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TMI Blog2015 (3) TMI 938X X X X Extracts X X X X X X X X Extracts X X X X ..... o have appreciated the rationale of judgment rendered by the Hon'ble Supreme Court in the case of CIT Vs. Raja Benoy Kumar Sahas Roy(1957)32 ITR 466(SC). 5. The Ld. CIT(A) ought to have appreciated that the Board's clarification vide circular No5 of 2014 that even if there is no exempt income provisions of section 14A r.w.s. 8D of the Rules apply. Hence, disallowance u/s. 14A is in order. 6. Any other ground(s) that may be urged at the time of hearing." 2. As submitted by the Learned Departmental Representative, grounds no.1 and 6 raised by the Revenue in this appeal are general, which require no specific adjudication. The issue raised in grounds No.2 to 4 relates to the claim of the assessee for exemption under S.10(1) of the Act on account of income generated from the production of seeds, treating the same as agricultural income. 3. The assessee in the present case is a company, which is engaged in the business of research, production and sale of agricultural seeds. Return of income for the year under consideration was filed by it on 30.9.2011 declaring total income of Rs. 5,78,67,231 under normal provisions of the Act and book profit of Rs. 6,10,85,898 under S.115JB of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risk and rewards associated with the agricultural operations carried on by the company belongs to company; iii) The R & D activities carried on by the company are part of the process before the agricultural produce is generated; iv) All the genotypes researched and developed by R & D are taken to multiplication through the agricultural activity; v) Produce and residue belong to assessee; vi) Activity carried out by the company is not in the nature of purchase of produce; vii) The Act does not restrict use of technology in agricultural process;" 5. The explanation offered by the assessee as above was not found acceptable by the Assessing Officer. According to him, the production of hybrid seeds was markedly markedly different from normal agricultural crop production in the sense it involved elaborate scientific, technical and specialised operation under regular technical supervision by the assessee company. He held that though the operations of the assessee company involved in production of seeds were akin to cultivation, they were completely different from the normal agricultural operations. He held that the process of recultivating the produce already raised by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from would fall within the ambit of "agricultural income" as was held by the Apex Court in "CITVs Raja Benoy Kumar Sahas Roy, 32 ITR 466'. The production of seeds and marketing is regulated by The Seeds Act; 1966 and the seeds cannot be marketed unless they are processed, tested and labelled On agricultural processing, the Apex Court had an occasion to consider the import and scope of the "process ordinarily employed by the cultivator': In "Dooers Tea Company Limited Vs. Commissioner of Agriculture, Income-tax, 44 ITR 6" and "K. Lakshman & Co. and Another Vs CIT, 239 MR 597" the Apex Court held that the process should be to make produce marketable. It should not change the character and nature of the produce without resulting in an altogether new product. Then it would be agricultural income. Applying the above principles, it can be construed that the processing carried on by the Company is ordinary process employed by the cultivator to be fit for marketing, for the following reasons: The processes carried on by the Company are much normal process carried on by a cultivator and as required by the statute ie. The Seeds Act; 1966. The products remain th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the farmers and getting them cultivated under its supervision and control, also falls within the ambit of agricultural income as specified in sub-clause (Hi) of clause (b) of section 2(lA) of the Income-tax Act; 1961. The primary source of seed in the activities of the Company is the mother plant; which is reared on earth for which certainly contribution of human labour and energy are essential. All the products of the land, which have some utility either for consumption or for trade or commerce, if they are based on land would be agricultural products. In the case of the Company, the seeds are derived from mother plants grown on land, which are considered as agricultural produce and hence the production of seeds by farming is an agricultural activity of the Company. Further, since the Company gets the cultivation done under its supervision and at its own costs and risks, the Company is considered to be a grower of agricultural produce and hence is considered as an "agriculturist': Here, it may be mentioned that the risks and rewards associated with the agricultural operations lie with the Company and are borne by the Company and the Company has an insurable interest on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cultural operations for enriching themselves with additional income, since the Company compensates them for their personal involvement in the operations carried out by them. Since the farmers would not be fully versed with the procedures, technical know-how and quality aspects, they carry out the agricultural operations under the able guidance of the Company When the farmers are paid lease rentals for their lands and also compensated for carrying out the agricultural operations, it cannot be construed as job work executed by the farmers and terming it as procurement of the Produce through Contract. Here, it could be ascertained that the risks and rewards in connection with the lease of the lands and the agricultural operations there on are to the account of the Company only and not to the farmers. Further, as could be verified from the Seed Production Agreement - Master Agreement, clause 12 thereof entitles the Company to terminate the lease agreement in a case where the cultivation of the Produce on any acre of land Is less, the Company would be entitled to terminate the lease. In view of the above, it cannot be construed that the agricultural operations carried out by the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the learned CIT(A), the Revenue has raised this issue in the present appeal filed before the Tribunal. 