TMI Blog2012 (9) TMI 577X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is agricultural in nature. Appeal decides in favour of assessee Depreciation on technical know-how fees – Held that:- As the Tribunal for the previous assessment year has directed the AO to consider the alternate plea of the assessee for allowance of depreciation on technical know-how fees, if claim is in accordance with law. Subsequently, the depreciation on technical-know-how fees treated as capital expenditure has been allowed. Therefore, depreciation on technical-know-how fees should be treated as capital expenditure and depreciation allowed. Case remand back to AO - ITA No.819 & 820/Bang/2010 - - - Dated:- 29-6-2012 - SHRI N BARATHVAJA SANKAR, AND SMT. P MADHAVI DEVI, JJ. Assessee by : Shri P.J Pardiwalla, Sr. Counsel Respondent by : Shri S.K Ambastha, CIT O R D E R PER P MADHAVI DEVI, JUDICIAL MEMBER Both these appeals are filed by the assessee. The relevant assessment years are 2003-04 and 2004-05. The appeals are directed against the order of the Commissioner of Income-tax (Appeals)- IV at Bangalore dated 31.03.2010. The appeals arise out of the assessment completed u/s 143(3) of the Income-tax Act, 1961 2. The brief facts of the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to this conclusion, he placed reliance upon the decision of the Hon ble ITAT, Hyderabad Bench in assessee s own case for the earlier years. He also considered the assessee s claim that there is substantial change in the activities carried on by the assessee from the assessment year 2002-03 but according to him, the records reveal no change in the activity carried on by the assessee as the entire agricultural operations for production of hybrid seeds were carried on by the respective holders of the lands which have been taken on lease under the supervision of the assessee. He, therefore, held that the supervision carried on by the assessee cannot be termed as that of a cultivator. He placed reliance upon the assessee s own case for the immediately preceding year and has held that the entire income of the assessee is income from business . The claim of exemption u/s 10 was rejected and entire income was subjected to the tax under the head business . Further he observed that the basic seeds production emanates from germplasm and the variations and genetic manipulations achieved by the assessee are by Scientific Research Activity and, therefore, the expenditure incurred on extensi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment has not recognized the assessee as an agriculturists in their records. Therefore, according to the CIT(A), it cannot be accepted that the assessee is an agriculturist. He, therefore, rejected the assessee s claim. Further he also held that the assessee is utilizing the Scientific Research Activity for producing the basic seeds and, therefore, the production of hybrid seeds from the basic seeds cannot be said to be an agricultural activity. He, therefore, treated the entire income as non-agricultural and, therefore, taxable. On the issue as to whether the expenditure claimed by the assessee in the additional ground is allowable or not, he held that the leasing agreements are sham and not genuine and, therefore, the said expenditure claimed to have been incurred for carrying out agricultural operations on leased lands is not allowable. 5. Aggrieved, the assessee preferred an appeal before us. 6. The learned Sr. counsel for the assessee Shri P.J Pardiwalla, while reiterating the assessee s submission made before the authorities below, drew our attention to the findings of the AO that the activities of the assessee have not changed from the earlier year ie. from the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the compensation received for residue seeds is paid to the farmers and as per the agreement, the company had further agreed to pay the farmers the compensation per kg of the hybrid seeds which meet the specification set by the company. He submitted that in these peculiar circumstances, the Hon ble High Court of Karnataka has held that the company, M/s Namdhari Seeds Pvt. Ltd. is not an agriculturist as none of the normal activities of the agriculturist have undertaken by the assessee company and the input given by the assessee is only the technical supervision of the company and it is the duty of the farmers to ensure fertility of the land, suitability of the land for cultivation, watering of the land, use of the seeds supplied by the assessee and also sell the hybrid seeds at a price fixed by the assessee company. He submitted that the Hon ble High Court has held that the assessee is not paying any rent per acre and is not giving anything in kind but only pays fixed price per quintal depending upon the terms of the agreement. He further submitted that the foundation seeds are grown by the farmers as per the specifications set out by the company and, therefore, agricultural opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, lease rentals should also be considered for computing the agricultural income As regards the production of hybrid seeds, the only objection of the AO is that the hybrid seeds are cultivated by the farmers on a contract basis and, therefore, the assessee cannot be said to have cultivated the hybrid seeds and, therefore, the entire operation cannot be considered as agricultural operations. As regards the objection of the AO and the CIT(A) that the germplasm generated is out of scientific research activity, we find that the AO has already held that there is no change in the activities of the assessee as compared to the earlier assessment year i.e 2002-03. For the assessment year 2002-03, the Tribunal in its order has observed that the assessee procures germplasm from laboratories and does not generate the said germplasm in its own laboratories. Therefore, the contention of the AO and the CIT(A) that some scientific activity is carried on by the assessee and the expenditure incurred by the assessee on such scientific activity should be considered while computing the agricultural income does not hold good. Now, whether the conversion of germplasm into basic