Ramachandran Nair, J.
1. Agricultural income is not liable to be assessed under the Central Income Tax Act by virtue of the exemption specifically provided under Section 10 of the Act. However when planters process or manufacture agricultural produce converting it into intermediary or final products for sale in the market, the income attributable to processing or manufacture becomes business income that attracts tax under the Central Income Tax Act (hereinafter referred to as the Central Act for short). From the very beginning income from Tea was assessable partly as agricultural income and partly as business income and specific provision is provided in Rule 8 of the Central Income Tax Rules (hereinafter referred to as the Rules) for assessment of income from Tea and for bifurcation of the same in the ratio given thereunder for the purpose of assessment under the Agricultural Income Tax Act (hereinafter referred to as the AIT Act for short) and under the Central Act. In fact Rule 7 of the Rules makes a general provision for assessment of income, partly agricultural and partly from business. Even though rubber planters were also engaged in processing of the crop derived from rubber plants, namely field latex into centrifugal latex and other allied products, which are value added products, there was no specific provision in the Rules until the assessment year 2002-2003 for assessment and bifurcation of income from processing of rubber for assessment under the State AIT Act as well as under the Central Act. However, from the assessment year 2002-03, Rule 7A was introduced specifically providing for assessment of income from processed rubber and bifurcation of the same in the ratio of 65:35 for assessment under the State AIT Act and under the Central Act respectively. When Rule 7A was introduced, it was specifically provided therein that already concluded assessments for past years will not be reopened for the purpose of levying tax on income from processed rubber under the Central Act.
2. The appellant is a Plantation Company jointly set up by the State and Central Governments and is engaged in rubber cultivation in Kerala. Since the appellant is engaged in processing of rubber latex into centrifugal latex, the appellant is liable to be assessed under the Central Act under Rule 7A of the Rules, which provides for assessment of 35% of the income from processed rubber under the Central Act.
3. The question that arises for consideration in this batch appeals filed by the appellant for the assessment years 2004-05, 2005-06 and 2006-07 is whether the appellant is entitled under Rule 7A of the Income Tax Rules for deduction of expenditure incurred on replantation of rubber. Admittedly, expenditure for new planting and for up keep until the plants start yielding which in the case of rubber is 6 to 7 years from the year of planting is to be capitalized as there is no income from the new immature plantation against which expenditure can be set off. Until the Central Income Tax Department started assessment under Rule 7A of the Income Tax Rules from 2002-03 onwards, the appellant was being assessed under the State AIT Act treating the entire income from rubber as 100% agricultural income against which the appellant could not claim deduction of the entire expenditure incurred in replantation and for maintenance of immature plants, which was treated as capital expenditure. Even though the State AIT Act prohibits deduction of expenditure incurred on replantation and maintenance of immature area, the Agricultural Income Tax Rules in Kerala provides an incentive in Rule 3 thereof, which provides for deduction of replantation allowance subject to a ceiling of a certain percentage of income from plantation. In fact under Rule 3 of the Agricultural Income Tax Rules, the deduction provided for replantation by rubber planters is up to 2.5% of the agricultural income from rubber. This is only by way of incentive for planters to keep on replacing old and unyielding trees with new plantation. Obviously in order to avail the incentive provided in Rule 3, the Assessee should have both yielding area and unyielding/immature area, and only when there is income from yielding area, replantation allowance can be claimed in respect of immature area that too up to 2.5% of the income from yielding area. Admittedly, the appellant is not entitled to replantation expenditure claimed by them in the computation of agricultural income for assessment under the State AIT Act. The question therefore to be considered is whether a claim of deduction which is inadmissible in the computation of income under the State AIT Act can be allowed under Rule 7A(2) of the Income Tax Rules in the computation of agricultural income as well as income assessable as "business income" under the Central Act by the Central Income Tax Officer. The claim made by the assessee for all the above years was disallowed in the assessment by the Income Tax officer, which is confirmed by the CIT (Appeals) and also by the Tribunal, against which these appeals are filed under Section 260A of the Income Tax Act.
4. We have heard learned Senior counsel Shri.A.K.Jayasankar Nambiar appearing for the appellant- assessee and also learned Standing Counsel appearing for the respondent.
5. Before proceeding to consider the claim made specifically under Rule 7A(2) of the Rules, we have to consider the nature of the rubber cultivation in contrast with other plantations, namely tea and coffee. Rubber seedlings are planted in a pattern providing a distance of around 15 feet between two plants and in the course of 6 to 7 years the plants mature into full trees and start yielding. Modern clones give economic yield for 20 to 25 years and thereafter the trees are cut and removed and the area is fully replanted, which again start yielding after 6 to 7 years. Since the foliage fully cover the planted area preventing entry of sun light, even grass does not grow in rubber plantation. Therefore, dead plants within the plantation cannot be replaced or substituted through infilling. In fact the appellant also has no case that infilling is done in yielding area, which is not possible in rubber plantation because under the foliage without sunlight new plants cannot grow. Even though replacement of plants is not possible in a rubber plantation, tea bushes and coffee bushes can be replanted in existing plantation through infilling. The Rule making authority under the Central Act probably was unaware of the limitations in the rubber plantation, and therefore, they have made Rule 7A(2) in same lines as Rules 7B(2) and 8(2), which provide for deduction of expenditure incurred for replacement of plants in coffee as well as tea estates.
