TMI Blog2023 (11) TMI 798X X X X Extracts X X X X X X X X Extracts X X X X ..... er from sale of hybrid seeds grown by farmers would not be agricultural income. Having considered the decisions passed by various Hon ble Courts/Tribunal, we are of the considered view that each case has been decided on its own facts and accordingly the Hon ble Court/Tribunal came to the conclusion regarding the eligibility of exemption u/s 10(1). As noted above, in the assessee s own case, the Hon ble jurisdictional High Court affirmed the findings of the coordinate bench of the Tribunal granting benefit of section 10(1) to the assessee in respect of income earned from growing and selling of hybrid seeds jointly with the farmers. Therefore, reliance on any other decision is not of much importance in the present case, as the issue has been consistently considered in assessee s own case for the past 18 years, i.e. from the assessment year 1990-91. As noted above, in the present case, the lower authorities came to the conclusion that the AO has brought on record material to prove that the assessee has not carried out any agricultural operations, therefore this year is different from the preceding years. However, as we have found above, the new material as sought to be relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he submissions of the assessee that substantial dividend income was earned without incurring any expenditure whatsoever including management or administrative expenses, the AO held that the investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. The AO further held that the assessee could not establish that the expenses debited to the profit and loss account do not relate to the investment activity. Accordingly, by applying the computation mechanism as provided under Rule 8D(2)(iii), the AO, inter-alia, computed the disallowance u/s 14A of the Act, i.e. 0.5% of the average value of the investment. It is further pertinent to note that even the disallowances as computed by the assessee during the assessment proceedings are on an ad hoc basis by considering 25% of the cost of the Treasury Department without taking into consideration the involvement of the Board of Directors for which administrative expenses are also incurred. In view of the above, we find no merits in the submission of the learned AR. Accordingly, we are of the considered view that the action of the AO in computing the disallowance u/s 14A r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... add, alter, amend, delete or withdraw any or all of the grounds of appeal at or before the hearing of the appeal so as to enable the Income tax Appellate Tribunal to decide the appeal according to law. 3. The only dispute raised by the assessee, in the present appeal, is against the denial of exemption under section 10(1) of the Act on the income earned from the sale of hybrid seeds. 4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business of manufacturing and trading in agrochemicals, and growing and selling seeds. For the year under consideration, the assessee e-filed its return of income on 30/09/2009, declaring a total income of Rs. 25,75,07,699, under normal provisions of the Act and book profit of Rs. 20,34,90,548, under section 115JB of the Act. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was observed that the assessee has claimed income of Rs. 54,77,17,169, arising from the seeds division as exempt under section 10(1) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocess ordinarily undertaken by the cultivator. By referring to the statements of farmers, recorded during the assessment proceedings under section 131 of the Act, the AO held that the assessee has not undertaken the basic agricultural operations, hence the agriculture income if any accrued is to the farmer and not to the assessee. By referring to the Seed Production Agreement entered with the farmers, the AO held that the role of the assessee is to provide guidance and supervision, to ensure that the farmer shall produce the desired quality of the hybrid seeds and the assessee has never carried out the agriculture operation ordinarily carried out by a cultivator. The AO further held that the activities carried out by the assessee are not akin to the activities carried out by ordinary cultivators. It was held that the assessee is processing the raw material through the farmers and manufacturing a different material which is used for sale in the open market as hybrid seeds, which cannot be said as agricultural process ordinarily deployed by the farmers. The AO placed reliance upon the decision of the Hon ble Karnataka High Court in CIT v/s Namdhari Seeds Pvt. Ltd., [2011] 16 taxmann. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the absence of such lawful possession the claim of the assessee under section 10(1) of the Act cannot be sustained. The learned CIT(A) further held that the claim of the assessee that the farmer was carrying out the agriculture operations on behalf of the assessee is not tenable due to the fact that no farmer would labour on his own land for others. It was also held that there is nothing on record to suggest that the agriculture operations were carried out jointly. Further, it was held that the business of the assessee involves manufacturing of hybrid seeds and the same does not involve the ordinary process of cultivation of seeds. The assessee is only an intermediary manufacturing seed for the consumption of the farmers, who are agriculturists in the real sense. Being aggrieved, the assessee is in appeal before us. 7. During the hearing, the learned Authorised Representative ( learned AR ) submitted that the assessee is involved, inter-alia, in growing and selling hybrid corn seeds jointly with the help of the farmers in the States of Andhra Pradesh and Karnataka. The learned AR explained the sequence of operations undertaken by the assessee for growing hybrid seeds which invol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has upheld the claim of the assessee for exemption under section 10(1) of the Act, except in the assessment year 2002-03 which was settled under the VSV Act. Thus it was submitted that this issue has been consistently decided in favour of the assessee for the earlier assessment years and there is no change in the facts and the manner in which the activities were undertaken by the assessee vis- -vis the earlier years. 