower authorities have totally misinterpreted the above provisions to deny deduction u/s. 80IA(4)(iv)(c) of the I.T. Act. Further, he submitted that the assessee has complied with all the requirements of the above section to entitle for deduction u/s. 80IA(40(iv)(c) of the I.T. Act. The Ld. AR further drew our attention to the Auditor's Certificate dated 20th January, 2010 6 I.T.A. No.157/Coch/2014 stating that the undertaking relating to distribution of electricity business was taken over by the assessee from Tata Tea Limited w.e.f. from 01-07-2007 (PB pg. nos. 13 to 27) and specifically with reference to cost towards renovation incurred by the assessee which is as follows:
A.Y. 2008-09 : Rs.50.31 Lakhs A.Y. 2009-10 : Rs.41.32 Lakhs (Approx.)
6. On the other hand, the Ld. DR submitted that a plain reading of sub-section (4), clause (b) makes it clear that deduction u/s. 80IA will be available under clause (iv) to an undertaking which fulfills all the three conditions laid out in sub-clause (a), (b) and (c) of the clause, i.e., the undertaking must have been set up for the generation or generation and distribution of power during the specific period and it should have started transmission or distribution by laying network of new lines during the specified period and it must undertake substantial renovation and modernization of the existing network of transmission or distribution lines during the specified period.
7. According to the Ld. DR in the instant case, the assessee company was incorporated for growing, manufacturing and sale of tea and incidental business is non tea operations such as growing, trading 7 I.T.A. No.157/Coch/2014 and sale of spices etc. and letting out of Bungalows. According to the Ld. DR power related business is not among the main or ancillary business of the assessee company. The Ld. DR submitted that the assessee has been purchasing power from KSEB and distributing the same. To be eligible for deduction under this clause, according to the Ld. DR, the assessee must be an undertaking which has been set up for the generation or generation and distribution of power, satisfying all the clauses and mere distribution of power does not make it an eligible undertaking within the meaning of section 80IA(4)(iv) of the I.T. Act. Since the assessee does not satisfy all the conditions laid out in clause
(iv) of sub-section (4), the Ld. DR submitted that in that it is not an undertaking set up for the generation or generation and distribution of power, it is not an eligible business within the meaning of section 80IA(4)(iv) and hence the claim of 80IA(4)(iv) shall not be allowed.
8. The Ld. DR submitted that as mentioned in sec. 80IA(40(iv)(c), the undertaking shall substantially renovate and modernize the existing network of transmission or distribution lines at any time during the period beginning on the 1st day of April, 2004 and on the 31st day of March, 2010. As per the explanation below the clause, according to the Ld. DR, substantial renovation and modernization means an increase in plant and machinery at least by 50% of the book value of such plant 8 I.T.A. No.157/Coch/2014 and machinery as on 1st day of April, 2004. It was also noted by the Ld. DR that the assessee company does not have any existing transmission or distribution lines to calculate the book value. It was also noticed by the Ld. DR that as on 01/04/2004, the said plant and machinery was in the books of account of Tata Tea Ltd. as the same was acquired by the assessee company only on 01/04/2005 and the assessee cannot go to the extent of calculating the book value of the plant and machinery lying in some other companies books of account and fixed assets, and later on renovates by adding 50% more value to it and claim deduction u/s. 80IA. According to the Ld. DR the clause 80IA(40(iv)(c) is intended for the companies who are engaged in the relevant business and who have existing network of transmission and distribution lines and hence, the assessee company is not eligible for deduction u/s. 80IA on this ground.
9. The Ld. DR submitted that the assessee company has acquired certain tea estate as a going concern from Tata Tea Ltd. by lease of land and sale/transfer of other assets including buildings and machineries and liabilities pertaining to the estates. According to the Ld. DR the said plant and machinery related to electricity transmission of the erstwhile Tata Tea Ltd. was acquired by the assessee company w.e.f. 01/04/2005 which shows that the plant and machinery were part of the business of Tata Tea Ltd. which has been splitted up and acquired by the assessee 9 I.T.A. No.157/Coch/2014 company and hence, the assessee company was not eligible for deduction u/s. 80IA.