8. We have heard the arguments of both the sides and also perused the relevant material on record. As agreed by the learned representatives of both the sides, this issue involved in the appeal of the Revenue is squarely covered by various decisions of the Tribunal as well as the decision of the Hon'ble Andhra Pradesh High Court in the case of Prabhat Agri-Biotech Ltd (ITTA No.88 of 2014 dated 21.2.2014). Copies of the relevant decisions of the Tribunal are placed on record by the assessee and a perusal of the same shows that a similar issue arose for consideration in the case of Prabhat Agri-Biotech Ltd, Hyderabad for different years. While deciding the issue for assessment years 2008-09 and 2009-10 vide its common order dated 4.1.2013 (supra), the coordinate bench of the Tribunal took note of the decision rendered in assessee's own case for the earlier year and decided the same in favour of the assessee by recording the following observations in paragraph 5 of its order- "5. We have heard the rival submissions and perused the material on record. Admittedly, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10(1) only in respect of basic foundation seeds which are generated out of the cultivation made by the assessee". Following the above order of the Tribunal, we hold that the assessee is entitled to exemption u/s 10(1) of the Act and that income generated on cultivation of basic /foundation seeds has to be treated as agricultural income. We order accordingly." Facts involved in the impugned assessment year being identical we respectfully follow the aforesaid decisions of the Tribunal and hold that the income generated from sale of basic seeds being agricultural income is exempt u/s 10(1) of the Act. Accordingly, we dismiss the ground raised by the department." 9. Against the aforesaid order of the Tribunal dated 4.1.2013, passed in the case of Prabhat Agri-Biotech Ltd (supra), the department filed an appeal before the Hon'ble Andhra Pradesh High Court and vide order dated 21.2.2014 passed in ITTA No.88 of 2014, Their Lordships upheld the decision of the Tribunal by observing as under- "We are unable to accept the farfetched idea that artificial production of seeds can be sold or used for commercial purpose. May be a few hybrid seeds could be produced by artificial method in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; 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 a 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 nature described in paragraph (ii) 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 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Karnataka. It is only in regard to the State of Karnataka that the assessing authority has held that as per the Land Reforms Act the assessee is not entitled to the benefit of exemption u/s.2(1A) of the Act. The bar levied by the Karnataka Land Reforms Act would be more hold good in so far as the Government of Karnataka has granted certificate to the assessee for production and distribution of the specified hybrid seeds and plants. Here 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the assessee in its leasehold lands." 12. On the above facts and circumstances involved in the case of Advanta India Ltd for assessment year 2002-03, which are identical to the facts involved in the present case, the Tribunal besides following the decision of the coordinate bench in the cases of Indo American Exports and Namadhari Seeds P. Ltd. (supra), also gave the following reasons in paragraphs 15 to 19 of its order, to allow the claim of the assessee that the income from the production of foundation/basic seeds as well as hybrid seeds from the land taken from the farmers on certain terms and conditions is agricultural income eligible for exemption under S.10(1) "15. The hon'ble Supreme Court in the case of CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 has considered comprehensively the concept of agricultural income for the purpose of the Income-tax Act. The court held that 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ode of Income-tax. Those premises do not have any role in deciding the nature of income within the framework of the 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." 13. In the case of Advanta India Limited, a similar issue again came up for consideration before the Tribunal for the assessment year 2003-04, involving identical facts and circumstances as is evident from para 2 of the Tribunal's order dated 29.6.2012 passed in ITA Nos.819 and 820/Bang/2010, extracted below- "2. The brief facts of the case are that the assessee company which is engaged in development and production of basic and hybrid seeds filed its return of income for the assessment year 2003-04 on 27.11.2003 declaring a loss of Rs. 3,59,00,900/-. The return was processed u/s 143(1) on 23.1.2004. Subsequently a revised return was filed on 21.10.2004 declaring a loss of Rs. 2,83,38,977/-. The assessment was taken up for scrutiny u/s 143(3) of the Incometax 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 prece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. 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 extensive research has not been considered by the assessee while computing the claim of agricultural income. Further he also observed that the assessee is carrying on the production of basic seeds in the assessee's own lands and for the production of hybrid seeds, these basic seeds are given to the farmers for cultivation under contract farming. According to him, cultivation of hybrid seeds under contract forming 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Assessing Officer under S.14A read with Rule 8D, after having found on verification of the relevant Balance Sheet of the assessee company that it had sufficient own funds of Rs. 259.75 Crores in the form of share capital and reserves and surplus as on 31.3.2011 to make investment of Rs. 20.30 crores. In support of this conclusion, he relied inter alia on the decision of the Bombay High Court in the case of Reliance Utilities Power Ltd (313 ITR 314). 18. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that a finding has been given by the learned CIT(A) in his impugned order on verification of the relevant Balance Sheet of the assessee company that it had sufficient own funds in the form of share capital, reserves and surplus to make investment of Rs. 20.30 crores, and the Learned Departmental Representative has not been able to rebut or controvert this finding of fact recorded by the learned CIT(A). As held by the Hon'ble Bombay High Court in the case of Reliance Utilities Power Ltd (supra), if it is a case of mixed funds maintained by the assessee, there is a presumption that the own funds of the assessee are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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