TMI Blog2002 (11) TMI 780X X X X Extracts X X X X X X X X Extracts X X X X ..... non-agricultural receipt. The ld. CIT-A in sustaining the above addition made by the Assessing Officer, has erred in holding that the income of ₹ 6,95,00,000 earned by the appellant on sale of parent paddy seeds is income accruing from scientific agriculture research and not income from agriculture. (2) The ld. CIT-A has misdirected herself in coming to the conclusion that scientific research conducted by the appellant in producing the paddy seeds included bio-technological techniques acquired under appellant s technical services agreement with a foreign collaborator. (3) Whether prejudice to the contention of the appellant that the receipt of ₹ 6,95,00,000 from sale of paddy seeds is an agricultural income, the ld. CIT-A was not correct in confirming the method adopted by the ld. Assessing Officer to arrive at the expenditure attributable to the sale of paddy seeds, thus allowing the deduction of ₹ 3,56,25,075 as against the claim of ₹ 8,67,53,447 by the appellant. 2. The assessee in this case is a limited company engaged in growing various kinds of hybrid seeds and earning income from their sale. The income from sale of seeds has been cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd research was also carried out to grow seeds of desirable trades . It was noticed by the Assessing Officer that in the profit and loss account, major items of expenditure had been claimed on account of fertilizers and pesticides, labour cost, field preparation, planting, thinning, weeding, roughing and harvesting etc. 6. The assessee was asked to explain in detail the various production techniques up to the stage of the foundation seed growing the list of varieties of parent seeds developed and commercialized, characteristic of a particular hybrid, breeding locations of the land where breeding techniques had been carried out and the copies of the leaf-lets given at the time of sale in order to prove the claim of exemption under section 10(1) of the Act. It is seen from the assessment order that the details called for were submitted by the assessee by means of a written communication dated 15-2-1999. In the note accompanying the said communication, the assessee submitted as follows :- Plant breeding is both, the art, and the science of changing and improving the heredity of the plant. Plant breeding was practiced when man learnt to select the better plants. Thus selection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for growing the parent seed whereas 74 acres was used for research purposes. It was noted as a fact that commercial seeds were grown on the land taken on lease from the farmers in the States of Andhra Pradesh, Karnataka, Bihar and Haryana. The assessee by means of another communication dated 3-12-1998 furnished details of agricultural land owned by the company together with identification numbers, dimension, location as also details of land taken on lease along with other relevant details such as lease agreements and confirmations from certain lessors. It was seen that out of the total land taken on lease in various districts of the country, commercial seeds had been grown on 15,284 acres in three States and on 15,101 acres in two other States. On the remaining leased land parent seeds had been grown on land measuring 88 acres and research activity had been carried out on land measuring 95 acres. On the basis of the aforesaid figures the Assessing Officer noted that out of the total land utilised by the assessee company approximately 2.76 per cent of the land had been used for research as well as growing of parent seeds. The view, in other words, was that the activity of the rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sticides, weedicides and other processing charges which are also common to other kind of seeds i.e., parent seeds and hybrid seeds whose selling prices are much lower than the selling price of germ plasm seeds. The prices of germ plasm seeds are so high because these includes recovery of expenditure towards scientific research which is quite substantial in the process of growing, raising and developing the germ plasm seeds. Going by the selling prices, involvement of tremendous amount of scientific research and skill in the whole process, etc., it can be safely inferred that this particular activity cannot be classified as a normal agricultural operation so as to put the same within the ambit of section 10(1) of Income-tax Act because, presence of normal agricultural operations are not the only process which are adopted in growing, raising and developing the germ plasm seeds. Such a product is not possible only through such normal agricultural operations but involvement of research based scientific techniques have to be invariably there in the process. 11. In proceeding to consider whether the sale of germ plasm seed constituted agricultural income or not the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but incidentally the copy thereof was not found annexed to the copy of the agreement filed before the Assessing Officer. It was also noted as a fact by the Assessing Officer that in lieu of the purchase of germ plasm seeds M/s. Hybrid Rice International Pvt. Ltd. had issued equity shares to the assessee company. 13. The Assessing Officer also made a reference to a note on seeds purchased and shown in the Schedule of fixed assets and which reads as under :- The Seeds have a decree of durability in as much as benefits from the same would be realized over a period of time. The Seeds do not get consumed in the process of growing final product of the company. This is because the company retains and maintains the strains of Seeds for future. This could be done by retaining some part of lot of Seeds and also by rejuvenating them. Generally, the company finds these seeds suitable for a period of about ten years, the actual usability may depend on various factors. 