Income Tax Appellate Tribunal - Hyderabad
Nuziveedu Seeds Limited, Hyderabad vs Department Of Income Tax on 20 March, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER
AND SMT.ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA No.1594/Hyd/14 : Assessment year 2011-12
Dy. Commissioner of Income- V/s. M/s. Nuziveedu Seeds Limited,
tax Circle 16(1), Hyderabad Hyderabad
(PAN - AACCN 7214 Q)
(Appellant) (Respondent)
Appellant by : Shri D.Sudhakar Rao DR
Respondent by : Shri V.Raghavendra Rao
Date of Hearing 25.2.2015
Date of Pronouncement 20.03.2015
ORDER
Per P.M.Jagtap, Accountant Member :
This appeal is preferred by the Revenue against the order of the learned Commissioner of Income-tax (Appeals)-V Hyderabad dated 11.8.2014 on the following grounds-
"1. The learned CIT(A) erred both in law and onfa cts of the case.
2. The learned CIT(A) should have appreciated that the assessee has departed from the basic agricultural operation and indulged into production of parent seeds by planned scientific and specialized procedures.
3. The CIT(A) ought to have noticed that the assessee itself is not carrying on any agricultural operations but only procuring the multiplied hybrid parent seed from the farmers as such, the activity of the assessee does not fall under agricultural operations so as to qualify the income as exempt u/s. 10(1) of the Act.
4. The learned CIT(A) ought to have appreciated the rationale of judgment rendered by the Hon'ble Supreme Court in the case of CIT Vs. Raja Benoy Kumar Sahas Roy(1957)32 ITR 466(SC).2 ITA No.1594/Hyd/2014
M/s. Nuziveedu Seeds Limited, Hyderabad
5. The Ld. CIT(A) ought to have appreciated that the Board's clarification vide circular No5 of 2014 that even if there is no exempt income provisions of section 14A r.w.s. 8D of the Rules apply. Hence, disallowance u/s. 14A is in order.
6. Any other ground(s) that may be urged at the time of hearing."
2. As submitted by the Learned Departmental Representative, grounds no.1 and 6 raised by the Revenue in this appeal are general, which require no specific adjudication. The issue raised in grounds No.2 to 4 relates to the claim of the assessee for exemption under S.10(1) of the Act on account of income generated from the production of seeds, treating the same as agricultural income.
3. The assessee in the present case is a company, which is engaged in the business of research, production and sale of agricultural seeds. Return of income for the year under consideration was filed by it on 30.9.2011 declaring total income of Rs.5,78,67,231 under normal provisions of the Act and book profit of Rs.6,10,85,898 under S.115JB of the Act. In the said return, income earned from the production and sale of seeds amounting to Rs.39.26 crores was claimed to be exempt by the assessee under S.10(1) of the Act. During the course of assessment proceedings, the said claim of the assessee was examined by the Assessing Officer and on such examination, he found that the assessee is carrying on research and development activity, which involves scientific study of parent seed and hybridization of different varieties of parent seeds so as to evolve the high yielding variety of hybrid seeds. He also noted that the assessee has entered into certain seed production agreements with the farmers for utilising the lands owned by them. As further noted by him from such 3 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad agreements, lands belonging to the farmers were being utilised by the assessee company for the production of hybrid seeds on mass scale from the foundation seeds on payment of certain compensation. The cultivation expenses incurred for this purpose were also being reimbursed by the assessee company to the farmers and as per the agreement made for a specified season, the farmers had agreed to undertake the crop production as per the specifications of the assessee company. The production of hybrid seeds was done by the farmers as per the specifications and control of the assessee company, for which they were duly compensated mainly for the labour inputs. On the basis of these facts emerging from the relevant agreements, the Assessing Officer was of the opinion that the assessee is not directly involved in any agricultural activity and the income earned by it from the production of seeds was not in the nature of agricultural income.
4. The Assessing Officer, therefore, required the assessee company to explain as to why its claim for exemption under S.10(1) of the Act should not be disallowed. In reply, the following explanation in writing was offered by the assessee company, vide its letter dated 26.3.2014-
"......
i) For the purpose of deriving income from agricultural land there is no requirement under the Act that such land should be owned by the assessee. If the assessee has an interest in the land for the purpose of conducting agricultural operations on the said land, then the revenue generated from such land would be agricultural land;
ii) Assessee entered into agreements with farmers who undertake farming on behalf of the company; and risk and rewards associated with the agricultural 4 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad operations carried on by the company belongs to company;
iii) The R & D activities carried on by the company are part of the process before the agricultural produce is generated;
iv) All the genotypes researched and developed by R & D are taken to multiplication through the agricultural activity;
v) Produce and residue belong to assessee;
vi) Activity carried out by the company is not in the nature of purchase of produce;
vii) The Act does not restrict use of technology in agricultural process;"
5. The explanation offered by the assessee as above was not found acceptable by the Assessing Officer. According to him, the production of hybrid seeds was markedly markedly different from normal agricultural crop production in the sense it involved elaborate scientific, technical and specialised operation under regular technical supervision by the assessee company. He held that though the operations of the assessee company involved in production of seeds were akin to cultivation, they were completely different from the normal agricultural operations. He held that the process of recultivating the produce already raised by the assessee from the agricultural land with a view to concentrate two or more traits in one single seed from two different parents having two distinct identifiable traits cannot be said to be a process which is ordinarily employed by a cultivator. He also noted that the high yielding hybrid seeds finally produced by the assessee underwent a series of physical and chemical treatments before they are sold in the open market as commercial hybrid seeds. He also held that the production of hybrid seeds on the land owned by the other farmers could not be treated as agricultural operations carried on by the 5 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad assessee company, going by the terms and conditions of the relevant agreements entered into by it with the farmers. He held that the assessee company therefore, could not be said to be either cultivating the seeds or deriving any agricultural income.
Accordingly, the claim of the assessee for exemption of income earned form the production and sale of seeds under S.10(1)of the Act was disallowed by the Assessing Officer in the assessment completed under S.143(3) vide order dated 30th March, 2014.
6. Against the order passed by the Assessing Officer under S.143(3), an appeal was preferred by the assessee before the learned CIT(A), and the following submissions were inter alia made on its behalf before the learned CIT(A) in support of its claim for exemption under S.10(1) of the Act in respect of income earned from the production and sale of seeds-
"Since the seeds are derived from mother plants grown on land, they are considered as agricultural produce and hence the production of seeds by farming is an agricultural activity of the Company Further; since the Company gets the cultivation done under its supervision and at its own costs and risks as stated above, the Company can be said to be a grower of agricultural produce and hence is considered as an "agriculturist".
Since the risks and rewards associated with the agricultural operations lies with the Company and are borne by the Company and the Company has an insurable interest on the farm produce, "the activities carried on by the company was in the nature of agricultural activities" and "the sale of the agricultural produce fall within the scope of agricultural income". Since the above satisfy the condition mentioned in sub-clause (Jii) of clause
(b) of section 2(1A) of the Income-tax Act; 1961, the income arising there from would fall within the ambit of "agricultural income" as was held by the Apex Court in "CITVs Raja Benoy Kumar Sahas Roy, 32 ITR 466'.
The production of seeds and marketing is regulated by The Seeds Act; 1966 and the seeds cannot be marketed unless they are processed, tested and labelled 6 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad On agricultural processing, the Apex Court had an occasion to consider the import and scope of the "process ordinarily employed by the cultivator': In "Dooers Tea Company Limited Vs. Commissioner of Agriculture, Income-tax, 44 ITR 6" and "K. Lakshman & Co. and Another Vs CIT, 239 MR 597" the Apex Court held that the process should be to make produce marketable. It should not change the character and nature of the produce without resulting in an altogether new product. Then it would be agricultural income.
Applying the above principles, it can be construed that the processing carried on by the Company is ordinary process employed by the cultivator to be fit for marketing, for the following reasons:
The processes carried on by the Company are much normal process carried on by a cultivator and as required by the statute ie. The Seeds Act; 1966.
The products remain the same even after processing where we remove unfilled seeds and foreign matter.
The seeds remain as seeds even after processing.
It retains its nature and character as seeds as produced on plants in the field.
No new product has evolved or emerged from the seeds on account of the processing .
Therefore, the operations carried out by the Processing Division of the Company falls within sub-clause (ti) of clause
(b) of section 2(lA) of the Income-tax Act, 1961.
In view of the foregoing, since the activities carried on by the company was in the nature of "agricultural activities" and the income arising there from falls within the ambit of "agricultural income'; the company is eligible for claim of exemption under section 10(1) of the Income-tax Act, 1961':
II. DEFINITION OF AGRICULTURAL INCOME / BASIS FOR CLAIM OF EXEMPTION U/S.10(1):
(A) "The definition of 'Agricultural income' is specified in section 2(1A) of the Income-tax Act, 1961, which means
(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes,' 7 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad
(b) Any income derived from such land by -
(i) Agriculture: or
(ii) The performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market;
or
(iii) The sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause.
(c) Any income derived from any building owned and occupied by the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs 9ii) and (iii)of sub-clause (b) is carried on.
The agricultural operations involve identification of the suitable land, ploughing or cultivating of the soil, fertilisation, sowing seed or plantation, pest control, pollination of the crop for better yield and quality, weeding, harvesting of the crop, thrashing, etc. In the Company's case, it produces the Hybrid Commercial Seeds and sells the same to various parties. Hence, the production of these seeds, since they have direct nexus with the land owned by it or on the leased lands by supplying seeds to the farmers and getting them cultivated under its supervision and control, also falls within the ambit of agricultural income as specified in sub-clause (Hi) of clause (b) of section 2(lA) of the Income-tax Act; 1961.
The primary source of seed in the activities of the Company is the mother plant; which is reared on earth for which certainly contribution of human labour and energy are essential. All the products of the land, which have some utility either for consumption or for trade or commerce, if they are based on land would be agricultural products.
8 ITA No.1594/Hyd/2014M/s. Nuziveedu Seeds Limited, Hyderabad In the case of the Company, the seeds are derived from mother plants grown on land, which are considered as agricultural produce and hence the production of seeds by farming is an agricultural activity of the Company.
Further, since the Company gets the cultivation done under its supervision and at its own costs and risks, the Company is considered to be a grower of agricultural produce and hence is considered as an "agriculturist':
Here, it may be mentioned that the risks and rewards associated with the agricultural operations lie with the Company and are borne by the Company and the Company has an insurable interest on the farm produce and 'thus, "the activities carried on by the company are in the nature of agricultural activities" and "the sale of the agricultural produce fall within the ambit of agricultural income':
Thus, the 'agricultural activities' and 'agricultural income' of the Company as above fall within the ambit of sub-clause (iii) of clause (b) of section 2(lA) of the Income-tax Act, 1961.
Further, the Company generates the hybrid seed by certain involved process by the Processing Division of the Company, which falls within sub-clause (ii) of clause (b) of section 2(lA) of the Income-tax Act; 1961 and processing carried on by the Company is ordinary process employed by the cultivator to be fit for marketing for the following reasons:
The process carried on by the Company are much normal process carried on by a cultivator and as required by The Seeds Act, 1966.
The products remain the same even after processing where the unfilled seeds and foreign matter are removed.
The seeds remain as seeds even after processing.
It retains its nature and character as seeds as produced on plants in the field.
No new product has evolved or emerged from the seeds on account of the processing.
Thus, the activities carried out by the Company through a series of scientific and specialised processes fall within the ambit of sub-9 ITA No.1594/Hyd/2014
M/s. Nuziveedu Seeds Limited, Hyderabad clause (ii) of clause (b) of section 2(lA) of the Income-tax Act 1961.
From the above it could be ascertained that the activities carried on by the Company are in the nature of "agricultural activities" and the income arising there from falls within the ambit of "agricultural income" as per the provisions of section 2(2A) of the Income-tax Act, 1961.
In light of the above submissions, the Company is entitled for claim of exemption under section 10(1) of the Income-tax Act 1961.
(B) Since the Company cannot carry out the agricultural operations on its own through out the country, it takes the land on lease from the farmers.
After taking the land on lease from the farmers, the Company supplies these to the farmers, who carry out the cultivation of the seed under the supervision of the Company and the expenses incurred by the farmers in connection there' with are reimbursed by the Company Apart from leasing out the lands to the Company, the farmers also carry out the agricultural operations for enriching themselves with additional income, since the Company compensates them for their personal involvement in the operations carried out by them.
Since the farmers would not be fully versed with the procedures, technical know-how and quality aspects, they carry out the agricultural operations under the able guidance of the Company When the farmers are paid lease rentals for their lands and also compensated for carrying out the agricultural operations, it cannot be construed as job work executed by the farmers and terming it as procurement of the Produce through Contract.
Here, it could be ascertained that the risks and rewards in connection with the lease of the lands and the agricultural operations there on are to the account of the Company only and not to the farmers.
Further, as could be verified from the Seed Production Agreement - Master Agreement, clause 12 thereof entitles the Company to terminate the lease agreement in a case where the cultivation of the Produce on any acre of land Is less, the Company would be entitled to terminate the lease.
10 ITA No.1594/Hyd/2014M/s. Nuziveedu Seeds Limited, Hyderabad In view of the above, it cannot be construed that the agricultural operations carried out by the farmers is synonymous to that of the job works done by them.
Further, when the Company pays lease rentals to the farmers for lease of their lands, it cannot be construed that the Company the Produce through contract.
C) The technical know-how procured from M/s. Mayhco Monsanto Blotech (India) Limited is only for supplementing the technology in carrying out the improvement to the seed in order to enhance the yield and quality of the seed in the agricultural operations.
As mentioned in item B above, it is reiterated that Company takes the land on lease from the farmers. After taking the land on lease from the farmers, the Company supplies the seed to the farmers, who carry out the cultivation of the seed under the supervision of the Company to enrich themselves with additionsl income. Further, the expenses incurred by the farmers in connection there with are reimbursed by the Company It may be mentioned that when all the risks and rewards connection with the lease of the lands and the agricultural operations thereon are to the account of the Company only and not to the farmers, it cannot be construed that the Company is not involved in any agricultural activity and is not deriving any agricultural income ':
Thus, it cannot be disputed that the seed is the product of agricultural activity and the seed cannot be sold commercially, unless it is produced by agricultural activity In this regard, reliance is placed on the decision of the jurisdictional High Court, i.e. the Honourable Andhra Pradesh High Court in "CIT Vs. Prabhat Agri Biotech Limited", IT.T.A.No.88 of 2014 dated 21- 02-2014 11 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad The Appellant accordingly prays for granting the exemption under section 10(1) of the Act in respect of the agricultural income of Rs.39,26,47,266."
7. The learned CIT(A) found merit in the submissions made on behalf of the assessee and relying inter alia on the decision of the Tribunal in the case of Prabhat Agri-Biotech Ltd rendered vide order dated 14.1.2013, passed in ITA No.1288 and 1289/Hyd/2010 for assessment years 2008-09 and 2009-10, as affirmed by the Hon'ble Andhra Pradesh High Court, he held that the operations of the assessee company involved in the production of seeds was in the nature of agricultural activity and the income earned from such activity was in the nature of agricultural income, eligible for exemption under S.10(1)of the Act. Aggrieved by the order of the learned CIT(A), the Revenue has raised this issue in the present appeal filed before the Tribunal.
8. We have heard the arguments of both the sides and also perused the relevant material on record. As agreed by the learned representatives of both the sides, this issue involved in the appeal of the Revenue is squarely covered by various decisions of the Tribunal as well as the decision of the Hon'ble Andhra Pradesh High Court in the case of Prabhat Agri-Biotech Ltd (ITTA No.88 of 2014 dated 21.2.2014). Copies of the relevant decisions of the Tribunal are placed on record by the assessee and a perusal of the same shows that a similar issue arose for consideration in the case of Prabhat Agri-Biotech Ltd, Hyderabad for different years. While deciding the issue for assessment years 2008-09 and 2009-10 vide its common order dated 4.1.2013 (supra), the coordinate bench of the Tribunal took note of the decision rendered in assessee's own case for the earlier year and decided the same in favour of the 12 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad assessee by recording the following observations in paragraph 5 of its order-
"5. We have heard the rival submissions and perused the material on record. Admittedly, the only dispute in the present appeals is with regard to assessee's claim of exemption u/s 10(1) of the Act by treating the income generated from sale of basic/foundation seeds as agricultural income. On perusal of the orders passed by the co-ordinate benches of this Tribunal in the case of the same assessee for the earlier assessment years, it is seen that identical dispute as involved in the present assessment year came up for consideration before this Tribunal. The Tribunal has consistently held that the income generated from the cultivation of basic/foundation seeds are agricultural income. In its latest order in ITA No.1214 and 1215/Hyd/2010 dated 13-4-2012, the Tribunal held in the following manner:-
" We have considered the rival submissions and perused the orders of the Revenue authorities. The issue before us is with regard to eligibility of assessee for exemption u/s S.10(1) in respect of the value of foundation/basic seeds produced by the assessee. We find that the decision of the Tribunal in the case of Swagath Seeds (P) Ltd. relied upon by the learned AR, before us, squarely covers this issue in favour of the assessee and against the revenue. Para-4 of the order of the Tribunal dated 16.5.2008 reads as under:
"4....... Admittedly, the assessee is cultivating by performing agricultural operation in order to generate basic foundation seeds. The said foundation seeds were distributed to farmers for the purpose of generating further seeds. The learned representative for the assessee clarified that in respect of seeds which ere purchased from other farmers, the assessee is not claiming any exemption u/s 10(1) of the IT Act. The assessee is admittedly claiming exemption u/s 10(1) in respect of basic foundation seeds which were generated by performing agricultural operation by the land by the assessee. This Tribunal in the assessee's own case for assessment year 2001-02 considered this issue and found that the assessee is entitled for exemption u/s 10(1) with regard to the basic seeds which were generated out of cultivation made by the assessee. In our opinion, the 13 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad decision of the Tribunal for assessment year 2001-02 in the assessee's own case is equally applicable to the assessment year under consideration. Therefore, by following the order of this Tribunal in ITA No.943/Hyd/2004 dated 18.1.2008, we hold that the assessee is entitled for exemption u/s 10(1) only in respect of basic foundation seeds which are generated out of the cultivation made by the assessee".
Following the above order of the Tribunal, we hold that the assessee is entitled to exemption u/s 10(1) of the Act and that income generated on cultivation of basic /foundation seeds has to be treated as agricultural income. We order accordingly."
Facts involved in the impugned assessment year being identical we respectfully follow the aforesaid decisions of the Tribunal and hold that the income generated from sale of basic seeds being agricultural income is exempt u/s 10(1) of the Act. Accordingly, we dismiss the ground raised by the department."
9. Against the aforesaid order of the Tribunal dated 4.1.2013, passed in the case of Prabhat Agri-Biotech Ltd (supra), the department filed an appeal before the Hon'ble Andhra Pradesh High Court and vide order dated 21.2.2014 passed in ITTA No.88 of 2014, Their Lordships upheld the decision of the Tribunal by observing as under-
"We are unable to accept the farfetched idea that artificial production of seeds can be sold or used for commercial purpose. May be a few hybrid seeds could be produced by artificial method in a laboratory. The seeds so produced with non-agricultural activity again will have to be sown in the agriculture filed to have a larger quantity for sale in the market. Accordingly, we hold that the seed is a product of agricultural activity. Therefore, the sale of the same cannot be brought under the provisions of the Income-tax Act. We, therefore, uphold the decision of the learned Tribunal in this matter."14 ITA No.1594/Hyd/2014
M/s. Nuziveedu Seeds Limited, Hyderabad Similar issue again arose in the case of Prabhat Agri-Biotech Ltd td. for assessment year 2010-11 and the Tribunal following the decision of the Hon'ble Andhra Pradesh High Court rendered vide order dated 21.2.2014 (supra) decided the same in favour of the assessee vide its order dated 28.8.2014 passed in ITA No.752/Hyd/2014.
10. It is true that in the case of Prabhat Agri-Biotech Ltd decided by the Tribunal as well as by the Hon'ble Andhra Pradesh High Court, the assessee was producing only the foundation/basic seeds and the hybrid seeds were purchased by the said company in the relevant years from the farmers, unlike the assessee company in the present case which produced even the hybrid seeds by taking the lands from the farmers on certain terms and conditions as stipulated in the relevant agreement. However, a similar fact situation as involved in the case of the assessee company was involved in the three cases decided by the Bangalore bench of the Tribunal and cited by the learned counsel for the assessee wherein exemption under S.10(1) was claimed by the assessee in respect of income derived from the production of hybrid seeds taken on the farms owned by other farmers and the said claim was accepted by the Tribunal. A similar issue was thus involved in the context of assessee's claim for exemption under S.10(1) in respect of income derived from production of hybrid seeds and the same was initially allowed by the Bangalore Bench of the Tribunal in the cases of Indo American Express and Namdhari Seeds Pvt. Ltd. vide its common order dated 14.7.2006 passed in ITA No.1040/Bang/2002 and ITA No.3102/Bang/2004, after considering the facts of the case in the light of the definition of 'agricultural income' given in S.2(1A) as well as the decision of the Hon'ble Madras High Court in the case of CIT V/s. Maddi Venkatasubbayya (20 ITR 151). The relevant 15 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad observations of the Tribunal as recorded in this context are reproduced below-
"5.4. After hearing both the sides, we are of the view that the only question to be decided by the Tribunal is as to whether the seeds produced by the assessee and sold in market generates agricultural income or is it a business income. The provision of section 2(1A) of the I. T Act is quoted below :
(1A) "agricultural income" means :-
(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes ;
(b) any income derived from such land by -
(i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in- kind to render the produce raised or received by him fit to be taken to market; or
(iii) the sale by a cultivator or receiver of rent- in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause ;
(c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator of the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on :
Provided that -
(i) the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling 16 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad house, or as a store-house, or other out-building, and
(ii) the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated -' It may be appreciated that agricultural income includes any rent or revenue derived from the land which is used for agricultural purposes. The issue is whether the revenue derived from such land by the assessee is agricultural income or not. For the purpose of deriving income from agricultural land there is no necessity that such land should be owned by the assessee. If the assessee has derivative interest in the land for the purpose of conducting agricultural operations on the said land, then the revenue generated from such land would be agricultural income. This has been so held by the Hon'ble Madras High Court in 20 ITR 151 (Commissioner of Income-
tax v. Maddi Venkatasubbayya). Here it may be appreciated that the assessee entered into lease agreement with various agriculture land owners for the purpose of obtaining lands for doing the process of agricultural operations. The Government of Karnataka has also granted registration to the assessee thereby permitting the assessee to take up production and distribution of various seeds and crops. The assessee's representatives are there on the land to supervise the manual labour operations and to protect the assessee's interest and it may be appreciated that the sowing, growing and protecting the crop and the produce is also taken by the assessee and the assessee alone. Here the kind attention of the Hon'ble Tribunal is drawn to the decision of the Allahabad High Court reported in 177 ITR 428 (Commissioner of Income-tax v. Associated Metals Co.) (All) wherein it has been held that the assessee company therein had entered into agreement with bhumidhars of land for sowing and growing and protecting crops and thereafter the major share of the profit was to be of the company therein. In that case it was held the income of the company was agricultural income. The assessee's case herein stands on a much better footing. It may also be appreciated by the Hon'ble Tribunal the assessing authority himself does not dispute the fact that the assessee is undertaking the agricultural operations. In fact the assessing authority 17 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad himself has accepted the agricultural income declared by the assessee on the contract production done outside the State of Karnataka. It is only in regard to the State of Karnataka that the assessing authority has held that as per the Land Reforms Act the assessee is not entitled to the benefit of exemption u/s.2(1A) of the Act. The bar levied by the Karnataka Land Reforms Act would be more hold good in so far as the Government of Karnataka has granted certificate to the assessee for production and distribution of the specified hybrid seeds and plants. Here it may also be appreciated that the nexus between the income claimed by the assessee as not includible in the total income and the agricultural operations conducted by the assessee and the lands from which the income as so generated have not been disputed by the Revenue. The immediate source of the income is the agricultural operations conducted by the assessee on the land and land alone and consequently the same is liable to be treated only as agricultural income."
"In view of such discussion, foundation seeds or Hybrid Seeds produced in own land or lands taken on lease i.e., on contract farming will be the result of agricultural operations and the profit arising out of such activities shall be treated as agricultural income."
11. In the case of Advanta India Ltd. V/s. CIT (2010) 5 ITR (Trib) 57 (ITAT Bang), a similar issue again came up for consideration of the Tribunal involving identical facts, as is evident form para Nos.4 and 5 of the order of the Tribunal which read as under-
"4. The assessee is a company engaged in the business of production and sale of hybrid seeds. The company is engaged in the research, development, processing and marketing of hybrid seeds. The assessee-company carried out studies and researches to find out the most suitable genetic composition of seeds in the respective local environment. The assessee procures germplasm prototype of the hybrid seeds from laboratories for employing the same in its subsequent operations. The germplasm is sown in fields which grows into what is called the basic seed. The basic seeds are gain replanted tog row the hybrid 18 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad seeds. The hybrid seeds are sold by the assessee- company, to farmers at large. This is the frame of operations carried on by the assessee during the previous year relevant to the assessment year in appeal. In the past, the assessee had carried out business in different formulations, like distributing basic seeds to farmers to grow into hybrid seeds and buying them back from the farmers, etc. But those business dynamics are not relevant for the impugned assessment year. As far as the impugned assessment year is concerned, the assessee itself is growing basic seeds as well as hybrid seeds.
5. Up to the basic seed activity, all the primary operations are performed by the assessee in its own lands or lands leased by it, under its own direct supervision and guidance engaging casual labour. The hybrid seeds are grown by the farmers in their own lands but leased out to the assessee company. The entire cost of production was to be reimbursed by the assessee to the farmers. Therefore, de facto speaking the hybrid seed operations was carried on by the assessee in its leasehold lands."
12. On the above facts and circumstances involved in the case of Advanta India Ltd for assessment year 2002-03, which are identical to the facts involved in the present case, the Tribunal besides following the decision of the coordinate bench in the cases of Indo American Exports and Namadhari Seeds P. Ltd. (supra), also gave the following reasons in paragraphs 15 to 19 of its order, to allow the claim of the assessee that the income from the production of foundation/basic seeds as well as hybrid seeds from the land taken from the farmers on certain terms and conditions is agricultural income eligible for exemption under S.10(1) "15. The hon'ble Supreme Court in the case of CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 has considered comprehensively the concept of agricultural income for the purpose of the Income-tax Act. The court held that agriculture in its primary sense denotes the cultivation of the field and is restricted to cultivation of the land in the strict sense of the 19 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad term meaning thereby tilling of the land, sowing of the seeds, planting and similar operations on the land. These are basic operations and require the expenditure of human skill and labour upon the land itself. The court further held that the performance of subsequent operations like tending, pruning, cutting, harvesting, etc., would not be enough to characterise them as agricultural operations. In order to invest them with the character of agricultural operations, subsequent operations must necessarily be taken in conjunction with and in continuation of the basic operations which are the effective cost of the produce being raised from the land.
16. If we examine the operations carried out by the assessee in the previous year relevant to the assessment year in appeal, we find that the production of basic seeds as well as hybrid seeds are the' results of basic agricultural operations carried on by the assessee-company in its own land as well as in leasehold land. The method of contract farming does not take away the character of the basic operations carried out by the assessee-company which are agricultural in nature. The assessee-company procures germ plasm and sows it in its own fields, and carries on all agricultural operations and produces the basic seeds. The basic seeds so harvested are again put through agricultural operations intimately connected with leasehold land for finally bringing out the hybrid seeds. Only for the reason that the basic seeds are sown in leasehold land and the manpower required is arranged through contract farming, it does not mean that the operations carried out by the assessee-company are not agricultural operations. As a matter of fact, it is to be seen that the assessee-company has carried out basic as well as secondary agricultural operations. Therefore, without any fear of contradiction, it is possible for us to hold that such entire income of the assessee is agricultural in nature which is to be excluded from the nature of total income.
17. The assessee is successful in its appeal:
18. As the main ground of the assessee itself is decided in its favour, we have not considered the alternative contention regarding application of rule 7 and proportionate exemption of income.
19. The reasons pointed out by the assessing authority to deny the claim of exemption made by the assessee-company are that the assessee is following international technology, marketing 20 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad expertise, integrated scientific and commercial activity, etc. These are all matters strange to the strict code of Income-tax. Those premises do not have any role in deciding the nature of income within the framework of the Income-tax Act, 1961. The reasons pointed out by the assessing officer are by and large issues to be decided by the policy makers in the Government."
13. In the case of Advanta India Limited, a similar issue again came up for consideration before the Tribunal for the assessment year 2003-04, involving identical facts and circumstances as is evident from para 2 of the Tribunal's order dated 29.6.2012 passed in ITA Nos.819 and 820/Bang/2010, extracted below-
"2. The brief facts of the case are that the assessee company which is engaged in development and production of basic and hybrid seeds filed its return of income for the assessment year 2003-04 on 27.11.2003 declaring a loss of Rs.3,59,00,900/-. The return was processed u/s 143(1) on 23.1.2004. Subsequently a revised return was filed on 21.10.2004 declaring a loss of Rs.2,83,38,977/-. The assessment was taken up for scrutiny u/s 143(3) of the Income- tax Act. During the assessment proceedings, the AO observed that there is no change in the business activity of the assessee company compared to the immediately preceding year i.e assessment year 2002-
03. He observed that the assessee which is engaged in the research, development, processing and marketing of hybrid seeds is carrying out activities from the first stage i.e research and development into the genetic composition which is best suited for local environment and agronomic practices in varying climatic zones in India. He observed that the research and development starts at the germplasm stage, which is multiplied into nucleus and then into pre- basic seeds and then into basic seed. He observed that up to the basic seed activity, all the primary operations are performed by the assessee company on its own lands or lands leased by it under its own direct supervision and guidance with the help of casual labour engaged by it and then the basic seeds are given to farmers for producing hybrid seeds, which are carried out by the farmers on their own lands which are leased to the company and 21 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad the cost of production is reimbursed to them and the produce is taken back by the company. The company thereupon cleans the hybrid seeds i.e removes the mud, stones and non-standard sized seeds and then treats the seeds with chemicals to prevent infestation, packs the seeds into cloth bags to suit market requirements and dispatches the seeds to consignees agents located all over the country for sale to the distributors. From the records of the assessee, the AO observed that the assessee has claimed an amount of Rs.3,62,21,263/- as exempt u/s 10 being income from agriculture. He observed that the assessee has taken different stands, relying heavily on the decisions of the various appellate authorities and, therefore, he held that the assessee is totally confused as to the heads of the income under which the profits from operations are to be declared. For coming to this conclusion, he placed reliance upon the decision of the Hon'ble ITAT, Hyderabad Bench in assessee's own case for the earlier years. He also considered the assessee's claim that there is substantial change in the activities carried on by the assessee from the assessment year 2002-03 but according to him, the records reveal no change in the activity carried on by the assessee as the entire agricultural operations for production of hybrid seeds were carried on by the respective holders of the lands which have been taken on lease under the supervision of the assessee. He, therefore, held that the supervision carried on by the assessee cannot be termed as that of a cultivator. He placed reliance upon the assessee's own case for the immediately preceding year and has held that the entire income of the assessee is income from business . The claim of exemption u/s 10 was rejected and entire income was subjected to the tax under the head 'business'. Further he observed that the basic seeds production emanates from germplasm and the variations and genetic manipulations achieved by the assessee are by Scientific Research Activity and, therefore, the expenditure incurred on extensive research has not been considered by the assessee while computing the claim of agricultural income. Further he also observed that the assessee is carrying on the production of basic seeds in the assessee's own lands and for the production of hybrid seeds, these basic seeds are given to the farmers for cultivation under contract farming. According to him, cultivation of hybrid seeds under contract forming cannot be termed as cultivation done by the assessee. He, therefore, rejected the assessee's claim of exemption u/s 10 of 22 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad the Income-tax Act and treated the entire income as business income."
After taking into consideration the above facts and circumstances of the case, a similar issue again was decided by the Bangalore Bench of the Tribunal in favour of the assessee following the decision of the coordinate bench in the cases of American Exports and Namdhari Seeds P. Ltd. (supra) as well as in assessee's own case for assessment year 2002-03, holding that the income derived by the assessee from the production of foundation/basic seeds as well as hybrid seeds constituted income eligible for exemption under S.10(1) of the Act, being agricultural income.
14. The issue involved in the present case relating to the assessee's claim for exemption under S.10(1) in respect of income derived from the production of foundation/basic seeds as well as hybrid seeds being agricultural income, thus is squarely covered by the various decisions of the Tribunal as well as the decision of the Hon'ble Andhra Pradesh High Court and this position is not disputed even by the Learned Departmental Representative at the time of hearing before us. We therefore, respectfully follow the judicial pronouncements on the issue discussed above and uphold the impugned order of the learned CIT(A) allowing the claim of the assessee for exemption under S.10(1) in respect of income derived from the production of seeds. Grounds No.2 to 4 of the Revenue's appeal are accordingly dismissed.
15. In ground no.5, the Revenue has challenged the action of the learned CIT(A) in deleting the disallowance made by the Assessing Officer under S.14A read with Rule 8D of the Income-tax Rules, 1962.
23 ITA No.1594/Hyd/2014M/s. Nuziveedu Seeds Limited, Hyderabad
16. During the year under consideration, the assessee company had received dividend income of Rs.1,77,472 on investment of Rs.20.30 crores., which was claimed to be exempt under S.10(33) of the Act. No disallowance on account of expenditure incurred in relation to the said exempt income however, was offered by the assessee as required by the provisions of S.14A. In this regard, it was also noted by the Assessing Officer that the assessee has incurred a huge expenditure of Rs.32.45 crores on account of interest. He therefore, applied Rule 8D and worked out a disallowance to be made under S.14A at Rs.1,48,00,979 on account of interest and Rs.5,07,695 on account of other common expenses.
17. On appeal, the learned CIT(A) deleted the disallowance made by the Assessing Officer under S.14A read with Rule 8D, after having found on verification of the relevant Balance Sheet of the assessee company that it had sufficient own funds of Rs.259.75 Crores in the form of share capital and reserves and surplus as on 31.3.2011 to make investment of Rs.20.30 crores. In support of this conclusion, he relied inter alia on the decision of the Bombay High Court in the case of Reliance Utilities Power Ltd (313 ITR 314).
18. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that a finding has been given by the learned CIT(A) in his impugned order on verification of the relevant Balance Sheet of the assessee company that it had sufficient own funds in the form of share capital, reserves and surplus to make investment of Rs.20.30 crores, and the Learned Departmental Representative has not been able to rebut or controvert this finding of fact recorded by the learned CIT(A). As held by the Hon'ble Bombay High Court in the 24 ITA No.1594/Hyd/2014 M/s. Nuziveedu Seeds Limited, Hyderabad case of Reliance Utilities Power Ltd (supra), if it is a case of mixed funds maintained by the assessee, there is a presumption that the own funds of the assessee are utilised for making the investment which has fetched the tax free income. Following this ratio laid down by the Hon'ble Bombay High Court and keeping in view the facts of the assessee, we are of the view that the investment of Rs.20.30 crores having been presumably made by the assessee out of its own funds, no disallowance on account of interest expenditure under S.14A can justifiably be made. We therefore, uphold the impugned order of the learned CIT(A) deleting the disallowance of Rs.1,48,00,979 made by the Assessing Officer on account of interest under S.14A read with Rule 8D.
19. As regards the balance disallowance of Rs.5,07,695 made by the Assessing Officer on account of other common expenses by applying clause (iii) of Rule 8D, we are of the view that the common expenses incurred by the assessee such as office and administrative expenses etc. can reasonably be attributed to some extent to the activity of making investment and the same therefore, are liable to be disallowed by applying the formula given in clause
(iii) of Rule 8D. As such, the CIT(A), in our opinion, is not justified in deleting the disallowance made by the Assessing Officer in this behalf. We, therefore, modify the impugned order of the learned CIT(A) on this issue and restore the disallowance made by the Assessing Officer under Rule 14A read with Rule 8D to the extent of Rs.5,07,695, Ground No.5 of the Revenue in this appeal is thus partly allowed.
25 ITA No.1594/Hyd/2014M/s. Nuziveedu Seeds Limited, Hyderabad
20. In the result, appeal of the Revenue is partly allowed Order pronounced in the court on 20th March, 2015 Sd/- Sd/-
(Asha Vijayaraghavan) (P.M.Jagtap)
Judicial Member Accountant Member
Dt/- 20th March, 2015
Copy forwarded to:
1. M/s. Nuziveedu Seeds Limited, Survey No.69, Gundla Pochampally, Village Medchal Mandal, RR District, