FIRST INCOME TAX OFFICER v. D.K. MARATHE
[Citation -1986-LL-0923-3]

Citation 1986-LL-0923-3
Appellant Name FIRST INCOME TAX OFFICER
Respondent Name D.K. MARATHE
Court ITAT
Relevant Act Income-tax
Date of Order 23/09/1986
Assessment Year 1980-81
Judgment View Judgment
Keyword Tags addition on account of sale • business or profession • proprietary business • business expenditure • proprietary concern • revenue expenditure • capital expenditure • specific provision • cost of production • source of income • trading activity • cross-objection • trading account • trading receipt • stock-in-trade • purchase price • erstwhile firm • closing stock • opening stock • wear and tear • actual cost • draft order • sale price • live-stock • stud farm • plant
Bot Summary: In the course of assessment proceedings the assessee's representative stated before the ITO that the assessee was not a trader in cattle. In order to ensure the availability of specific stock of milk, the assessee had to keep buffaloes which would give maximum possible yield and had to maintain a constant stock of such buffaloes. The assessee's main stock-in-trade was milk and the buffaloes or milch cattle which only constituted a plant from which such stock of milk in which the assessee traded, was derived. Could be considered as cost of production, but the expenditure on purchase of buffaloes provided to the assessee a benefit of an enduring nature, because a good number of buffaloes could be expected to give an assured amount of yield of milk for a reasonable period of time. In the case before us the assessee h a s not even attempted to value the opening stock and closing stock of buffaloes, because he admits that the buffaloes do not constitute his stock-in- trade. Before the Commissioner the counsel for the assessee argued that section 36(1)(vi) was totally inapplicable to this case as that section would apply when the animals are dead or become 'permanently useless' for the business of the assessee. The assessee has himself offered the amount as a trading receipt and its taxability has not been challenged before us by the assessee either in a cross-objection or in a cross-appeal.


This is appeal by revenue and first ground taken is that Commissioner (Appeals) erred in deleting addition of Rs. 1,98,597 made to total income. It is necessary to state briefly facts leading to this appeal. 2. assessee runs dairy for which purpose he has to maintain fixed number of cattles. We are concerned with assessment year 1980-81 for which accounting period ended on 31-3-1980. assessee showed in his return income of Rs. 1,73,220. business of providing milk is being conducted as proprietary concern since 1-9-1979. During period 1-9-1979 to 31-3-1980, i.e., 7 months of accounting period, assessee purchased 55 buffaloes for Rs. 1,98,597. purchase price of cattles so purchased was debited to trading account. assessee sold 83 old buffaloes for Rs. 73,695 (in course of hearing before us assessee's representative stated that correct figure was Rs. 73,790). selling price was reportedly credited to trading account. No opening stock or closing stock of buffaloes was maintained and, therefore, no value of such stock made while arriving at trading profit. In course of assessment proceedings assessee's representative stated before ITO that assessee was not trader in cattle. He was purchasing and selling milch cattle to enable him to carry on business of conducting dairy farm. ITO held that purchase of 55 buffaloes could not be allowed as revenue expenditure of year. ITO further observed that none of buffaloes purchased during year was sold. 83 buffaloes sold were old buffaloes. Provisions of section 36(1)(vi) of Income-tax Act, 1961 ('the Act') were applicable in this case. ITO further held that since purchase price of buffaloes which were sold during year was allowed as revenue expenditure in earlier years, sale proceeds realised during year would be taxed under section 41(1) of Act. 3. matter went before Commissioner (Appeals) both on question of admissibility of cost of 55 buffaloes and taxability of sale of 83 buffaloes under section 41(1). Commissioner (Appeals) held that ITO and IAC had erred in applying provisions of section 36(1)(vi) to this case as this section has no application to facts of present case. Commissioner (Appeals) was swayed by fact that assessee had debited purchase price to trading account and had shown sale price on credit side of trading account. Commissioner (Appeals) held that assessee purchased buffaloes as part of his trading activity of supplying milk to fixed clientele regularly. assessee sold buffaloes not because they had become permanently useless but because they had become uneconomical considering cost of cattle feed and yield of milk they gave. buffaloes constituted stock-in-trade of assessee's business. Even in past purchase price was allowed as revenue expenditure. Commissioner (Appeals), therefore, held