8. On the other hand, the learned Departmental Representative ( learned DR ) by referring to the Seed Production Agreement submitted that the agricultural operations are to be performed by only the farmer and there is no involvement of the assessee, unlike previous years. The learned DR further submitted that the compensation paid by the assessee is a rate fixed per Kg of the produce and the same is neither against the labour nor against the land, which clearly establishes that the payment made to the farmer is for the purchase of the agricultural produce. It was further emphasised that the compensation also depends upon the quality standards specified. Accordingly, the learned DR submitted that the terms of the agreement proved beyond doubt that it is only an agri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. has merged with Bayer CropScience Ltd with effect from 01/04/2019, pursuant to the order dated 13/09/2019, passed by the Hon ble National Company Law Tribunal. Pursuant to the merger, the assessee has filed a revised Form no. 36 along with grounds of appeal, which was taken on record. The assessee was incorporated on 08/12/1949, in India and is engaged in the business of manufacturing and selling agrochemicals. As per the assessee it is, inter-alia, involved in growing and selling of hybrid corn seeds jointly with the help of the farmers in the States of Andhra Pradesh and Karnataka. As per the assessee, a substantial majority (approximately 95%) of the lands on which agricultural activities are carried out by the assessee are situated in the State of Andhra Pradesh, while only 5% of such land is situated in the State of Karnataka. During the year under consideration, the assessee earned income of Rs. 54,77,17,169, from growing and selling of hybrid seeds, which was claimed as exempt under section 10(1) of the Act. The AO as well as the learned CIT(A) denied the claim of the assessee under section 10(1) of the Act primarily on the basis that the assessee has not carried out the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... performed by the assessee through a coordinator who engages a casual labour for this purpose. 11. From the perusal of the record, we find that the issue of claim of exemption under section 10(1) of the Act by the assessee is not novel and has been coming up for consideration in the case of the assessee since the assessment year 1990-91. From the perusal of the assessment order dated 24/12/1992, passed under section 143(3) of the Act, for the assessment year 1990-91, forming part of the paper book from pages 916-924, we find that the AO denied the exemption claimed under section 10(1) of the Act on the basis that the assessee is not the owner of the land and it has not taken the land on lease to perform basic and subsequent operations. It was further held that these operations are carried on by the farmers only and the assessee has not done any basic or subsequent operation on the land to produce hybrid seeds, but what the assessee has done is only entering into contracts with the farmer to purchase the produce. The AO further held that what the assessee had engaged in here was only the purchase of hybrid seeds from the farmer which had been grown according to its requirements u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isputed that the aforesaid order passed by the learned CIT(A) was not challenged further by the Revenue. 13. We further find that in the assessment year 1991-92 and 1992-93 the AO accepted the claim of loss from producing the hybrid seeds as agricultural loss. In the assessment years 1993-94 to 1995-96, the learned CIT(A) after noting the following salient features of the Seed Production Agreement, as is evident from page 933 of the paper book, allowed the claim of loss from the sale of hybrid seeds as an agricultural loss:- a) The farmer is the sole and absolute owner of the agricultural land. b) The company having the technical know-how necessary for the production of hybrid seeds, enters into an agreement with the fanner for utilising the agricultural land belonging to the farmer. c) The farmer agrees that the land-would be allowed to be used exclusively for the production of the company's hybrid seeds. In other words, the agreement gives beneficial ownership of lands to the company to carry out its agricultural activities. d) The farmer shall provide manpower in carrying out its agricultural operations such as land preparation, planting, imigation, fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer was directed to accept the agricultural income shown by the assessee. The assessments for AY 91-92 and 92-93 were passed u/s143(3) and the Assessing Officer has accepted the agricultural income as shown by the assessee himself. However, thereafter the Assessing Officer negated the claim of the assessee by assessing the receipts as business receipts against agricultural receipts shown by the assessee. The assessments for AY 96-97 and 97-98 were reopened u/s 147/148. The assessee filed a letter dated 24.12.2000 requesting the AO to treat the return as return filed in response to notice u/s 148. As discussed above that the Assessing Officer was not satisfied with the explanation that the activity done by the assessee are of agricultural activity as in his view, these are commercial activities, therefore, the Assessing Officer passed assessment by holding that the receipts are of business receipts against agricultural receipts shown by the assessee. 