TMI Blog2018 (11) TMI 267X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee etc. Thus, the activity constitutes agricultural activity as the assessee constitutes an agriculturist and the entire activity of production and growing of said seeds becomes an agricultural activity. The solitary evidence gathered by the AO in the solitary case of Shri Bhuma Bala Narasimha Reddy does not hold good considering the fact that the said evidences was not put to the assessee in a settled perspective of legal proceedings. Therefore, procurement of seeds from the landlords-cum-growers is not the transaction of purchase of seeds for trading activity. Thus the claim made by the assessee is proper. The decision of CIT(A) is fair and reasonable and does not call for any interference. - Decided in favour of assessee. Disallowance u/s.14A r.w. Rule 8D(2) - Held that:- It is a settled issue that the said provisions are not applicable when the exempt income is not includes in the total income of the assessee. Accordingly, relevant grounds in the assessment years under consideration are required to be allowed in favour of the assessee. - ITA No. 642/PUN/2015, ITA No. 398/PUN/2016 & ITA No. 1505/PUN/2016, ITA No. 1548/PUN/2017 - - - Dated:- 2-11-2018 - Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and vests withthe assessee company. 3. Whether on the facts and in the circumstances of the case, the Ld.CIT(A)was correct in holding that the seeds growers were producing the seeds for the assessee only whereas as per information received u/s.133(6) of the Actrevealed that some of the growers were producing the grains at their own level,i.e. independently and in view of the above, the seeds procured by the assesseefrom growers is nothing but purchases from the seeds growers in question. 4. Whether on the facts and in the circumstances of the case the Ld.CIT(A)was correct in accepting assessee s version of agricultural operation based oninvalid documentation making the entire operation sham. 5. Whether on facts circumstances of the case the Ld.CIT(A) was correctin appreciating that converting seeds into certified seeds is an agriculturalactivity. 6. On the facts and in the circumstances of the case, the order of the AO berestored and that of the CIT(A)-1 be vacated. 7. The appellant craves leave to add, amend or alter all or any of theGrounds of Appeal. On facts, the issues raised in Ground Nos. 4 5 has genesis in the outcomeof the enquiries/invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id show cause notice, assessee filed writtensubmissions and explained the facts relating to (a) leasing of lands from theland owners across width and breadth of the country; (b) giving ofagricultural advances to the said landlords or growers of seeds forundertaking the agricultural activity under the control and management ofthe assessee who has expertise in growing (a) nuclear seeds; (b) the breederseeds; (c) the foundation seeds and finally (d) the certified seeds. Assesseefurther submitted that the certified seeds are finally sold for higher rate andtherefore, all these procedures involve scientific methods and innovations onone side and the control and management of the assessee s technical staffsuch as Agricultural graduates . According to the assessee, the landlords arenot employees of the assessee. They work on contractual basis. 6. On considering the same, the AO rejected the contention of the assessee. Accordingly, AO held that the lease-land documentation, being anunregistered ones, is not a reliable ones. They are typed ones on theunregistered documents; they are stereo-typed ones and they suffer fromcredibility. Further, AO held that the assessee failed to demonstrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower mentioned that the nature oftransaction is a trading activity only. However, AO did not find them relevant for considering the case of the assessee. Eventually, AO denied the claim of agricultural income and treatedthe same as income from business activities as per the discussion given inPara Nos. 5.8 and 5.9 of his order and the same are extracted here under : 5.8 .. However, in the case of Namdhari Seeds Pvt. Ltd., Hon ble High Court ofKarnataka reported in 17 Taxmann 83, (2011) has considered the judgmentscited supra and held that where assessee company engaged in production ofhybrid seeds, entered into agreement with farmers for production of total hybridseeds on their land for its own benefit income arises to assessee from sale ofsuch seeds grown by farmers could not be agricultural income for the purpose ofexemption u/s.10(1) of the I.T. Act. The court also stated that entire reading ofterms of agreement could only indicate that assessee company was interestedonly to have healthy foundation seeds grown process of converting same ascertified seeds