TMI Blog2009 (11) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... tly similar and identical to that of producing hybrid germplasm seeds in the case of Proagro Seeds Co.[ 2002 (11) TMI 780 - ITAT DELHI] decided by the Tribunal. Therefore, the decision of the Tribunal in the case of Proagro Seeds Co. is squarely applicable to the issue involved in this appeal of the present assessee. In the present case, it is an admitted position that the grains or seeds originally produced or raised from the very first crop harvested by the assessee has been used or utilized for developing or producing hybrid parent seeds or breeder seeds. Therefore, the grains so originally produced would constitute agricultural income under s. 2(1A)(b)(i) of the Act. It is the assessee's case that number of generations of crops were carried out from year to year until the two traits of desired level are concentrated or fixed in a single seed and this, process takes anywhere from seven to ten years to develop an elite germplasm or hybrid parent seed known as breeder seeds. However, at this moment, we are only concerned with the question whether any part of income can be attributed to very grain or seed produced by the assessee at the first level. The assessee's ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see, is directed against the order dated 8-9-2004 passed by the ld. CIT(A) in the matter of an assessment made under section 143(3) of the Act by the Assessing Officer, for the assessment year 1998-99. 2. This appeal was heard along with ITA Nos. 1868, 1869, 1870 and 1871/Delhi/2005 filed by the assessee and ITA Nos. 2289, 2290, 2291 and 2292/Delhi/2005 filed by the revenue and the Cross-Objection Nos. 345, 346, 347 and 348/Delhi/2005 filed by the assessee, for the assessment years 1997-98, 1999-2000, 2000-01 and 2001-02 respectively. The issue involved in this appeal pertaining to the assessment year 1998-99 is whether income from sale of parent seeds is agricultural income as claimed by the assessee. This issue involved in the present appeal is also a subject-matter of dispute in the assessment years 1997-98, 1999-2000, 2000-01 and 2001-02. However, in those assessment years, the impugned order of the CIT(A) in this assessment year 1998-99 has been merely followed by the CIT(A) insofar as the issue involved in this appeal is concerned. Some other issues are also involved in assessment years 1997-98, 1999-2000, 2000-01 and 2001-02, and those appeals and cross-objections pertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. That, the Commissioner of Income-tax (Appeals) XXIX erred in law and on facts in holding that the 'appellant's activity of producing parent seeds does not involve only process ordinary employed by a cultivator both at the pre-harvest stage, but it is highly developed and sophisticated research which is being continuously employed by the appellant for the production of seeds'. 8. That, the Commissioner of Income-tax (Appeals) XXIX erred in law and on facts of the case in relying upon the decision of the Income-tax Appellate Tribunal, Delhi, the case of Proagro Seeds Co. Ltd. v. Jt. CIT in ITA No. 90 (Delhi) of 2000, ITAT Delhi Bench 'B', which is clearly distinguishable. 9. That, the Commissioner of Income-tax (Appeals) XXIX erred in law and on facts of the case in holding that the appellant was not carrying on agricultural activities within the meaning of section 2(1A) and the Assessing Officer was justified in treating the income of the appellant as business income, even though the Department had consistently accepted this activity as agricultural in past several years. 10. That, the Commissioner of Income-tax (Appeals) erred in law and on fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... griculture, which are carried out upon agricultural land and the products, i.e., parent seeds, are an agricultural product grown on and produces or derived from the agricultural land by performing all the basic and subsequent operations of agriculture. The assessee further stated before the Assessing Officer that the activity of the assessee uses all traditional and modern inputs and the process of agriculture used by farmers and agriculturist in India and world wide. Thus, the income arises from supply of seeds grown by agricultural operations and not from the supply of any technical service or from sale of any technology. From the submission of the assessee, Assessing Officer found that the assessee was dealing in the development of high yield variety of parent seeds, which are supplied to a joint venture company, viz., SPIC PHI Ltd., in which the assessee was having 50 per cent holding. Presently since 2001, the joint venture company has been converted into assessee's whole subsidiary company with assessee's 100 per cent shareholding therein. The assessee produces developed parent seeds that are capable of hybrid production and are grown and multiplied in production fiel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though it may have been the effect of preserving, fostering and regenerating the products of the land. The distinction is not so important in the cases where the agriculturists perform these operations as a part of his integrated activity in cultivation of the land. Where, however, the products of the land are of spontaneous growth, unassisted by human skill and labour are spent merely in fostering the growth, preservation and regeneration of such products of land the question falls to be considered whether these subsequent operations performed by the agriculturists are agricultural operations and enjoy the characteristics of agriculture operations. [Emphasis supplied] 7. In the light of the definition of the agricultural income as understood by the Assessing Officer, the Assessing Officer examined the activities carried out by the assessee-company to determine as to whether the activities carried out by the assessee are agricultural activity as contemplated under section 2(1A) of the Act. The Assessing Officer's order runs as under: 8. In the light of the above we should examine the activities carried out by the assessee-company. The assessee-company is a branch of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the parent seeds so as to evolve the high yielding variety of hybrid seeds. The production of hybrid seeds is, therefore, a scientific and a technological process which requires study of characteristic of parent seeds and their hybrid product and subsequent studies of the hybrid seeds utilizing principles of bio-technology, the characteristics of the parent seed and, therefore, genetic structure play an important role and, therefore, the study of the parent used in the process has to be utilized for getting the desired quality of hybrid seeds. This hybrid seeds are sold in the market for agricultural production by the farmers. It is important to note that the hybrid seeds are so engineered that when the crops from it is used as seeds, the yields are much less. This indicates that the seeds are generated by certain involved process, which the farmer cannot do and he has to again revert back to the producer of the hybrid seeds for a subsequent crops if he wants similar results of high production in the subsequent crops. This indicates that the assessee-company has a well-defined identification process of parent seeds from which hybrid seeds can be generated by repeated generation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and subsequent studies. It may be true that no hi-tech equipment are used in this production as it is only as biological process. Nonetheless the study and information utilized in the production of parent and hybrid seeds is of a very high standard and has international recognition. It will not be out of place to mention that it is because of high technology that the assessee dispatches the relevant information and material to its head office and get reimbursed for the same. 10. Recently the Supreme Court while examining the issue of agricultural income in the case of K. Lakshmanan Co. v. CIT [2000] 108 Taxman 167 (SC) has observed, elaborating the concept of agricultural income as under: eliminating the unnecessary words from the said definition, agricultural income would mean any income derived from such land by the performance by a cultivator of any process ordinarily employed by him to render the produce raised by him to be taken to market. It is clear from the reading of the aforesaid statutory provision that what is taken to the market and sold must be produced which is raised by the cultivator. Even though for the purpose of making it marketable or fit for sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 8. In short, the Assessing Officer, thus, was of the view that the parent seeds were developed by a series of technical steps involving use of the biological study of the property of seeds which are different from the normal agricultural operations ordinarily employed by a cultivator, and the assessee has departed from the basic agricultural operation and indulged into the production of parent seeds by planned scientific and technical steps and, therefore, these cannot be classified as agricultural income as envisaged in section 2(1A) of the Act. The Assessing Officer further observed that it is mandatory for the Assessing Officer to exempt the income from taxation if and only if all the conditions laid down in the exempting statute are completely and exclusively fulfilled, and there is no scope for extending the meaning of exempting statute, which are to be applied only when all the conditions are fulfilled. 9. In the light of the above view taken by the Assessing Officer, the Assessing Officer treated the income from production and sale of parent seeds as non-agricultural income and brought the same to tax. 10. Being aggrieved with the Assessing Officer's action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) are as under : (i) The Assessing Officer has confused the R D activities of the Research Unit with the operations of producing parent seeds by Production Unit. (ii) The Assessing Officer misapplied the ratio of judgment of Hon'ble Supreme Court in the case of Raja Benoy Kumar Sahas Roy (supra), and also K. Lakshmanan Co. v. CIT [2000] 108 Taxman 167. 13. In the light of the objections raised by the assessee, the CIT(A) called for another remand report from the Assessing Officer. In that remand report dated 20-2-2002, the Assessing Officer reiterated that the assessee has not been cultivating seeds in a manner, which is normally carried on by any ordinary cultivator in producing crops of grains. The Assessing Officer stated in the remand report that in the course of the field visit by her she found that number of trained agricultural scientists were inspecting standing crops and making notes. The Assessing Officer, therefore, concluded that the entire research farm was by itself a scientific laboratory. The Assessing Officer also stated that the commercial hybrid seeds sold by the joint venture company invariably lose their vigour if those are replanted after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey explained that these trials had been conducted of the same varieties of parent seed for three consecutive years, before these were released for commercial use. He also explained that these resultants hybrids were very vigorous and high yielding but were self-destructive, and farmers were advised not to sue the same for planting a fresh crop as the yield would be very poor. Shri Dubey emphasized that almost all the research carried out by the assessee was in the field under the open sky. 14. The Assessing Officer also stated in the remand report as under : The Assessing Officer also observed that the appellant had leased 175 acres of land for cultivation in Ghaziabad, Aurangabad, Bangalore, Hyderabad and other places in India. That the text of all lease deeds was alike and it showed that the purpose for taking the lands on lease was 'agricultural research and not commercial exploitation of land for agricultural purpose'. She further reported that in the P L account, assessee is showing high profit of Rs. 5,18,06,000, against which it is claiming direct farm expenses of Rs. 1,49,96,000; Farm wages of Rs. 42,13,000 and land lease rent of Rs. 21,32,000. All o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch Unit and the Production Unit. 3.3 It is explained that the object of the research programmes undertaken by the POC in India is to develop elite germplasm seeds and breeder seeds. A particular 'research programme' ends with the successful development of such seeds. For every successful development of a germplasm there are large number of failures and the record of these failures is also maintained. Thereafter, the seeds and the related data is stored. The various components and stages of the research programmes have been explained as under : Generally speaking every seeds is a germplasm. But, in the context of research, the term 'germplasm' refers to seeds with distinct identifiable traits. These germplasms are catalogued around the world. POC maintains a wide base of such germplasm seeds together with the research data obtained from its various research divisions. The proprietary research material is never shared with any outsider including production divisions of the company. At the very initial stage, the germplasms are characterized for local adaptation at various research farms of POC in India at Bangalore, Hyderabad, Ghaziabad, Aurangabad and now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arried out as a normal agricultural protocol. It is for this reason that it takes anywhere from seven to ten years to develop an elite germplasm. Every generation has to go through normal procedure of sowing/planting, sprouting and of normal coming of age of the plant and then only it is harvested and the grains so obtained are used as seeds for next crop and so on. 3.6 The elite hybrid germplasm seeds ('germplasm') are duly tested for developing various combinations of commercial hybrid seeds. About two to three hundred new combinations are developed every year. These combinations are evaluated in the field trials conducted at the research farms as also in the farmers' fields. For growing trial crops such cultural practices are adopted as are ordinarily employed by the farmers in that area. The process of field trials and testing takes three to five years. It is only again repeated that during all these trials observational data is meticulously maintained. Once successful hybrid seed is concerned. The research unit is now ready to supply breeder seeds to the production unit as and when required. 3.7 No germplasm or the accompanying research data is sold to any pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) production and sale of parent seeds.' Research Unit (i) Research is aimed at identifying and creating germplasms through farm based selective breeding that give better performance in diverse climatic and soil conditions. Research information and materials are documented and preserved and are not sold by the PE or the appellant or its branches. Technical information is shared between all research units of Pioneer Overseas Corporation. (ii) The Head Office reimburses all research-related costs. Production Unit (iii) Breeder seeds supplied by the Research Unit are sown and cultivated on agricultural lands. The produce of parent seeds is supplied to SPIC PHI Seeds, a Joint Venture Company, which uses the seeds for cultivating hybrid seeds for supply to farmers. The farmers in turn use the hybrid seed to grow crops. (iv) The Production Unit grows parent seeds by performing the entire range of basic and secondary operations of agriculture. These are carried out upon agricultural land situated in India. 3.9 The appellant also relied on the judgments of CIT v. Soundarya Nursery [2000] 241 ITR 530 (Mad.) and CIT v. Venkateshwara Hatcheries (P.) Ltd. 237 ITR 174 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; It is clear from RBI's permission that the main activity for which RBI has given permission to the appellant is to conduct agrigenetic research and to make available parent seeds to Joint Venture Company ....... provided the results to these research works are made available to Indian Companies . Two points emerge from the above. Assessee was supposed to basically carry out agrigenetic research and make the same available to Indian Companies, and to make available parent seed to Joint Venture Company under a parent seed charge arrangement. Further, RBI has specifically instructed that the branch office shall not indulge in any new trading, commercial or industrial activity other than what is approved. This means that, unlike as agriculturists, the assessee is not free to sell its produce in the market. Assessee is bound to sell its product only to the Joint Venture, as per RBI's permission. This issue becomes all the more relevant when we examine the pricing mechanism of the assessee. 