TMI Blog2007 (9) TMI 305X X X X Extracts X X X X X X X X Extracts X X X X ..... ning Stock of Rs. 9,45,093 cultivated seeds + Cultivation Expenses Rs. 25,67,060 35,12,153 ------------- -------------- Net agriculture income of Rs. 20,39,618" 3. The Assessing Officer vide para 3 of the assessment order observed that the agricultural activities carried on by the assessee are as under: "In the first stage the assessee purchases germplasm. Germplasm is a group of seeding which can regenerate itself with similar characteristics. Any seed which is capable of passing on the characters to the next generation and is used as a basic planting material in plant breeding is termed as germplasm seed. The germplasm is evaluated for the purpose of identifying the characters. The activity involves identifying the parental lines (female and male) and to identify competitive and superior hybrids. The germ plasm passes through quarantine and post quarantine system of NBPGR and is planted in company's research farms in crop specific growing seasons. The germplasm lines are evaluated and data is recorded on yield, maturity periods, insect and disease resistance, quality parameters, photo period sensitivity, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 2(1A) of the Income-tax Act: (i) Any rent or revenue derived from land, which is situated in India and is used for agricultural purposes. (ii) any income derived from such land by agricultural operations including processing of agricultural produce raised or received as rent in kind so as to render it fit for the market. As the assessee is engaged in the cultivation up to basic seed stage (Foundation Seed) by undertaking all basic operations of agricultural on the land, the income derived by the assessee on sale of foundation seed is definitely agricultural income, in support of the assessee claim, we rely on the decision in the case of Raja Benoy Kumar Sahas Roy (32 ITR 466). Let us consider an example of case of a rice mill, an assessee who is owner of a rice mill and is cultivating paddy. The options can be, (i) He might sell the paddy in the outside market after cultivation, then the sale receipts are agricultural receipts. (ii) He might use the paddy so cultivated for processing at the rice mill and produce rice and sell rice. Here, since the goods are used as raw material the value of paddy that would have fetched will be taken as the purchase price for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id seed production stage: the assessee purchases hybrid seed cultivated by farmers and a simple process of chemical treatment will be made and packed to suit and retain the traits of the seed. As per section 2(1) of the Income-tax Act, 1961 agricultural income means any rent or revenue derived from land, which is situated in India and is used for agricultural purposes. Any income derived from such land by agricultural operations including processing of agricultural produce raised or received as rent in kind so as to render it fit for the market. The prima sense in which, agricultural is understood, is root meaning 'ager' - field + culture = cultivation, i.e., to say the field cultivation of the grounds, in the sense tilling of the land, sowing of the seeds planting and similar operations of the land. These are called basic operations of agricultural and demand for expenditure of human labour and skill upon the land itself. The assessee has conducted all the basic and secondary operations of agricultural in cultivating the foundation seed, which is claimed as agricultural income. From the plan reading of the Act the nature of the produce had no relevance to the agricultura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons comprehended with the term agricultural (like weeding, water, manuring etc.) on the land, the resultant product grown (seed) after performing such operations are clearly the products of agriculture. Thus, we submit that though assessee is in the business of sale of commercial seeds, they need not be deprived of claiming income as agricultural income for the income earned by them from such agricultural operations." However, the Assessing Officer was of the view that the activity of the assessee is composite in nature. In the initial stages the assessee was doing extensive research activity and producing the basic seeds. No doubt the assessee had been utilizing the land to achieve its goal of producing the hybrid seeds. The assessee's contention that part of its activity is agriculture income, is not tenable. The assessee's activity in the initial stage involves more of research activity rather than the agricultural activity. According to the Assessing Officer, the following activities are research activities: I. Germplasm collection (i) Acquisition of lines and (ii) Local collections II. Genetic Resources Evaluation includes activities such as introduction, mainte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the farmer is taken back by the assessee and after processing it, the same is marketed under its brand name. The entire activity of the assessee is nothing, but, business activity as the essential ingredients like adventure in nature of trade, continuous and systematic activity and the profit motive are present. 7. The Assessing Officer further observed that plant breeding is an art and the science of changing and improving the heredity of the plant so as to increase its production and productivity. The technique of plant breeding lies in the ability of the plant breeder (the scientist) to observe plant differences, which have got economic value. At the end of the successful research which goes on for 9 to 10 years or even more, a handful of seed which is 100 per cent genetically pure, known as "nucleus seed" is produced. This nucleus seed is multiplied by plant breeder himself under the strict controlled conditions to develop what is known as "breeder's seed", which is also 100 per cent genetically pure. The breeder's seed multiplication give rise to 'foundation seed'. In the instant case, assessee through its research activity, is developing foundation seed in its leased ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dation seed amounting to Rs. 20,39,618 as non-agricultural income and added the same to the income of the assessee and, accordingly, completed the assessment after set off of carry forward loss, at an income of Rs. 13,38,180 vide order dated 29-3-2004 passed under section 143(3) of the Act. 9. The assessee preferred an appeal before the CIT(A). The learned CIT(A) while holding that there is no denying the fact that the foundation seed is produced by the appellant by doing basic agriculture operations, upheld the order of the Assessing Officer and dismissed the appeal. 