Commissioner of Income Tax vs J.N. Sarma and Others

A.K. Patnaik, J.—This is an application filed by the Commissioner of Income Tax, North-Eastern Region, Shillong, u/s 256(2) of the Income Tax Act, 1961, with a prayer to require the Income Tax Appellate Tribunal, Gauhati Bench, Guwahati, to state a case and to refer to this court the following question of law :

"Whether, on the facts and in the circumstances of the case and in view of the wording in Rule 8(2) of the Income Tax Rules, 1962, the Tribunal has not erred in allowing replantation expenses as revenue expenditure ?"

The facts of the case are that the respondent carries on the business of producing, manufacturing and selling tea and is assessed under the Income Tax Act, 1961, in the status of a Hindu undivided family. During the accounting year 1984-85, the respondent incurred some expenses on replantation of tea bushes and, in the course of assessment for the assessment year 1985-86, claimed the sum as revenue expenditure. The Income Tax Officer, A-Ward, Jorhat, in his assessment order disallowed an amount of Rs. 1,00,000 out of such expenses on plantation on the ground that the expenses were on replanting on an area en bloc which was as good as a new plantation, and were thus capital in nature. Aggrieved by the said order of assessment, the respondent filed an appeal before the Commissioner of Income Tax (Appeals), North-Eastern Region, Guwahati, who on an interpretation of rule 8 of the Income Tax Rules, 1962, held the said expenses of Rs, 1,00,000 as revenue expenditure and allowed the same.

Against the said order of the Commissioner of Income Tax (Appeals), the Department preferred an appeal before the Income Tax Appellate Tribunal, Gauhati Bench, and contended that the Commissioner of Income Tax (Appeals) erred in allowing replanting expenses without considering the fact as to whether the replanting was for replacement of bushes or on virgin area and the Tribunal held :

"After considering the rival contentions and the findings of the learned Commissioner of Income Tax (Appeals), we find that the claim of the assessee was correctly allowed by the Commissioner of Income Tax (Appeals) on the facts of the case. There is no finding by the Income Tax Officer that the replanting was on virgin area of the tea garden. In the absence of necessary findings, the contention of the Revenue cannot be accepted. The order of the learned Commissioner of Income Tax (Appeals) on this point is sustained."

Aggrieved by the said order of the Tribunal, the Department filed a Reference Application No. 125/(Gauhati) of 1991 u/s 256(1) of the Income Tax Act, 1961, for referring the question stated in paragraph 1 (see page 1057) above for the opinion of this court. The Tribunal, however, rejected the reference application by its order dated April 21, 1993, on the ground that its order in the appeal was passed on the findings of fact and as such no question of law arose on the same.

Mr. D.K. Talukdar, learned standing counsel for the Income Tax Department, submits that since the interpretation of Sub-rule (2) of rule 8 of the Income Tax Rules, 1962, relating to allowance in respect of the cost of planting of bushes in replacement of bushes was involved, a question of law arose out of the order passed by the Tribunal in second appeal. He, accordingly, submitted that the Tribunal should be required to state a case on the question stated in paragraph 1 (see page 1057) above for the opinion of this court.

Mr. B.N. Sarma Barthakur, appearing on behalf of the respondent, on the other hand, submitted that there is no finding in the assessment order passed by the Income Tax Officer that the replantation was done on virgin area and that the Tribunal sustained the order of the Commissioner of Income Tax (Appeals) allowing the cost of replantation on the facts of the case and accordingly no question of law arose out of the order of the Tribunal passed in second appeal.

We are unable to accept the aforesaid submission of Mr. B.N. Sarma Barthakur. The Income Tax Officer rejected the claim of the assessee on the ground that the expenditure of Rs. 1,00,000 appeared to be on replantation on an area en bloc which was as good as a new plantation and was thus capital in nature. It was only the Commissioner of Income Tax (Appeals) who allowed the said claim of the assessee under Sub-rule (2) of Rule 8 of the Income Tax Rules, 1962, as revenue expenditure. The Department''s grievance before the Tribunal in second appeal was that the Commissioner of Income Tax (Appeals) could not have allowed the said claim of the assessee without a finding that the expenses were on replantation for purposes described in Sub-rule (2) of Rule 8 of the Income Tax Rules, 1962, namely, for replacement of bushes that have died or become permanently useless in an area already planted. The Tribunal rejected this contention in its order in second appeal saying that the claim of the assessee was correctly allowed by the Commissioner of Income Tax (Appeals) on the facts of the case. The question of law that arose out of the aforesaid order of the Tribunal was as to whether, in view of the wording of Rule 8(2) of the Income Tax Rules, 1962, the Tribunal was right in coming to the finding that the claim of the assessee was correctly allowed by the Commissioner of Income Tax (Appeals) on the facts of the case. The Tribunal''s decision not to make a reference to this court was thus not correct.

We, however, find that the question as framed by the Department in the reference application is not correctly worded inasmuch as it gives an impression as if the Tribunal allowed the expenses as revenue expenditure on an erroneous interpretation of the rule. It is the Commissioner of Income Tax (Appeals) who allowed the expenditure under the rule and, according to the Revenue, by overlooking the wording of Rule 8(2). We would, therefore, call upon the Tribunal to state a case for our opinion on the following question of law :

"Whether in view of the wording of Rule 8(2) of the Income Tax Rules, 1962, the Tribunal was right in coming to the finding that the claim of the assessee was rightly allowed by the Commissioner of Income Tax (Appeals) on the facts of the case ?"

With the aforesaid observations and direction the petition is allowed. The Tribunal shall state a case and refer the question of law as stated in paragraph 8 (see page 1059) above for the opinion of this court.

S.N. Phukan, Actg. C.J.

I agree.