C.N. Ramachandran Nair, J.

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 re-plantation 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 re-plantation and for maintenance of immature plants, which was treated as capital expenditure. Even though the State AIT Act prohibits deduction of expenditure incurred on re-plantation and maintenance of immature area, the Agricultural Income Tax Rules in Kerala provides an incentive in Rule 3 thereof, which provides for deduction of re-plantation 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 re-plantation 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