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Dy. Commissioner of Income tax Versus M/s. Nuziveedu Seeds Limited

2015 (3) TMI 938 - ITAT HYDERABAD

Qualify the income as exempt u/s. 10(1) - whether the assessee does not fall under agricultural operations? - Whether the assessee has departed from the basic agricultural operation and indulged into production of parent seeds by planned scientific and specialized procedures? - Held that:- 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 .....

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ly 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 is 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 carried out basic as well as secondary agricultural operations. Therefore, without any fear of contradiction, it is po .....

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ultural income. - Decided in favour of assessee.

Disallowance under S.14A rwr 8D - CIT(A) deleted the disallowance - Held that:- As held in the case of Reliance Utilities Power Ltd (2009 (1) TMI 4 - HIGH COURT BOMBAY), if it is a case of mixed funds maintained by the assessee, there is a presumption that the own funds of the assessee are utilised for making the investment which has fetched the tax free income. Following this ratio and keeping in view the facts of the assessee, we are .....

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er on account of other common expenses by applying clause (iii) of Rule 8D, we are of the view that the common expenses incurred by the assessee such as office and administrative expenses etc. can reasonably be attributed to some extent to the activity of making investment and the same therefore, are liable to be disallowed by applying the formula given in clause (iii) of Rule 8D. As such, the CIT(A), in our opinion, is not justified in deleting the disallowance made by the Assessing Officer in .....

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y the Revenue against the order of the learned Commissioner of Income-tax (Appeals)-V Hyderabad dated 11.8.2014 on the following grounds- 1. The learned CIT(A) erred both in law and onfa cts of the case. 2. The learned CIT(A) should have appreciated that the assessee has departed from the basic agricultural operation and indulged into production of parent seeds by planned scientific and specialized procedures. 3. The CIT(A) ought to have noticed that the assessee itself is not carrying on any ag .....

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e 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 .....

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e earned from the production and sale of seeds amounting to ₹ 39.26 crores was claimed to be exempt by the assessee under S.10(1) of the Act. During the course of assessment proceedings, the said claim of the assessee was examined by the Assessing Officer and on such examination, he found that the assessee is carrying on research and development activity, which involves scientific study of parent seed and hybridization of different varieties of parent seeds so as to evolve the high yieldin .....

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to the farmers and as per the agreement made for a specified season, the farmers had agreed to undertake the crop production as per the specifications of the assessee company. The production of hybrid seeds was done by the farmers as per the specifications and control of the assessee company, for which they were duly compensated mainly for the labour inputs. On the basis of these facts emerging from the relevant agreements, the Assessing Officer was of the opinion that the assessee is not direc .....

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nd there is no requirement under the Act that such land should be owned by the assessee. If the assessee has an interest in the land for the purpose of conducting agricultural operations on the said land, then the revenue generated from such land would be agricultural land; ii) Assessee entered into agreements with farmers who undertake farming on behalf of the company; and risk and rewards associated with the agricultural operations carried on by the company belongs to company; iii) The R & .....

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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 .....

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rcial hybrid seeds. He also held that the production of hybrid seeds on the land owned by the other farmers could not be treated as agricultural operations carried on by the assessee company, going by the terms and conditions of the relevant agreements entered into by it with the farmers. He held that the assessee company therefore, could not be said to be either cultivating the seeds or deriving any agricultural income. Accordingly, the claim of the assessee for exemption of income earned form .....

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e production and sale of seeds- Since the seeds are derived from mother plants grown on land, they 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 as stated above, the Company can be said to be a grower of agricultural produce and hence is considered as an "agriculturist". Since the risks and rewards ass .....

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here 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 Compan .....

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ator 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 the same even after processing where we remove unfilled seeds and foreign matter.  The seeds remain as seeds even after processing.  It retains its nature and character as seeds as produced on plants in the field.  No new product has .....

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on under section 10(1) of the Income-tax Act, 1961': II. DEFINITION OF AGRICULTURAL INCOME / BASIS FOR CLAIM OF EXEMPTION U/S.10(1): (A) "The definition of 'Agricultural income' is specified in section 2(1A) of the Income-tax Act, 1961, which 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-i .....