that assessee had to be allowed deduction on ordinary principles of accountancy in computing business income under section 28(i) of Act. He accordingly deleted disallowance of Rs. 1,98,597. This is now contested in appeal by department before us. 4. Shri Raju, appearing for department, argued that it was admitted fact that assessee was engaged in business of running dairy farm. He was not dealer in live-stock. This fact was not disputed. Therefore, purchase of buffaloes to secure and maintain constant source or supply of milk could not be said to be expenditure on purchase of stock-in-trade and, therefore, revenue expenditure. No stock of animals was maintained. value of opening and closing stock was not shown and, therefore, fact that purchase price of buffaloes was debited to trading account and sale of buffaloes was credited to same account did not by itself mean that such expenditure was business expenditure. Shri Raju further argued that there was specific provision in Act in section 36(1)(vi) which dealt with deductions to be allowed in respect of animals used for purpose of business or profession otherwise than as stock-in-trade. This section, according to Shri Raju, was applicable in present case where buffaloes were used in dairy farming business but were not used as stock-in-trade. In support of this argument Shri Raju referred to provisions of section 80JJ of Act which provided for deduction of specific amount in business of live-stock breeding or poultry or dairy farming. Shri Raju pointed out that assessee sold only decrepit animals because it had to maintain constant number of animals which would provide adequate milk to ensure steady supply of milk, to fixed clientele. On behalf of assessee Shri Gokhale, CA, relied mainly on order of Commissioner (Appeals). He argued that opening stock of buffaloes was taken over as on 1-9-1979 when business of dairy farming was taken over from erstwhile firm by assessee as his proprietary business. total number of cattle as on 1-9-1979 was 130 and 65 heads of cattles were purchased during year for Rs. 1,98,597 and 83 sold during year. According to Shri Gokhale, assessee supplied milk in Chembur area. He had fixed number of customers to whom coupons were given and he was under obligation to provide milk to these customers as per their daily requirements indicated in coupons supplied to them. In order to ensure availability of specific stock of milk, assessee had to keep buffaloes which would give maximum possible yield and had to maintain constant stock of such buffaloes. Whenever assessee found that yield of animal had gone down or in other words, buffaloes had become uneconomical, he sold them during year and purchased new stock. To assessee cost of milk included cost of buffaloes which he acquired for getting supply of milk. He, therefore, submitted that cost of 6 5 buffaloes (55 mentioned in ITO's order) was rightly treated as normal business expenditure in view of nature of business carried on by assessee. 5. We have heard both parties and have gone through order of Commissioner (Appeals). short question is whether expenditure claimed o n purchase of animals for milking by assessee who deals in dairy farming is admissible as revenue expenditure and/or whether provisions of section 36(1)(vi) would be applicable in type of case like this. It is not disputed by assessee that he does not deal in live-stock. He is not trader in cattle. For same reason probably he does not maintain stock account of cattle purchased and cattle sold. assessee-representative could not state with certainty which of cattle were sold during year and what exactly was cost of such cattle. He also admitted that value of opening stock and closing stock of cattle was not maintained. All that he said was that fixed stock of cattle capable of giving good yield of milk was maintained by assessee so as to ensure steady and constant supply of milk which was major requirement of his business of running dairy. Every buffalo purchased was expected to give good yield during its time for period of at least four to five years. Thus, buffaloes purchased from time to time constituted what may be called assessee's source of production or asset which assessee exploited for certain period of time. When such source started drying up or became uneconomical, assessee would sell buffaloes and acquire fresh lot of buffaloes which would yield good amount of milk. In that sense animals maintained by assessee were not his stock-in-trade but some kind of plant which was used in business for ensuring steady production and/or supply of milk. case of assessee could be compared with that of stud farm where horses were bred for racing and disposed of when they were no longer in their form, or it could be compared with kennel club where pedigree dogs were owned by private owners and maintained for race meetings. In both such cases animals did not form stock-in-trade of business but provided source of income in some form or other to owner who purchased them or maintained them. Reference in this case may be made to provisions of section 36(1)(vi). Clause (vi) reads as under: " (vi) in respect of animals which have been used for purposes of business or profession otherwise than as stock-in-trade and have died or become permanently useless for such purposes, difference between actual cost to assessee of animals and amount, if any, realised in respect of carcasses or animals;" following comments on this section by learned author Shri Sampath Iyengar in their Law of Income-tax, Vol. 2, 1985 edn., are relevant and apposite in present context: " Animals must not be trading asset.