and Hon ble Court held that the entire income amounts tobusiness income of the assessee. Further, as a matter of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on 22-03-2013, CIT(A) held as under : 7.8 In view of the above facts and discussion and in view of the ratio laiddown by the above referred decisions, I am of the considered view that the AOis not justified in making addition of ₹ 6,89,99,157/- by treating agriculturalincome of the appellant company as non-agricultural income. The addition ofRs.6,89,99,157/- is deleted. The AO is directed accordingly. From the above, it is evident that the CIT(A) relied heavily on the decision ofPune Bench of the Tribunal in the case of ACIT Vs. M/s.Ajeet Seeds Ltd. (supra) and allowed the appeals of the assessee for these years underconsideration. In the subsequent assessment years too, relief was granted tothe assessee. 9. Aggrieved with the same, the Revenue filed the present appeals for. 10. Regarding the appeal for A.Y. 2012-13 by the Revenue, the AO roped inthe additional points to deny the claim of exemption to the said agriculturalincome of ₹ 10.22 crores (rounded off). The said additional points includethe suspected and self-serving lease agreement of land, which is the soledocument in the possession of the assessee demonstrating the agriculturalnature of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by conventional method. Therefore, assessee company does not fulfils even basic condition of agriculture. If the basic operation of agriculture are not carried on by the assessee company,then the harvested foundation seeds purchased by him and converting them tocertification seeds cannot be termed as integrated part of the foundation activityof agriculture. In addition to above, the court has also viewed that, income fromdeveloping/producing of breeder seed or hybrid germplasm or parent hybridseeds, cannot be treated as agriculture income at ₹ 10,22,21,189/- is herebytreated as its business income and the same is added to the total income ofassessee. However, as assessee company has recognition of in house R Dunits (s) upto 31/03/2012, on aforesaid business income at ₹ 10,22,21,189/-,it is entitled for deduction u/s.35(2AB) of the Income tax Act, 1961. Initiatepenalty proceedings u/s.271(1)(c) of the Income tax Act, 1961, for furnishing ofinaccurate particulars of income. 11. Regarding the appeal for A.Y. 2013-14, assessee made similar claim asin the A.Yrs. 2011-12 and 2012-13 and claimed ₹ 12,02,03,945/- asagricultural income exempt from taxation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricultural produceto the assessee. Thus, the assessee becomes buyer in the capacity oftrader of seeds. Thus, considering the processing activities, the wholeexercise for the assessee becomes a manufacturing activity or thebusiness activity. (c) Miscellaneous Arguments : The verification thatlandlords/growers resulted in gathering of incriminating informationwhere a grower confirmed that he merely sold the agricultural produceto the assessee. Further, Ld. DR for the Revenue submitted that there is no issue aboutthe income or loss of the trading income. Further, on the apportionment ofthe indirect expenditure, Ld. DR submitted that the same becomes relevantonly if the revenue stand on the claim of exemption u/s.10(1) of the Act isconfirmed. Ld. DR for the Revenue filed the paper book containing the copies oforder sheet dated 12-01-2018, copies of show cause notices and othernotices, replies from the assessee, copies of the assessment/appellate orders,copies of the financial statement, details of expenditure claimed by the assessee on account of agricultural activities and other activities, copies ofthe lease agreements of land etc. 16. Ld. ARs Contentions : Per Contra, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and submitted that the AO didnot reject the genuineness of the expenditure on agricultural activities,production of seeds by the growers (assessee s contractors for production ofseeds), sales of the certified seeds. The fact that assessee incurred ₹ 36.19crores (rounded off) on account of agricultural activities and the same wasnot disturbed by the AOs. This amount was incurred directly on agriculturalactivities such as land preparation expenditure. Details are given on Page 3 of the assessment order for A.Y. 2011-12and the same are reproduced below : Sl.No. Expenses directly related to the activities Amount i. Land Preparation expenses 25909610 ii. Fertilizer Pesticides 47621370 iii. Labour Wages 71045020 iv. Incentives to growers 13890456 v. Lease rent for agricultural land 62135400 vi. Other Farm Expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uments of the Ld. Counsel for the assessee are specifically discussed inthe following paragraphs. Cross Examination : Referring to the said