4.1 The touchstone on which the department is seeking to test the nature of appellant's activities is the definition of Agriculture as given in section 2(1A)(b)(ii) of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e absolutely necessary for the purpose of effectively raising produce from the land and rendering the produce fit for the market and the exclusion of any and every operation, related to land from the purview of the agriculture clearly indicates that in this landmark case, the Apex Court is relying on the restrictive definition of agriculture given in (b)(ii) of section 2(1A). It may also be noted that in this landmark case, the Apex Court was looking at the entire question of what constitutes agricultural income. (ii) Boggavarapu Peda Ammaiah v. CIT 54 ITR 578 (AP) : Held that in the light of the language section 2(1)(b)(ii) of the Income-tax Act, as the operations of re-dying, stripping and grading were not essential to make tobacco marketable in India, though such operations were carried out to make it fit for export, such operations could not be regarded as process ordinarily employed by cultivators necessary to make the produce marketable. The income attributable to these operations cannot, therefore, be treated as agricultural income and should treated as business income. (iii) Maharaja Vibhuti Narayan Singh v. State of Uttar Pradesh 65 ITR: Even if the keep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the light of their conforming or otherwise with the process ordinarily employed by cultivators to render the produce raised fit to be taken to market. A second principle emerging from these judgments is that the nature of the commodity must remain the same even after application of the process if it is to fall within the scope of agricultural income. This would be evident through the discussions pertaining to changing of eucalyptus leaves into oil and mulberry leaves to cocoon, vide cases discussed supra. The third principle emerging from the above cases is that the process employed has to be within the limits of what is necessary to make the commodity fit for taking to market and no more. 4.4 If the three tests are applied to the appellant's operations of growing parent seed, it would be apparent that it is not possible to give the appellant the benefit of income falling within the definition of section 2(1A)(b)(ii), vide the analysis which follows : The process of development of parent seeds for hybridization are a far cry from the process ordinarily used by the cultivator for making the crop raised fit for market in the following major ways : (a) These par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for preventing rotting by fungus, pests, etc. This operation is also not done ordinarily by the cultivator. The appellant's arguments that the appellant's income is agricultural income because all the basic agricultural operations have been carried on is not justified because the appellant has not used the process which is employed ordinarily by the cultivator but has also used highly specialized research techniques and methods as mentioned above and only after that parent seeds have been produced. Thus, from the above discussion it is clear that at both pre-harvest and post-harvest the appellant has used such process and methods which are not ordinarily employed by the cultivator. Therefore, considering the judgments of Apex Court and others as mentioned above the appellant's income does not fall in the definition of Agriculture Income within meaning of section 2(1A) of the Income-tax Act. The appellant's reliance on the case of Soundarya Nursery (supra) and Venkateshwara Hatcheries (supra) also does not help to the appellant as the facts are quite distinguishable. In the case of Soundarya Nursery, the appellant was not carrying on any advanced agriresearch a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rima facie appeared to be a case where the assessee had sold various types of seeds with a huge turnover and with the exception of sum of Rs. 6.95 crores pertaining to the sale of hybrid/germplasm seeds the assessee's stand had come to be accepted. The stand, as noted from the orders of the tax authorities and which we have indicated in so many words in the present order was that even the receipt from the sale of hybrid/germplasm seeds constituted income from agriculture. No doubt there have been technological and scientific advances over the year, but in exempting from tax agricultural income what has been kept in mind and contemplated is that income which arises from the use of land for agricultural purposes by conventional methods. Section 2(1A) has defined the term agricultural income and it must be emphasized that reference is to a cultivator produce which is, fit to be taken to market , the sale is of a produce raised or received by a cultivator and in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of section 2(1A)(b)(ii). Sub-clause (ii) talks of any process ordinarily employed by cultivator or r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the development of high-yielding variety of parent seeds, which are supplied to the Joint Venture Company in which assessee is a partner, and, all the income deriving from cultivation of parents seeds has been shown by the assessee as agricultural income. He further submitted that the assessee's research wing, where research activities are carried out and production wing, where parents seeds are grown, are distinct and independent to each other, and the Assessing Officer is not justified in observing that the assessee was developing terminator technology seeds which involved highly sophisticated research in bio-technology. He further submitted that in the production unit, the assessee is engaged in producing parent seeds by employing agricultural primary as well as secondary operations as understood within the meaning of decision of Hon'ble Supreme Court in the case of Raja Benoy Kumar Sahas Roy (supra). He further pointed out that research development activity of the research unit and the production and sale of parents seeds by the production unit should not be treated as a single integrated activity of the assessee. He explained that the object of the research programme u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esearch Unit has developed a particular variety of 'hybrid breeder seed' (also known as foundation seed) that the research comes to end. The breeder seed, in small quantity, is then stored along with supported field-data. As and when Production Unit needs to multiply a particular variety of breeder seed, it requisitions it from the Research Unit to be used a seed for sowing. 2. Research is never sold or licensed or otherwise transferred or shared with any third party. In other words, the assessee conducts research exclusively for developing parent-breeder seed. It has been repeatedly emphasized before the lower authorities that the assessee has never been engaged in the business of commercial exploitation of research per se either in India or outside India. The entire revenue is earned from production and sale of parent seed only. 3. This year the assessee has leased 107 acres of agriland for research development and field trials and 120 acres of land for production of parent seed and produced 1,81,319 Kgs. of various varieties of parent seed. (P.6/PB-1). 4. The expenditure on research has never been claimed as a charge on the income from sale of parent seed. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the assessee has not claimed this expenditure on developing the breeder seed. The research is an internal and preparatory activity of the branch for providing breeder seed to the Production Unit as an input for the sowing. On the other hand, the Branch derives its income from production and sale of parent seed in bulk quantities after carrying out all basic and secondary operations on land without any element of research. 7. Both the Assessing Officer and the CIT(A) have made the fundamental mistake of confusing the activity of scientific research for developing hybrid breeder/foundation seed with the activity of producing parent seed through normal agricultural operations. The parent seeds are produced through ordinary cultivation by using the breeder seed for sowing purposes for producing crop of parent seed. It has been repeatedly brought to the notice of the lower authorities that there is absolutely no research involved in producing parent seed in bulk quantities. All operations (basic as well as secondary) are such which thousands of ordinary farmers of parent seed carry out. 8. There is clearly a distinction between the activity of research and development f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s agriculture as explained by the Constitution Bench of the Supreme Court in 105 ITR 133. Knowledge of natural biological processes taking place in a plant and adopting secondary operations in order to obtain desired agricultural product are not processes which are covered by sub-clause (ii) of section 1(A)(1). 12. The nature of product is not a relevant factor as long as it is derived from land through agricultural operations (pl. see 32 ITR 466 SC 105 ITR 133 ). 13. The assessee is cultivating land for growing parent seeds, and the income therefrom is derived from : (a) Agricultural lands situated in India, which have admittedly been taken on lease by the assessee. There is no dispute in this regard. (b) Conducting all basic operations like tilling of land and sowing seeds (there is no dispute in this regard) and (c) Carrying out various secondary operations for preserving, controlling and fostering growth of crops by adopting scientific and modern techniques of crop management. 14. (a) Every cultivator of parent seeds needs breeder seed for the purpose of sowing. There are hundreds of thousands farmers who cultivate parent seed from the breeder seed purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aying that 'agricultural income' is referable to sub-clauses (ii) and (iii) and not to sub-clause (1) of section 2(1A)(b). 