10. The Ld. DR submitted that the assessee company was not formed by the transfer to a new business of machinery or plant previously used for any purpose. According to the Ld. DR, the Tata Tea Ltd. had established the said plant and machinery for transmission and distribution of electricity long back and has been using since then. The Ld. DR submitted that the plant and machinery acquired by the assessee company had been installed long back and which has been using continuously by Tata Tea Ltd. According to the Ld. DR even if the assessee company claimed to have started a new business, it does not fulfil the eligibility conditions and hence not eligible for 80IA deduction.
11. The Ld. DR further submitted that as per sec. 80IA(3) Explanation 2 any plant and machinery previously used for any purpose is transferred to a new business, the total value of the machinery or plant transferred shall not exceed 20% of the total value of the plant and machinery used in the business. As per the assessee company's claim, the WDV of the plant and machinery as on 01/04/2004 was Rs. 88,39,340/-. According to the Ld. DR in the name of substantial renovation the assessee added Rs. 50,30,932/- worth plant and 10 I.T.A. No.157/Coch/2014 machinery and the existing plant and machinery to the total plant and machinery is above 35% and hence does not fulfil the eligibility conditions as per the Explanation and hence not eligible for deduction u/s. 80IA.
12. In view of the above discussions, the Ld. DR submitted that the assessee company is not eligible for the deduction u/s. 80IA and hence the claim of the assessee company is to be rejected and the deduction claimed to be added back to the total income.
13. He also relied on the order of the CIT(A).
14. We have heard both the parties and perused the record. In this case, the claim of the assessee is u/s. 80IA(4)(iv) of the I.T. Act. Section 80IA(4)(iv) reads as follows:
(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income" of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years.
Sub- section (4) has six clauses (i) to (vi), each of which describes the types of undertaking or enterprise which is eligible to claim the deduction under this section, i.e. the nature of the 'eligible business' In the assessee's case, the deduction is being claimed u/s. 80IA(4)(iv) reads as follows:
11 I.T.A. No.157/Coch/2014
(iv) an undertaking which:-
(a) Is set up any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on the 1st day of April,1993 and ending on 31st March, 2010.
(b) Starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on the 1st day of April,1999 and ending on the 31st day of March, 2010;
Provided that the deduction under this section to an undertaking under sub-clause (b) shall be allowed only in relation to the profits derived from laying of such network of new lines for transmission or distribution.
(c) Undertakes substantial renovation and modernization of the existing network of transmission or distribution lines at any time during the period beginning on the 1st day of April, 2004 and ending on the 31st day of March, 2010.
Explanation - For the purposes of this sub-clauses, "substantial renovation and modernization" means an increase in the plant and machinery in the network of transmission or distribution lines by at least fifty per cent of the book value of such plant and machinery as on the 1st day of April, 2004)".
14.1 Further, it is to be noted that the explanation defines what is substantial renovation and modernization and it lays down that the value of transmission and distribution lines should increase as per the books, at least by 50% as compared to the book value as on 01-04-2004. Admittedly in this case, as on 01/04/2004, the said plant and machinery was in the books of account of Tata Tea Ltd. Being so, the question of increase in the value of transmission or distribution lines does not arise. 12 I.T.A. No.157/Coch/2014 The assessee sought to rely on the expenditure incurred towards renovation and modernization of transmission line during the period A.Y. 2008-09 which was Rs.50.31 lakhs and A.Y. 2009-10 which was Rs.41.32 lakhs and therefore, it was submitted that the assessee has complied with the provisions of sec. 80IA(4)(iv) of the I.T. Act. This fact shows that the assessee was in the business of tea plantation and the plant and machinery was acquired by the assessee company w.e.f. 01/04/2005. It is to be noted that the assessee company had acquired certain tea estates as a going concern from Tata Tea Ltd including plant and machinery used for transmission and distribution of electricity. As such, it cannot be said that the assessee has undertaken substantial renovation and modernization of transmission and distribution lines as stipulated u/s. 80IA(40(iv)(c) of the I.T. Act. We accept the submission of Ld. DR that the provisions of sec. 80IA(4)(iv)(c) of the I.T. Act are meant to encourage modernization and upgradation of plant and machinery in power sector within a specified period in order to ensure wider network and