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nd with respect to which, or the produce of which, any process mentioned in paragraphs 9ii) and (iii)of sub-clause (b) is carried on. The agricultural operations involve identification of the suitable land, ploughing or cultivating of the soil, fertilisation, sowing seed or plantation, pest control, pollination of the crop for better yield and quality, weeding, harvesting of the crop, thrashing, etc. In the Company's case, it produces the Hybrid Commercial Seeds and sells the same to various .....

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tion 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 .....

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e agricultural produce fall within the ambit of agricultural income': Thus, the 'agricultural activities' and 'agricultural income' of the Company as above fall within the ambit of sub-clause (iii) of clause (b) of section 2(lA) of the Income-tax Act, 1961. Further, the Company generates the hybrid seed by certain involved process by the Processing Division of the Company, which falls within sub-clause (ii) of clause (b) of section 2(lA) of the Income-tax Act; 1961 and proces .....

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roduced on plants in the field.  No new product has evolved or emerged from the seeds on account of the processing. Thus, the activities carried out by the Company through a series of scientific and specialised processes fall within the ambit of subITA clause (ii) of clause (b) of section 2(lA) of the Income-tax Act 1961. From the above it could be ascertained that the activities carried on by the Company are in the nature of "agricultural activities" and the income arising the .....

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rs, who carry out the cultivation of the seed under the supervision of the Company and the expenses incurred by the farmers in connection there' with are reimbursed by the Company Apart from leasing out the lands to the Company, the farmers also carry out the agricultural 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 proce .....

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ions 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 farmers is synonymous to that of the jo .....

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the land on lease from the farmers. After taking the land on lease from the farmers, the Company supplies the seed to the farmers, who carry out the cultivation of the seed under the supervision of the Company to enrich themselves with additionsl income. Further, the expenses incurred by the farmers in connection there with are reimbursed by the Company It may be mentioned that when all the risks and rewards connection with the lease of the lands and the agricultural operations thereon are to th .....

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s. Prabhat Agri Biotech Limited , IT.T.A.No.88 of 2014 dated 21- 02-2014 The Appellant accordingly prays for granting the exemption under section 10(1) of the Act in respect of the agricultural income of ₹ 39,26,47,266. 7. The learned CIT(A) found merit in the submissions made on behalf of the assessee and relying inter alia on the decision of the Tribunal in the case of Prabhat Agri-Biotech Ltd rendered vide order dated 14.1.2013, passed in ITA No.1288 and 1289/Hyd/2010 for assessment yea .....

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nts 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 sho .....

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ns and perused the material on record. Admittedly, the only dispute in the present appeals is with regard to assessee s claim of exemption u/s 10(1) of the Act by treating the income generated from sale of basic/foundation seeds as agricultural income. On perusal of the orders passed by the co-ordinate benches of this Tribunal in the case of the same assessee for the earlier assessment years, it is seen that identical dispute as involved in the present assessment year came up for consideration b .....

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oduced by the assessee. We find that the decision of the Tribunal in the case of Swagath Seeds (P) Ltd. relied upon by the learned AR, before us, squarely covers this issue in favour of the assessee and against the revenue. Para-4 of the order of the Tribunal dated 16.5.2008 reads as under: 4....... Admittedly, the assessee is cultivating by performing agricultural operation in order to generate basic foundation seeds. The said foundation seeds were distributed to farmers for the purpose of gene .....

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ssessee is entitled for exemption u/s 10(1) with regard to the basic seeds which were generated out of cultivation made by the assessee. In our opinion, the decision of the Tribunal for assessment year 2001-02 in the assessee s own case is equally applicable to the assessment year under consideration. Therefore, by following the order of this Tribunal in ITA No.943/Hyd/2004 dated 18.1.2008, we hold that the assessee is entitled for exemption u/s 10(1) only in respect of basic foundation seeds wh .....

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ng 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 .....

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uphold the decision of the learned Tribunal in this matter." Similar issue again arose in the case of Prabhat Agri-Biotech Ltd td. for assessment year 2010-11 and the Tribunal following the decision of the Hon'ble Andhra Pradesh High Court rendered vide order dated 21.2.2014 (supra) decided the same in favour of the assessee vide its order dated 28.8.2014 passed in ITA No.752/Hyd/2014. 10. It is true that in the case of Prabhat Agri-Biotech Ltd decided by the Tribunal as well as by the .....

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ses decided by the Bangalore bench of the Tribunal and cited by the learned counsel for the assessee wherein exemption under S.10(1) was claimed by the assessee in respect of income derived from the production of hybrid seeds taken on the farms owned by other farmers and the said claim was accepted by the Tribunal. A similar issue was thus involved in the context of assessee s claim for exemption under S.10(1) in respect of income derived from production of hybrid seeds and the same was initiall .....

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n this context are reproduced below- "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 ; ( .....

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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 cultiv .....

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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 deriving income from agricultural land there is no necessity that such land should be owned by the assessee. If the assessee has derivative interest in the land for the purpose of conducting agricultural operations on the said land, then the revenue generated from such land would be agricultural income. This has been so held b .....

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tatives 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 .....

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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 .....

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the same is liable to be treated only as agricultural income." "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." 11. In the case of Advanta India Ltd. V/s. CIT (2010) 5 ITR (Trib) 57 (ITAT Bang), a similar issue again came up for consideration of the Tribunal involvi .....

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d seeds from 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 gain replanted tog row the hybrid seeds. The hybrid seeds are sold by the assesseecompany, to farmers at large. This is the frame of operations carried on by the assessee during the previous year relevant to the assessment year in appeal. In the past, the assessee had carried out business in different formulations, like .....

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labour. The hybrid seeds are grown by the farmers in their own lands but leased out to the assessee company. The entire cost of production was to be reimbursed by the assessee to the farmers. Therefore, de facto speaking the hybrid seed operations was carried on 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 f .....

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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 the expenditure of human skill and labour upo .....

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ed 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 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 germ plasm and sows it .....

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of fact, it is to be seen that the assessee-company has carried out basic as well as secondary agricultural operations. Therefore, without any fear of contradiction, it is possible for us to hold that such entire income of the assessee is agricultural in nature which is to be excluded from the nature of total income. 17. The assessee is successful in its appeal: 18. As the main ground of the assessee itself is decided in its favour, we have not considered the alternative contention regarding ap .....

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ns 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 e .....

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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, .....

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the cost of production is reimbursed to them and the produce is taken back by the company. The company thereupon cleans the hybrid seeds i.e removes the mud, stones and non-standard sized seeds and then treats the seeds with chemicals to prevent infestation, packs the seeds into cloth bags to suit market requirements and dispatches the seeds to consignees agents located all over the country for sale to the distributors. From the records of the assessee, the AO observed that the assessee has clai .....

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se 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 su .....

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e 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 contr .....

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as well as in assessee s own case for assessment year 2002-03, holding that the income derived by the assessee from the production of foundation/basic seeds as well as hybrid seeds constituted income eligible for exemption under S.10(1) of the Act, being agricultural income. 14. The issue involved in the present case relating to the assessee s claim for exemption under S.10(1) in respect of income derived from the production of foundation/basic seeds as well as hybrid seeds being agricultural in .....

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production of seeds. Grounds No.2 to 4 of the Revenue s appeal are accordingly dismissed. 15. In ground no.5, the Revenue has challenged the action of the learned CIT(A) in deleting the disallowance made by the Assessing Officer under S.14A read with Rule 8D of the Income-tax Rules, 1962. 16. During the year under consideration, the assessee company had received dividend income of ₹ 1,77,472 on investment of ₹ 20.30 crores., which was claimed to be exempt under S.10(33) of the Act. .....

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expenses. 17. On appeal, the learned CIT(A) deleted the disallowance made by 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 ₹ 259.75 Crores in the form of share capital and reserves and surplus as on 31.3.2011 to make investment of ₹ 20.30 crores. In support of this conclusion, he relied inter alia on the decision of the Bombay High Court in the case of R .....

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