17. The question, as to whether a process to which the 'agricultural produce' is subjected to is a process ordinarily employed by a cultivator, would arise only if such process is applied to the produce after it has been detached from the land. (K. Lakshmanan Co. 239 ITR 597 ). 18. The provisions of section 2(1A)(b)(ii) (iii) come into play only after the crop is harvested/detached from land for being sold in the market. Provisions of section 2(1A)(b)(ii) (iii) cannot be applied to secondary operations in respect of standing crops, no matter how modern and scientific they be, if used for managing the growth of standing crop of mother plants in a desired manner. 19. In order to decide as to whether income is allocable to a process to which the post-harvest produce is subjected, the is (sic) : Whether a cultivator, who produces parent seed, ordinarily employs such process for taking the seed to the market. As to which process is 'a process ordinarily employed' by the farmer would depend on the nature of the produce and wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parent seed is clearly exempt under section 10(1). The issue is squarely covered by the decisions of Supreme Court in 32 ITR 466 105 ITR 133 and recent decision of the ITAT Hyderabad Bench in Vibha Agrotech Ltd. [2008] 1 DTR 281) (P........./PBV). [Pl. see Supreme Court decision in Arooran Sugar Ltd. 227 ITR 432 (SC)] Encl: (1) Note on activities of POC in India is at pages 207-215 and 231-258/PB-II of 1998-99. (2) Legal Propositions on agricultural income are at Pgs. 246-220/PB-II of 1998-99. [Emphasis supplied] 21. He further submitted that the nature of activities undertaken by the assessee to produce parent seeds is undoubtedly an agricultural activity as understood within the meaning of section 2(1A) of the Act. He then explained the meaning of bio-technology, and urged that no bio-techno-logy were carried out by the assessee while producing parent seeds, for which an open market is available to purchase and sale them. He further invited our attention to the rejoinder submitted by the assessee to the Assessing Officer's remand report and reiterated what has been contended in the said rejoinder of the assessee. He emphasized that in order to decide the issue, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h operations . He further submitted that no permission was granted by the Reserve Bank of India to do any agricultural operation or activity as understood within the meaning of section 2(1A) of the Act. He further submitted that assessee being non-resident company cannot operate in India unless permission granted by the Reserve Bank of India or by the Government, and the RBI's approval dated 18-11-1992 granted under section 29(1)(a) of the FERA was to open a branch office in India by changing the status from liaison office in India. The nature of the permission granted by the RBI was to conduct agri-genetic research and, therefore, the Assessing Officer was justified in observing that assessee was engaged in agricultural research operations and not any agricultural operations as understood within the meaning of section 2(1A) of the Act. He further pointed out that the assessee has not made any sale directly to the vendors but the sale of parent seeds has been made to its joint venture company, which in turn converts the parent seeds into the hybrid seeds and then sold to the farmers for the purpose of their cultivation. 26. At this stage, he emphasized upon the meaning of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 3-5-2000 under Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000, and Notification No. FEMA 1/2000-RB, dated 3-5-2000 under Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000, the learned standing counsel for the department further submitted that the assessee-company cannot be supplied to do any agricultural activity in India by owning land either free hold and/or lease hold unless such permission is obtained from the concerned authority by the assessee. It was further submitted by the learned standing counsel for the department that if we look to the minutes of the 120th EXIM Committee meeting for export and import of seeds and planting materials held under the Chairmanship of Shri S.L. Bhat, Additional Secretary, Government of India, DAC on 12-9-2007, it would be clear that the Exim Committee recommended the proposal of 10KG of each cultivar maize seed C.V. PHM 67 and PHM 6V for trial purposes from Lamphum, Thailand by the assessee-company, which goes to show that the assessee was engaged in the scientific and research development of seeds and not engaged in cultivation ordinarily e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that during the research carried out by the assessee- company, the seeds which were produced but discarded were undoubtedly sold, and the amount realized from the discarded seeds has been adjusted or set off against the gross research expenses, and the balance research expenses has been reimbursed by the assessee's head office. In this connection, he has furnished the following data for various years relating to the research expenses incurred and amount of recovery by way of sale of discarded seeds : Details of crop research expenses of the Branch Office: Sl. No. Financial Year Gross Research Expenses (Rs. in thousand) Discard Recovery Netted against Gross Research Expenses (Rs. in thousand) Research expenses invoiced to Head Office for Reimbursement (Rs. in thousand) Discarded seeds recovery to research expenses 1. 1996-97 21,890 239 21,651 1% 2. 1997-98 25,792 261 25,531 1% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricultural income within the contemplation of section 2(1A) of the Income-tax Act, 1961 ('the Act'). The expression agricultural income is defined under section 2(1A) of the Act. The definition of agricultural income given in section 2(1A) of the Act is in identical term with the definition of that as given in section 2(1) of the Indian Income-tax Act, 1922 or as given in earlier section 2(1A) of the Act. It defines the expression Agricultural income as under : 2. Definitions. In this Act, unless the context otherwise requires : (1) ****** (1A) 'agricultural income' means (a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes; (b) any income derived from such land by (i) agriculture; or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or (iii) the sale by cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) has examined and analyzed the scope and effect of clauses (i), (ii) and (iii) of Bengal Agricultural Income-tax Act, 1944 corresponding to clauses (i) to (iii) of section 2(1)(b) of the 1922 Act and present section 2(1A)(b) of the 1961 Act, and has observed thus : Going back to section 2(1)(b) it refers to income derived from land which means arising from land and denotes income the immediate and effective source of which is land. Section 2(1)(b) consist of three clauses. Let us first construe clauses (ii) and (iii). Clause (ii) includes cases of income derived from the performance of any process therein specified. The process must be one which is usually employed by the cultivator or receiver of rent-in-kind; it may be simple manual process or it may involve the use and assistance of machinery. That is the first requirement of this proviso. The second requirement is that the said process must have been employed with the object of making the produce marketable. It is, however, clear that the employment of the process contemplated by the second clause must not alter the character of the produce. The produce must retain its original character and the only change that may hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only is there no indication in the context which would justify the importing of the concept of sale in the relevant clause, but as we have just indicated the indication provided by clauses (ii) and (iii) is all to the contrary. What this clause seems clearly to have in view is agricultural produce itself which has been used by the assessee. In the present case, it is common ground that the appellant has utilized for its business the agricultural produce in question and we feel no difficulty in agreeing with the High Court when it held that the agricultural produce utilized by the appellant for its business constitutes income under section 2(1)(b)(i). If the agricultural produce used by the appellant was not intended to be included within the definition of income under section 2(1)(b) we apprehend that the whole clause would have been very differently worded. Where income derived from sale was intended to be prescribed the Legislature has done so in terms by clause (iii) of section 2(1)(b). Where the marketable condition of the produce resulting from the employment of the specified processes and income derived from the adoption of such process was intended to be included in the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket. 39. The aforesaid decision of Hon'ble Supreme Court in the case of Dooars Tea Co. Ltd. (supra) has been relied upon by the same Court in the case of K. Lakshmanan Co. (supra) where the Hon'ble Supreme Court has observed and held as under : 7. On the basis of the facts found by the Tribunal, we do not find any infirmity in the conclusion of the High Court. Section 2(1) of the Act defines the expression 'agricultural income'. The relevant part of the definition reads thus: '2. Definitions. In this Act, unless the context otherwise requires, (1) 'agricultural income' means (a) ****** (b) any income derived from such land by (i) agriculture; or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or. . . .' 