14. The Assessing Officer also noted Annexure E to the tax audit report for assessment year 1996-97 wherein M/s. Hybrid Rice International Pvt. Ltd. had shown the purchase of germ plasm seeds as scientific research ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent at ₹ 3,38,74,925. 17. Being aggrieved the assessee filed an appeal to the Commissioner of Income-tax (Appeals). At this stage it was submitted that the Assessing Officer was not correct in classifying the paddy seeds sold for ₹ 6.95 crores as germ plasm seeds. It was emphasized that the invoice described the seeds as paddy seeds. To explain the procedure of high yielding varieties of seeds the assessee placed reliance on the opinion of one Prof. P.K. Aggarwal, a member of the Private Seed Sector Committee, World Bank, Washington and this person had earlier headed the IARI, New Delhi. As per para 8 of the order of the Commissioner of Income-tax (Appeals), Shri Aggarwal had opined that the germ plasm was an expression used in a broad sense to denote the hereditary properties of a seed, which were transmitted from one generation to another. According to him any plant or seed when used as a basic substance in plant breeding was termed germ plasm. It was his view that development of a new germ plasm seed required 6 to 8 years of efforts in the field. Male and female parents, according to him, were identified depending upon their traits from the plants and these were t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uce or not. As regards the use by M/s. Hybrid Rice International Pvt. Ltd., it was submitted that these seeds were used for multiplication and part of these were also sold commercially. According to the assessee there was no justification on the part of the Assessing Officer in forming the opinion that the seeds were not agricultural produce on the basis of the area of the land used for growing the seeds. This fact, according to the assessee, made it clear that the seeds were grown from the earth by applying agricultural operations. For the proposition that anything grown from the earth was to be taken as agricultural produce, reliance was placed on the judgment of the Hon ble Supreme Court in the case of Raja Benoy Kumar Sahas Roy 32 ITR 466 (SC). In conclusion it was urged that the income from sale of paddy seeds amounting to ₹ 6.95 crores be treated as income from agriculture and, therefore, exempt under section 10(1). 20. The Revenue s case before the Commissioner of Income-tax (Appeals) as would be apparent from reading para 11 onwards was that the opinion of Shri P.K. Aggarwal could not be relied upon as the same did not have any status under the Income-tax Act. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed only for improving/diversifying the crops was not correct. The following were pointed out :- (a) Technology and application of it towards breeding of agricultural crops in which PROAGRO has vested interests such as Maize, Sorghum, Millet and any new crop added by PROAGRO in the future; (b) Know-how on latest breeding technologies, agronomy and seed production; (c) Know-how on seed enterprise operation and diversification into other crops; and (d) Know-how on recent innovations in bio-technology and their application in practical crop improvement programme. 23. The Commissioner of Income-tax (Appeals) considered various factual aspects of the case as also the decisions cited and on the basis of the following discussion rejected the stand of the assessee approving ultimately the view taken by the Assessing Officer to treat the income of ₹ 6.95 crores as non-agricultural :- The submissions of the appellant are considered. The appellant is engaged in scientific research in the development of seeds. The research is being conducted in technical collaborations with M/s. Global Technologies Inc. of the USA. The foreign company provides its services, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parents are identified, they are crossed in all possible combinations, the hybrid products are regrown, they are observed, tested shortlisted for further treatment, retested for viability in different agro climate conditions, replanted repeatedly till they test positive in all desired traits. This activity takes 6 - 8 years and 50 to 60 generations of plant growth. The Supreme Court in CIT v. Raja Benoy Kumar Sahas Roy ( supra) held that the primary sense in which the term agriculture is understood is cultivation of the field. Agriculture is an integrated activity of cultivating, planting, growing and harvesting. In the case of the appellant the integrated activity is disturbed and basic agricultural operations of tilling, cultivating are minimal. It is seen from the accounts maintained by the appellant that of the total expenditure of ₹ 2,27,91,789 incurred on research expenses [besides expenses of ₹ 1,28,20,500 claimed under section 35-B], the agricultural costs constitute only a sum of ₹ 4,77,926. The remaining expenditure is on salary, staff welfare, travelling, advertisement exp. written off etc. The income of ₹ 6,95,00,000 earned by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the CIT (Appeals) that Dr. Arvind Kapoor was the General Manager of the assessee company whereas in the two affidavits filed one of Dr. Arvind Kapoor and the other of Shri S.K. Kapur stated to be the Managing Director of the assessee company, this fact is denied. The application under Rule 10 has been filed in May, 2000, but the same does not appear to have been adjudicated upon by the earlier benches. 