IN THE HIGH COURT OF KERALA AT ERNAKULAM
The Hon'ble MR. Justice C.N.RAMACHANDRAN NAIR
The Hon'ble MR. Justice M.L.JOSEPH FRANCIS
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I. T. A. No. 87 of 2010
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Dated this the 3rd day of January, 2011
ITA.No. 87 of 2010()
1. THE COMMISSIONER OF INCOME TAX,
... Petitioner
Vs
1. M/S.STATE FARMING CORPORATION OF KERALA
... Respondent
For Petitioner :SRI.JOSE JOSEPH, SC, FOR INCOME TAX For Respondent :SRI.K.ANAND (A.201)
J U D G M E N T
Ramachandran Nair, J.
The question raised in the appeal filed by the Revenue is whether 35% of the income received by the respondent-assessee on sale of scrap rubber could be brought to central income tax by applying Rule 7A of the Income Tax Rules, 1962. We have heard senior counsel Sri. P.K. R. Menon appearing for the appellant, and learned counsel appearing for the respondent-assessee which is a Government undertaking.
2. Natural rubber obtained from plantation is essentially agricultural income which could not be brought to tax under the Central Income Tax Act. However, when large planters started processing field latex to intermediary products of rubber, Central Government felt that so much of the income attributable to the industrial activity, that is conversion and manufacture of rubberinto products should be brought to tax under the Central Income Tax Act. This is in line with the provision under the Income Tax Rules providing for bifurcation of income from manufactured tea between agricultural income and income taxable under the Central Act. Accordingly, Rule 7A was introduced to the Income Tax Rules from the assessment year 2004-05 onwards. For easy reference we extract hereunder Rule 7A(1) and (2):
7(A)(1). Income derived from the sale of centrifuged latex or cenex or latex based crepes (such as pale latex crepe) or brown crepes (such as estate brown crepe, remilled crepe, smoked blanket crepe or flat bark crepe) or technically specified block rubbers manufactured or processed from field latex or coagulum obtained from rubber plants grown by the seller in India shall be computed as if it were income derived from business, and thirty-five per cent of such income shall be deemed to be income liable to tax. (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 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."
3. The question to be considered in this case is whether scrap rubber generated in the respondent's industry should be treated as falling under Rule 7A for the purpose of levy of tax on 35% of the income therefrom. What we notice is that the most crucial question that is nature, identity and source of scrap rubber is not considered by any of the authorities. The Tribunal, however, accepted the contention of the respondent that scrap sold was generated in the course of agricultural operation, and so much so, it is not assessable under Rule 7A. The contention of the revenue on the other hand is that respondent has sold scrap rubber generated by the industry as a whole which attracts tax under Rule 7A. Even though without details on facts as to the nature and source of scrap obtained and sold by the respondent, it would not be possible to decide the issue this way or that way, we still feel Rule 7A requires some clarification for the purpose of not only deciding the issue in this case, but also cases that will arise in future in the case of this assessee as well as similar industries.
4. Natural rubber is obtained by tapping matured rubber trees and when it is extracted from rubber tree by tapping it, it is in liquid form, looks like milk and depending upon the variety, and health of the tree, rubber content in the liquid rubber may vary. Rubber latex has .short life and rubber in all forms are industrial raw materials used in the manufacture of various products like tyre, tube, flap, glouse, bush, etc. Whatever be the form in which natural rubber is sold, that is even when it is sold in the latex form, it's price is based on dry rubber content (DRC) in the latex. For the purpose of most of the industries, rubber required is in dry smoked sheet form. However, for industries engaged in production of tubes, glouses, baloon, rubber thread, etc., rubber used is in liquid form. Small and medium farmers do not have factories to process rubber latex and therefore they either sell field latex mixed with ammonia for short term preservation to processing industries or convert field latex into rubber sheet, dry, smoke and sell the same. However, large planters are engaged in processing of field latex into centrifuged latex, from which tube, gloves, rubber thread, etc. are produced. Centrifuging is a process done with extensive machinery in the factory and in the process excess water in the field latex is skimmed out and concentration of rubber content in the latex is increased to around 60%. In other words, centrifuging is nothing but a process whereunder rubber latex is concentrated, coloured and preserved. .Centrifuged rubber also has a shelf life of around 6 months. As is clear from Rule 7A, apportionment of income derived from manufacture of centrifuged latex and other products referred to therein for the purpose of assessment between agricultural income and central income is in the ratio of 65:35. What is intended to be taxed under the Central Act is 35% of the income from sale of rubber products referred to in Rule 7A (1), that is centrifuged latex, latex based crepe, pale latex crepe (PLC), etc.
5. Rubber latex is extracted from rubber trees by cutting the bark in a particular pattern. In the course of tapping the trees for extraction of latex, rubber scrap in dry form also is obtained from the cutting groove in the tree and also from the shell which is the sticking latex that solidifies. Similarly latex spills over from the shell or otherwise falls from the trees on earth and soldifies which is also collected as scrap rubber. In fact sizable quantity of scrap rubber is generated in the course of extraction of rubber latex from trees and these are generally known as tree scrap, shell scrap & earth scrap. The sale of these items of scrap rubber obviously cannot be brought to central income tax by . applying Rule 7A above referred because such scrap is generated in the course of taking yield which is purely an agricultural operation. However, if any scrap is generated in the industrial activity in which products referred to in Rule 7A are made, certainly such scrap rubber is also an item assessable to central income tax by applying Rule 7A(1). In fact all items of rubber products or intermediaries and bye products and scrap obtained while processing rubber latex to make the products referred to in Rule 7A are assessable to central income tax and agricultural income tax in the ratio stated in the said rule. However, it is a matter to be seen whether some of the products referred to in Rule 7A(1) namely latex based crepes is a solid rubber formed in the process of centrifuging latex and if so there will not be any other scrap as such in the production process. In any case, what is required to be found out is whether the scrap involved in this case is scrap generated in the industrial activity of processing latex into the products referred to in Rule 7A(1) and only the income from the scrap so generated could be brought to central income tax under the said Rule. In other words, scrap rubber obtained in the course of agricultural operations as stated . above cannot be brought to tax under Rule 7A(1). In view of the findings and observations above, we allow the appeal by setting aside the order of the Tribunal and that of the CIT (Appeals) and by remanding the matter to the assessing officer to verify whether income from scrap assessed is obtained in the course of agricultural operations that is in the course of taking yield or whether it is industrial scrap generated in producing rubber products covered by Rule 7A and to assess income from scrap to the extent indicated above, only if such scrap falls under the latter category stated above. Respondent-assessee should produce accounts and also agricultural income tax assessment which will disclose the income from scrap assessed.
(C.N.RAMACHANDRAN NAIR)
Judge.
(M.L. JOSEPH FRANCIS)
Judge.
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