prevention of transmission loses. This objective is sought to be achieved by prescribing a criterion of increase in the book value of the transmission or distribution lines, which are treated as plant and machinery by the electricity supply company, compared to the book value as on 01-04-2004. We are, therefore of the opinion that the assessee's claim of capitalization of expenditure incurred on renovation 13 I.T.A. No.157/Coch/2014 and modernization in the books of accounts is a condition precedent for allowing the claim of deduction u/s. 80IA(40(iv)(c) of the Act. In the present case, since the plant and machinery used for transmission and distribution of electricity has been acquired from Tata Tea Ltd., it cannot be said that book value appearing in the books of Tata Tea Ltd. as on 1st day of April, 2004 relates to the assessee-company. Being so, in our opinion the assessee has not complied with the provisions of sec. 80IA(4)(iv)(c) of the I.T. Act. Further, we make it clear that income so increased on disallowance of deduction u/s. 80IA(4)(iv) of the I.T. Act , is to be considered as income from plantation of tea only. With this observation, we reject this ground raised by the assessee.
15. The next ground is with regard to disallowance of gratuity contribution made to the approved Trust in excess of the amount debited in the Profit and Loss Account.
16. The brief facts of the issue are that the Assessing officer has disallowed this amount as this amount was not certified by the auditors and was claimed only in the computation of total income. The Assessing officer's observations are as follows:
"The assessee company claimed gratuity of Rs.72,15,856/- in the computation without disclosing in the Audited Balance sheet and P&L 14 I.T.A. No.157/Coch/2014 account. The assessee has claimed the same as deduction in the computation of income. However the statutory auditor has not certified in the Audited report of accounts any such amount and as such the said expenditure is treated as inadmissible and added back to the total income."
17. On appeal, the CIT(A) observed that this amount was paid to LIC towards gratuity and also in the KHDP Employees Gratuity Fund Trust, approved by Commissioner on 22/08/2006. Moreover the amount charged and as certified by the auditors charged to P&L account was Rs. 38,77,125/- and Rs. 17,07,190/- was earlier year's liability and the balance amount of Rs. 72,15,858/- was shown as adjustable from Gratuity Trust and was included under loans and advances by the assessee himself and not as an amount paid towards gratuity. Since this amount has been adjusted from gratuity fund during the year, and included under loans and advances, the CIT(A) held that the same was not an allowable expenditure u/s. 43B and for this reason only, even the auditors did not certify this amount as gratuity paid and hence the Assessing officer was right in law in disallowing the same. According to the Ld. CIT(A), this amount has been offered for disallowance in the A.Y. 2009-10 when this amount was written off in the books of account, whereas given the method of accounting, the same was disallowable in A.Y. 2008-09. Accordingly, the CIT(A) confirmed the addition of Rs. 72,15,856/- made by the Assessing officer.
15 I.T.A. No.157/Coch/2014
18. The CIT(A) also observed that since this disallowance is sustained in this assessment year 2008-09, the assessee would get the relief of this amount in A.Y. 2009-10, where the same amount has been disallowed to avoid double addition of the same amount.
19. The CIT(A) further observed that although gratuity related to the staff working in tea estate, but in this case this amount was not actually paid to the workers and was only an adjustment in the books. Hence the CIT(A) held that this expenditure cannot be said to be relatable to tea business and hence the benefit of Rule 8 and section 33AB would not be allowed to the assessee. Against this, the assessee is in appeal before us.
20. We have heard the parties and perused the record. Admittedly, the assessee has paid to the gratuity contribution in excess of the amount debited to Profit and Loss account and the expenditure was not relatable to the assessment year under consideration and each assessment year is independent assessment year and only expenditure relating to that assessment year is to be claimed as business expenditure actually incurred by the assessee and for determining the income of the assessee, incurring of expenditure should be wholly and exclusively laid down for the purpose of business of the assessee. In the 16 I.T.A. No.157/Coch/2014 present case, the contribution to the approved gratuity fund cannot be allowed. Being so, the CIT(A) is justified in disallowing the same. The claim of the assessee that for invoking the provisions of sec. 43B, actual payment is to be allowed. This argument of the assessee is totally misconstrued. Only the expenditure relevant to the assessment year under consideration is to be allowed. Being so, we do not find any infirmity in the order of the CIT(A).