26. During the course of the hearing of the present appeals, the learned Departmental Representative appearing on behalf of the Department while pressing the application for additional evidence had stated more than once that the said additional evidence was filed only to counter the statement of Dr. Kataria, who had been produced on behalf of the assessee and it was necessary to rebut whatever he had stated at the time of recording of his statement. We must emphasize that the hearing before the Tribunal by the present Division Bench is afresh and we are not bound by the hearings conducted by the earlier Division Benches as also the material, which has been placed on record during the course of such hearings. By this we do not mean the paper books and other evidence relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rue that the method of cultivation may be different when seeds, Hybrid Seeds, or parent seeds are grown. The method to grow a seed is by cultivating the land and for this purpose one must have to perform all agricultural operations. For all types of seeds as discussed above, agricultural operations are to be used for growing. Germ plasm Seed : Any seed which is capable of passing on the characters to the next generation and is used as a basic planting material in plant breeding is termed as germ plasm seed. Every seed therefore can be germ plasm seed. Germ plasm seed is ordinarily for use in crop improvement programme. These may be used for growing parent seeds, which will be used for growing commercialized hybrid seeds. Parent Seeds : Seeds with some distinguishing traits and are capable of passing their distinguishing traits to their next generation upon growing are used as parent seeds. These seeds are used for growing of large quantities of hybrid seeds. Hybrid Seeds : Whenever parent seeds of more than one type are used to grow seeds, the resultant seeds are known as hybrid seed. It may be noted that all the above seeds can be sold to farmers and are capable of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent arguments advanced by her were a reiteration of the reasons recorded by the tax authorities in rejecting the assessee s claim. The further submissions, which were highlighted before us, were:- (i) On behalf of the assessee it was stated time and again that the operations in growing hybrid seeds/germ plasm seeds involved the usual agricultural practices of sowing, irrigation, applying fertilizers, harvesting, etc., but mention had been clearly avoided of the plant breeding or scientific procedures; (ii) The scientific techniques adopted by the assessee were a far cry from the agricultural practices espoused by the traditonalist; (iii) The submissions on behalf of the assessee on some occasions in writing to the tax authorities as also the verbal submissions advanced before the Tribunal invoked an initial reaction that procedures followed by the assessee were similar to those followed by traditional cultivators/agriculturists, but the main distinguishing feature was the plant breeding procedure that made the cultivation of hybrid seed production different from traditional crop cultivation; and (iv) That the assessee had offered simply the explanation giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... farming, butter and cheese making etc., but according to her, the principle that extension of the term agriculture beyond a point was an unwarranted distortion was a principle, which was even now valid. In concluding the learned Departmental Representative urged that the order passed by the Commissioner of Income-tax (Appeals) be confirmed vis-a-vis assessment year 1996-97. In reply the learned counsel for the assessee reiterated the arguments already advanced earlier so we really do not have much to record in the present order. 37. We have considered the rival submissions and have also perused the orders passed by the tax authority. The decisions cited at the bar have also been taken into account and the written notes/submissions placed by both the sides on our record during the course of the hearing have also been taken into account. We may mention that paper books filed by both the sides and which are a part of the record have also been taken into account. In our opinion, there is substantial merit in the arguments advanced by the learned Departmental Representative on behalf of the Revenue although we must, at the outset, observe that during the course of the hearing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivities of the assessee may pertain to the field the major operations are of a mechanical nature ruling out the role of nature. It has been very aptly emphasized that agriculture is the art and science of cultivating land and growing and harvesting crops. These are operations like weeding, irrigating and tending. The crops, however, are left to grow and mature by the forces of nature . It is apparent that in the assessee s case the initial activities may be akin to agriculture, but the major portion, therefore, is not and therefore the sale proceeds of ₹ 6.95 crores cannot be treated as agriculture income. The action of the CIT (Appeals) is confirmed. 40. Dealing with the claim on account of expenditure i.e., No. (3) we after hearing the parties uphold the action of the CIT (Appeals) being of the view that no further expenditure can be allowed and the deduction allowed by the Assessing Officer and confirmed by the CIT(Appeals) is held to be in order. Decisions in 159 ITR 132/ 82 ITR 452 and 56 ITR 77 cited by the assessee are considered. 41. Taking up the Revenue s appeal for the assessment years 1994-95, the ground raised is as under :- On the facts and in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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