8. Eliminating the unnecessary words from the said definition, 'agricultural income' would mean any income derived from such land by the performance by a cultivator of any process ordinarily employed by him to render the produce raised by h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e should be obtained from sale as such though in a sense it contemplates the sale of the produce.' (p. 12) 10. We are in respectful agreement with the aforesaid observations. The High Court, as we have already observed, has rightly come to the conclusion that the income derived by the appellant from the sale of the cocoons could not in law be regarded as agricultural income. The question of law was, therefore, rightly answered in the affirmative and against the appellant. 40. It now becomes necessary for us to deliberate upon the meaning of the term agricultural purpose as for any income to fall within agricultural income , the primary condition, as laid down in section 2(1A) of the Act, must be satisfied that the land situated in India is used for agricultural purposes . The expression such land in section 2(1A)(b) refers back to the land mentioned in section 2(1A)(a) of the Act and must have the same quality. The case of the assessee fails if he does not prove that the land is used for agricultural purposes . In the light of the expression agricultural income contemplated in section 2(1A) of the Act, it is necessary to consider the connotation of the term agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are raised from the land by the performance of these basic operations that the subsequent operations attach themselves to the products of the land and acquire the characteristic of agricultural operations. The cultivation of the land does not comprise merely of raising the products of the land in the narrower sense of the term like tilling of the land, sowing of the seeds, planting, and similar work done on the land but also includes the subsequent operations set out above all of which operations, basic as well as subsequent, form one integrated activity of the agriculturist and the term 'agriculture' has got to be understood as connoting this integrated activity of the agriculturist. One cannot dissociate the basic operations from the subsequent operations and say that the subsequent operations, even though they are divorced from the basic operations can constitute agricultural operations by themselves. If this intregated activity which constitutes agriculture is undertaken and performed in regard to any land that land can be said to have been used for 'agricultural purposes' and the income derived therefrom can be said to be 'agricultural income' derived f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land. Where, however, the products of the land are of spontaneous growth, unassisted by human skill and labour, and human skill and labour are spent merely in fostering the growth, preservation and regeneration of such products of land, the question falls to be considered whether these subsequent operations performed by the agriculturist are agricultural operations and enjoy the characteristic of agricultural operations. It is agreed on all hands that products which grow wild on the land or are of spontaneous growth not involving any human labour or skill upon the land are not products of agriculture and the income derived therefrom is not agricultural income. There is no process of agriculture involved in the raising of these products from the land. There are no agricultural operations performed by the assessee in respect of the same, and the only work which the assessee performs here is that of collecting the produce and consuming and marketing the same. No agricultural operations have been performed and there is no question at all of the income derived therefrom being agricultural income within the definition given in section 2(1) of 1922 Act. Where, however, the assessee per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricultural purposes and agricultural operations and it is pertinent, therefore, to enquire what is the connotation of the term agriculture . As we have noted above, the primary sense in which the term 'agriculture' is understood is agar - field and cultra - cultivation, i.e., the cultivation of the field, and if the term is understood only in that sense agriculture would be restricted only to cultivation of the land in the strict sense of the term meaning thereby, tilling of the land, sowing of the seeds, planting and similar operations on the land. They would be the basic operations and would require the expenditure of human skill and labour upon the land itself. There are, however, other operations which have got to be resorted to by the agriculturist and which are absolutely necessary for the purpose of effectively raising the produce from the land. They are operations to be performed after the produce sprouts from the land, e.g., weeding, digging the soil around the growth, removal of undesirable under growths and all operations which foster the growth and preserve the same not only from insects and pests but also from depredation from outside, tending, pruning, cut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n constitute agricultural operations by themselves. If this integrated activity which constitutes agriculture is undertaken and performed in regard to any land that land can be said to have been used for agricultural purposes and the income derived therefrom can be said to be agricultural income derived from the land by agriculture. In considering the connotation of the term agriculture we have so far thought of cultivation of land in the wider sense as comprising within its scope the basic as well as the subsequent operations described above, regardless of the nature of the products raised on the land. These products may be grain or vegetables or fruits which are necessary for the sustenance of human beings including plantations and groves, or grass or pasture for consumption of beasts or articles of luxury such as betel, coffee, tea, spices, tobacco, etc., or commercial crops like cotton, flax, jute, hemp, indigo, etc. All these are products raised from the land and the term agriculture cannot be confined merely to the production of grain and food products for human beings and beasts as was sought to be done by Bhashyam Ayyangar, J., in Murugesa Chetti v. Chinnathambi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition. In the first instance, it is defined as rent or revenue derived from land which is used for agricultural purposes; and it is next defined as income derived from such land by agriculture or by the activities described in clauses (ii) and (iii) of section 2(1)(b) of the Act. These activities are postulated to be performed by the cultivator or receiver of rent-in-kind of such land in regard to the products raised or received by him which necessarily means the produce raised on the land either by himself or by the actual cultivator of the land who pays such rent-in-kind to him. If produce raised or received by the cultivator or receiver of rent-in-kind is, thus, made the subject-matter of clauses (ii) and (iii) in section 2(1)(b) of the Act, the term agriculture used in clause (i) of section 2(1)(b) must also be similarly restricted to the performance of the basic operations on the land and there is no scope for reading the term agriculture in the still wider sense indicated above. If the term agriculture is thus understood as comprising within its scope the basic as well as subsequent operations in the process of agriculture and the raising on the land of products whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been performed and there is no question at all of the income derived therefrom being agricultural income within the definition given in section 2(1) of the Indian Income-tax Act. Where, however, the assessee performs subsequent operations on these products of land which are of wild or spontaneous growth, the nature of those operations would have to be determined in the light of the principles enunciated above. Applying these principles to the facts of the present case, we no doubt start with the finding that the forest in question was of spontaneous growth. If there were no other facts found, that would entail the conclusion that the income is not agricultural income. But then, it has also been found by the Tribunal that the forest is more than 150 years old, though portions of the forest have from time to time been denuded, that is to say, trees have completely fallen and the proprietors