2010 (6) TMI 673 - AT - Income Tax

Agriculture Income - Computation of total income - production and sale of hybrid seeds - HELD THAT - Operations carried out by the assessee in the previous year relevant to the assessment year in appeal we find that the production of basic seeds as well as hybrid seeds are the results of basic agricultural operations carried on by the assessee-company in its own land as well as in leasehold land. The method of contract farming does not take away the character of the basic operations carried out by the assessee-company which are agricultural in nature. The assessee-company procures germplasm and sows it in its own fields and carries on all agricultural operations and produces the basic seeds. The basic seeds so harvested are again put through agricultural operations intimately connected with leasehold land for finally bringing out the hybrid seeds. Only for the reason that the basic seeds are sown in leasehold land and the manpower required is arranged through contract farming it does not mean that the operations carried out by the assessee-company are not agricultural operations. As a matter of fact it is to be seen that the assessee-company has carried out basic as well as secondary agricultural operations. Therefore without any fear of contradiction it is possible for us to hold that such entire income of the assessee is agricultural in nature which is to be excluded from the nature of total income. The assessee is successful in its appeal. Exemption of income - HELD THAT - The reasons pointed out by the assessing authority to deny the claim of exemption made by the assessee-company are that the assessee is following international technology marketing expertise integrated scientific and commercial activity etc. These are all matters strange to the strict code of income-tax. Those premises do not have any role in deciding the nature of income within the framework of the Income-tax Act 1961. The reasons pointed out by the AO are by and large issues to be decided by the policy makers in the Government. In result appeal filed by the assessee is allowed.

Issues:
1. Appeal against the order of the Commissioner of Income-tax (Appeals)-II, Hyderabad
2. Assessment under section 143(3) of the Income-tax Act, 1961
3. Claim for deduction of income as agricultural
4. Whether income from production of hybrid seeds is agricultural in character
5. Interpretation of section 2(1A) of the Income-tax Act

Analysis:
1. The appeal was filed against the order of the Commissioner of Income-tax (Appeals)-II, Hyderabad, for the assessment year 2002-03 under section 143(3) of the Income-tax Act, 1961. The case was transferred to Bangalore Bench from Hyderabad Bench as per the Income-tax (Appellate Tribunal) Rules, 1963.
2. The appellant, a company engaged in the production and sale of hybrid seeds, claimed a deduction of income under rule 7 of the Income-tax Rules, 1962, arguing that the income was partially agricultural. The Assessing Officer treated the entire income as business income, disregarding the appellant's contention.
3. The main issue revolved around whether the income earned from the production of hybrid seeds was agricultural in nature. The appellant argued that the entire income was agricultural, while the Assessing Officer maintained it was business income due to international technology and marketing expertise involved.
4. The Tribunal analyzed section 2(1A) of the Income-tax Act, which defines agricultural income, and referred to precedents to determine the character of income derived from the production of seeds. It was established that income from seeds produced on own or leased land through agricultural operations qualifies as agricultural income.
5. The Tribunal emphasized that the basic agricultural operations carried out by the appellant in producing basic and hybrid seeds, even on leasehold land, retained their agricultural nature. The appellant's activities, including procurement of germplasm and agricultural operations, were deemed agricultural, warranting exclusion from total income.
6. The Tribunal ruled in favor of the appellant, allowing the appeal and rejecting the Assessing Officer's reasons for denying the claim of exemption. The Tribunal clarified that factors like international technology and marketing expertise were irrelevant in determining the nature of income under the Income-tax Act.

In conclusion, the Tribunal held that the appellant's income from the production of hybrid seeds was agricultural in character and should be excluded from total income. The judgment underscored the significance of basic agricultural operations in determining the nature of income, irrespective of factors like technology and marketing expertise.

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