Gujarat High Court Upholds Tax Disallowance To J.K. Paper On Expenses For Supervising Farmer-Grown Trees

The Gujarat High Court has upheld an Income Tax Appellate Tribunal finding that expenditure incurred by J K Paper Limited on supervising trees grown by farmers could not be treated as agricultural expenditure.

The tribunal had also excluded expenditure on producing coppice shoots through a process that did not involve primary operations on land.

A bench of Justice Bhargav D. Karia and Justice Pranav Trivedi upheld the tribunal's decision to restrict the disallowance of agricultural loss to ₹9.43 lakh, against the ₹78.12 lakh addition made by the Assessing Officer.

J K Paper's Social Forestry Division grew saplings on its own land through operations including tilling, sowing, planting, weeding and removal of undesirable growth.

The company then sold the saplings to farmers, who planted and raised them into trees on their fields. J K Paper's staff supervised the trees until the company eventually purchased the grown trees from the farmers.

The company had contended that the forestry activities were connected with its requirement for raw material for paper manufacturing. It argued that selling saplings to farmers helped reduce the cost of raw material and ensured that trees were grown in farmers' fields for eventual supply to the company.

The Revenue, on the other hand, argued that the activities from growing the saplings until the eventual purchase of trees from farmers formed part of a single agricultural activity. It challenged the tribunal's treatment of expenses relating to supervision, conveyance, and staff salaries as business expenditure.

The tribunal applied the principles laid down by the Supreme Court on agricultural income and examined the different stages of J K Paper's Social Forestry activities.

It found that once the saplings had been sold, the farmers carried out the agricultural activity. The tribunal consequently treated expenses incurred by J K Paper on supervision of the trees, staff salaries, conveyance and related activities as business expenditure rather than expenditure on agricultural operations.

The tribunal also considered the company's clonal method of producing saplings. Coppice shoots were collected from farmers' Eucalyptus fields, cut into small pieces and treated with fungicide and rooting hormone. They were then placed in root trainers containing an artificial medium and kept in mist chambers under controlled conditions before being hardened and transported to farmers' fields. The tribunal noted that the process involved no soil.

It held that expenditure on growing such coppice shoots, without carrying out primary operations on land, could not be treated as agricultural expenditure.

The high court upheld these findings, observing that, in view of the factual findings recorded by the tribunal, “the Tribunal was right in law in restricting the addition” to ₹9.43 lakh.

The original disallowance made by the Assessing Officer was ₹78,12,884, which included ₹4,32,380 towards depreciation.

The tribunal had restricted the addition to ₹9.43 lakh, and the high court answered the first substantial question of law in favour of J K Paper and against the Revenue.

The court also considered the treatment of the expenditure while computing book profit under Section 115JB of the Income Tax Act. The Assessing Officer had disallowed ₹1,63,85,686 while computing book profit.

The high court held that, following the tribunal's findings on which expenditure constituted agricultural activity, only the ₹9.43 lakh loss disallowed by the tribunal could be considered for the purpose of computing book profit under Section 115JB. It therefore answered the second question partly in favour of the Revenue to that extent.

In the separate penalty proceedings, the Revenue challenged the deletion of a penalty imposed under Section 271(1)(c). The provision concerns penalty for concealment of income or furnishing inaccurate particulars.

The high court upheld the deletion of the penalty. It relied on the principle that where the disputed concealment does not result in any additional tax liability, there is no tax sought to be avoided n which the penalty can be based.

The court also noted that being a company subject to Minimum Alternate Tax does not by itself prevent a penalty from being imposed where concealed income increases book profit and consequently the MAT liability.

The Revenue's challenge to the penalty deletion was accordingly dismissed.

For Revenue: Karan G. Sanghani, Senior Standing Counsel

For Assessee: Prachi Darji with Mayur Punjabi for Anandodya S. Mishra