21. The Ld. AR made an alternative claim that in the event of disallowance, it should be considered as part of the income from tea business. He relied on the judgment of the Hon'ble Supreme Court in the case of Karimtharuvi Tea Estates Ltd. and Another vs. State of Kerala and Others (48 ITR 83). If the assessee claimed as expenditure relevant to the tea business, then, it should be considered as income of the tea business only. With this observation, we dismiss this ground.
22. The next ground is with regard to disallowance of provision made for DA of Rs.2.93 crores on the ground that the liability is unascertained and is to be treated as contingent liability.
17 I.T.A. No.157/Coch/2014
23. The facts of the case are that the Assessing officer made this addition holding that this was an unascertained contingent liability observing as following:
"The assessee company has made a provision for DA after the notification of minimum wages for plantation workers by the Govt. of Kerala dated 18/02/2006. The said order was challenged by the Association of Planters of Kerala in the Hon. High Court of Kerala and the High Court stayed the order till final disposal of the case.
It is noted that the liability will be crystallized only after the disposal of the case and hence the liability is unascertained and hence treated as contingent liability not admissible as expenditure and hence the contentions of the AR is rejected and disallowed the amount".
24. The Ld. AR submitted that the provision of Rs. 2.93 crores was made towards frozen dearness allowance for the workers. Since almost the entire labour work force were engaged in the tea operations of the company, the entire provision was charged to tea income. This amount included Rs.51,66,192/- relating to the statutory bonus and provident fund contributions of the DA, which the assessee had already offered as disallowance u/s. 43B. For the balance amount of Rs.2,41,05,985/- it was submitted that this ground was not pressed and hence same may be treated as withdrawn.
25. On appeal, the CIT(A) observed that the amount included Rs. 51,66,192/.- which was already disallowed by the assessee in its 18 I.T.A. No.157/Coch/2014 computation and hence this amounted to double disallowance. Hence the addition to the extent of Rs.2,41,05,985/- was confirmed by the CIT(A).
26. The CIT(A) also observed that since the amount was only a provision created in the accounts, the same cannot be treated as derived from growing and manufacturing of tea and it would acquire that character only at the point when it is actually paid to the plantation workers. Thus the CIT(A) held that the provision in the nature of contingent liability would be added back in the central income. Against this, the assessee is in appeal before us.
27. We have heard both the parties and perused the record. We find that the assessee has not shown any reason for not pressing this ground before the lower authorities. Hence, this ground is rejected.
28. The assessee has made an alternative claim that on disallowance, and adding back to the income of the assessee, it should be treated as income from tea business so as to apply the provisions of sec. 33AA r.w.s. Rule 8 of the I.T. Rules. As discussed in earlier para with regard to gratuity payment, if this amount is claimed as relating to tea business as a expenditure on adding back the same to the income of the assessee, 19 I.T.A. No.157/Coch/2014 then it is to be treated as income from tea business only. With this observation, we dismiss this ground.
29. In the result, appeal filed by the assessee is partly allowed.
Pronounced accordingly on 19-09-2014
sd/- sd/-
(N.R.S.GANESAN) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Place: Kochi
Dated: 19th September, 2014
GJ
Copy to:
1. M/s. Kannan Devan Hills Plantation Co. Pvt. Ltd., KDHP House, Munnar-685 612.
2. The Assistant Commissioner of Income-tax, Circle-1(2), Ernakulam.
3. The Commissioner of Income-tax(Appeals)-II, Kochi.
4. The Commissioner of Income-tax, Kochi.
5. D.R., I.T.A.T., Cochin Bench, Cochin.
6. Guard File.
By Order (ASSISTANT REGISTRAR) I.T.A.T., Cochin