stray and a solitary case of a letterby Shri Bhuma Bala Narasimha Reddy, (the farmer-cum-landlord) andreferring to the principles of cross examination, Ld. Counsel for the assesseesubmitted that AO failed to put the said Shri Bhuma Bala Narasimha Reddybefore the assessee for cross examination. Ld. Counsel for the assesseesubmitted that the AO invoked the provisions of section 133(6) of the Act forthe A.Y. 2012-13 in respect of 3 farmers namely mentioned about the fact ofreceiving of advances for seed growing and production in respect of theirlands. Giving reference to a letter from one of the farmers (Bhuma BalaNarasimha Reddy), Ld. Counsel submitted that the payments are received byhim in respect of sale of Jawar Crop cultivated in his farm. Ld. Counselsubmitted that the same constitutes mistaken confirmation of Bhuma BalaNarasimha Reddy. Referring to the principles of natural justice, Ld. Counselsubmitted that the AO collected these evidences at the back of the assesseeand the same are not put to the assessee during the assessment procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent from the natural seeds available inthe market. For getting the certified seeds produced, there is requirement oftreating the seeds procured from the growers with insecticides and chemicalsby the scientific processes. Referring to the manner of generation of suchhybrid/breeder, Ld. Counsel for the assessee submitted that these seeds aregenerated out of cross pollination and the said seeds being named asfoundation seeds and the same are supplied for mass production. Accordingto Ld. Counsel, it is not the case of producing seeds ordinarily for use. Further, explaining the process of growth of the plants, vegetables etc., Ld. Counsel for the assessee submitted that after receiving the harvest from thefarmers, the said seeds are dried, weeded, cleaned, graded to remove theunwarranted ones. Eventually, the foundation seeds are certified as certifiedseeds before they are supplied for sale in the market. This process applied tovarious crops involving Mango, Apple, Vax, Banana etc. This issue is alreadya settled issue by the Coordinate Bench of Pune in the case of M/s.AjeetSeeds Ltd. (supra) after distinguishing the judgment in the case of NamdhariSeeds Pvt. Ltd. (supra). Validi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Engages farmers for cultivation of land for production/agricultural activity Engages farmers for production of hybrid seeds 3. Takes entire produce from farmers Purchases hybrid seeds, if only as per specification from farmers 4. Reimbursed entire cultivation expenses, Land Preparation-Rs.2,59,09,610 Fertilizer Pesticide Rs.4,76,21,370/- Farm Expenses-Rs.3,31,46,970/- Labour Charges ₹ 7,10,45,020/- Not concerned with expenditure 5. Entire risk of crop failure is with assessee Risk of quantity, quality, failure cost remains with farmers Further, heavily relying on the jurisdictional High Court judgment inthe case of ACIT Vs. Ajeet Seeds Ltd. (supra), Ld. Counsel submitted that thesaid judgment is, being favourable to the assessee, was delivered afterdistinguishing the judgment of Karnataka High Court in the case of NamdhariSeeds Pvt. Ltd. Referring to the AO s allegation that the seeds were purchased by the assessee from the growers, Ld. Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that treating the seed and then selling is not a separate activity. Theappellant ultimately sells the seeds as it is. It is submitted that subsequentprocesses done by the appellant does not alter the character of seed. iii. It is like removing mud from wheat and then selling the same; or ripeningof Mango, or Banana, or like keeping the product in cold storage and selling athigher price; or selling the crop by packing them and selling through retailchains at higher margins. All are cases of agricultural income. iv. The appellant has ensured quality of product by just sorting them outand has not done any material subsequent operation on the produce. Details offurther operation after seeds are received, performed by company areexplained. v. Decision of Hon ble SC in the case of State of Madras Vs. Raman Co. and others 93 STC 185 is important for this issue. In that case, the assesseehad purchased unusable railway wagons for scraping and selling and Hon bleSC had held that unusable wagon was nothing but scrap and sale is also ofscrap. Hence there was no new product since both input and output are seeds; Similarly the produce of agriculture is seed and after certi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds created by the AOconstitute frivolous and unsustainable legally. Referring the orders of theCIT(A) in all these assessment years, Ld. Counsel submitted that the saidorders are fair and reasonable and the same should be confirmed withoutamending the same for