Madhya Pradesh High Court
Deputy Commissioner Of Income Tax vs Smt. Suniti Singh on 21 January, 2008
Equivalent citations: (2008)215CTR(MP)326, [2008]299ITR1183(MP)
Author: Dipak Misra
Bench: Dipak Misra, S.C. Sinho
JUDGMENT Dipak Misra, J.
1. In the present appeal preferred under Section 260A of the IT Act, 1961 (in short 'the Act) the following substantial question of law emanates for consideration:
Whether in the facts and circumstances of the case the Tribunal is justified in holding the decision of the CIT(A) in deleting the addition of Rs. 68,000 on the foundation that in the sale of calves no cost of acquisition is involved and hence, the question of income by way of capital gain does not arise ?
2. The facts which are essential to be adumbrated for adjudication of this appeal are that the assessee is running a dairy and sells cow milk. The AO observed that the assessee had claimed depreciation on calves forming a part and parcel of the live stock and, therefore, it was stock-in-trade of the assessee and income from the sale of such stock-in-trade is liable to tax. Thus, the AC) treated the calves to be stock-in-trade and assessed it to tax.
3. Being dissatisfied with the aforesaid order the assessee preferred an appeal and the appellate authority dislodged the finding of the AO and deleted a sum of Rs. 68,000.
Being aggrieved by the order passed by the appellate authority, the Revenue preferred an appeal before the Income-tax Appellate Tribunal (for short 'the Tribunal') which concurred with the view expressed by the appellate authority.
4. We have heard Mr. Rohit Arya, learned senior counsel along with Mr. S. Lal for the Revenue and Mr. Sumit Nema and Mr. Mukesh Agrawal, learned Counsel for the respondent assessee.
5. Mr. Rohit Arya, learned senior counsel assailing the impugned order submitted that the appellate authority as well as the Tribunal has fallen into serious error by coming to hold that no capital gain arose as there was no cost of acquisition though in the instant case, the question involved was whether the calves which form a part of the live stock and the income from the sale of such stock-in-trade constitutes the business income and would be liable to tax. It is urged by him that the issue raised before the Tribunal was that the sale of calves gave rise to income which was liable to be taxed as business income but the Tribunal erroneously did not address to the same and confirmed the order passed by the CIT(A) in respect of the capital gain. It is further submitted by him that the cost has been incurred by the assessee in the acquisition of calves and hence, the conclusion arrived at by the Tribunal is totally unsustainable. To bolster his submission he has placed reliance on the decision rendered in the case of CIT us. V. Ramaswamy Mudaliar (Decd.) . Learned senior counsel has also commended us to the decision rendered in CIT us. B.C. Srinivasa Setty .
Mr. Sumit Nema, learned Counsel appearing for the assessee per contra, submitted that the calves, as the entire factual scenario would exposit, do not form a part of stock-in-trade. It is canvassed by him that no amount has been spent in the process of acquisition of calves as has been soundly held by the first appellate authority as well as the Tribunal and the said conclusion being within the parameters of law does not warrant any interference. It is argued by him that the business of the assessee relates to sale of milk and the female cows constitute the asset which was for production of milk and sale thereof and, therefore, the fertilization of the cows was for production of milk and the calves were obtained as mere capital gain. Learned Counsel has further submitted that sale of calves is by no stretch of imagination a part of the business activity of the assessee as the business of the assessee entirely constitutes sale of milk and judged in proper perspective it cannot constitute stock-in-trade business activity of the assessee. Learned Counsel for the assessee submitted that the sale of calves has to be put in the compartment of capital receipt which is to be taxed in accordance with the provisions of Section 45 of the Act and its computation has to be made in accordance with Section 48. It is propounded by him that in the present case the cost of acquisition of the calves cannot be ascertained because there are no expenses directly attributed towards bringing them into existence inasmuch as all the expenditure is in the nature of revenue expenditure such as fodder, medicines, etc. which are already claimed as deductible expenditure in the P&L a/c and there is no direct capital expenditure which can be attributed to give birth to the calves. The learned Counsel contended that the entire expenses related to production of milk which have been shown as income from sale of milk and, therefore, the Tribunal has correctly concurred with the finding of the first appellate authority. It is highlighted by Mr. Nema that the tax effect in the instant case is less than Rs. 50,000 and as per CBDT instructions dt. 28th Oct., 1992, the monetary limit for filing of appeal or reference before the High Court has been fixed at Rs. 50,000 and the CBDT instructions are binding on the Revenue and hence, the appeal deserves to be dismissed on that score also.