11. Similarly for other years i.e. AY 93-94 to 2000-01, the Assessing Officer treated all the receipts as business receipts against the claim of agricultural income. The CIT(A) allowed the claim of the assessee by holding that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubbayya in 20 ITR 151 and in the case of Associated Metal Co in 177 ITR 428(Alld) where the facts were identical decided the issue in favour of the assessee. The decision of the Supreme Court in the case of Raja Benoy Kumar Sahas Roy in 32 ITR 466 was also taken into consideration by the Tribunal. While discussing the ratio of these decisions in detail, the Tribunal came to the conclusion that on entering into an agreement with farmers the receipts shown by the assessee are agricultural receipts. We further noted that the CIT(A), who allowed the appeal in the case of Indo American Exports and Namdhari Seeds Pvt Ltd (supra) has also taken into consideration the decision of the CIT(A) in the case of the assessee. It was noted by the CIT(A) that the facts in the case in hand and the facts in the case of Monsanto India Ltd (the assessee) are identical. These facts have been noted by the Tribunal while deciding the appeal in the case of Indo American Exports and Namdhari Seeds Pvt Ltd (supra) at page 7 of its order. This order was passed on 14.7.2006 at Bangalore. 12.1 The Id DR has raised a contention that by entering into an agreement with the farmers, the assessee has created va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove, we confirm the orders of the Id CIT(A) for the remaining years also. 19. The department fails in all their appeals. 15. We find that vide common order dated 05/08/2011, the Hon ble jurisdictional High Court dismissed the appeal filed by the Revenue in CIT v/s M/s Monsanto India Ltd., ITA No.633 of 2010, etc., for the assessment years 1993-94 to 2001-02, 2003-04 and 2004-05. We find that in the aforesaid order the Hon ble jurisdictional High Court held that for earning agricultural income, it is not necessary that the assessee must own the land and it is enough if it is established that the agriculture operations have been actually carried on by the assessee. The relevant findings of the Hon ble jurisdictional High Court, in the aforesaid order, are reproduced as under:- 3. Perusal of the order of the ITAT shows that the Tribunal has confirmed the order of CIT(A) by recording finding of fact that the assessee in fact carried on agricultural operations and that the orders passed to that effect in assessment years 1990-91 to 1992-93 have been accepted by the revenue. For earning agricultural income, it is not necessary that the assessee must own the land and it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaken by the company? A.16 The company officials visit the fields, checks the suitability, advise them to do ploughing, they observe the ploughing, they advise to ridges and furrows, they advise about the gap between the rows, after the land is ready, they bring parent seeds to the field, they guide us to sowing of seeds, after watering, weedicides will be supplied and guide us how to use those inputs on timely basis. After post germination, they visit and supervise about the course of activity to be done. According to the health of the crop, they supply fungicides and guide us how to use. At the time of age to 20-25 days of the crop, they guide us earthening up process and after that irrigation activity is done. Under their guidance, we grow the crop till harvest. At the time of age of 50-55 days of crop, detaseling activity is carried out at the cost of the company under their supervision. 18. We find from the annexure to the assessment order on page 182 of the appeal set that during the cross-examination of Shri D. Satyanarayana Reddy, he accepted that the assessee s employees/representative make their presence during all the activities, particularly sowing, germ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e destroy male rows to maintain purity and agronomy. Once the crop is at matured stage where we attain 30% to 35% moisture of seed, we harvest the crop, collect wet ears and more to driers for drying and Shelling. After shelling, check the moisture and fill the seed into bags and move them to warehouses or cold storage for further processes. Q19 Please explain the role and responsibility of the employees of the company in pre-germination, post germination, harvesting and post harvesting activities? A.19 At pre-germination, selection of fields, preparation of fields and determining populations, row ratios, attending plantings, confirming isolation and previous crops. Also, ensuring proper application of basal fertilizers. Post Germination: Population counts, confirmation of male and female rows, isolations, monitoring crop health and agronomic aspects like inter cultivation, weeding, fertilizer applications and sprayings. Also, roughing unwanted plants. Harvesting: Destruction of male rows, checking seed moistures, harvesting sections, harvesting and moving wet ears to driers. Post Harvesting: Drying operation to ensure moisture percentage to 12% before shel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 6 per Kg of the estimated wet ears . Therefore, it is evident that in the preceding years also compensation model was based on the quantity of the product, as in the year under consideration. 