---In order to claim deduction under this clause [36(1)(vi)] user of animals must not be as stock-in-trade. If business consists of buying and selling animals, allowance would not be admissible under this clause but will otherwise be deductible. above relief would however extend to animals maintained in stud farm or milch cattle in dairy farm or reaching hounds in kennel club to supply runners at race meeting. " [Emphasis supplied] Reference may also be made to observations of Rowlatt, J. in case o f Earl of Derby v. Aylmer (Surveyor of Taxes) 6 Tax Cases 665 (KB). In this case appellant owned two stallions at stud farm and was assessed in respect of profits derived from what are termed 'stallion fees'. He contended that in computation of these profits for income-tax purposes he was entitled to deduction under section 12 of Customs and Inland Revenue Act, 1978, by reason of diminished value of stallions year by year. Court held that claim did not come within scope of section. Rowlatt, J. made following observations: " You have got article whether it be animal or vegetable article, life of which is only limited term of years. As years go on you take produce and reproduction of that animal, and when years come to end animal or tree or whatever it is, dies or is killed because it is no longer worth keeping. That diminished value, by reason of efflux of time year by year of animal or tree, does not seem to me to be diminished value by reason of wear and tear; it is simply diminished value because you have invested your money in source of production which is wasting source of production,. . ." Similar view was taken by King's Bench Division in another case Abbott v . Albion Greyhounds (Salford) Ltd. [1947] 15 ITR (Suppl.) 46, where company acquired and maintained kennel of racing greyhounds, in order that they might be able to supply runners at race meetings which they held from time to time at track. dogs were maintained only during their racing career; afterwards they were either destroyed or sold as pets. question was whether in arriving at company's profits there should be valuation of kennel at beginning and end of each financial year. Court held that kennel of greyhounds was not company's stock-in-trade; expenditure incurred in purchasing them was capital expenditure and, therefore, valuation of kennel at beginning and end of financial year was not proper method of arriving at company's profits. 6. We have to examine question whether impugned expenditure is capital expenditure or revenue expenditure in light of judgments referred to above and facts of present case. We find on facts that expenditure on purchase of buffaloes cannot be considered as normal business expenditure merely because amount was debited to trading account and similar expenditure was allowed as revenue expenditure in past. These accounting entries have wrongly influenced decision of Commissioner (Appeals). treatment given to such expenditure in past by department also cannot be allowed to cloud our judgment. We must take note of fact that buffaloes provided source of income to assessed. assessee's main stock-in-trade was milk and buffaloes or milch cattle which only constituted plant from which such stock of milk in which assessee traded, was derived. cost of buffaloes cannot be said to enter into cost of production of milk. Expenditure on purchase of every buffalo ensured steady supply of milk for period of time. purchase price of buffaloes ensured advantage of enduring nature. cost of maintenance of buffaloes at most such as maintenance of stables expenditure on cattle feed, etc., could be considered as cost of production, but expenditure on purchase of buffaloes provided to assessee benefit of enduring nature, because good number of buffaloes could be expected to give assured amount of yield of milk for reasonable period of time. Since assessee did not deal in live- stock but exploited these animals for period of time for securing commodity in which trade, viz., milk expenditure on this live-stock had to be treated as capital expenditure, as observed by Rowlatt, J. in Earl of Derby's case. assessee had invested his money in source of production and, therefore, such expenditure was