6. For easy reference we extract hereunder Rule 7A(2) and the corresponding provisions applicable for coffee and tea plantations, namely Rules 7B(2) and Rule 8(2) of the Income Tax Rules.
"7A (2) In computing such income, an allowance shall be made in respect of the cost of planting rubber plants in replacement of plants that have died or becomes permanently useless in an area already plated, if such area has not previously been abandoned, and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of clause (31) of section 10, is not includible in total income.
7B (2) In computing the incomes referred to in sub- rule (1) and (1A), an allowance shall be made in respect of the cost of planting coffee plants in replacement of plants that have died or become permanently useless in an area already planted, if such area has not previously been abandoned, and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of clause (31) of section 10, is not includible in the total income.
8(2) In computing such income as allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area already planted, if such area has not previously been abandoned and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of clause (3) of section 10, is not includible in the total income."
7. Even though we have stated that Rule 7A(2) has no application because rubber saplings are not planted in yielding plantation in replacement of plants that have died or have become permanently useless because the saplings cannot grow under the shade of foliage and therefore no planter does infilling in yielding area, still we feel if the assessee is able to prove that they have made infilling in existing plantation they are entitled to deduction of replanting expenditure in terms of Rule 7A(2) of the Rules. However, in this case, admittedly, the appellant has claimed deduction towards replanting expenditure of above 1.90 crores each for the first two years i.e. 2004-05 and 2005-06, and around Rs.2.49 crores for the assessment year 2006-07. Since the expenditure so claimed is not for infilling or replacement of dead or useless plants as contemplated under Rule 7A(2) of the Rules and on the other hand, the replanting expenditure claimed is for replantation of certain areas after cutting and removal of old trees therein, the expenditure claimed for replanting such area cannot be allowed as a deduction under Rule 7A(2), which provides deduction of expenditure only for infilling by way of replacement in existing yielding plantation, which is not the case here.
8. Learned Senior counsel appearing for the assessee contended that after the introduction of Rule 7A, income from processed rubber has to be assessed by the Central Income Tax Officer and 65% of the income so determined by the Central Income Tax Officer is to be assessed for assessment under the State AIT Act by the Agricultural Income Tax Officer. There can be no dispute on this position because the law is settled by various decisions of the Supreme Court in the context of assessment of tea income under Rule 8, wherein the Supreme Court held that assessment of the income partly as agricultural and partly as business income by the Central Income Tax Officer is binding on the AIT Officer for assessment under the AIT Act. Learned Standing Counsel appearing for the Revenue also did not oppose the legal position but he supported the assessment confirmed in two level appeals by contending that Rule 7A(2) does not authorize deduction of replantation expenditure for replanting an area, which is capital in nature. There can be no dispute that the investment in planting and development of plantation up to maturity i.e. until the plants start yielding has to be treated as capital expenditure for development of a capital asset which starts yielding after 6 to 7 years of planting. The assessee's counsel submitted that there is no difference between infilling in an yielding plantation and replantation of an area because expenditure in both cases are of the same nature i.e. for planting and maintaining immature trees up to 7 years. He therefore contended that the Central Act overrides the State AIT Act, and so much so, the claim is allowable under Rule 7A (2) of the Rules.
After hearing both sides, we are unable to accept the case of the assessee for more than one reason. In the first place, expenditure covered by Rule 7A(2) does not cover expenditure incurred for replantation of an area. On the other hand, Rule 7A(2) only provides for deduction of expenditure for infilling through replacement of dead trees or other trees that have become useless, which is not the case here. As already stated by us, Rule 7A(2) is in the same line as Rule 7B (2), which provides for replacement of dead or old or unyielding coffee plants in yielding coffee plantation, and Rule 8(2) which provides for replacement of dead or useless tea bushes in tea plantation. Yielding healthy rubber plantation does not admit replacement of dead plants within such area as new saplings cannot grow under shade and is never done by any planter. So much so, expenditure for replantation of an area is not covered by Rule 7A(2) and in our view the lower authorities including the Tribunal rightly rejected the claim. We also feel that the Central Income Tax Officer while determining income in the nature of agricultural as well as business income under Rule 7A should keep in mind the principles of computation of agricultural income under the State AIT Act and as far as possible, assessment should be made without violating the provisions of the State AIT Act. If the appellant's claim is allowed, certainly so much of the portion of the agricultural income determined by the Central Income Tax Officer will be in direct conflict with the Scheme of assessment of agricultural income under the State AIT Act which prohibits deduction of expenditure on replantation of an area and only an incentive is provided by way of replantation allowances under Rule 3 of the State Agricultural Income Tax Rules as stated above. We are of the view that the Tribunal rightly held that the expenditure on replantation of an area wherefrom no income is derived by the assessee is not to be reckoned or considered in the computation of income from yielding area. Expenditure incurred for planting and development of the plantation up to maturity has to be necessarily capitalised and is not allowable asa revenue expenditure. Since the assessee has no case that they have incurred any expenditure for infilling the yielding area and the expenditure incurred is only for replantation after cutting and removing old plantation, there is no question of considering or allowing the claim under Rule 7A(2). The assessee's claim is thoroughly misconceived and the lower authorities including the Tribunal rightly held so. Consequently, we dismiss all the appeals.