22. During the hearing, much emphasis was laid by the learned DR on clause 2(f) of the agreement dated 08/11/2008, with Shri D. Satyanarayana Reddy to submit that in the year under consideration the farmer was solely responsible for performing the agricultural operations and unlike the earlier years wherein the assessee and the farmer jointly agreed to perform the agricultural activities, in the year under consideration, the agricultural operations was solely conducted by the farmer. For ready reference, clause 2(f) of the agreement dated 08/11/2008, with Shri D. Satyanarayana Reddy is reproduced as under:- 2f. WHEREAS the SECOND PARTY has agreed to perform agricultural operations such as sowing Foundation Seeds for the purpose of production of Hybrid Seeds from the said Foundation Seeds, jointly with the SECOND PARTY on the lands here in before described as the sole property of the SECOND PARTY. 23. It was submitted that while in the agreement dated 29/10/2004, clause 2(f) rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his contract and First party shall be free to take such criminal or civil action in the court of law as they deem fit. The SECOND PARTY agrees unequivocally not to disclose to any person any information that may be passed on to him by the FIRST PARTY during the subsistence of this contract, in respect of the production technology, cultivation methods of farming adopted by the parties to these presents during the process of cultivation of the produce, and that the SECOND PARTY shall not alienate the land. The SECOND PARTY shall not obstruct the servants, agents and officers of the FIRST PARTY at any time from inspecting, working, testing and/or doing such other acts, deeds or things as they think fit and necessary at their discretion for the purpose of better production of the produce. 25. It is pertinent to note that in Arosan Enterprises Ltd. v. UOI: (1999) 9 SCC 449, the Hon ble Supreme Court held that the Agreement must be read as a whole with corresponding obligations of the parties so as to ascertain the true intent of the parties. Therefore, upon careful perusal of all the clauses of the agreement dated 08/11/2008, we are of the considered view that both the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tax Rules, 1962. We find that these arguments have been made for the first time before the Tribunal, however, in the absence of any change in the facts and circumstances of the case and manner of assessee s operation as compared to the earlier years, we are inclined to follow the binding decision of the Hon ble jurisdictional High Court rendered in assessee s own case. 27. It is evident from the record that the AO as well as the learned CIT(A) placed reliance upon the decision of the Hon ble Karnataka High Court in Namdhari Seeds Pvt. Ltd. (supra), wherein it was held that where the taxpayer entered into an agreement with farmers for production of open hybrid seeds on the land for its own benefit, income arising to the taxpayer from sale of hybrid seeds grown by farmers would not be agricultural income. During the hearing, the learned DR apart from placing reliance upon the aforesaid decision relied on various other decisions of the coordinate bench of the Tribunal wherein, inter-alia, following the aforesaid decision of the Hon ble Karnataka High Court, the issue was decided in favour of the Revenue. On the contrary, the learned AR apart from relying on the decisions rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aka High Court overruled the decision of the coordinate bench in Namdhari Seeds Pvt. Ltd., the same cannot lead to the conclusion that the very basis on which the Tribunal decided the issue in favour of the assessee in earlier years has been overturned. It is further pertinent to note that the said decision of the coordinate bench in assessee s own case was subsequently affirmed by the Hon ble jurisdictional High Court and therefore the same is binding on us. Further, the basis on which the Revenue denied the exemption claimed under section 10(1) of the Act, in the present case, are only the different facets of the same argument that the assessee has not carried out agricultural operations as are normally undertaken by the cultivator. Since the manner in which the agricultural process as undertaken by the assessee in the year under consideration is similar to the preceding years, respectfully following the judicial precedents in assessee s own case we are of the considered view that the assessee is entitled to claim exemption under section 10(1) of the Act in respect of income earned from growing and selling of hybrid seeds. Accordingly, the only issue arising in the present appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit to the assessee company for a long period and should be treated as capital expenditure. 6) The appellant prays that the order of the CIT(Appeals) on the above grounds be set aside and that of the Assessing Officer be restored. 7) The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 30. The only dispute raised by the Revenue, in the present appeal, is against the deletion of disallowance made on account of Employee Stock Option Plan ( ESOP ) expenses. 