all the 4 years. DECISION OF THE TRIBUNAL 17. There are couple of common issues for adjudication before us in these 4appeals by the Revenue involving . They are : (1)issue of granting exemption u/s.10(1) of the Act in respect of the incomeearned by the assessee out of production of certified seeds and relatedactivities. This is common issue for all the 4 assessment years underconsideration and; (2) the issue of making disallowance u/s.14A r.w. Rule8D(2) of the I.T. Rules, 1962. This issue is relevant for A.Yrs. 2013-14 and2014-15 only. 18. We heard both the sides and perused the orders of the Revenue. Wehave also perused the paper book filed by both the sides and the decisionrelied on by them. The objections of the AOs are : A. Absence of the registered deeds of leased lands on stamp papersmakes the claim of the assessee u/s.10(1) of the Act unviable. B. a. Letter from Mr.Bhuma Bala Narasimha Reddy conveying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rown in the said lands using the services of the landowners-cum-growers. Itis not a case of buying of seeds from the landlords. Assessee paid to thelandlords for the services as well as the rent of the lands. 18.1 Further, regarding the rule of consistency, we find that otherundisputed facts include that the assessee s claim of agricultural income onsimilar facts were accepted by the Revenue over the years. This is for the firsttime the Revenue disturbed the claim of the assessee from the A.Y. 20-11-12onwards. Further also, on the sales undoubted, the various processes inpreparation of the certified seeds and sale of the same through retail outletsare also undisputed by the Revenue. The objection of the Revenue is that thesaid lease documents were not registered in accordance with the provisions ofsection 17(1A) of the Registration Act, 1908. Considering the above, theobjections of the AO are mere procedural ones and when acted upon, they arenot adequate enough to treat the lease deeds as bogus or sham etc. 18.2 Further on this, we find that the land owners-cum-growers run intothousands of growers spread across many states in India. The assesseefurnished the copies of 7/12 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion on said confirmation letter from Mr. Bhuma BalaNarasimha Reddy Failed to provide copy of the same to assessee andallow the benefit of cross examination if desired : Relevant facts arediscussed in the preceding paragraphs of this order. During the assessmentproceedings for the A.Y.2012-13, for the first time, AO conducted theenquiries by invoking the provisions of section 133(6) of the Act in respect ofthe select cases of land owners-cum-growers on sample basis. Barring asolitary case in respect of Mr. Bhuma Bala Narasimha Reddy, all other casesconfirmed the genuine claim of agricultural activities and also the contents ofthe said land-lease Agreements. In the solitary case of Mr. Bhuma BalaNarasimha Reddy, there is no positive confirmation in favour of the assessee. It indicated the sale of seeds grown in his land. The quantity of seeds is verysmall and negligible vis- -vis the turnover of the assessee. In any case, whensuch adverse evidence is fathered by the AO, it is the duty of the AO to putthe same to the assessee for comments. It is a settled legal principles ofnatural justice and allowed the benefit of cross examination if required. AOneeds to consider the reply o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A Nos. 90 to 115/PN/2012, dated 22-03-2013 for the A.Yrs. 2002-03 to2008-09 adjudicated similar issue and held that growing of breeder andfoundation seeds and finally making of the certified seeds on the lands ownedby the landlords-cum-growers amounts to agricultural activity. OperationalPara No.6.2 of the said order of the Tribunal is relevant and the same isextracted here as under : 6.2. The CIT(A) having considered the same, observed that foundation seeds,breeder hybrid seeds produced by the assessee himself results into agriculturalincome or non-agricultural income has been decided in favour of the assesseeby the ITAT Bangalore Bench in the case of Advanta India Ltd. vs. DCIT (2010)5 ITR 57 (Bang.Trib). In the said case, reasons pointed out by the AssessingOfficer to deny the claim of exemption made by the assessee were thatassessee was following international technology, marketing expertise,integrated scientific and commercial activity etc. The Tribunal in the case ofAdvanta India Ltd. (supra) held that all these reasons/matters were strange tothe strict code of Income Tax Act. The ITAT, Bangalore Bench has concluded that foundation seeds or hybrid seeds produced in own l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... synthetic one. Thus, growingseeds can never be non agricultural. In view of this, we do not see anysubstantial question of law in these appeals. 