CIT Vs. SAMI LABS LTD.

JUDGEMENT

(1.) THE Revenue has preferred this appeal challenging the order passed by the Tribunal, which has held the cultivating expenses incurred by the assessee are in the nature of expenditure in the course of business, as such assessee is entitled to claim deduction of said expenditure. The assessee is involved in the manufacture and export of standardized herbal extracts as well as in the manufacture of fine chemicals. The assessee filed return of income for the year 2004 -05. Assessee claimed deduction under section 10B of the IT Act, 1961 (for short hereinafter referred to as the Act). The assessing authority disallowed the cultivation expenses amounting to Rs. 90.64 lakhs. The appeal preferred by the assessee to the CIT(A) came to be dismissed. In the further appeal against the said order to the Tribunal, the Tribunal held the assessee had not generated any agricultural income out of its venture; the assessee has not engaged in any agricultural activities but for cultivation of coleus plants to facilitate its business and due to commercial expediency, it had incurred cultivation expenses to the tune of Rs. 90.64 lakhs. These expenses incurred by the assessee were for a commercial expediency and wholly and exclusively for the purpose of its business. Therefore, the Tribunal held that authorities below were not justified in disallowing the cultivation expenses of Rs. 90.64 lakhs claimed by the assessee. Aggrieved by the said order, Revenue is in appeal.

(2.) THE learned senior counsel appearing for Revenue, assailing the impugned order, contended that the Tribunal has recorded a finding that assessee was involved in agricultural activity. In fact, it has advanced money to the farmers for growing coleus crop. The expenses incurred in connection with the cultivation of said crop could be set off against the income which was exempted from payment of income -tax. But, it cannot be construed as an expenditure incurred in carrying on the business. Such activity is a separate activity of the assessee which is not in connection with the business and therefore, assessee was not entitled to claim deduction under the heading "Revenue expenditure". The material on record discloses that coleus is a rare herbal plant which commands appreciation value in medicinal fraternity for research. The assessee has been in the business of manufacture and export of herbal extracts including cultivation of coleus. To maximize the production and sale of herbal extract, the assessee incurred expenditure on cultivation activities for the development of coleus. The said plant was grown in wild. Vast research was required to make a commercial cultivation of the plant. To cultivate this plant, the assessee had to undertake farm trials to optimize in different fields such as:

(3.) THE question for consideration is, whether it is to be considered as capital expenditure or revenue expenditure. The Tribunal relied on Circular No. 6 of 2007 ((2007) 212 CTR (St) 97) issued by the Board, wherein it has been clarified as under: