Income Tax Appellate Tribunal - Indore
The Dcit- 1(1), Indore vs M/S. Krishidhan Seeds Limited, Indore on 30 November, 2018
Krishidhan Seeds Limited
ITANos.37/Ind/2013, 84/Ind/2013,
ITA Nos. 231/Ind/2013 & 315/Ind/2013
आयकर अपील
य अ धकरण, इंदौर यायपीठ, इंदौर
IN THE INCOME TAX APPELLATE TRIBUNAL,
INDORE BENCH, INDORE
BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER
AND SHRI MANISH BORAD, ACCOUNTANT MEMBER
ITA No.37/Ind/2013
Assessment Year 2008-09
M/s. Krishidhan Seeds Pvt.Ltd, Deputy Commissioner of
302, Royal House, Ushaganj, Vs. Income Tax-1(1),
Indore Indore
(Appellant) (Respondent )
PAN No.AHCPB6349L
ITA No.84/Ind/2013
Assessment Year 2008-09
Deputy Commissioner of M/s. Krishidhan Seeds
Income Tax-1(1), Vs. Pvt.Ltd,
Indore 302, Royal House,
Ushaganj, Indore
(Revenue) (Respondent )
ITA No.231/Ind/2013
Assessment Year 2009-10
M/s. Krishidhan Seeds Pvt.Ltd, Deputy Commissioner of
302, Royal House, Ushaganj, Vs. Income Tax-1(1),
Indore Indore
(Appellant) (Respondent )
PAN No.AHCPB6349L
ITA No.315/Ind/2013
Assessment Year 2009-10
Deputy Commissioner of M/s. Krishidhan Seeds
Income Tax-1(1), Vs. Pvt.Ltd,
Indore 302, Royal House,
Ushaganj, Indore
(Revenue) (Respondent )
1
Krishidhan Seeds Limited
ITANos.37/Ind/2013, 84/Ind/2013,
ITA Nos. 231/Ind/2013 & 315/Ind/2013
Revenue by Smt. Ashima Gupta, CIT
Assessee by Shri Prakash Jain & Ms. Shreya
Jain,CAs
Date of Hearing 18.10.2018
Date of Pronouncement 30.11.2018
ORDER
PER MANISH BORAD, AM.
The above captioned cross appeals filed at the instance of assessee and Revenue pertaining to Assessment Year 2008-09 & 2009-10 are directed against the orders of Ld. Commissioner of Income Tax (Appeals)-I (in short 'Ld.CIT(A)'], Indore dated 12.11.2012 and 20.02.2013 respectively which are arising out of the order u/s 143(3) of the Income Tax Act 1961(In short the 'Act') dated 20.12.2010 & 28.12.2011 framed by DCIT-1(1) & ACIT, Range-1, Indore.
2. As the issues raised in these cross appeals are mostly common relating to the same assessee, these were heard together and are being disposed off by this common order for the sake of 2 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 convenience and brevity. Facts for Assessment Year 2008-09 are taken as basis for adjudication of the common issues.
3. Brief facts of the case as culled out from the records are that the assessee is a limited company engaged in seeds processing and trading. It is one amongst the first three sub licensees of Mahyco Monsanto Biotech (M.M.B) India Ltd, which has commercialized Bollgard (BG-I) & Bollgard-II (BG-II) hybrid cotton seeds. It is a pioneer in production of hybrid seeds and is a research based agricultural biotech company engaged in delivering high quality seeds for the Indian commercial seed market. Its research and development activities and research stations are recognized by the Department of Scientific and Industrial Research (DSIR), Govt. of India, Ministry of Science & Technology, New Delhi and possess a certificate of renewal bearing No.TU/IV-RD/2069/2007 dated 25.6.2009 renewed up to 31.03.2010. The main purpose of the research and development (R&D Division) is to add value to the current and future products by improving productivity, adding value through new characters, saving of cost of production for seeds grown in company's own field as well as produced by farmers into 3 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 their fields. The company is actively involved in research, production, processing, packing and marketing of high quality seeds of cotton, cereals, pulses, oil seeds and vegetables.
4. Assessee company's income source is partly from seed processing and trading through contract farmers as well as in-
house plant and machinery and it has also earned agriculture income from the 109.50 acres of agriculture land owned by for cultivating agricultural seeds.
5. For the Assessment Year 2008-09 e-return filed on 30.9.2008 declaring total income of Rs.7,40,75,085/-, income from agriculture disclosed at Rs. 2,90,33,798/-. Case selected for scrutiny and Notices u/s 143(2) and 142(1) were duly served upon the assessee.
Written submissions were filed. Books of accounts were produced which were examined on test check basis. Ld.A.O observed that the assessee claimed deduction u/s 35(1)(iv) of the Act for the capital expenditure of Rs.2,88,51,028/- for the R&D office building, Ginning Project, Lab Project and other machineries, furniture & fixture, electrical installation installed in the research building.
4Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 Ld.A.O called for the detailed note on the activities carried out by the assessee in the Research and Development field. Detailed submissions were given with stage-wise activities for R&D and at some places in the assessment order the Ld.A.O got convinced by the R&D activities carried out, but at some places he is not able to accept that why the need of new R&D building arised even when the assessee owned and possessed R&D building. Ld.A.O also raised doubt on the clarification given by the Auditor in Column 15(b) of Form 3CD required to be given in the audit report u/s 44AB of the Act wherein it was mentioned that scientific research assets expenditure u/s 35(1)(iv) of the Act not debited to the Profit & Loss Account at Rs.2,88,51,028/-. Ld.A.O accordingly came to the conclusion that the alleged capital expenditure for Research and Development building and machinery at Rs.2,88,51,028/- needs to be disallowed. Doubt was also raised by the Ld.A.O that the alleged capital expenditure is also attributable to the agricultural operation of which the assessee is showing exempt income.
6. Ld.A.O also examined the research development expenditure of revenue in nature at Rs.3,12,37,588/-. Ld.A.O after making 5 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 discussions in the type of expenditure and its nexus with the research and development concluded that all the alleged R&D expenses of Rs.3,72,37,588/- are attributable to the agricultural income and hence the same are attributable from agriculture income only.
7. Ld.A.O while examining the gross receipt from agricultural operations and the expenditure incurred to earn the agriculture proceeds observed that the percentage of expenditure have come down from 20.91% to 16.39% which in his view was not acceptable in the given facts wherein the business turnover as well as the administrative expenses registered a sharp increase. Ld.A.O therefore disallowed Rs.10,48,112/- as the alleged expenditure wrongly claimed as business expenditure even though they were related to the earning of agriculture income. Apart from the above disallowances, Ld. A.O made disallowance u/s 14A, disallowance deduction for discarded land and wealth tax debited to profit and loss account at Rs.20,84,530/-, Rs.5,32,892/- and Rs.1,81,876/-
respectively and assessed the income at Rs.13,80,11,116/-.
6Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013
8. Similar types of addition were also made for Assessment Year 2009-10 to the returned income of the assessee in the following manner;
Total income as per return Rs.3,61,94,331/-
1. On account of disallowance u/s 35(1)(iv) Rs. 40,42,117/-
2. On account of R&D expenses Rs.4,54,34,487/-
3. On account of disallowance u/s 14A r.w. Rule 8D Rs. 42,07,107/-
4. On account of disallowance u/s 36(1)(iii) Rs. 22,64,237/-
5. On account of Wealth Tax Rs. 1,57,643/-
6. On account of prior period expenses Rs. 1,38,439/-
Total Income assessed Rs.9,24,38,361/-
Rounded Off Rs.9,24,38,360/-
9. Aggrieved assessed filed appeal before Ld.CIT(A) and partly succeeded.
10. Now both the assessee and revenue are in appeal before the Tribunal for Assessment Year 2008-09 and 2009-10 raising following grounds of appeals;
11. Assessee has raised following grounds of appeal for Assessment Year 2008-09 7 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 "1.The order of the learned Commissioner of Income Tax (Appeals)-I, is unjustified and is beyond the facts and circumstances of the case.
2. The learned Commissioner of Income Tax (Appeals)-I, has erred in passing an order under section 250 of the Income Tax Act, 1961, that the learned CIT(A)-I had disproportionately disallowed a sum of Rs. 1,03,70,466/- out of the Research & Development Expenditure (Capital & Revenue) incurred by the assessee during the previous year for which he a eligible for deduction u/ s 35(1)(iv) & 37(1).
3. The learned Commissioner of Income Tax ( Appeals)-I, has erred in upholding the addition made by the AO of Rs. 10,48,112/- on account of disproportionate agriculture expenses.
4, The leaned Commissioner of Income Tax (Appeals-I, has erred in upholding the addition made by the AO of Rs. 20,84,530/ - under section 14A of I.T. Act.
5. The learned Commissioner of Income Tax (Appeals)-I, has erred in upholding the disallowance made by the AO of Rs. 5,32,892/- being expenditure incurred on account of discarding of land.
6. The learned Commissioner of Income Tax (Appeals)-I, has erred in upholding the disallowance made by the AO of Rs. 1,81,876/- being expenditure incurred on account of payment of Wealth Tax.
7. The appellant craves leave to add, to amend or alter any of the grounds of appellant craves leave to add, to amend or alter any of appeal as when necessary.
12. Revenue has raised following grounds of appeal for Assessment Year 2008-09;
8Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 "On the facts and circumstances of the case the Ld. CIT(A) erred in ting to restrict the disallowance of capital expenditure of Rs..2,88,,51,028/- on scientific research and development expenses u/s 35(1)(iv) Revenue expenditure amounting to Rs. 3,12,37,588/- to Rs.1,03,70,466/- on - prorate basis without appreciating the fact that the assessee had failed to discharge its onus that each and every expenditure was incurred wholly and exclusively on scientific research and development".
13. Assessee has raised following appeal for Assessment Year 2009-10;
"1. The order of the learned Commissioner of Income Tax (Appeals)-I, is unjustified and is beyond the facts and circumstances of the case.
2. The learned Commissioner of Income Tax (Appeals)-I, has erred in passing an order under section 250 of the Income Tax Act, 1961, wherein the learned CIT(A)-I has disallowed a sum of Rs. 1,83,70,760/- out of the Revenue Research & Development Expenditure incurred by the assessee, which are eligible for deduction 37(1).
3. The learned Commissioner of Income Tax (Appeals)-I, has erred in upholding the addition made by the AO of Rs. 42,07,107/- under section 14A of I.T. Act.
4. The learned Commissioner of Income Tax (Appeals)-I, has erred in upholding the disallowance made by the AO of Rs. 1,38,439/- being prior period items.9
Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013
5. The learned Commissioner of Income Tax (Appeals)-I, has erred in upholding the rejection of revised computation of total income by the Addl. Commissioner of Income Tax Range-1, which is submitted by the assessee during the course assessment., wherein assessee had treated income generated from sale of seeds, whether produced on owned land or on the land owned by the cultivators/farmers, being income derived from agricultural activities and claimed the same exempt u/ s 10(1) of the Income Tax Act, 1961.
14. Revenue has raised following appeals for Assessment Year 2009-10.
"(i)On the facts and circumstances of the case the Ld. CIT(A) erred in directing to delete the disallowance of capital expenditure of Rs..40,42,117/- on scientific research and development expenses u/s 35(1)(iv) and restrict the Revenue expenditure amounting to Rs.
4,54,34,487/- to Rs.1,83,70,760/- on prorate basis without appreciating the fact that the assessee had failed to discharge its onus that each and every expenditure was incurred wholly and exclusively on scientific research and development.
On the facts and circumstances of the case the Ld. CIT(A) erred in deleting addition of Rs.22,64,237/- made by the A.O u/s 36(1)(iii) r.w.s. 40A(2)(b) of I.T. Act
(ii)(a) While holding so ld. CIT(A) failed to appreciate that there was nexus between interest bearing funds diverted to associate concern on no interest basis backed by judicial pronouncements as relied upon by A.O"
10Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013
15. At the outset Ld. Counsel for the assessee requested for not pressing Ground No.1, Ground No.3, 4, 5, 6 for Assessment Year 2008-09 and Ground No.1,3,4 and 5 for Assessment Year 2009-10.
16. As the request of Ld. Counsel for the assessee for not pressing the above grounds has not been opposed by the Departmental Representative, we dismiss the Ground No.1, 3,4,5,6 for Assessment Year 2008-09 and Ground No.1,3,4&5 for Assessment Year 2009-10 raised by the assessee as not pressed.
17. Now the issue remaining for adjudication relates to the following;
(i) Capital expenditure for scientific development expenses u/s 35(1)(iv) of the Act at Rs.2,88,51,028/- and Rs.40,42,177/- for Assessment Years 2008-09 and 2009-10.
(ii) Revenue expenditure relating to research and development at Rs.3,12,37,588/- for Assessment Year 2008-09 and Rs.14,54,34,487/- for Assessment Year 2009-10.
11Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013
(iii) Addition towards un accounted expenditure incurred for earning agriculture income for Assessment Year 2008-09 at Rs.10,48,122/-
18. Now we will take up the issue relating to claim of capital expenditure for research and development at Rs. 2,88,51,028/- and Rs.40,42,117/- and revenue expenditure for Research & Development at Rs.3,12,37,588/- and Rs.4,54,34,487/- which have been disallowed by the Ld.A.O. First appellate authority has given substantial relief to the assessee by giving the finding of fact that the assessee's involvement in doing research and development activity cannot be doubted and so is the genuineness of the revenue expenditure claimed. Ld.CIT(A) further held that the business model of the assessee having taxable business income and exempted agriculture income certainly have some expenses commonly incurred for each other and the possibility cannot be ignored that some element of revenue expenditure which though have been claimed against the taxable business income may have been incurred for earning agriculture income. Adopting this view Ld.CIT(A) proportionately disallowed a sum of Rs.1,03,70,466/- and 12 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 Rs.1,83,70,760/- for Assessment Year 2008-09 and Assessment Year 2009-10 out of the research development expenditure (capital and revenue) on the basis of the gross receipts earned from agriculture operation and taxable business operations.
19. Ld. Counsel for the assessee aggrieved with the findings of Ld.CIT(A) submitted that there is no item of evidence brought in by the revenue authorities to prove that research and development activities were not carried out. The allegation of the Assessing Officer are merely based on surmises and conjectures ignoring the fact that the assessee being a limited company is consistently involved in research and development activities and the revenue authorities has not raised any doubt on the genuineness of the alleged capital and revenue expenditure. Even otherwise the alleged revenue expenditure though claimed as research and development expenditure, would have been allowable u/s 37(1) of the Act as a revenue expenditure is incurred in the course of business. Written submissions were also been placed on record and the relevant extracts of the same is mentioned below;
13Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 "The learned Deputy Commissioner of Income tax-1(1) has erred in disallowing deduction u/s 35(1)(iv) being capital expenditure incurred on scientific research amounting to Rs.2,88,51,028/- on following heads of assets:-
Heads Amount (In Rs.)
Research Lab Equipment 2414039/-
Research BT Lab Equipment 845606/-
Research Building 913063/-
Research Ginning Project Building 14357753/-
Research GaMs Deliniting Project Building 6192558/-
Plant and achinery 476749/-
Research Furniture & Fixture 324856/-
Research office equipment 92396/-
Motor cars 2501200/-
Computers 732805/-
28851028/-
The detail/explanation the above expenditure and head wise purpose of above expenditure are as under:-
1. Research Lab. Equipments Rs. 24,14,039/-
During the year under appeal assessee had acquired 16 Moisture meters of Rs.4,65,920/- Brunswick Incubator Shaker Rs.6,73,092/- Upright Freezer Rs.4,35.377/- Refrigerated Centrifuge Rs.4,63,477/- Cooling Microfuge, Digital PH Meter, Autoclaves and their accessories, Analytical Balance and other various equipments of Rs.3,74,173/-. These equipments are use ony for R&D purposes, and these equipments cannot be used by the Ginning Industry.
2. Research BT Lab. Equipments Rs. 8,45,606/-
During the year under appeal assessee has acquired Gene Pulser Electro Porator of Rs.3,60,425/- and visible spectrometer of Rs.4,84,181/- both 14 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 of these equipments can be utilized for BT cotton laboratory only, such equipments cannot be used by ginning industry.
3. Research Building of Rs. 9,13,063/-
During the year under appeal, assessee has incurred capital expenditure of Rs.9,13,063/- on account of construction of research building. This expenditure is incurred for extension/alteration of this building, which is used for R&D activities.
4. Research Ginning Project Building of Rs.1,43,57,753/- The business of the assessee is production of hybrid seeds. Hybrid cotton seeds are major source of revenue. Out of total sales of Rs.1,92,87,61,485/- sale of hybrid cotton seeds is Rs.83,45,62,059/- i.e. more than 43% of total sales is contributed by sales of hybrid cotton seeds. During the year under appeal, assessee has incurred capital expenditure of Rs.1,43,57,753/- for construction of research building, named as Research Ginning Project Building, which is used by the assessee for hybrid cotton research activities. In this building various plant and machineries including specialized ginning units and gas delinting plant are also installed. These machines are not the normal ginning machines and they are specialized ginning machiness which are used for R&D for removing lint from the Breeder Seeds, Foundation seeds and certified seeds. These machines are of advance technology used for improving the quality of hybrid cotton seeds supplied by the contract farmers.
Final destination of any cotton product, is consumer via textile industries. When we take factory oriented research, we need to establish that individual variety/hybrid, the fibre quality is as per requirement/suitability of ginning, spinning & weaving factories. Ginning mills requires that the cotton fibre should be maximally matured & uniformed and also there should be good yield of lint. The other process which is required for spinning is strength of the cotton 15 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 fibre that decides the speed which can be used in spinning mills. The last important thing in fibre is fineness which is required for the quality of textile. Therefore in breeding we need to have this parameter studied on cotton fibre.
For the above purposes we need to have industrial research, which are inconsonance with factory requirement. Therefore R&D wanted Ginning Machine to handle a small representative samples (about 50 kg) to permit to draw representative samples of 1-1/2 kg for analysis drawn & therefore this specialized ginning unit was housed in R&D". In the substantial part of this building other most sophisticated/ultra modern machines and equipments are installed. With the help of these machines R&D work is carried out by a team of renowned scientists and to assist the scientists in this building a number of subordinate staff works under the guidance of Breeders (Breeders are BSC Ag. And MSC. Ag.) Research Gas Delinting Project Building of Rs.61,92,558/- During the year under appeal, assessee has constructed Research Gas Delinting Project Building costing Rs.61,92,558/-. In this building research is carried out removal of Lint from the Cotton seeds. The very purpose of the research is 'least damage' to the Hybrid Seeds so that their germination can be increased. In the substantial part of these buildings the assessee has installed several other most sophisticated/ultra modern machines and equipments with the help of these machines R&D work is carried out.
Research Plant & Machinery Rs.4,76,750/-
During the year under appeal, assessee has purchased cotton ginning machines of Rs.3,70,770/-, besides these machines assessee has also purchased other small equipments of Rs.1,05,980/- mainly equipment for Delinting. These machines are not the normal ginning machines they are specialized ginning machines which are used for R&D for 16 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 removing lint from the Breeder Seeds, Foundation seeds and certified seeds, these machines are of advance technology used for improving the quality of Hybrid cotton seeds supplied by the contract farmers. These machines & equipments can be utilized for BT cotton laboratory only, such Machines cannot be used by ginning industry because these specialized machines cannot give mass production, these machines are used for R&D purposes so as to improve the quality of the hybrid BT cotton seeds. Final destination of any cotton product, is consumer via textile industries. When we take factory oriented research, we need to establish that individual variety/hybrid, the fibre quality is as per requirement/suitability of ginning, spinning & weaving factories. Ginning mills requires that the cotton fibres should be maximally matured & uniformed and also there should be good yield of lint. The other process which is required for spinning is strength of the cotton fibre that decides the speed which can be used in spinning mills. The last important thing in fibre quality is fineness which is required for the quality of textile. Therefore in breeding we need to have this parameter studied on cotton fibre.
For the above purposes we need to have industrial research, which are inconsonance with factory requirement. Therefore R&D wanted Ginning Machine to handle a small representative samples (about 50 Kg) to permit to draw representative samples of 1-1/2 kg for analysis drawn & therefore this specialized Ginning unit was housed in R&D". Research Furniture & Fixture of Rs.3,24,587/- During the year under appeal, assessee has purchased various furniture & fixtures of Rs.3,24,857/- to be used for R&D Scientists, staffs and subordinates. These furniture & fixtures are installed in the Research Laboratories, for the exclusive use of R&D Scientists and their assistants.
Research Office Equipments of Rs.92,397/-
17Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 During the year under appeal, assessee has purchased Fire Extinguisher of Rs.66,595/- and Cyber Shot Camera of Rs.13,702/-, one water dispenser Rs.6100/- and an exhaust fan of Rs.6000/-. All these machines are installed in its Research Division, use of fire extinguisher is for safety, Cyber Shot Camera is required for security and vigilance and other items are exclusively used by the Research Division. Research Motor Car of Rs.25,01,201/-.
During the year under appeal, assessee has purchased Two Motor Cards of Rs.25,01,201/-, these motor cars used exclusively by the senior scientists, for visiting/monitoring purposes of R&D farms and crops, the assessee is carrying out R&D activities at "Abohar (Punjab), Ratlam (MP), Hyderabad (AP), Paud, Pune (MS), Karnal (Haryana), Unava Ahemdabad (Gujarat)" besides these places scientists has to visit various farms/universities where the RCGM Trials, LST trials are carried out to monitor and supervise the R&D activities.
As to the use of research factory building The Ld. A.O mainly disallowed the deduction u/s 35(1)(iv) by doubting the use of investment of Rs.1,43,57,753/- made in the construction of research Ginning Project Building and Rs.61,92,558/- in the Research Gas Delinting Project Building without appreciating following facts;
1. That research building is different than the other one, in this building all the most sophisticated/ultra modern machines and equipments are installed, with the help of these machines R&D work is carried out and a team of renowned scientists work in this building. Whereas the research factory building is adjacent building where all the research approved/certified by the scientists are implemented, in this building a number of subordinate staff works under the guidance of Breeder (breeders are the BSCAg. And MSC.Ag.), thus both of the buildings are research buildings and are eligible for exemption.
18Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013
2. Part of the building is used for ginning cotton and therefore in practice workmen of the assessee call it ginning project building. According to the Ld. A.O there could not be research in ginning. This is fallacious. The assessee has expertise in BT Cotton, its processed seeds are supplied to several cultivators with the contract that the cotton so produced would be sold to the assessee only. This cotton is grown in different areas, in variable climates and conditions in the country. By process of ginning cotton seeds and lint are separated. Again research is made on the fiber of lint to test its length and strength. The Ld. A.O without following this process simply mentioned (page 11) "these appears no question of any aspect of 'research' in the process of ginning." This is again a guess.
3. Even if it is held, for arguments sake that the only a part of building is used for R&D even then the assessee is entitled to deduction u/s 35(1)(iv) of the Act in view of the decision of Hon'ble Andhra Pradesh High Court in the case of Cit V Yamuna Digital 238 ITR 717 (A.P).
4. The Ld.A.O failed to appreciate that the appellant company is having a team of renowned scientists whose detailed bio-data and research work carried on are given on page No.344 to 376. The details of name and qualification of some of the scientists which are in employment of the company is as under;
Name Educational Qualification Compilation Page Number Dr. Govind Krishna B.Sc (Hons), M.Sc (Agri), Ph.D 344 Garg (Biochemistry) from IIsc, Bangalore, Post Doctoral (Biochemical Genetics) from University of Illinois, US Dr.L.A. Deshpande Ph.D inPlant breeding from 345 Marathwada Agricultural University, Parbhani (MS) Dr.I.S. Singh Ph.D in Plant Breeding from Institute 346-47 of Cambridge, UK 19 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 Dr.Rameshwar Singh B.Sc & M.Sc, Ph.D in Genetics & 348-352 Plant breeding from Purdue University, USA Dr. Prashant B.Sc & M.Sc, Ph.D in Agriculture 353-354 Jiwandhar Mohale Development Dr. Mohammad B.Sc & M.Sc, Ph.D in Agriculture 355-356 Asadullah Siddiqui Botany Dr. Vijay Tiwari B.Sc & M.Sc, Ph.D in Agriculture 357-359 Philosophy Madhukar Pawar M.Sc, Agriculture 360-361 Prashant P. Pise ADB (Bioinformatics), M.Sc 362-363 (Agriculture) Dr. Santosh Kumar B.Sc, M.Sc, Ph.D (Genetics and Plant 364-365 Singh Breeding) Ashish Kamble B.Sc, M.Sc (Ag.) Plant Breeding & 366-367 Genetics Dr. Mahendar Singh B.Sc, M.Sc, Ph.D Plant Breeding & 368-371 Genetics Dr. Laxman Singh B.Sc, M.Sc, Ph.D Plant Breeding & 372-372 Dhayal Genetics The details of other scientists are given on page-373 to 376 of compilation.
From the above it is clear that in the Ginning building the appellant company is not only executing the work of ginning but also doing research on cotton produced, quality, quantity, strength and length of the cotton produced from the cotton seed prepared by the company. Thus in the Ginning factory building also require to sit and work in that building. It is also to submit that the cotton required voluminous place to store. It is also to submit that it is not the case of the Ld.A.O that appellant company is engaged in the business of ginning, pressing and selling of cotton. There is no occasion wherein appellant company has sold cotton. The cotton gene by the appellant company is given for sample to various textile mills.
Regarding disallowance of research expenses we have to submit as under;
20Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013
1. It is not the case of the Ld.A.O that the scientific research expenses aggregating to Rs.3,12,37,588/- headwise details are as under is capital expenditure or bogus expenditure;
S.No. Head of Expenses Amount Amount
1 Salaries
Salaries 8,160,084
Bonus 960,150
Leave Encashment 67,723
Medical Exp Reimbursement 233,346
Leave Travel Allowance 122,994
E.S.I. Co's Contribution 529
Staff Welfare Exp. 97,172
Staff Entertainment 6,289
Staff Hospitality 469 9,648,756
2 Elisa Plate Expenses 2,984,199
3 Speed Testing Charges
Testing Charges 2,786,931
Seed Certification 1,200 2,788,199
4 RCGM-LST Trial Exp 2,053,057
5 Labour Wages
Labour Wages 1,971,513
Saldar Wages 299,118
6 Germination Paper 446,966
Expenses
7 Membership & Subscription 1,643,585
8 Rent
Rent - Office 112,925
Rent - Godown 21,150
21
Krishidhan Seeds Limited
ITANos.37/Ind/2013, 84/Ind/2013,
ITA Nos. 231/Ind/2013 & 315/Ind/2013
Rent-Rest/Guest House 13,100 147,175
9 Seeds (Demonstration)
Purchase Seed (Demo) 145,268
Model Farm/Demo Exp 8,096
Field Test Charges 4,050
Cattle Feed 82,760
Purchase Thread 7,325
Fertilizers & Chemical 428,931
purchase
Agriculture Expenses 43,068
Ply-house Expenses 16,575
Land Lease charges 46,027 782,100
10 Establishment Exp
Establishment Exp 149,888
Printing & Stationary 80,488
Computer Stationary 12,754
Postage & Courier 13,748
Tel/Mobile/Fax Exp 203,998
Internet Expenses 7,329
News Paper Books Periodic 5,045 473,250
11 Security 408,293
12 Electricity Charges
Electricity Charges 143,822
Generator Expenses 1,976 145,798
13 Staff Travelling
Fare-Air 87,539
Fare-Other 229,655
Lodging & Boarding Exp 373,538
Daily Allowance 386,329 1,077,061
22
Krishidhan Seeds Limited
ITANos.37/Ind/2013, 84/Ind/2013,
ITA Nos. 231/Ind/2013 & 315/Ind/2013
14 Stipend 155,561
15 Vehicle
Vehicle Fuel charge 2,567,027
Vehicle Maintenance 11,978
Vehicle Repairs - 2 wheeler 18,576
Vehicle Repairs - 4 wheeler 239,179
Insurance - Vehicle 11,296
Int. - 2 W wheeler loan 26,480
Int. - 4 W Vehicle loan 101,073 2,975,605
16 Travelling
Other Travelling Exp. 43,966
Travel Exp (others) 42,702
Vehicle Hire charges 74,633
Local conveyance 139,379 300,680
17 Laboratory Expenses
Laboratory Expenses 1,195,684
Laboratory Chemical 339,739
Chemicals Purchase 51,285
Laboratory Consumables 713,941 2,300,648
18 Repairs & Maintenance
Rep & Maintenance (P&M) 57,265
19 Repairs and Maintenance
Rep & Maintenance 9,036
(Building)
Rep & Maintenance (Other 144,110
Rep & Maint. (Guest House) 600 153,746
20 Legal Expenses
Legal & Prof Exp 94,926
License Fees 4,500
23
Krishidhan Seeds Limited
ITANos.37/Ind/2013, 84/Ind/2013,
ITA Nos. 231/Ind/2013 & 315/Ind/2013
Documentation Charges 200,075 119,501
21 Seminar Expenses
Staff Conf/Seminar Exp. 2,500
Seminar Expenses 2,500
Meeting Exp-Dealers 940 5,940
22 Advertisement
Advt. Press Media 27,000
Advt. Banners & others 910
Advt. Wall Painting 860 28,770
23 Borewell & Pipe Line
Pipeline Expenses 102,133
Borewell expenses 1,994 104,127
24 Electric Fitting Material 75,199
Miscellaneous
25 Expenses/Incomes
Elec. Char-Resi/Guest 66
Water Charges 2,550
PFT - (ST payable) 18,987
PFT (ST Exempt) 80,701
Octroi/Market Cess 12,630
Hamali Charges - Gen 3,677
Vehicle Toll-Tax 420
Insurance - Assets 606
Insurance - Stocks 5,097
Insurance - Others 2,085
VAT/Sales Tax 1,085
Property Tax 2,483
Misc. expenses 58,793
24
Krishidhan Seeds Limited
ITANos.37/Ind/2013, 84/Ind/2013,
ITA Nos. 231/Ind/2013 & 315/Ind/2013
Compensation 2,000
General Expenses 128,502
Donation & Charity 2,467
Dr. Bal written off 35,523
Lug Lble & Price Labl 1,993
Bank Comm/Charges 32,778
Int. on Cash Credit 131
Int - Short Term Lo 1,478
Miscellaneous Income (131,591)
Food Court Exp (24,325)
Custom Duty Charges (146,455) 91,624
Total 31,237,588
2. Thus the above expenditure are business expenditure and as such being revenue expenses allowable as business expenditure u/s 37 of the I.T.Act in view of the fact that these expenditure are incurred for producing and procuring the seeds given to farmers on contract basis which the company are selling in the market."
20. Ld. Counsel for the assessed placed reliance on following judgments;
(i) Rajasthan State Warehousing Corporation V/s CIT ( 2000) 242 ITR 0450 (SC).
(ii) CIT V/s Maharashtra Sugar Mills Ltd. (1971) 82 ITR 0452 ( SC),
(iii) In the case of CIT V/s Indian Bank Ltd (1965) 56 ITR 0077 (SC)
(iv) CIT v/s Engineering Innovation Ltd (2010) 327 ITR 0392 (Himachal) 25 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013
(v) Vibha Agrotech Ltd V/s DCIT Income-tax Act, 1961, No.1799/Hyd/2012 order dated 28.05.2014
21. Per contra Ld. Departmental Representative supported the findings of Ld.A.O and also submitted that the assessee failed to prove before the assessing authority about the use of the new factory building for research and development activities.
Quantitative details were not provided for various types of seeds produced/procured. Ld.D.R. also supported the findings of Ld.A.O that the business operations and agricultural operations are mixed by virtue of which the assessee have tried to evade tax by claiming expenses though incurred for earning agriculture income but claimed against the taxable business income.
22. We have heard rival contentions and perused the records placed before us. The first common issue raised in the cross appeal for Assessment Year 2008-09 and 2009-10 relates to research and development expenditure of capital nature at Rs.2,88,51,028/- for Assessment Year 2008-09 and Rs.40,42,117/- for Assessment Year 2009-10 and revenue expenditure for R&D at Rs.3,12,37,588/- and 26 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 Rs.4,54,34,487/- for Assessment Year 2008-09 and 2009-10 respectively.
23. We observe that the assessee company is engaged in the business of growing seeds which is supplied to the farmers on contract basis with the understanding that seed grown by them is to be sold to the assessee company which after processing, grading, tagging etc. sold to the dealers. The assessee is pioneer in production of high breed seeds it is research based, dynamic agricultural biotech company delivering high quality seeds for the Indian Commercial Seed market. Its R&D activities and research stations are recognized by the Department of scientific and Industrial Research (DSIR), Govt of India, Ministry of Science & Technology, New Delhi, a certificate of renewal bearing no.
TI/IV/RD/2069/2007 dated 25th June, 2009 renewed up to 31st March ,2010 is issued to the company.
24. The main purpose of having an R & D division within a seed company and committing significant expenditure is to add value to the current and future products by improving productivity , adding value through new characters, saving of cost of production of seeds 27 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 grown in company's own filed as well as produced by farmers into their fields.
25. The company is actively involved in research, production, processing, packing and marketing of high quality seeds of cotton, cereals, pulses, oil seeds and vegetables. The appellant company is a pioneer in production of BT Cotton Seeds, the seeds produced by the company guarantees at least 200% production than the conventional cotton seeds used by the Indian Farmers, within a period of the 3 years you will surprise to note that more than 80% of the farmers are sowing BT cotton seeds. Assessee is also developing a number of BT/ GMO seeds. The company is first to apply for BT Brinjil, GMO Soyabean, approvals are pending under various offices of Government of India.
26. Company's Research Seeds are the seeds, developed by the company, with their in-house research department. KSL since its inception had recognized the need for a robust R & D and Technology base, to ensure its continued growth and competitive edge in the seeds business. The main focus of company's research is to develop elite varieties and hybrids that would attract farmer's 28 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 attention because of high yield and quality. It is pertinent to state that normally, research and development of one variety (various varieties falls within a crop) of any crop takes 3 to 5 years. The asseessee is one amongst the first three sub-licensees of Madhyco Monsanto Biotech (M.M.B) India Ltd, which has commercialized Bollgard (BG-I) & Bollgard-II (BG-II) hybrid cotton seeds in India, it is a pioneer in production of hybrid seeds, it is a research based, dynamic agricultural biotech company delivering high quality seeds for the Indian commercial seed market.
27. Its R&D activities and research stations are recognized by the Department of Scientific and Industrial Research (DSIR), Govt. of India, Ministry of Science & Technology, New Delhi, a certificate of renewal bearing No.NU/IV/RD/2069/2007 dated 25th June 2009 renewed up to 31st March 200 is issued to the company (copy of the same available on paper book page 151. The main purpose of having an R&D Division within a seed company and committing significant expenditure is to add value to the current and future products by improving productivity, adding value through new characters, saving of cost of production for seeds grown in 29 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 company's own field as well as produced by farmers into their fields.
28. The company is actively involved in research, production, processing, packing and marketing of high quality seeds of cotton, cereals, pulses, oil seeds and vegetables.
29. The assessee is a pioneer in production of BT cotton seeds, the seeds produced by the company guarantees at least 200% production than the conventional cotton seeds used by the Indian farmers, within a period of the 3 years you will surprise to note that more than 80% of the farmers are sowing BT cotton seeds.
Assessee is also developing a number of BT/GMO seeds he is first to apply for BT Brinjil, GMO Soyabean, approvals of which were pending at the time of assessment proceedings before the various Government offices, however now approval are received which are available on paper book page-381 to 408.
30. We also find that the Ld.CIT(A) after thoroughly examining the business model of the assessee as well as its research and 30 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 development activities came to the conclusion that undoubtedly the assessee is regularly carrying out Research and Development activities and the alleged capital expenditure incurred towards research and development activities have certainly been incurred.
In coming to this conclusion Ld.CIT(A) observed as follows;
"4.2.1 Before me, the detailed submissions on these issues were filed which find s place in para 3 of this order. From these submissions and the assessment order, it is noted that the assessee is a seed development company. It has two divisions - one agriculture division and the other commercial division. The company is also having in-house Scientific Research department for development of hybrid seeds. The income on production of seeds in its own agricultural land have been shown as agricultural income [ which is exempt from tax]; whereas the income on sale of seeds produced through contract farmers are shown as taxable income. It has been submitted that the assessee is one amongst the first three sub-licensees of Mahyco Monsanto Biotech (M.M.B) India Ltd., which has commercialized Bollgard (BG-I) & Bollgard-Il (BG-II) hybrid cotton seeds in India; and that it is a pioneer in production of Hybrid seeds; that it is a research-based, dynamic agricultural biotech company delivering high quality seeds for the Indian commercial seed market. It has been further submitted that its R&D activities and research stations are recognized by the Department of Scientific and Industrial Research (DSIR), Govt. of India, Ministry of Science & Technology, New Delhi, a certificate of renewal bearing No TU/IV/-RD/2069/2007 dated 25th June 2009 renewed up to 31st March 2010 is issued to the company;
that the main purpose of having an R & D Division within a Seed 31 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 Company and committing significant expenditure is to add value to the Current and future products by improving productivity, adding value through new characters, saving of cost of production for seeds grown in company's own field as well as produced by farmers into their fields; that the company is actively involved in research, production, processing, packing, and marketing of high quality seeds of Cotton, Cereals, Pulses, Oil Seeds and is a pioneer in production of by the cotton seeds, the seeds produced by the company guarantees a tleast 200% production than the conventional cotton seeds used by the Indian farmers; and that within a period of the 3 years more than 80% of the farmers would be sowing BT Cotton seeds; and further submitted ilia: ~ assessee is also developing a number of BT /GMD seeds and is first to apply for by the BT Brinjil, GMD Soyabean; and that approvals are pending under various offices of. Government of India.
It is also submitted that the Company's Research Seeds are the seeds, developed by the company, with their in-house research department; that the assessee ( KSL) since its inception had recognized the need for a robust R&D and Technology base, to ensure its continued growth and competitive edge in the seeds business; and that the main focus of company's research is to develop elite varieties and hybrids that would attract farmer's attention because of high yield and quality. It has been pointed out that normally, research and development of one variety (various varieties falls within a crop) of any crop takes 3 to 5 years.
4.2.2 In the context of addition on fixed assets for scientific research & development, the AD had noted that the assessee possessed sufficient premises for its research work at the beginning of accounting period; and took the view that further addition totaling to Rs 2,88,51,028/- ( during the year under consideration) was riot linked to any research activity for 32 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 the business of the assessee [ indirectly meaning thereby to be linked with on agricultural operations and thus agricultural income]. He accordingly held that the such expenditure of capital nature [ used for scientific research development] was deductible from agricultural income only. Further while examining the issue from the point of use of those assets [ i.e whether for research or not] the AD took note of those assets (i.e. whether for research or not) the AO took note of the break up details of the addition 2,88,51,028/- [being the cost on account of Research Factory building at Rs 2,05,50,312/- and one research building at Rs 9,13,063/-; and the balance on account of expenditure on Plant & machinery] and further break-up details of the said Research Factory building [being Research Ginning Project at Rs 1,43,57,753/- and Research Delenting Project at Rs 61,92,558/] and inferred that the said Research Factory building, being for Ginning project, could not have been used for any research purpose; and after taking into account the cost shown to have incurred on plant and machinery installed in that Research factory building, he disallowed the claim of Rs 2,12,89,597/- [ out of Rs 2,88,51,028/-] on the ground of genuineness also and held that the balance Rs.75,61,431/- was deductible against agriculture income. To sum up, finally AO made entire disallowance of Rs.2,88,51,028/- (claimed by assessee u/s 35(1)(iv) towards capital expenditure on scientific research & development] from its business income.
During the appeal proceedings, it has been submitted that part of the said building [Research Factory Building] is used for ginning cotton and therefore in practice, workmen of the assessee call it ginning project building. It is explained that the assessee has expertise in BT Cotton; its processed seeds are supplied to several cultivators with the contract that the cotton so produced would be sold to the assessee only; and this 33 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 cotton is grown in different areas in variable climate s and conditions in the country; that by process of ginning cotton seeds and lint are separated and again research is made on the fiber of lint to test its length and strength ; and that .the AD without appreciating this process simply observed that there appears no question of any aspect of 'research in the process of ginning."
31. Further as regards the alleged revenue expenditure incurred towards research and development work, Ld.CIT(A) appreciated by giving the finding of fact that the genuineness of the expenditure is not doubted and so is the involvement of the assessee in the research and development activities and primarily the claim of the assessee seems to be on the sound footing. In observing so Ld.CIT(A) mentioned as follows;
"4.2.3 Similarly In the context of revenue expenses on such Research & development which was claimed at Rs 3,12,37,588 u/s 37(1), the AO took the view that the expenses were to be considered in the agricultural account and in. view thereof he disallowed the entire claim of deduction from its business income. In its reply, the assessee has listed the various heads and given the break-up of expenditure and detailed explanation onto the nature of the expenses [refer par a 3.5]. In the facts of the case, it cannot be held that assessee had not done R&D work and or not incurred any revenue expenditure on such R&D work.
4.2.4 Thus on the subject issue, what I find that on the one side assessee has claimed the entire deduction [2,88,51,028 + 3,12,37,588] 34 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 from its business income and thereby reduced its tax liability whereas the AO has attributed & linked such expenditure with its agricultural income which is exempt from tax] and that resulted into higher taxable income. I have carefully considered the point of view & the basis adopted by the AO as well as assessee both and find that both had taken the extreme approach whereas the actual state of affairs lies somewhere in between".
32. Moving further the activities of the assessee of developing the seeds at various stages i.e. Nucleus seeds, breeder seed, foundation seed and certified seeds and the activities being carried out by contract forming as well as the seeds grown and produced in the 109.5 acre land owned by the assessee company to various stages of the company's business model have been noted by the Ld.CIT(A) in the following manner;
"The seeds are developed in various stages. The first stage is seed (in short NS), the second is Breeder Seed (BS), the third is Foundation Seed (FS) and the last is certified seeds.
(ii) The Nuclear Seeds are developed by the assessee in its laboratories (R & D centers) by several permutations and combinations of various germ plasmas (held by the company). The company also acquires germ plastma from various universities and other sources for R&D purposes.
It requires several steps. The Nuclear seeds so produced are sent for various trials to designated government authorities/universities for approval of variety. (Refer assessee's submission - para-3 of this order -
35Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 for further details on Nuclear Seeds)
(iii) The next in the chain for seed production is the breeder seed. The selected nuclear seeds are taken up and shown. The plants are raised in open fields either in isolation or strictly selfed.
(iv) The breeder seed is used for production of foundation seed. which in- turns are used for production of certified seeds.
(v) The functions upto foundation seed production requires special skills and are handled by its R&D division.
(v) R&D unit also purchases seed of various qualities from Agriculture Universities and other government institutions and performs experiment by sowing, breeding and harvesting the said seeds in various kinds of soils and climates and atmosphere. In R&D different types of experiments are also performed like germination of seeds pollination of flowers and plants in different conditions and matching of different Parts of plant of different genus. Students from Agriculture Universities come to the R&D department for training and they are paid stipend.
(vi) During the year under consideration, around 77 acres of land r taken on lease) was used for R&D purposes. The land is situated at various places. Land is utilized for Cotton - Abohar Panjab (8 acres) for North Zone Cotton, Ratlam (MP) (8 acres) for HXB Cotton; Hyderabad (AP) (32.5 acres) for Rice, Cotton & Maize; Paud Pune (MS) (10 acres) & Krunal (Haryana) (3 acres) for Rice and Unava Ahemdabad (Gujarat) (15 acres) for Wheat, Mustard, Bajraand Castor.
(vii) The Breeder Seeds & Foundation seeds are grown and produced in its own agricultural land [109 acres] as well as through contract forming.
36Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013
(viii) The certified seeds are ultimately made through contact forming only.
(ix) In the contract forming, the assessee enters into the contract with formers [generally through growers & organisers]. The company sells its seeds at predetermined prices and provides required know how. '!'he formers, after harvesting the crop, sales back the produce [ next stage of multiplied seeds] to the assessee. The seeds grown out of foundation seed are the final seed , which after required certification, are sold by its business division in the market, after packing and levelling.
(x) The income of the agricultural division, being out of agricultura1 operations, are exempt from tax. Whereas the income arisen to the business division through the contract forming is shown as taxable income [ here agricultural operations are done by those formers on their land and thus income arising through contract forming becomes its ( i.e, assessee's) taxable income]
(xi) The produce of its agricultural land [ i.e. the breeder seed & foundation seed] also sold to the contract formers. The multiplied seeds produced by the contract formers, out of foundation seed of agricultural division is purchased back by its commercial division.
In the facts of the case, it has to be accepted that the assessee has been doing R & D and incurred the expenditure thereof by way of addition of building & plant and machinery used in R&D. The assessee has employed number of scientists. Its in-house R&D has also been Technology. However, the benefit from the expenditure made in the R&D arises in both the divisions (agriculture division & commercial division) Therefore, in my considered view, the R&D expenditure will have to be 37 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 allocated -between both the divisions. In the facts of the case, the proper criterion &allocation would be the net income of the two divisions, prior to deduction of R&D expenses. For this purpose, I have looked into the income shown as agricultural income. What I find that, that being exempt from tax; assessee has shown that on the higher side. So that requires adjustment".
33. After going through the systematic analysis, deep study of the business model and the use of Research & Development activities in this process as observed by Ld.CIT(A), we perused the findings of Ld. Assessing Officer and observed that at page-9 of the impugned assessment order, Ld.A.O has observed that the assessee possessed research Lab, Research Poly House and Research Building which are quite old. During the instant assessment year under appeal 2008-09 research factory building, furniture & fixture and Plant & Machinery related there to have been claimed as capital expenditure. There seems merit in the contention of the Ld. Counsel for the assessee that the new research building is different from those existing as they are more sophisticated and equipped with better modern machines which helps the team of renowned scientists to do research and development work. It is also surprising to note that Ld.A.O who is not an expert in the field of research and development of the activities carried out by the assessee gave contradictory findings at many places. Some times it emerges from his finding that assessee is doing the research and development activities but alleged new building has not been used for this work. Somewhere it is mentioned that the business process 38 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 is very complicated and not understandable by a common man but in the next few lines gives categorical finding that the alleged research building cannot be used for research work in ginning.
34. Ld.A.O failed to appreciate that only part of the building is used for ginning cotton. The assessee has expertise in BT cotton, its processed seeds are supplied to several cultivators with a contract that the cotton so produced would be sold to the assessee only. This cotton is grown in different areas in variable climates in the country. By processing ginning cotton, seeds and link are separated. Research is made on the fibre of lint to test its length and strength. It seems that the Ld.A.O has merely made a guess work mentioning that there appears no question of any aspect of research in the process of building. Even for sake of discussion it is presumed that some part of the research building is also used for the agricultural operations for earning exempt income but this fact cannot be denied that the alleged capital expenditure for the building, furniture & Machinery have been used for Research and Development activity.
35. Section 35(1)(iv)of the Act provides that the deduction can be claimed in respect of any expenditure of capital nature on scientific research related to the business carried on by the assessee. Hon'ble High Court of Andhra Pradesh in the case of CIT V Yamuna Digital Electronics(P) Ltd (1999) 103 Taxman 46/238 ITR 717 held "that the expenditure need not wholly relate to research and 39 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 development. Section 35(1)(iv) does not say that the expenditure should be wholly and exclusively used for research and development. As long as the expenditure is of a capital nature and it is used for scientific research relating to the business carried on by the assessee, the assessee is entitled to claim deduction". Ld.A.O also failed to appreciate that the assessee has been issued a certificate by the Department of Scientific and Industrial Research, Govt. of India, Ministry of Science and Technology, New Delhi for its research and development activity and research stations. It is well established from the records that the assessee is a pioneer in production of BT cotton seeds in India. Process of ginning is used for separation of lint from cotton seed. Gas delinting is the latest technology which assure lowest damage to the seed. In turn the germination of hybrid seed is improved because earlier acid delinting was popular wherein the losses of germination were very high. Thus for Research & Development new machines were installed to improve/increase the quality and profitability.
36. On perusal of the assessment order reveals that Ld.A.O failed to take any pains to depute a team to visit the site and to understand the business process. Rather he tried to come to a conclusion merely by visiting the website of the assessee company and linking various activities separately carried out by the assessee by treating them as interlinked without giving any basis.
Learned DCIT, who has gone through hundred pages of the 40 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 submission, verified books of accounts in thousands pages, has found negligible sale of Lint (end product of Ginning industry), which is the end product of the ginning industry. Before passing these comments he should have seen what assessee is doing of its end product, if he is assessed as ginning unit, what about the finished product, and what is by-product. In fact in the production 'of Hybrid cotton Seed, finished product is BT Cotton seed and lint is by product which" is of negligible commercial value, whereas in the ginning unit lint is the finished product and cotton seed is by- product. Learned DCIT could not differentiate between Ginning unit and Hybrid cotton seed production. Sir, your honour has assessed a number of units engaged in ginning, before going to the point of R&D carried by the assessee it is pertinent to know what is ginning industry.
Ginning industry is an industry, where cotton is separated in two parts (Lint and Cotton seed) the main product is Lint and by product is Cotton seed (Sarki). Out of the cotton (present rate Rs. 6000 per Quintal) ginned, about 34% in quantity lint is produced (Present rate is Rs. 16500 per quintal or Rs. 58000 per Candy), and 65% cotton seed (having present market rate of Rs. 1250 per quintal).
37. By the application of research and development activity assessee is able to fetch much higher price for the cotton seeds prepared by it as against the cotton seeds sold by the ginning units.
41Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 In our view for production of hybrid seeds research and development activity is must for which necessary infrastructure is required and the revenue authorities cannot enforce or direct the assessee or other concern running similar business to adopt a particular pattern of the research and development apparatus including building and machinery. It is the prerogative of the assessee to do the best in the interest of the business and if there is a need for strengthening R&D work and more than one research building or purchasing more machineries, furniture and fixtures is necessary, then it should not be taken as something adverse to revenue.
38. As regards the note given by the Auditor in the tax audit report it seems that the Ld.A.O has misunderstood the note because while preparing tax audit report u/s 44AB of the Act the auditor has to fill annexure in Form 3CD and under the column 15(b) is required to mention that the amount of expenditure claimed as deduction but not debited to profit and loss account and auditor has specifically mentioned that the capital expenditure of Rs.2,88,51,028/- has not been debited to profit and loss account. It does not mean that he qualified the report nor can it be inferred that no such expenditure is allowable.
39. Ld. A.O also failed to appreciate that the assessee has explained about the method of production, evaluation of crop through initial station trials, advanced station trails, multi station 42 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 trails. Assessee has also established a product evaluation and regulatory trial department as required by Genetic Engineering, Ministry of Environment & Forest, Govt. of India. It is also on record that assessee has given a detailed note about the process of development of seed namely germ Plasm collection, conversion, characterization and documentation and the role of R&D in development of seeds.
40. To conclude our discussion, we find that the assessee is regularly doing the research and development activity. The claim of the capital expenditure of the old research buildings stands duly allowed. The allegation of the Ld. Assessing Officer that the capital expenditure incurred during the year under appeals have not been used for research and development activities seems completely baseless and based on surmises and conjunctions and can be termed as a guess work, just to take a view of denying the benefit of Section 35(1)(iv) of the Act for capital expenditure incurred for research and development activity. We also find that the alleged connection of the research building and machineries with agricultural operations is also a guess work and is not supported by any fact. We therefore are of the considered view that the claim of the assessee u/s 35(1)(iv) of the Act at Rs.2,88,51,028/- and Rs.40,42,117/- for Assessment Year 2008-09 and 2009-10 for the capital expenditure on scientific research and development expenditure was fully justified and Ld.A.O erred in denying the same. We accordingly allow the claim of capital expenditure u/s 43 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 35(1)(iv) of the Act claimed by the assessee for assessment year 2008-09 and 2009-10 at Rs. 2,88,51,028/- and Rs.40,42,117/- respectively.
41. Now coming to the issue of the revenue expenditure of Rs.3,12,37,588/- and Rs.4,54,34,487/- claimed as expenses for scientific and research development work, we have perused the details filed by the assessee, observation by both the lower authorities and find that genuineness of the alleged revenue expenditure has nowhere been doubted at any stage. Ld.A.O has tried to link the alleged revenue expenditure with the expenditure incurred in connection to agricultural proceeds which again has no basis because the turnover of agricultural receipts is rather less than the alleged revenue expenditure which proves that the observation of the Assessing Officer is merely based on surmises and conjunctions. Even Ld. CIT(A) has given a categorical finding observing that "there is no doubt that the research and development expenses of both capital and revenue nature has been incurred. It cannot be held that the assessee had not done research and development work and not incurred/any revenue expenditure for such research and development work". Ld.CIT(A) further held that both the assessee and Assessing Officer have taken the extreme approach whereas the actual state of affairs lies somewhere in between. Thereafter Ld.CIT(A) taking the basis of the turnover from commercial activity as well as from the agricultural activity apportioned the expenditure of alleged research and development 44 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 in the ratio of 89:11 making following observation for 2008-09.
"4.2.5 During the year, the assessee has shown sale of its agriculture produce I[~ of breeder & foundation seeds in its agricultural division] to contract formers totalling to.Rs 2,90,33,798/-. As against that the expenditure on agricultural operation is shown at Rs 47,58,649/-. This amounts to only 16.4% which is very low. In the immediately preceding year, the total sale was 2,52,47,283/- and the expense Rs 52,79,626/- and that amounted 21%. Even that was also on lower side. This fact was pointed to the representatives. It was noted that R&D revenue expenses included the expenditure such as salary, labour wages, staff travelling & vehicle fuel expenses and thus nature of expenses being same, it was quite possible that part of direct expenses were debited as revenue expenses on R&D. The assessee had also admitted that the functions upto foundation seed production requires special skills and are handled by its R&D division. While examining the details of such expenses [i.e revenue R&D expenses], mixed accounting was noted. The representatives of the assessee fairly conceded the observation. In my view the reasonable normal agricultural expenses should have been at least 35%. This would work out agricultural expenses at Rs 1,01,61,829/out of which assessee has shown Rs 47,58,649/- only. Thus the balance amount of Rs 54,03,180/- would have to be excluded from R&D revenue expenses, and would be treated as normal agricultural expenses. As a result thereof, the agricultural income would be reduced to Rs 1,88,71,968/-, which need to be taken for proportionate allocation of R&D expenses. It is noted that the AO has already made disallowance of Rs 10,48,112/- considering that diverted into its business expenses[ refer ground no 41. The balance amount of Rs 43,55,068/- would be taken further as diverted into its business expenses and as such to that extent business income would be taken 45 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 higher then shown by the assessee. The R&D revenue expenses would then be taken at Rs.2,58,34,408/- (i.e. 3,12,37,588 - 54,03,180/-) and the same would be considered for further allocation between agricultural income & commercial income.
It is further noted that the P & L account reflects income at Rs 11,07,40,723(after deduction of depreciation from its agricultural, commercial & R&D activities. The Income shown includes the agricultural income also. Thus the total income ( agriculture & commercial 1 before the deduction of R&D expenses would workout to be Rs 7 8.29339/- [ i.e. 11,07,40,723/- + 3,12,37,588 + 2,88,51,028 }.The agriculture income has already been worked at Rs 1,88,71,.968/- Accordingly 11 % of R&D expenses need to be allocated towards agriculture income, The balance 89% will have to be allocated towards commercial activity. In other words, the ratio for allocation of R&D expenses between ,exempted agricultural) & taxable (commercial) income would be 11 : 89. Thus out of the R&D expenses of Rs 5,46,85,436 (2,88,51,028 + 2 58: I 408), the expenditure of Rs 60,15,398/ - would be allocated to agricultural division & the balance of Rs 4,86,70,038/- towards commercial division.
In the result, the addition to the extent of Rs 1,03,70,466 [ 43,55,068/- + 60,15,398], over and above the disallowance of Rs , 10,48,112/- made separately [refer ground no 4], is further sustained. The. assessee would accordingly get a relief of Rs 4,97,18,150/- [2,88,51,028 + 3,12,37,588 - 1,03,70,466]".
42. In the given facts where the alleged expenditure is not doubted for its genuineness and being spent purely for business purposes, 46 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 whether the finding of Ld.CIT(A) apportioning the expenditure on the basis of the turnover can be held to be justified or not needs to be dealt with. We find that the assessee is a Limited Company working since many years and is a pioneer in the business of production of hybrid seeds. Books of accounts are regularly maintained and duly audited. Revenue receipts by the assessee are of the commercial as well as agricultural activity. All the details relating there to are being separately maintained. The expenditure incurred in connection of both type of activities are duly verifiable from the books of accounts regularly maintained. Merely for the reason that the alleged R&D regular expenditure includes the expenditure for salary, labour wages, staff travelling, vehicle fuel expenses and others, one cannot draw inferences that they have been incurred for both the type of activity. Ld.CIT(A) has only mentioned and appreciated that "it was quite possible that part of direct expenses were debited as revenue expenses on R&D."
43. Apportionment of the expenditure without bringing any material on record to specifically prove that the expenditure connected with agricultural operations have been intentionally 47 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 claimed against the commercial activity to evade tax, one cannot just make a guess work of making an ad-hoc appropriation thereby challenging the genuineness of the duly audited books of accounts regularly maintained. This is not the case before us that the Ld. A.O rejected the book results u/s 145 of the Act.
44. It is settled law that when an assessee is carrying indivisible business in various ventures and some among them yield taxable income and others do not, then the entire expenditure is permissible without any apportionment. We find support from following judgments dealt in forthcoming paragraph.
45. In the case of Rajasthan State Warehousing Corporation V/s CIT ( 2000) 242 ITR 0450 (SC). Hon'ble Apex Court held as under:-
"10. Mr. Shukla has fairly conceded that if the exempted income and the taxable income are earned from one and indivisible business then the apportionment of the expenditure cannot be sustained. But, submits the learned counsel, in this case the Tribunal did not record a finding that the business of the assessee is one indivisible, therefore, the apportionment of the expenditure is valid. We are afraid, we cannot accede to the contention of the learned counsel inasmuch as a plain reading of the question itself shows that it embodies--"the business of the assessee being one and indivisible".
This being the position, it is not open to the Revenue to contend that the 48 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 business is not one and indivisible. In view of the fact that a perusal of the question itself discloses that income from various ventures is earned in the course of one and indivisible business, the impugned order upholding the apportionment of the expenditure and allowing deduction of only that proportion of it which is referable to taxable income; is unsustainable.
We, therefore, answer the question in the negative, that is, in favour of the assessee and against the Revenue. The order under appeal is accordingly set aside and the appeal is allowed with costs".
46. In the case of CIT V/s Maharashtra Sugar Mills Ltd. (1971) 82 ITR 0452 (SC), in the instant case the Hon'ble Apex Court held as under :-
"3. The finding of the Tribunal that the cultivation of sugar-cane as well as the manufacture of sugar constitutes one business is a finding of fact. That finding has not been challenged before us. What was urged on behalf of the Department is that the assessee's business consisted of two parts, namely, (1) cultivation of sugar-cane and (2) manufacture of sugar. The former part being agricultural operation, the income there from is not eligible to tax and therefore any expenditure incurred in respect of that activity is not deductible. This contention proceeds on the basis that only expenditure incurred in respect of a business activity giving rise to income, profit or gains taxable under the Act can be given deduction to and not otherwise. We see no basis for this contention. To find out whether a deduction claimed is permissible under the Act or not, all that we have to do is to examine the relevant provisions of the Act. Equitable considerations are wholly out of place in construing the provisions of a taxing statute. We have to take the provisions of the statute as they stand. If the allowance claimed is permissible under the Act then the same has to be deducted from the gross 49 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 profit. If it is not permissible under the Act, it has to be rejected. As mentioned earlier, it is not disputed that the cultivation of sugar-cane and the manufacture of sugar constituted one single and indivisible business. Sec.
10(2) says that the profits under s. 10(1) in respect of a business should be computed after deducting the allowances mentioned therein. One of the allowances allowed is that mentioned in s. 10(2)(xv) which says that any expenditure laid out or expended wholly and exclusively for the purpose of such business shall be deducted as an allowance. The mandate of s. 10(2)(xv) is plain and unambiguous. Undoubtedly, the allowance claimed in this case was laid out or expended for the purpose of the business carried on by the assessee. The fact that the income arising from a part of that business is not eligible to tax under the Act is not a relevant circumstance. For the foregoing reasons we agree with the view taken by the High Court.
47. Hon'ble Apex court In the case of CIT V/s Indian Bank Ltd (1965) 56 ITR 0077 (SC) the Hon'ble Apex Court held as under :-
"In allowing a deduction which is permissible one need not look behind the expenditure and see whether it has the quality of directly or indirectly producing taxable income. This is for two reasons : First, Parliament has not directed this enquiry. There are no words in s. 10(2) of 1922 Act to that effect. On the other hand, indications are to the contrary. In s. 10(2)(xv), what Parliament requires to be ascertained is whether the expenditure has been laid out or expended wholly and exclusively for the purpose of the business. The legislature stops short at directing that it be ascertained what was the purpose of the expenditure. If the answer is that it is for the purpose of the business, Parliament is not concerned to find out whether the expenditure has produced or will produce taxable income. Secondly, the reason may well be that Parliament assumes that most types of expenditure which are laid out wholly and exclusively for the purpose of 50 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 business would directly or indirectly produce taxable income, and it is not worth the administrative effort involved to go further and trace the expenditure to some taxable income.
Therefore, it seems that there is nothing in the language of s. 10 from which it can be fairly implied that an expenditure or allowance falling within the section must fulfill some other condition before it can be allowed. Therefore on the facts and circumstances of the case the bank was entitled to claim the deduction of the entire interest paid by it on fixed deposits.--Indian Bank Ltd. vs. CIT (1961) 41 ITR 552 (Mad) : TC15R.982 affirmed; S.A.S.S. Chellappa Chettiar vs. CIT (1937) 5 ITR 97 (Mad) :
TC15R.995 approved; CIT vs. N.S.A.R. Concern (1938) 6 ITR 194 (Rang) overruled; CIT vs. Somasundaram Chettiar AIR 1928 Mad 487; Provident Investment Co. Ltd. vs. CIT (1931) 6 ITC 21 : (1932) 2 Comp Cas 312 and Indore Malwa United Mills vs. CIT (1962) 45 ITR 210 (SC) distinguished".
48. Further when the alleged revenue expenditure has not been doubted on its genuineness then the same even if not having connection with the research and development activity, is still allowable as business expenditure u/s 37(1) of the Act because the expenditure has been incurred for business purposes.
Hon'ble High Court of Mumbai in the case of CIT V/s Sales Magnesite (P) Ltd (1995) 214 ITR 01 held that "commercial expediency must be decided from businessmen's point of view. Even expenditure incurred voluntarily on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business would be deductible under this section. The question whether it was necessary or commercially expedient or not is a 51 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 question that has to be decided from the point of view of the businessman and not by the subjective standard of reasonableness of the revenue".
Hon'ble Apex Court in the case of CIT V/s Dhanrajgirji Raja Narasasingirji (1973)91 544 held that "it is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure".
Hon'ble jurisdictional High Court in the case of Hemraj Nebhomal V CIT (2005) 146 Taxman 278 ITR 345 held that "Once the conditions laid down in section 37(1) are found satisfied, it is not proper on the part of the taxing authorities to probe into the question as to whether the expenditure is legitimate or necessary etc. This type of inquiry is neither contemplated nor called for. It is only when the Assessing Officer finds that the claim made is bogus or false or not incurred as a fact, it can be disallowed, otherwise not valid".
49. Respectfully following above judgments as well as in the given facts and circumstances of the case we are of the considered view that the alleged revenue expenditure incurred at Rs.3,12,37,588/- and Rs.4,54,34,487/- needs to be allowed as business expenditure incurred for scientific research and development activity u/s 35(1)(iv) of the Act and we therefore set aside the finding of Ld.CIT(A) making an appropriation of the expenditure between commercial and agricultural activity completely ignoring the fact that separate details were maintained by the assessee including 52 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 quantitative details of goods produced under both the activities, no major abnormality in the percentage of expenditure of the total agricultural proceeds consistently shown in the preceding years and most importantly no material evidence has been placed before us which could prove that the assessee has intentionally claimed the expenditure relating to agricultural operations against the revenue from commercial activity just to evade tax. We therefore set aside the finding of Ld.CIT(A) to this effect and allow the claim of R&D revenue expenses made for Assessment Year 2008-09 and 2009-10.
50. In the result Ground No.2 for Assessment Year 2008-09 & 2009-10 of the assessee's appeal are allowed and Ground No.1 raised by the Revenue authorities for the Assessment Year 2008-09 and 2009-10 are dismissed.
51. Now we take up Ground No.3 raised by the assessee challenging the finding of Ld.CIT(A) upholding the addition made by the Ld.A.O of Rs.10,48,112/-on account of disproportionate agricultural expenses. We find that Ld.A.O disallowed this amount by taking the basis of percentage of expense of the agricultural proceeds of the preceding year and applied it to Assessment Year 2008-09 wherein the assessee claimed lower percentage of the expenditure. Ld.CIT(A) sustained this addition.
52. Now the assessee is in appeal before the Tribunal.
53Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013
53. Ld. Counsel for the assessee relied on the written submission made by it which reads as follows;
"In this regard it is submitted that the reason for decreasing agricultural expenses in comparison to earlier years is that in the preceding assessment year the expenditure was 20.91 % of the gross receipt and for the assessment year in question is 16.39 % . The reason for same are as under :-
1] During the year assessee company has use hybrid seeds which required lesser pesticide, fertilizers etc. Thus the expense on these heads were reduced.
2] Due to use of high yield the quantity of crop grown increased , thus gross receipt from agricultural activities is increased. 3] The selling rate of crop per kg / per quintal increased in comparison to rate procure in the immediately preceding year. From all these reasons the percentage agricultural expenditure is reduced , thus it is prayed the disallowance of Rs. 10,48,112 made by the L.d A.O. be deleted."
54. Ld. Departmental Representative supported the orders of lower authorities.
55. We find that the expenditure claimed by the assessee against the agricultural activities comes to 20.91% for Assessment Year 2007-08 and it decreased to 16.39% in Assessment Year 2008-09. The reason for the decrease in the percentage in expenditure given by the assessee are general in nature and the submissions mainly included the reason for increase in revenue due to better selling price and use of varieties of hybrid seeds. Nothing concrete has 54 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 been placed on record to show that why the expenses decreased during the year even when other expenditure on commercial activities have increased in comparison to preceding years. No plausible reason with documentary evidences were placed before us. We therefore find no reason to interfere in the finding of Ld.CIT(A) and therefore confirm the addition of Rs.10,48,112/- made by the Ld.A.O on account of disproportionate agricultural expenses. Accordingly Ground No.3 of the assessee for Assessment Year 2008-09 is dismissed.
56. Now we are left with Ground No.2 of the revenue's appeal for Assessment Year 2009-10 relating to deletion of addition of Rs.22,64,237/- by Ld.CIT(A) deleted the addition which was made by the Ld.A.O u/s 36(1)(iii) r.w.s. 40A(2)(b) of the Act. The brief facts relating to this ground are that the Ld.A.O during the course of assessment proceedings observed that certain loans and advances to the tune of Rs.3245.38 crores stood given to the associate concerns of the assessee and the assessee was asked to explain the nature of loans and advances made by it and whether any interest has been charged. Detailed reply was submitted through which the assessee tried to assert that the alleged advances relates to the regular transactions for purchase/sales/rent with the associate concerns and these balances are in the normal course of business and it cannot be construed that the interest free loan has been given to the subsidiaries and hence no disallowance u/s 36(1)(iii) of the Act is 55 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 warranted.
57. The submissions of the assessee were not sufficient to convince the Ld.A.O as he observed that in the regular course of business the assessee is paying the interest on the advances of dealers for advance booking and dealership business but ironically no interest has been charged to the advances given to sister concerns. Further looking to the fact that the assessee is paying huge interest to the bank and others, Ld.A.O applied the rate of 12% and calculated the disallowance of interest u/s 36(1)(iii) r.w.s. 40A(2)(b) at Rs.22,64,237/-.
58. Against the alleged disallowance assessee preferred appeal before the Ld.CIT(A) and succeeded.
59. Now the revenue is in appeal before the Tribunal.
60. Ld. Departmental Representative supported the order of Ld.A.O.
61. Ld. Counsel for the assessee relied on the finding of Ld.CIT(A) and also submitted that the alleged loans and advances were given to its 100% subsidiary companies of the assessee are for the business expediency with the long term planning of benefits for the proposed IPO project. Reliance were placed on the judgment of Hon'ble Apex Court in the case of S.A. Builders vs. CIT (2006) 206 CTR 631 (SC).
56Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013
62. We have heard rival contentions and perused the records placed before us. The issue relates to disallowance of interest u/s 36(1)(iii) r.w.s 40A(2)(b) of the Act, we find that there stood loans and advances to the tune of Rs.3245.38 crores given to five associates/subsidiary companies of the assessee. The alleged amount also includes amount receivable for sales to the subsidiary during the year amounting to Rs.95,34,908/- and the alleged amounts also includes the amount receivable towards rent as well as advances given to the seed distributors for financing the cultivators. The cycle for seed plantation and harvest generally ranges from 4-6 months and as stated by the Ld. Counsel for the assessee during the hearing before the lower authorities that the seed distributor has to give advance to seed cultivators/farmers before the plantation season and in turn the seed cultivator/farmer commits their oblige as proceeds of seed to the said distributor. Further for procuring the confirmed seed production sub distributor is required to finance the cultivation cycle and for this purpose it is required to give advance for seed purchase to the vendors which is a standard industry practice. The alleged subsidiary company have also indulged in the seed cultivators and have specialization in scientific research of specific seed variety and sourcing of seeds. Details were also paced before the lower authorities for the purchases made during the financial year 2009- 10 which were adjusted against the advances stood given as on 31.03.2009. These details clearly indicate that the alleged loans 57 Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013 and advances are purely in the regular course of business with the intent of maximization of profit as well as the revenue. As regards diversion of borrowed fund to the sister concerns is concerned, we find that the Hon'ble Apex Court in the case of S.A. Builders V/s CIT (2006) 206 CTR held that "borrowed funds advance to a third party should be for commercial expediency, if it is sought to be allowed u/s 36(1)(iii). It can be said to be advanced to the sister concern for commercial expediency where holding company (assessee) has a deep interest in its subsidiary and the holding company holds advances the borrowed money, the subsidiary and the same is used by the subsidiary for some business purposes, the holding company would ordinarily be entitled for deduction of interest on its borrowed funds". We also finds that Ld.A.O failed to appreciate the fact that similar type of addition was made in the case of the assessee for Assessment Year 2003-04 which was deleted by Ld.CIT(A) and subsequently the revenue could not succeed before the Tribunal as the decision of the Ld.CIT(A) was upheld. We therefore respectfully following the judgment of Hon'ble Apex Court as well as the decision of Tribunal in the case of the assessee for the Assessment Year 2003-04 are of the considered opinion that no disallowance was called for u/s 36(1)(iii) r.w.s. 40A(2)(b) of the Act at Rs.22,64,237/- and no interference is therefore called for in the findings of Ld.CIT(A). We accordingly dismiss ground No.2 raised by the revenue for the Assessment Year 2009-10.
58Krishidhan Seeds Limited ITANos.37/Ind/2013, 84/Ind/2013, ITA Nos. 231/Ind/2013 & 315/Ind/2013
63. The other grounds are general in nature which needs no adjudication.
64. In the result the appeal of the assessee for 2008-09 & A.Y. 2009-10 is partly allowed and that of revenue for both the years i.e. 2008-09 and 2009-10 are dismissed.
The order pronounced in the open Court on 30.11.2018.
Sd/- Sd/-
( KUL BHARAT) (MANISH BORAD)
JUDICIAL MEMBER ACCOUNTANT MEMBER
दनांक /Dated : 30 November, 2018
/Dev
Copy to: The Appellant/Respondent/CIT concerned/CIT(A)
concerned/ DR, ITAT, Indore/Guard file.
By Order,
Asstt.Registrar, I.T.A.T., Indore
59