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TMI Blog2012 (9) TMI 577X X X X Extracts X X X X X X X X Extracts X X X X ..... 43(3) of the Income-tax Act. During the assessment proceedings, the AO observed that there is no change in the business activity of the assessee company compared to the immediately preceding year i.e assessment year 2002-03. He observed that the assessee which is engaged in the research, development, processing and marketing of hybrid seeds is carrying out activities from the first stage i.e research and development into the genetic composition which is best suited for local environment and agronomic practices in varying climatic zones in India. He observed that the research and development starts at the germplasm stage, which is multiplied into nucleus and then into pre basic seeds and then into basic seed. He observed that up to the basic seed activity, all the primary operations are performed by the assessee company on its own lands or lands leased by it under its own direct supervision and guidance with the help of casual labour engaged by it and then the basic seeds are given to farmers for producing hybrid seeds, which are carried out by the farmers on their own lands which are leased to the company and the cost of production is reimbursed to them and the produce is taken bac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rming cannot be termed as cultivation done by the assessee. He, therefore, rejected the assessee's claim of exemption u/s 10 of the Income-tax Act and treated the entire income as business income. 3. Aggrieved, the assessee preferred an appeal before the CIT(A) and reiterated the submissions made before the AO. The CIT(A) after considering the assessee's contentions at length, observed that in the assessment year 2003-04, the assessee has claimed to have changed its system of accounting and that the assessee has also raised additional grounds of appeal before the CIT(A). Considering the same, the CIT(A) called for a remand report from the Assessing Officer. Vide letter dated 15.9.2009, the AO filed the remand report according to which the company had produced pahani extract of its own lands and not of the farmers. According to the AO, the company has changed/re-drafted the lease agreement to suit to its advantage for claiming exemption as agricultural income but has never produced the details of expenses for growing hybrid seeds on farmers' lands and that the assesseee's name is also not mentioned as cultivator in the pahanis. Therefore, the AO concluded that the claim of lease tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r before us. As regards the findings of the AO and the CIT(A) that up to the basic seeds, the activities of the assessee are based on scientific research and are non agricultural activity, the learned counsel for the assessee submitted that the assessee purchases the germplasm and cultivates the basic seeds in its own lands and, therefore, this activity is also to be considered as agricultural activity. He drew our attention to page 2 of the ITAT order for the assessment year 2002-03, wherein this fact has been recorded i.e that the assessee procures germplasm prototype of the hybrid seeds from the laboratories for employing the same in its subsequent operations and the germplasm is sown in the fields which grows into what is called basic seed. 7. The learned DR on the other hand supported the orders of the authorities below and submitted that this issue of contract farming had arisen in the case of M/s Namdhari Seeds Pvt. Ltd. and the Hon'ble Karnataka High Court vide its order dated 24.10.2011 has held the issue against the assessee. He has filed copy of the said order before us and submitted that the assessee's case has to be dismissed. The learned DR has also filed before us a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's case, the assessee is not only paying the rent for the land but is also reimbursing the entire cost of cultivation to the farmer and the farmer is cultivating the seeds on its behalf under direct supervision. Thus according to him, the farmer is discharging his duties as an agent of the assessee company in producing the hybrid seeds and the company being inanimate person, it has to cultivate through its agents only. He submitted that unlike the case of M/s Namdhari Seeds, the assessee takes the entire produce and sell the produce after segregating seeds and the compensation received is its own income, while the farmers get only the rent for the lands and the reimbursement of cost and nothing else. He submitted that the assessee alone is the beneficiary or loser of the higher or lower yield respectively and, therefore, it cannot be said that the assessee is purchasing the seeds cultivated by the farmers. Thus, according to him, the decision of the Tribunal in the assessee's own case for the assessment year 2002-03 is applicable and not the decision of the Hon'ble High Court of Karnataka in the case of M/s Namdhari Seeds Pvt. Ltd. 9. Having heard both the parties and having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n into land which grows into plants for production of basic seeds. From this simple operation, it can be seen that no scientific research activity is involved and all the activities are carried on by the assessee in its own lands or on the lands taken on lease by it. Therefore, this activity also cannot be considered as non-agricultural activity. Simply because the basic seeds are not fit for human consumption, it cannot be said that the produce is not agricultural produce. The definition of 'agriculture' given in sec. 2(1A) of the Income-tax Act does not specify that the produce should be fit for human consumption. Only requirement is that the produce should be out of cultivation by usage of land. Hence this finding of the AO is also not correct. Coming to the last stage i.e production of hybrid seeds, the bone of contention between the Revenue and the assessee is that the assessee is not carrying on the agricultural activity but it is the farmers who are carrying the agricultural activity and, therefore, the assessee cannot be termed as an agriculturist. As rightly pointed out by the learned counsel for the assessee, company is an inanimate person and cannot be expected to do t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed deduction of Rs.1,88,38,838/- under Rule 7 of the IT Rules. The deduction has been claimed by the assessee on the ground that the income is partly agricultural and partly from business. But in the note enclosed to the computation of income, the assessee has further stated that the company reserves the right to contend at the time of hearing that the entire income of the company is fully exempt since it is agricultural income as per the Income-tax Act. 6. The Assessing Officer relying on the decision of the ITAT, Delhi in the case of Proagro Seeds Company Ltd., v. JCIT in ITA No.90/Del/2000, dated11.11.2002, noticed the assessee why the claim for partial deduction should not be denied. The assessee replied that the entire income was in the nature of agricultural income and relied on the judgement of the Hon'ble Supreme Court rendered in the case of Raja Benoy Kumar Sahas Roy (32 ITR 466) and other cases. 7. But anyhow the Assessing Officer did not accept any of the contention of the assessee and treated the entire income as business income mainly on the following premises : i) The profit derived by the assessee arose mainly on account of international technology, marketing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) of this sub-clause ; (c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator of the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on : Provided that - (i) the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the (ii) land requires as a dwelling house, or as a store-house, or other out-building, and (iii) the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated -- It may be appreciated that agricultural income includes any rent or revenue derived from the land which is used for agricultural purposes. The issue is whether the revenue derived from such land by the assessee is agricultural income or not. For the purpose of derivi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it may also be appreciated that the nexus between the income claimed by the assessee as not includible in the total income and the agricultural operations conducted by the assessee and the lands from which the income as so generated have not been disputed by the Revenue. The immediate source of the income is the agricultural operations conducted by the assessee on the land and land alone and consequently the same is liable to be treated only as agricultural income." 12. Finally the Tribunal in the said order has concluded as follows : "In view of such discussion, foundation seeds or Hybrid Seeds produced in own land or lands taken on lease i.e., on contract farming will be the result of agricultural operations and the profit arising out of such activities shall be treated as agricultural income." 13. Therefore, it is to be seen that the issue raised in the present appeal is squarely covered by the above mentioned decision of the Bangalore 'B' Bench in the case of Indo American Exports and M/s. Namdhari Seeds P. Ltd., 14. The Hon'ble Supreme Court in the case of Commissioner of Income-tax v. Raja Benoy Kumar Sahas Roy (32 ITR 466) has considered comprehensively the concept of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n regarding application of Rule 7 and proportionate exemption of income. 18. The reasons pointed out by the assessing authority to deny the claim of exemption made by the assessee company are that the assessee is following international technology, marketing expertise, integrated scientific and commercial activity etc., These are all matters strange to the strict code of Income-tax. Those premises do not have any role in deciding the nature of income within the framework of Income-tax Act, 1961. The reasons pointed out by the Assessing Officer are by and large issues to be decided by the policy makers in the Government. 10. However, now we have to see whether the case of the assessee is covered by the decision of the Tribunal in the assessee's own case or by the decision of the Hon'ble Karnataka High Court in the case of M/s Namdhari Seeds Pvt. Ltd.. A judgment of the Hon'ble High Court is applicable only if the facts and circumstances are similar. The following differences in the facts and circumstances of the assessee's own case and the case of M/s Namdhari Seeds are worth noting. M/s Namdhari Seeds Pvt. Ltd. M/s Advante India Ltd. 1. It does not take land on lease from far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said order before us along with the paper book. 14. The learned DR however supported the orders of the authorities below. 15. Having heard both the parties and having considered the rival contentions, we find that the Tribunal for the assessment year 1995-96 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. 16. Before us, the learned counsel for the assessee has also filed a copy of the letter of DCIT dated 24.8.2009, wherein it is mentioned that the depreciation on technical-know-how fees treated as capital expenditure has been allowed. In view of the same, we remand this issue also to the file of the Assessing Officer to allow depreciation on technical-know-how fees as it is treated as capital expenditure. 17. As regards, the last ground relating to non exclusion of profit on sale of assets while computing the total income, we find that the CIT(A) has failed to adjudicate the same and give any finding. In view of the same, we deem it fit and proper to remand the issue back to the file of the CIT(A) with a direction to consider the ground raised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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