have planted fresh trees in those areas, and they have performed operations for the purpose of nursing the trees planted by them. It cannot be denied that so far as those trees are concerned, the income derived therefrom would be agricultural income. In view of the fact that the forest is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der growths and all operations which foster the growth and preserve the same not only from insects and pests but also from degradation from outside, tending, pruning, cutting, harvesting and rendering the produce fit for the market. The latter would all be agricultural operations when taken in conjunction with the basic operations above described, and it would be futile to urge that they are not agricultural operations at all. 42. The subsequent operations indicated above may be assimilated to agricultural operations when they are in conjunction with the basic operations, but could it be said that even though they are divorced from the basic operations on the land they could nevertheless enjoy the characteristic of agricultural operation? Can we eliminate the basic operations altogether and say that even if the basic operations are not performed on land in a given case the mere performance of the subsequent operations would be tantamount to the performance of agricultural operation on the land so as to constitute income derived by the assessee therefrom agricultural income within the definition of that term as contained in section 2(1) of the Act? Surely, the mere performance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the subsequent operations do not acquire the characteristic of agricultural operations. 44. From the said decision, it is further clear that the mere fact that an activity has some connection with or is in some way dependant upon land cannot be sufficient to bring it within the scope of the term agriculture and such extension of the term 'agriculture' is unwarranted. In the first instance, the term 'agricultural income' is defined as any rent or revenue derived from land which is situated in India and is used for agricultural purposes, and it is next defined as income derived from such land by agriculture or by the activities described by paragraphs (ii) and (iii) of section 2(1A)(b) of the Act, 1961 [corresponding to section 2(1)(b) of 1922 Act]. These activities are postulated to be performed by the cultivator or receiver of rent-in-kind on such land in regard to the products raised or received by him which necessarily means the produce raised on the land either by himself or by actual cultivator of the land who pays such rent-in-kind to him. If the produce raised or received by the cultivator or receiver of rent-in-kind is, thus, made the subject-matter of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cture, we consider it appropriate to see whether the assessee's activity of developing hybrid parent seed, i.e., breeder seed, and activity of multiplication of parent seed by sowing breeder seed, are totally distinct and separate to each other as so claimed by the assessee. It is the case of the assessee that research unit developing breeder seed is a self-contained unit and its object is to develop elite germplasm seeds or hybrid parent seeds, known as breeder seeds, which are capable of producing commercial hybrid seeds. The assessee has explained before the authorities below the various components and stages of its activity of developing hybrid parent seeds, which has been reproduced by the CIT(A) in paras 3.3 to 3.7 of his order. The relevant portion of CIT(A)'s order has already been reproduced above herein by us. 48. From the nature of activity carried out by the assessee, it is clear that the breeder seeds developed or produced by the assessee are sown to obtain large quantities of parent seeds, which are being supplied to joint venture company for a price. The assessee undertakes the production of parent seed through multiplication of breeder seed, which are dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o joint venture company. If we look to the dominant and primary object and intention of the assessee-company in obtaining permission from RBI to undertake the certain activities, it is more than clear that the assessee's activity of developing breeder seeds by research and producing parent seeds in large quantity for the purpose of supplying the same to joint venture company cannot, by any stretch of imagination, be said to be to totally distinct, separate and independent to each other so as to consider the activity of producing parent seeds being dissociated from activity of developing breeder seeds. This sort of contention advanced the assessee is totally misconceived and baseless. The activity of developing breeder seed is nothing but a part of one and composite integrated activity of producing parent seeds of desired results for the purpose of supplying it to the Joint Venture company. The assessee's contention that breeder seeds are developed in different field or plot of land than that of producing parent seed is not material and relevant, and it does not change the very dominant and primary object and intention of the assessee to conduct agri-genetic research for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. From the various components and stages of producing or developing hybrid parent seeds known as breeder seeds and then producing parent seeds in large quantity after sowing breeder seeds as narrated or stated by the assessee, it is noticed by us that the breeder seeds are developed through fixation of desired traits by raising successive generations of crops to arrive at pure in bred lines (elite germplasms or breeder seeds or hybrid parent seeds, by whatever name it may be called) which are then hybrided with in-bred lines or elite germplasms of another set of desired traits and so on and so forth taking about 7-10 years to develop a successful hybrid parent seed, and only then it can be used for commercial production of parent seed for supply to assessee's joint venture company. The assessee has incurred huge expenditures in developing a successful hybrid parent seed or elite hybrid germplasms. The different breeder seeds of distinct traits are produced by sowing and planting a vast variety of seeds individually and each plant is harvested individually and there-after two seeds of different traits are hybrided by way of process where two plants or seeds are crossed over num ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... till a desired trait is obtained. This sort of developing a breeder seed of desired traits or enhancing various traits and concentrating them in a few germplasms by carrying out research year after year cannot be said to be a process that is ordinarily employed by a cultivator doing agriculture , or rendering the produce raised by him fit to be taken to market. The seed or crop produced at the first level by the assessee having one particular identifiable trait was never intended by the assessee to be taken or were never taken to market but the same was crossed with some other seeds or crops having different traits over a certain number of generations of crops till a desired trait is obtained. This process carried out by the assessee cannot be said to be a usual or ordinary process carried out by any cultivator with regard to any produce raised by him from the land. There is no difficulty in applying modern technology or method in raising a crop while carrying out primary as well as secondary operations in the sense in which these operations are understood or explained by the Hon'ble Supreme Court in the case of Raja Benoy Kumar Sahas Roy (supra). But, in the present case, aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... progress made by each plant along with inputs of fertilizer is stated to be recorded in the field book. Each plant is harvested individually, and various traits of the grain obtained is stated to be recorded. Thereafter, based on commercial need for developing certain types of hybrid seeds of desired traits, a seed is selected which has a particular trait optimally but may not have another desired trait which may be found in another seed. The two seeds having different traits to each other are crossed over a certain number of generations of crops until the two traits of desired level or result are uniformly fixed in one seed. Thus, the two seeds with distinct identifiable traits are developed into a single hybrid seed, which is different from the original two seeds. Similar exercise is carried out for fixing other desired traits. In this manner, all desired traits, thus, get concentrated in a few elite hybrid germplasms. This process of enhancing various traits and concentrating them in a few elite hybrid germplasms and thus producing elite hybrid germplasms or breeder seeds is carried out year after year as an ongoing research programme. It is stated that it takes anywhere fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduce raised by him fit to be taken to market, it is not necessary for