10. Being aggrieved by the Order of the learned CIT(A), the assessee is in appeal before us. 11. Ground Nos. 1 to 4 read as under: "1. The Order of the learned CIT(A) is erroneous both on facts and in law. 2. The learned CIT(A) erred in holding that the activity carried on by the assessee in producing hybrid seed does not represent agricultural activity and further erred in holding that the income of Rs. 13,38,180 derived during the year under consideration from out of the said activity is not exempt from tax. 3. The learned CIT(A) ought to have held that the total income assessed for the year under consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e disqualified as an agricultural operation. These days highly technical equipment and operations are employed in the farms for the production of crops, but, that does not make them a non-agricultural produce. Implementation and use of better farming practices need not disqualify the income generated from basic agricultural operations from being claimed as agricultural income. Basic seed is definitely produced through normal agricultural operations with the involvement of research based scientific techniques. In today's time of advanced technology and support from companies, the farmers definitely have more knowledge and specialized skill than could have ever been dreamt of few years ago. Thus, the Assessing Officer's allegation that the normal farmers do not have knowledge about the development of foundation seed is no longer true. When the activity of the appellant can clearly be divided into an agricultural process till the basic seed formation and further into a commercial activity in marketing the hybrid seeds, the question of an integrated, composite and indivisible activity being involved does not arise. He further submits that the assessee has undertaken all the agricultura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seeds produced by the assessee are the result of intensive research and other technical inputs. The activity of research was inextricably linked with the process of growing of foundation seed, and both activities, therefore, had to be considered together. Foundation seed would not be possible only through normal agricultural operations, but involvement of research based scientific techniques have to be invariably there in the process. Therefore, the production of foundation seed is 'non-agriculture' and is a clear commercial activity and, hence, the income from the sale of foundation seed is an income from business within the meaning of section 2(13) of the Income-tax Act. He, therefore, submits that the order passed by the Assessing Officer and confirmed by the learned CIT(A), be upheld. The reliance was also placed on the decision in Proagro Seed Co. Ltd. and the decisions reported in the case of K. Lakshmanan Co. v. CIT [1999] 239 ITR 597 (SC), Aspinwall Co. v. CIT [2001] 251 ITR 323 (SC), CIT v. Abdul Ahad Najar [2001] 248 ITR 744 (J K). 17. We have carefully considered the submissions of the rival parties and perused the material available on record and also the case law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturing process and, hence, negatived the assessee's claim. The Tribunal upheld the claim of the assessee. On a reference, it has been held by their Lordships that the activity of the forest lessees of extraction of timber from the forest and conversion of the same into logs and planks was a manufacturing process and, hence, the assessee was eligible for deduction under section 80J. 21. Both the decisions relied on by the learned D.R. are on different provisions of the Act and not on the impugned issue at all, therefore, the decisions therein cannot determine the course of decision making in the instant case, hence, not applicable. 22. The Hon'ble Supreme Court in the case of Raja Benoy Kumar Sahas Roy has considered the term 'agriculture' and held at page 466 as under: "'Agriculture' in its primary sense denotes the cultivation of the field and is restricted 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. These are basic operations and require the expenditure of human skill and labour upon the land itself. Those operations which the agriculturist has to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 98 and sale of discarded seeds at Rs. 38,52,866. It was further observed by the Assessing Officer that the total sale includes sale of parent seeds amounting to Rs. 16,19,854 to M/s. Hybrid Rice International Pvt. Ltd. and there was another sale in respect of Germplasm seeds of paddy for an amount of Rs. 6,95,00,000 to the same party. The remaining sale pertained to commercial hybrid seeds. The Assessing Officer after detailed discussion treated the receipt of Rs. 6.95 crores pertaining to the sale of germplasm seed as non-agricultural receipt and brought the same to tax. On appeal, the learned CIT(A) after rejecting the stand of the assessee, approved, ultimately, the view taken by the Assessing Officer to treat the income of Rs. 6.95 crores as non-agriculture. On further appeal to Tribunal, the Tribunal while confirming the Order of the learned CIT(A) held vide paras 38 and 39 of its order as under: 38. "No doubt there have been technological scientific advances over the years, 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s agricultural activity. The production activity from the level of basic seeds to the level of hybrid seeds, was treated as non-agricultural activity of the assessee which has been upheld by the learned CIT(A). On second appeal to the Tribunal, the Tribunal after considering the various decisions including the decision of ITAT, Delhi Bench in Proagro Seeds Co. Ltd., has held vide paras 16 and 17 of its order as under: "23. In the case on hand, Basic seeds are given to the farmers by sale or otherwise. The farmers cultivate these seeds and the hybrid seeds produced by them is sold back to the Company, as mandated by the contract. But for the agreement prohibiting the farmers from selling this produce to anybody else than the Company, there would have been a market by itself for these hybrid seeds as well as for basic seeds. The terms of agreement which are "stringent" have been elaborated in the latter part of the order and it is this agreement that prevents the farmers from selling the hybrid seeds. Our conclusions and reasons for the findings are set out in the later part of this order. Once there is a sale and also a purchase of a product, then it cannot be termed as 'integral' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of primary as well as subsequent operations involving huge skill and efforts as defined under section 2(1A) of the Income-tax Act and the same is an agricultural income as provided under section 2(1A) of the Act, entitled to exemption under section 10(1) of the Income-tax Act. Accordingly, the Assessing Officer is directed to treat the income from basic seeds Rs. 20,39,618 as agricultural income and allow exemption under section 10(1) of the Income-tax Act. The grounds taken by the assessee, are, therefore, allowed to the extent indicated above. 28. The Ground No. 5 reads as under: "The learned CIT(A) erred in confirming the addition made by the Assessing Officer of Rs. 5,16,124 without considering various explanations submitted before him." 29. After hearing the rival parties, perusing the material available on record and in the absence of any supporting material placed on record by the assessee and also keeping in view that the impugned issue does not arise from the order of the learned CIT(A), the ground taken by the assessee is devoid of any merit and, accordingly, the same is rejected. 30. In the result, the appeal of the assessee stands partly allowed. - - TaxTMI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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