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January 10, 2023

Tea bushes and shade trees that are established to protect tea bushes to be considered as agricultural income

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Tea bushes and shade trees that are established to protect tea bushes to be considered as agricultural income

Fact and Issue of the case

The brief facts of the case are that the assessee company during the year received a total compensation of Rs.4,45,53,602/- from NHAI on account of compulsory acquisition of agricultural land along with standing crops of tea bushes, shade trees and labour quarters constructed on land. The bifurcation of the amount is as under:

  • Assessee has received Rs.3,00,84,778/- from NHAI as compensation against acquisition of agricultural land, which is not a capital asset by virtue of section 2(14) of the Income Tax Act, 1961.
  • Assessee received Rs.75,84,192/- from NHAI against sale of tea bushes.
  • Assessee received Rs.17,47,763/- from NHAI against sale of shade trees.
  • Assessee received Rs.51,36,869/- from NHAI against sale of labour quarters.

Though the land of the assessee has been accepted by the Department as agricultural land which was not a capital asset as per section 2(14) of the Act and hence the compensation received by the assessee on acquisition of the land has not been taxed. However, the Assessing Officer treated the amount received from sale of tea bushes and sale of shade trees and sale of labour quarters as taxable business income of the assessee.

The assessee in this appeal has taken the following grounds of appeal:

“1. That the Ld. CIT(A) erred in considering the receipt of Rs. 75,84,192/- from NHAI as business income without appreciating the fact that the same was on account of sale of Tea bushes, which is duly exempted u/s 10 of the IT Act,1961.

2. That the Ld. CIT(A) erred in considering the receipt of Rs. 17,47,763/- from NHAI as business income without appreciating the fact that the same was on account of sale of trees (Shade Trees), which is duly exempted u/s 10 of the IT Act, 1961.

3. That the Ld. CIT(A) erred in considering the receipt of Rs. 51,36,869/- from NHAI as business income without appreciating the fact that the same was on account of sale of labour quarters, which is duly exempted u/s 10 of the IT Act, 1961.

4 On the facts and circumstances of the case, the Ld. CIT(A) erred in disallowing interest of Rs 19,32,000/- on account of interest payment to the related concern. The interest disallowed is 12% of Rs 1,61,00,000/-which is equal to Rs.19,32,000/-.

5. On the facts and circumstances of the case, the Ld. CIT(A) erred in disallowing interest of Rs 37,53,492/- on account of interest attributable to investments made in Subsidiary Company “Doloo Overseas Ltd”. The interest disallowed is 12°% of Rs 3,12,79,100/-which is equal to Rs 37,53,492/-.

6 Without prejudice to grounds No. 4 &5 of “Grounds of Appeal”, the Ld. CIT(A) erred in not considering the interest disallowance as mentioned above i.e. Rs 56,85,492/- (Rs.19,32,000 + Rs.37,53,492) as a disallowance leading to enhancement of income from tea business. In other words, the disallowance effectively should be restricted to 40% of Rs 56,85,492/- i.e. Rs 22,74,196/- as per Rule 8 of the Income tax Rules.

7. The appellant craves leave to add to, alter, to delete from or substantiate the above grounds of appeal.”

Observation of the Court

Though the land of the assessee has been accepted by the Department as agricultural land which was not a capital asset as per section 2(14) of the Act and hence the compensation received by the assessee on acquisition of the land has not been taxed. However, the Assessing Officer treated the amount received from sale of tea bushes and sale of shade trees and sale of labour quarters as taxable business income of the assessee.

So far as the amount received on account of sale of tea bushes and shade trees is concerned, we agree with the submission of the ld. Counsel for the assessee that since the land, in question, has already been treated as agricultural land, therefore, the produce thereupon i.e. the tea bushes and even the shade trees grown for the protection of the tea bushes would also fall in the definition of income from sale of agricultural produce which is exempt u/s 10 of the Act. Our above view is fortified by the decision of the Hon’ble Jurisdictional Calcutta High Court in the case of CIT vs. Kanan Devan Hills Produce Company Ltd.

Admittedly, in this case in hand, the land has already been treated as agricultural land not capital in nature and the tea bushes have been cultivated by the assessee to obtain tea leaves and the shade trees are grown by the assessee for the protection of its tea crops. In our view, not only the tea leaves but the entire plant i.e. tea bushes is the agricultural produce and the shade trees has also been grown and cultivated by the assessee which is a part of its activity to grow and protect tea crops. In view of this, the action of the lower authorities in taxing compensation received on account of sale of tea bushes and shade trees cannot be held to be justified. The addition made by the lower authorities by taxing the sale of tea bushes and shade trees is ordered to be deleted.

Conclusion

The tribunal ruled in favour of the assessee and stated that Tea bushes and shade trees that are established to protect tea bushes to be considered as agricultural income

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