21.3 In the process, the Hon ble High Court considered the applicability ofthe judgment of Tribunal in the case of Advanta India Ltd. Vs. Dy.CIT 5 ITR57 (Bangalore Tribunal). Regarding the reference made by the Ld. Counselsto the Bangalore Bench of the Tribunal in the case of Advanta India Ltd. (supra) and Karnataka High Court judgment in the case of CIT Vs. NamdhariSeeds Pvt. Ltd. 341 ITR 342 (Kar.), the Hon ble High Court distinguished thesaid judgment in the case of Namdhari Seeds Pvt. Ltd. (supra). Relevant ParaNos. 5 and 6 of the judgment in the case of Ajeet Seeds Ltd. are extractedhere as under : 5. The learned Counsel for the appellant tells us, that the view taken by theauthorities below is erroneous and was based on judgment of Income TaxAppellate Tribunal in the case of Advanta India Ltd. Vs. Dy.CIT (2010) 5 ITR 57(Bangalore Tribunal). According to the learned Counsel for the appellant, thisjudgment is set aside by Karnataka High Court, in the case of Commissioner ofIncome-tax, Central Circle, Bangalore Vs. Namdhar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer was justified intreating the entire income as business income. 21.5 From the above, it is evident that, under an agreement, the NamdhariSeeds Pvt. Ltd. (supra) assessee purchases the seeds grown by otherlandlords at a fixed rate per quintal. In the language of the Hon ble HighCourt, the NSPL is considered interested only to have healthy foundationseeds grown for the process of converting them to certified seeds and the assessee cannot be held as an agriculturist as the concerned agriculturalactivities are undertaken by the owner of the land. This ratio is entirelyinapplicable to the facts of the present case. In the case on hand, the assessee paid rent to the farmers, bore other expenditure relating to the landdevelopment/ploughing/tilling/cultivation, fertilizers, pesticides, labour,transportation of seeds etc. In the present case, assessee monitored theprocess of agricultural activities from the time of employing the qualifiedAgricultural degree holders/others and monitored from the stage oftilling/land development till the point the produce is transported to thescheduled places bearing the entire expenditure on all events of growth of theseeds to the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e activity constitutesagricultural activity as the assessee constitutes an agriculturist and theentire activity of production and growing of said seeds becomes anagricultural activity. The solitary evidence gathered by the AO in the solitarycase of Shri Bhuma Bala Narasimha Reddy does not hold good consideringthe fact that the said evidences was not put to the assessee in a settledperspective of legal proceedings. Therefore, procurement of seeds from thelandlords-cum-growers is not the transaction of purchase of seeds for tradingactivity. Further, the judgment of Coordinate Bench of the Tribunal in thecase of Ajeet Seeds Ltd. (supra) was confirmed by the Hon ble Court ofjudicature Bombay, Aurangabad Bench in the said case. Therefore, we are ofthe opinion that the claim made by the assessee is proper. The decision ofCIT(A) is fair and reasonable and does not call for any interference. Therelevant grounds raised by the Revenue are dismissed. 24. Disallowance u/s.14A of the Act r.w. Rule 8D(2) of the I.T. Rules : This issue is relevant for the appeals for A.Ys. 2013-14 and 2014-15 only. Ground No.6 and 7 of the appeals of Revenue are relevant. AO madedisallowance u/s.14A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, worked out the disallowance u/s. 14Ar.w.Rule-8D at Rs . 7,71 , 422/-. On careful consideration of facts circumstancesin the present case, it is seen that the appellant company has not earned anydividend income from investment made in the shares of Paithan Mega FoodPark Pvt. Ltd. It has been held in many judicial pronouncements that thedisallowance u/s 14A has to be restricted to the amount of exempt income. Theabove proposition of law is supported by the following decisions : (1) Daga Global Chemicals Vs. ACIT in ITA No.5592/2012 order dated01-01-2015. (2) Jeevraj Tea Ltd. Vs. DCIT (2014) (AY 2008-09) 41 CCH 047(Ahmedabad Tribunal) (3) ACIT Vs. Punjab Cooperative Marketing Federation in ITANo.548/CHD/2011 (Chandigarh Tribunal) In the case where the assessee has not earned any dividend income oninvestment made in the shares whose dividend is exempt then nodisallowance can be made u/s 14A in respect of expenditure, if any,relating to the investment in respect of which no exempt income hasbeen received/earned. The above proposition of law is supported by followingdecisions - (1) CIT Vs. Shivam Motors P. Ltd. [2014] 89 CCH 059 (Allahabad HighCourt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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