7. To appreciate the submissions raised at the Bar it is apposite to refer to the concept of stock-in-trade and the concept of business. In H. Mohmed & Co. v. CIT , while dealing with the concept of stock-in-trade, it has been held as under:
The essential characteristics of stock-in-trade are : it. must be commodity in which there is dealing, i.e. which is bought and sold as distinguished from a commodity with which the business is carried on, viz., from the exploitation of which the income is derived. The distinction is between selling outright in the course of the business activity as distinguished from deriving income from exploitation of one's own assets.
8. The High Court of Karnataka in C.G. Thimmaiah v. CIT has held as follows:
Merely because the trees were cut, dressed and sized into logs for the purpose of convenient sale, it could not be construed as converting them into stock-in-trade. Therefore, the profit derived from the sale of rosewood trees was assessable to tax under the head 'Capital gains'.
9. At this juncture, it is seemly to refer to the concept of business as has been defined under Section 2(13) of the Act and to certain decisions in the said sphere. In CIT v. A. Dharma Reddy (Decd.) . the apex Court has opined that business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
In Narain Swadeshi Weaving Mills v. CEPT , the apex Court has held that business connotes some real, substantial and systematic or organized course of activity or conduct with a set purpose.
In State of Gujarat v. Raipur Mfg. Co. Ltd. , their ''Lordships have ruled that to infer from a course of transactions that if it is intended thereby to carry on business ordinarily the characteristics of volume, frequency, continuity and regularity indicating an intention to continue the activity of carrying on the transaction must exist but no test is decisive of that a person desires to carry on the business may be raised.
In State of Andhra Pradesh v. H. Abdul Bakshi & Bros. , the apex Court opined that business without profit is not business, any more than a pickle is candy. To regard an activity as business there must be course of dealings, either actually continued or contemplated to be continued with a profit motive and not for sport or pleasure.
10. Keeping the aforesaid concepts in view, it has to be scrutinised whether in the obtaining factual matrix calves form a part of stock. Certain conditions which emerge in the present case are that the assessee is engaged in the business of sale of milk and cows constitute an asset for production of milk; that the primary motive to have the cows is for production of milk; that the income is from sale of milk and all expenses and maintenance like fodder and medicines are designed to obtain milk; that the calves which have been sold are male and they cannot produce milk which is the business activity of the assessee. Two aspects are to be taken into consideration, namely, (1) the expenses made by the assessee to maintain the cows have already been put in the compartment of P&L a/c; and (2) the calves came into existence in the aforesaid process.
First we shall advert to the facet whether the calves under the aforesaid fact foundation can be regarded as stock-in-trade. From the facts that have been exposited, it is discernible that the business of the assessee relates to sale of milk and the female cows constitute the asset and they are exploited for production of milk. The primary motive of the assessee is to fertilise the cows so that they can yield milk. The income is derived through the sale of milk and all expenses which have gone into are to upkeep them and maintenance of cows like purchase of fodder, medicines, etc. are exclusively designed for obtaining milk and the said expenditure has been shown as revenue expenditure in the P&L a/c. The calves came into being in the process so that the female cows can be utilised to produce and eventually the milk is sold. The male cows (sic-ealves) are sold as they are of no value to the assessee as they cannot produce milk. There is no material on record to show that selling of calves is a part of the business activity of the assessee. Facts brought on record clearly show that the assessee is engaged in the business activity which relates to sale of milk.
11. The sale of calves by the assessee. as has been indicated hereinabove, relates to sale of male calves. The sale of calves is not on account of realisation of stock-in-trade or as a business activity. It is submitted by Mr. Nema, learned Counsel for the assessee that if the factual matrix is properly appreciated it would be vivid that the sale of calves can only be regarded as capital receipt and not a part of business activity. Learned Counsel has submitted that it is to be taxed in accordance with the provision of Section 45 of the Act and its computation should be done in accordance with Section 48. It is urged by him that if the provisions contained under Sections 45 and 48 are scanned there can be no shadow of doubt that the cost of acquisition being unworkable in the case of this nature, no taxable income would be accrued. In C1T v. B.C. Srinivasa Setty (supra) the apex Court has held that Section 45 is a charging section and Section 48 provides base for computation. Their Lordships further proceeded to hold that there is a quantitative difference between the charging provision and computation provision and ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. If in the facts of a particular case, computation under Section 48 is not possible, the charge under Section 45 fails because it cannot be effectuated.
12. In Sunil Siddharthbhai v. CIT , the apex Court has expressed the opinion as under:
...At the time when the partner transfers his personal asset to the partnership firm, there can be no reckoning of the liabilities and losses which the firm may suffer in the years to come. All that lies within the womb of the future. It is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership firm when neither the date of dissolution or retirement can be envisaged nor can there be any ascertainment of liabilities and prior charges which may not have even arisen yet. Therefore, the consideration which a partner acquires on making over his personal asset to the firm as his contribution to its capital cannot fall within the terms of Section 48. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in Section 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether.
13. Submission of Mr. Nema is that in the present case the cost of acquisition of calves cannot be ascertained because there are no expenses directly attributable towards bringing them into existence. All the expenditure has to be treated as revenue expenditure which has been claimed by the assessee as deductible expenditure in the P&L a/c.
14. At this juncture, it is apposite to refer to the decision rendered in Sri Krishna Dairy & Agricultural Farm v. CAT , wherein it has been held that birth of calves was incidental to the business activity of the assessee and it is difficult to accept them as asset as there was no cost of acquisition of calves and, therefore, gain which arose in such sale was not liable to tax as capital gain. Mr. Rohit Arya, learned senior counsel for the Revenue has placed heavy reliance on the decision rendered in Ramaswamy Mudaliar (Decd.) (supra). We have carefully perused the said decision. In our considered opinion the said decision is distinguishable on facts. The Madras High Court in the said decision was dealing with the expenditure incurred by the assessee for the purpose of nurturing, protecting and preserving the foetus of the colt and the filly in goods shape and health so that healthy off springs were brought into existence by the mare. The maintenance or upkeep expenses of the marc was really intended to bring into being the offspring in the shape of colt and filly and in that sense, the same could be legitimately regarded as cost incurred by the assessee in the acquisition of the colt and the filly. The Bench has further observed that there is distinction between trained and untrained animals. Being of this view it treated that there was ascertainable cost of acquisition and, therefore, the assessee was liable to tax under Section 48 of the Act. It is worth rioting that in the said case the expenditure on mare did not result in production of milk which could result or entail in carrying of business. The amount spent on mare was for a different purpose which gave rise to the business and, therefore, it has been held therein that the expenditure incurred was available for capitalisation. In the case at hand, the entire expenses were attributable to the production of milk. The whole intention of the assessee is to produce milk and sell it and not to produce offspring and sell them. In view of the aforesaid, we are inclined to agree with the view taken in the case of Sri Krishna Dairy & Agricultural Farm (supra).
15. In view of the aforesaid premises we are disposed to think that the Tribunal is right in holding that sale of calves by the assessee cannot be regarded as capital gain since the cost of acquisition is not ascertainable.
16. The present appeal can also be looked from another aspect. It is not disputed that the tax effect is less than Rs. 50,000. The CBDT vide instruction dt. 28th Oct., 1992 fixed the monetary limit for preferring appeal or reference before the High Court at Rs. 50,000. Later on that has been increased to Rs. 2 lakhs. In Asstt. CIT v. Aradhana Oil Mills (2002) 30 ITC 446, it has been held that CBDT circulars are binding on tax authorities and if the appeal involved an amount less than that fixed by the CBDT the appeal would be dismissed. In the instant case the quantum of addition involves Rs. 68,000 for the asst. yr. 1991-92. The tax effect is Rs. 15,984 which is much below the quantum fixed by the CBDT.
17. Judged from both the angles, we are of the considered opinion that the appeal is sans merit and liable to be dismissed and accordingly, we so direct without any order as to costs.