not revenue expenditure. It was also not assessee's stock-in-trade. In Abbott's case King's Bench had decided that even valuation of kennel at beginning and end of financial year was not proper method for arriving at company's profits, when kennel of greyhounds was not company's stock-in-trade and expenditure incurred in purchasing them was capital expenditure. In case before us assessee h s not even attempted to value opening stock and closing stock of buffaloes, because he admits that buffaloes do not constitute his stock-in- trade. By acquiring buffaloes from time to time and selling decrepit animals simultaneously so as to maintain constant stock of milch cattle assessee is ensuring that his source of income is kept in tact and any expenditure of this type has to be treated as capital expenditure. We, therefore, reverse decision of Commissioner (Appeals) in this regard and restore order of ITO. 7. supplementary question is whether provisions of section 36(1)(vi) are applicable. We find on perusal of order of ITO that except for passing reference to section 36(1)(vi) no allowance under this section has been made in computation of income. Before Commissioner (Appeals) counsel for assessee argued that section 36(1)(vi) was totally inapplicable to this case as that section would apply when animals are dead or become 'permanently useless' for business of assessee. We Also find that Commissioner (Appeals) has not given any finding on applicability of section 36(1)(vi). In our opinion, therefore, third question where revenue submits that assessee can claim benefit in buffalo account only under section 36(1)(vi) is on facts and circumstances of present case academic question and need not be dealt with on merits as it does not arise out of orders of authorities below. 8. next ground raised by department is that Commissioner (Appeals) erred in holding that ITO's action in classifying sale proceeds of buffaloes as income taxable under section 41(1) is incorrect inasmuch as that in past inadvertently purchase of buffaloes has been allowed as deduction while computing total income. We do not find much substance in this ground for following reasons. 9. facts in this regard would indicate that department is really not aggrieved by decision of Commissioner (Appeals) which was given in following circumstances. assessee as stated above, credited sales proceeds of buffaloes amounting to Rs. 73,795 to trading account and offered this amount for taxation as trading receipt. Before IAC to whom draft order was referred under section 144B of Act objection to addition on account of sale proceeds of buffaloes was specifically withdrawn. IAC's observations in his directions to ITO were as under: " second objection of assessee is against addition on account o f sale proceeds of buffaloes at Rs. 73,795. Before me, assessee had withdrawn objection and, therefore, addition made by ITO is confirmed. " ITO chose to treat this amount as profit under section 41(1) because according to ITO assessee had already claimed purchase price of these buffaloes as expenses in earlier years. 10. treatment of this amount as profit under section 41(1) was subject-matter of appeal before Commissioner (Appeals). Commissioner (Appeals) held that ITO's classification of this income as taxable under section 41(1) was incorrect because no allowance or deduction had been allowed to assessee in any of earlier assessment years as taxable entity was different in current assessment year from what it was in earlier assessment years. assessee was proprietary concern from 1-9-1979 and it was not established that purchase price of these buffaloes was allowed to assessee in his proprietary business in current year. Commissioner (Appeals) further observed that assessee had himself shown sale proceeds as his taxable income and, therefore, it was wholly unnecessary for ITO to change classification of this income. 11. We agree that assessment of this income under section 41(1) is not justified as it is not proved that assessee had got in his present capacity benefit of deduction on account of purchase of buffaloes that were sold during year. We find there is no change in income or tax as result of finding of Commissioner (Appeals) on this issue and in that sense department is not aggrieved by Commissioner (Appeals)'s order. Even on merits department has no case for taxation of amount as profit under section 41(1). assessee has himself offered amount as trading receipt and its taxability has not been challenged before us by assessee either in cross-objection or in cross-appeal. We would, therefore, hold that this ground of appeal by revenue is misconceived. same is, therefore, dismissed. 12. In result, appeal by department will be treated as allowed in part. addition of Rs. 1,98,597 as capital expenditure made by ITO is restored. *** FIRST INCOME TAX OFFICER v. D.K. MARATHE
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