him to cross and to regenerate over a number of crops year-after-year the two variety of seeds or grains, containing two identifiable distinct traits, which have been produced by him in the first crop. This process of re-cultivating the produce already raised by the assessee from the agricultural land with a view to concentrate two or more traits in one single seed or grain after two grains having two distinct identifiable traits are crossed-over cannot, by any stretch of imagination, be said to be a process which is ordinarily employed by a cultivator to render the produce already raised by him fit to be taken to market. The various seeds having distinct identifiable traits produced by the assessee at the very first stage of its over all integrated activity of producing hybrid seeds can be considered to be agricultural produce fit to be taken to market, subject to only that process which is ordinarily employed by a cultivator to render the produce raised by him fit to be taken to market as contemplated under sub-paragraphs (ii) and (iii) of clause (b) of section 2(1A) of the Act. In view of the provisions conta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he two seeds having different traits are crossed over number of generations of crops until a desired result is obtained and it takes about number of years. The grains or produce raised or obtained after the first crop is harvested is used as seeds for next crop and so on. In this process, we find that the provisions of section 2(1A)(b)(ii) and (iii) came into play immediately after the first crop was harvested and grains or produce were obtained by the assessee. We, therefore, have to see whether the process to which the said grain or produce obtained by the assessee in the first crop were subjected to is a process ordinarily employed by a cultivator to render the produce raised by him fit to be taken to the market as contemplated under section 2(1A)(b)(ii) and (iii) of the Act. In the instant case before us, the grains or seeds produced in first crop were used as seed for next crop and so on until a seed of desired trait is obtained by the assessee. Applying the principles enunciated in the judgment of Hon'ble Supreme Court in the case of Dooars Tea Co. Ltd. (supra) to the facts of instant case, it is clear that the aforesaid process of re-generating seeds by the assessee wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve to be undertaken, the section does not contemplate the sale of an item or a commodity which is different from what is cultivated and processed to make it marketable. In this view of the matter, the Hon'ble Supreme Court, therefore, held that feeding of mulberry leaves to silk worms was not a process ordinarily employed by the cultivator of mulberry leaves to make them marketable by way of producing silk cocoons. The Hon'ble Court further observed that had mulberry leaves been subjected to some process and sold in the market as such, then certainly the income derived therefrom would be regarded agricultural income. The Hon'ble Court further held that the agricultural produce of the cultivator will be mulberry leaves and by no stretch of imagination can the silk worms, and certainly not the silk cocoons, be regarded as the agricultural produce of the cultivator. 56. Applying the ratio of the said decision of Hon'ble Supreme Court in the above-referred case of K. Lakshmanan Co. (supra) to the facts of the present case, it is clear that what was originally produced and raised by the assessee is the original seeds or grains with distinct identifiable traits and q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different traits are developed into a single hybrid seed which is different from the original two seeds, and this exercise was repeatedly carried out over a number of years for fixing some other traits, and by way of this process, all desired traits get concentrated in a few elite hybrid seeds or germplasms. In our considered view, this process as claimed by the assessee cannot, by any stretch of imagination, can be regarded as a process ordinarily employed by a cultivator to render the said original seeds or grains produced by the assessee at the first stage fit to be taken to the market. The assessee's activity of fixing desired traits available in different seeds or grains into one seed after two seeds are crossed and number of generations of crops were raised repeatedly over a number of years can be viewed in the same sense in which an activity of feeding of mulberry leaves to silk worms is understood in the case of K. Lakshmanan Co. (supra). The produce breeder seeds and/or hybrid parent seeds wherein different traits of two or more seeds got concentrated by the assessee, is certainly a different from the original seeds cultivated and raised by the assessee at the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduced by the assessee from the agricultural land are re-generated after the two seeds of different traits are crossed over a certain number of generations of crops until the two traits of desired level or result are uniformly fixed in one seed, and the two seeds are developed into a single hybrid seed, which is different from the original two seeds, and this process of enhancing traits and concentrating them in a few seeds and producing such breeder seeds is carried out year-after-year, and the final produce is then sold only to joint venture company for producing hybrid commercial seeds, which hybrid commercial seeds are in turn sold to farmers for their cultivation, it is clear beyond any doubt that the assessee did all these activities with the object of profit-making by indulging and involving into a well-designed and systematic business activity, which any ordinary cultivator is not expected to perform ordinarily in the course of any agricultural operations carried out by him on a land within the meaning of section 2(1A) of the Act. In the present case, what is relevant and crucial to consider is what subsequent process has been employed by the assessee with regard to the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tus tress grown by it would not be in the nature of agricultural income. The Hon'ble High Court held that in the case before them, the oil extracted from the eucalyptus leaves lost its original identity and the assessee was not able to prove that the eucalyptus leaves had no market. The Court observed that In order that an income might fell within the definition of 'agricultural income . . .' two conditions had to be satisfied : (1) the process to which the agricultural produce is subjected whether manual or mechanical, should be one which is ordinarily employed by a cultivator; and (2) the said process should be employed in order to render the produce fit to be taken to market and not for any other purpose. The produce must retain its original character in spite of the process unless there is no market for selling it in that condition. In the present case before us, the assessee produced certain seeds and grains after raising a crop of variety of seeds in the field. These seeds or grains contained certain identifiable traits and quality. Thereafter, with a view to develop certain types of hybrid seeds of desired traits and qualities, the seeds originally produced by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew that the ratio of the aforesaid decision in the case of Stanes Amalgamated Estates Ltd. (supra) is squarely applicable to the facts of the present case, and in this view of the matter, the hybrid seed or elite germplasm or parent hybrid seed produced by the assessee cannot be regarded as agricultural produce within the meaning of section 2(1A) of the Act. 60. Further, in the case of Boggavarapu Peda Ammaiah v. CIT [1964] 54 ITR 578 (AP), it has been held that in the light of the language in section 2(1)(b)(ii) of the Income-tax Act, as the operations of redying, stripping and grading were not essential to make tobacco marketable in India, though such operations were carried out to make it for export, such operations could not be regarded as process ordinarily employed by cultivators necessary to make the produce marketable. The income attributable to these operations cannot, therefore, be treated as agricultural income and should be treated as business income. Applying the same analogy to the facts of the present case, we hold that the assessee's operations of re-generating seeds or grains by way of repeated cultivation after two seeds produced by the assessee at the firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the pre-harvest and post-harvest stage of producing breeder seeds and parent seeds, and has rightly hold that the assessee's activities does not fall into the definition of agricultural income within the meaning of section 2(1A) of the Act. In this view of the matter, we, therefore, hold that the parent seeds produced by the assessee by adopting such process as explained by the assessee and analysed above, cannot be regarded as agricultural produce within the meaning of section 2(1A) of the Act, and the income derived from sale of such parent seeds is, thus, not an agricultural income under section 2(1A) of the Act. 62. In the light of the discussions we made above, we do not find any cogent or justifiable reason to interfere with reasoning and observations made by the learned CIT(A) in paras 4 to 4.4 of his order, which have already been reproduced above by us in para 17 of this order. The analysis made by the learned CIT(A) in para 4.4 of his order about the assessee's process of development and production of parent seeds by hybridization is not found faulted with, and is upheld with approval. 