31. The brief facts of the case pertaining to this issue, as emanating from the record, are: During the assessment proceedings, on the perusal of the profit and loss account, it was observed that the assessee has debited Rs. 2,58,53,254 towards ESOP expenses. Accordingly, the assessee was asked to explain the nature of the expenses and allowability of these expenses. In response thereto, the assessee submitted that Monsanto Company USA ( MC ) has established the Monsanto Company Long Term Incentive Plan. As part of the plan, the employees of the assessee were provided with the opportunity to acquire the shares of MC via stock options/equity-based awards. The eligibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reproduced as under:- 6. We have considered the submissions made by learned counsel for the parties and have perused the record. The singular issue, which arises for consideration in this appeal is whether the tribunal is correct in holding that discount on the issue of ESOPs i.e., difference between the grant price and the market price on the shares as on the date of grant of options is allowable as a deduction under section 37 of the Act. Before proceeding further, it is apposite to take note of section 37(1) of the Act, which reads as under: Section 37(1) says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, Profits and Gains of Business or Profession . 7. Thus, from perusal of section 37(1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expended and does not contain a requirement that there has to be a pay out. If an expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraphs 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under section 37(1) of the Act subject to fulfilment of the condition. 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of account, which has been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. 12. So far as reliance place by the revenue in the case of Infosys Technologies Ltd.(supra) is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under section 201 of the Act for non-deduction of tax at source and it was he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in denying the claim of agricultural exemption under section 10(1) of the Act. b) On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in not following the order passed by the Bombay High Court in the Appellant's own case for earlier years which has binding effect as there was no change in facts or in the manner in which the agricultural activity has been carried out by the Appellant in the current year as compared to the earlier years. c) On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) further erred in denying the claim of exemption by relying upon various decisions which are distinguishable on facts. d) On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in making various observations which are factually incorrect and contrary to the facts available on record which the Appellant craves leave to elucidate at the time of hearing, leading to perverse finding that the Appellant is not involv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information/working on the said disallowance made in the return of income filed. In response thereto, the assessee submitted that all the investments were made out of their own funds and the assessee does not have any borrowings at the beginning and at the end of the year. It was further submitted that the assessee has sufficient own funds for the purpose of making investments and all the investments are made in the units of mutual funds. Accordingly, it was submitted that no financial expenditure was incurred by the assessee directly related to earning the exempt income during the year under consideration. As regards the disallowance of Administration related expenditure, the assessee submitted that the income on current investments represents dividends from mutual funds, wherein the investment is mainly confined to daily dividend schemes, and the dividends declared under the said schemes are directly deposited into the bank account of the assessee through ECS route. Therefore, except for any minimal and initiative cost which may be incurred initially for making the investment in the schemes, no other expenditure was incurred subsequently for earning such income. Accordingly, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offered under section 14A of the Act during the assessment proceedings. The learned AR further submitted that the investments made by the assessee were mainly in debt mutual funds and dividend option schemes. It was further submitted that the dividend option aims at paying periodic dividends to the investor provided the fund has earned returns. The dividend payment may be either ad hoc or at regular intervals like daily, quarterly, half-yearly, or annual. Thus, these schemes would require minimal administration by the assessee. It was further submitted that considering the fact that some time is spent by the employees of the Treasury Department of the assessee for monitoring investment activities, the disallowance under section 14A was restricted to Rs. 12,84,603 being 25% of the cost of the Treasury Department of the assessee. 43. On the contrary, the learned DR by vehemently relying upon the orders passed by the lower authorities submitted that the findings recorded by the AO are sufficient and a clear indication of his compliance with the procedure under section 14A(2) of the Act. 44. We have considered the submissions of both sides and perused the material available on re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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