TMI Blog2001 (2) TMI 284X X X X Extracts X X X X X X X X Extracts X X X X ..... arise out of the respective assessments completed under section 143(3) of the Income-tax Act, 1961. 2. The assessee-company is deriving agricultural income as well as earning business income under its Agricultural Division and Commercial Division respectively. While doing so, it has carried on Research and Development activities necessary for its operations. The assessee-company has claimed the deduction of such R D Expenditure entirely from its business income liable to Income-tax. The Assessing Officer did not accept the claim of deduction and disallowed the same by adding back to the business income returned by the assessee-company. The Assessing Officer was of the view that the R D activities have been carried out for assessee-company's agricultural activities and the deduction should have been entirely set off against agricultural income. This dispute was taken up in first appeals. The learned CIT (A) discussed the matter at length and has passed a consolidated order for the four assessment years from 1990-91 to 1993-94; the first one in the series of orders passed by the CIT (A). The learned CIT (A) has found that the R D Expenditure related to both agricultural division a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Development has to be apportioned between Commercial Division and Agricultural Division in the same proportion as sales in these two divisions. 3. The CIT (A) ought to upheld the action of the Assessing Officer in treating the expenditure incurred on Research as relating to Agricultural Division and not to the business." 7. The grounds of cross-objection filed by the assessee-company for the assessment year 1994-95 is as follows-- "1. ........ 2. The CIT (Appeals) erred in directing that the Research and Development expenditure is applicable for both agricultural division and commercial division. 3. ........" 8. In its appeal for the assessment year 1995-96, the assessee-company has raised the following grounds-- "1. ........... 2. The Commissioner (Appeals) erred not allowing the entire expenditure on research and development amounting to Rs.5,04,366 against business income of the assessee. 3. The Commissioner (Appeals), having found that the agricultural operations are only a means to an end i.e., commercial activity should have held that the entire expenditure on research and development was an admissible deduction in the computation of taxable income. 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raising the commercial production. The commercial production of seeds collected from the farmers at the pre-determined market price on the basis of the buy-back agreement are further processed by the assessee-company and later sold to dealers. The purchase and sale of commercial seeds are managed under the Commercial Division of the assessee-company and the income earned out of the same is declared as business income. It is in the above context, the question is raised whether the R D Expenditure has to be absorbed fully in the Agricultural Division or in the Commercial Division of the assessee-company for the purpose of Income-tax Act? 10. Shri K.R. Meena, the learned Senior Departmental Representative appearing for the Revenue, contended that the R D Expenditure has necessarily to be allocated towards agricultural income in full. He contended that the assessee-company is carrying on its business under two separate divisions; one Agricultural and the other Commercial. They are independent sources of income for the assessee-company. It is not that agricultural income is incidental to the carrying on of its main business of purchase and sale of Commercial seeds. The agricultural di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT (A) may be set aside on this point for the assessment years 1990-91 to 1994-95 and the appeals filed by the Revenue may be allowed, and the cross-objection and the appeal filed by the assessee-company may be dismissed. 11. Shri A. Satyanarayana, the learned counsel appearing for the assessee-company on the other hand, argued that the agricultural operations carried out by the assessee was a means to achieve the end, that of the commercial activity carried on by it and therefore, the entire R D Expenditure being related to assessee's business, should be allowed as a deduction. The learned counsel submitted that the assessee-company has been carrying on an integral business of developing and producing hybrid seeds. The R D activities are extremely essential to support the business carried on by the assessee-company. It is not true to say that the assessee-company has been carrying on two separate businesses. The assessee-company is not carrying on a separate business to produce and sell parent seeds to corporate sectors and another separate business to buy and sell commercial seeds produced from farmers. The assessee-company is producing and using the same parent seeds for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 (SC). (b) Addl CIT v. Challappalli Sugars Ltd [1979] 116 ITR 255 (AP). (c) CIT v. K.C.P. Ltd [1991] 192 ITR 648 (SC). 13. We have heard both sides. The general principles to be applied in similar circumstances have been laid down by the courts in the decisions cited before us. In the decision cited by the learned Senior Departmental Representative in Waterfall Estates Ltd.'s case, the assessee-company was deriving income from tea and coffee estates and coffee curing works. That company was managed by managing agents. In that case, the assessee had to work out the net income from taxable and non-taxable sources. For the assessment year 1968-69, the assessee-company claimed the whole of the managing agency commission against income from tea. The Tribunal held that proper allocation of the managing agency commission was called for in proportion to the expenditure incurred on various activities such as tea plantation, coffee plantation and coffee curing works. The Tribunal held that the several activities carried on by the assessee constituted separate and distinct activities. Confirming the finding of the Tribunal, the Hon'ble S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) Where the activities constituted one single and undivisible business, the entire expenditure has to be allowed as deduction and the fact that the income from a part of the business is not exigible to Income-tax is not a relevant reason to justify a proportionate disallowance of the expenditure. 14. In the light of the above, let us examine the issue on hand. As rightly held by the learned CIT (A) in his consolidated order dated 7-3-1996, the assessee-company has two objectives; one agricultural and the other commercial. The objectives of agricultural activities is pursued through development of parent seeds and selling to corporate sector. The commercial objective is to deal in hybrid seeds obtained from farmers. The first one is under Agricultural Division and the second one is under Commercial Division. The learned CIT (A) has examined this aspect in detail in the light of the object clause incorporated in the Memorandum of Association of the assessee-company. We are in agreement with the finding of the learned CIT (A). The market for the parent seeds sold by agricultural division is the corporate sector. The market for the Hybrid Seeds dealt in by the Commercial Divisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities have to be allowed, as deduction in computing the taxable income. In the decisions cited by the learned counsel for the assessee, viz., in Maharashtra Sugar Mills Ltd's case and KCP. Ltd.'s case, the facts were different. In those cases, the assessee was not growing sugar-cane as a distinct activity and independent source of income. Growing of sugarcane and manufacture of sugar constituted single and indivisible business. Therefore, those decisions are not applicable to the present case. The decision of the learned CIT (A) is not in contravention of the provisions contained in section 35(1)(i) and section 43(4)(i) of the Income-tax Act. It is in view of these provisions that the learned CIT (A) has allowed the proportionate expenditure as a deduction in computing the taxable income. Actually, there was no dispute at all regarding the deductibility of R D Expenditure as such, but the dispute was really on the quantum of the expenditure to be allowed. Revenue insisted nothing to be deducted, whereas assessee-company canvassed for the deduction of the whole of R D Expenditure. The learned CIT (A) rightly held that the assessee-company is entitled to deduction on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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