63. The view we have taken above is supported by decision of Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting to Rs. 3.56 crores. Can it be said on the facts of the present case that the assessee has employed conventional methods in producing the seeds? The answer is an emphatic No , the judgment of Hon'ble Supreme Court in the case of Raja Benoy Kumar Sahas Roy (supra) is squarely applicable in spite of the fact that it was rendered in 1957 and we are a few decades away as today, but no decision to the contrary has been brought to our notice on behalf of the assessee and some of the decisions cited are not at all applicable having been rendered in different contexts. The Commissioner of Income-tax (Appeals) in her order has very rightly observed that whereas some part of the activities of the assessee may pertain to the field the major operations are of a mechanical nature ruling out the role of nature. It has been very aptly emphasized that agriculture is the art and science of cultivating land and growing and harvesting crops. These are operations like weeding, irrigating and tending. The crops, however, are left to grow and mature by the forces of nature. It is apparent that in the assessee's case the initial activities may be akin to agriculture, but the major ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of particulars of the income and that the assessee's perception that its activities were agricultural in nature and had been treated to be so for the previous years, no question of law can be said to have arisen for their consideration. From this decision of Hon'ble High Court in CIT v. Proagro Seeds Co. Ltd. [2008] 296 ITR 235 (Delhi), it becomes clear that the penalty levied by the Assessing Officer was deleted by the Tribunal, and the Tribunal's order was further upheld by the Hon'ble High Court after considering the issue about the levy of penalty on merit and not for the reason that the Tribunal's order in the quantum appeal has either been set aside or modified by any Higher Appellate Forum. Further, after the decision of the Tribunal in the quantum appeal of Proagro Seeds Co. Ltd.'s case (supra), its subsidiary company, namely, Hybrid Rice International (P.) Ltd. revised its return for the year 2001-02 onwards and declared income from the similar activity as business income and claimed depreciation on germplasm seeds. The depreciation was claimed on the actual cost of the germplasm seeds, which had been acquired in the earlier years without making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee are hybrid parent seeds produced from elite hybrid germplasms wherein different traits are concentrated in one seed. The so-called parent seeds are produced from breeder hybrid seeds. The seed developed and produced by the assessee in the present case is elite hybrid germplasm which are sown to produce large quantity of parent seeds of hybrid nature. Thus, the assessee's case is not of producing ordinary basic seeds but is of developing and producing elite hybrid germplasm and then parent hybrid seeds in large quantity as it would be clear from the various components and stages of process carried out by the assessee as explained and narrated by the assessee itself [see paras 3.3 to 3.8 of CIT(A)'s order incorporating the components and stages of producing elite germplasm seeds as explained by the assessee itself]. Thus, the nature of assessee's activity of producing elite hybrid germplasm or breeder hybrid seeds to develop a parent hybrid seed supplied to joint venture company are exactly similar and identical to that of producing hybrid germplasm seeds in the case of Proagro Seeds Co. Ltd. (supra) decided by the ITAT, Delhi Bench D , Delhi. Therefore, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y engaged in research, production and marketing of hybrid seeds, and filed its return of income declaring nil income under the normal provisions of the Act and an income of Rs. 42,30,543 under section 115JB of the Act. During the course of assessment proceedings, the assessee filed revised computation of total income and claimed part of its income amounting to Rs. 20,39,648 as agricultural income under section 10(1) of the Act. Income of Rs. 20,30,618 represents income from sale of basic seeds, which was directed to be treated as agricultural income being exempted under section 10(1) of the Act. 69. In this case of Vibha Agrotech Ltd. (supra), the Income-tax Appellate Tribunal, Hyderabad Bench has also referred to its another decision in the case of Advanta India Ltd. v. Jt. CIT [IT Appeal Nos. 512 and 513 (Hyd.) of 2002 and 136 and 236 (Hyd.) of 2001], where the revenue authority had treated the activity of the assessee up to the basic seeds level as agricultural activity and the production from the level of basic seeds to the level of hybrid seeds was treated as non-agricultural activity of the assessee. The Tribunal, after considering the various decisions including the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase (supra) has been followed, and in the light of that decision, the income up to the basic seeds level was only treated as agricultural activity, and the production activity from the level of basic seeds to the level of hybrid seeds was treated as non-agricultural activity of the assessee. In the present case, the assessee is engaged in the development and production of elite hybrid germplasm or hybrid parent seeds known as breeder seeds and after sowing these breeder seeds, it has produced parent seeds in large quantity, which was sold to its joint venture company. Therefore, the activity of assessee of producing and developing the elite hybrid germplasm and thereafter production of parent seeds of hybrid nature are above the level of producing basic seeds. The benefit to the extent of production of basic seeds can be given to the present assessee, which aspect of the matter is being decided in later part of this order. 71. In this view of the matter, it is, thus, clear that the decision of ITAT, Delhi Bench in Proagro Seeds Co. Ltd.'s case (supra) still holds ground and in the light of that decision, the ld. CIT(A) has rightly held that the assessee's activity of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;. The expression ''agriculture has got to be understood as connoting the integrated activity of basic operations upon the land as explained by the Hon'ble Supreme Court in the case of Raja Benoy Kumar Sahas Roy (supra). Insofar as the activity of the assessee to the level of obtaining seeds or grains from first crop harvested by the assessee and before the same are re-generated and/or re-planted, we find that there is no dispute about the fact that both the basic operations and secondary operations were performed by the assessee except applying the process of rendering the said grains fit to be taken to market. The sub-paragraphs (ii) and (iii) of clause (b) of section 2(1A)(b) contemplate the sale of the produce sub-paragraph (ii) indirectly inasmuch as it refers to the process employed for making the produce marketable and sub-paragraph (iii) directly inasmuch as it refers to the price realized by sale of the produce which has been subjected to the process ordinarily employed by a cultivator to render the produce raised by him fit to be taken to market. Therefore, it is clear that income derived from sale of agricultural produce has been provided for by sub-paragr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn 1262.00 53.00 Millet 3047.00 118.00 Sorghem 1552.00 73.50 Sunflower 1303.00 240.00 Rice 2643.00 135.00 Mustered 900.00 60.00 73. From the comparative price shown above, the average price of all variety of seeds charged by the assessee for hybrid seeds is about 16 times more than the market price of the hybrid commercial seeds sold by joint venture company to the farmer. The price of basic seeds produced by the assessee at the first level before hybridization would even be lower than the price of hybrid commercial seeds sold to farmers. 74. The manner in which and the procedure by which the income shall be arrived at in the case of income derived in part from agriculture and in part from business has been prescribed under rule 7 of the Income-tax Rules, 1962, which lays down as under : 7. Income which is partially agricultural and partially from business. (1)In the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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