seeds also invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment, processing and marketing of Hybrid Seeds. The assessee company carried out studies and researches to find out the most suitable genetic composition of seeds in the respective local environment. The assessee procures germplasm prototype of the Hybrid Seeds from the laboratories for employing the same in its subsequent operations. The germplasm is sown in fields which grows into what is called the Basic Seed. The Basic Seeds are again replanted to grow the Hybrid Seeds. The Hybrid Seeds are sold by the assessee company, to farmers at large. This is the frame of operation carried on by the assessee during the previous year relevant to the assessment year in appeal. In the past, the assessee had carried out the business in different formulations like distributing Basic Seeds to farmers to grow into Hybrid Seeds and buying it back from the farmers, etc., But those business dynamics are not relevant for the impugned assessment year. As far as the impugned assessment year is concerned, assessee itself is growing Basic Seeds as well as Hybrid Seeds. 4. Up to Basic Seed activity, all the primary operations are performed by the assessee in its own lands or lands leased by it, u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Seeds is agricultural in character or not. The alternative contention of the assessee is that at least income attributable to the production of Basic Seeds is agricultural in nature. 10. We heard Shri. P. J. Pardiwala, the Senior Counsel appearing for the Assessee and Smt. Swathi S. Patil, the learned counsel appearing for the Revenue. 11. An exactly similar issue was considered by ITAT, 'B' Bench of Bangalore in the case of Indo American Exports and M/s. Namdhari Seeds Pvt. Ltd., in their common order dated 14.7.2006, passed in ITA No.1040/Bang/2002 and ITA No.3102/Bang/2004. After considering the facts and rival contentions in detail, the Tribunal held as follows : "5.4. After hearing both the sides, we are of the view that the only question to be decided by the Tribunal is as to whether the seeds produced by the assessee and sold in market generates agricultural income or is it a business income. The provision of section 2(1A) of the I. T Act is quoted below : (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; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution of various seeds and crops. The assessee's representatives are there on the land to supervise the manual labour operations and to protect the assessee's interest and it may be appreciated that the sowing, growing and protecting the crop and the produce is also taken by the assessee and the assessee alone. Here the kind attention of the Hon'ble Tribunal is drawn to the decision of the Allahabad High Court reported in 177 ITR 428 (Commissioner of Income-tax v. Associated Metals Co.) (All) wherein it has been held that the assessee company therein had entered into agreement with bhumidhars of land for sowing and growing and protecting crops and thereafter the major share of the profit was to be of the company therein. In that case it was held the income of the company was agricultural income. The assessee's case herein stands on a much better footing. It may also be appreciated by the Hon'ble Tribunal the assessing authority himself does not dispute the fact that the assessee is undertaking the agricultural operations. In fact the assessing authority himself has accepted the agricultural income declared by the assessee on the contract production done outside the State of Karna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontinuation of the basic operations which are the effective cost of the produce being raised from the land. 15. If we examine the operations carried out by the assessee in the previous year relevant to the assessment year in appeal, we find that the production of Basic Seeds as well as Hybrid Seeds are the results of basic of agricultural operations carried on by the assessee company in its own land as well as in leasehold land. The method of contract farming does not take away the character of the basic operations carried out by the assessee company which are agricultural in nature. The assessee company procures germplasm and sows in its own field, and carries on all agricultural operations and produces the Basic Seeds. The Basic Seeds so harvested are again put through agricultural operations intimately connected with leasehold land for finally bringing out the Hybrid Seeds. Only for the reason that the Basic Seeds are sown in leasehold land and the manpower required are arranged through contract farming, it does not mean that the operations carried out by the assessee company are not agricultural operations. As a matter of fact, it is to be seen that the assessee company has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the entire charges and repayment the labour charges. 11. Taking the above differences into consideration, it can be seen that the decision of the Hon ble High Court of Karnataka in the case of M/s Namdhari Seeds Pvt. Ltd., is based on the peculiar facts and circumstances of its case. The Hon ble High Court has held that the assessee therein, i.e M/s Namdhari Seeds Pvt. Ltd., is in fact purchasing the hybrid seeds produced by the farmers and the contract is to produce hybrid seeds as per the specifications. In the case on hand, we find that the farmers though are employed to cultivate the lands are acting on behalf of the assessee company under its supervision and the entire produce is taken by the assessee only. 12. In view of the same, we are of the opinion that the decision of the Hon ble Karnataka High Court in the case of M/s Namdhari Seeds is not applicable in its entirety to the facts of the case before us. The issue is covered in favour of the assessee by the decision of this tribunal in the assessee s own case for the assessment year 2002-03. Respectfully following the decision of the Co-ordinate Bench to which one of us i.e J.M is a signatory, the grounds o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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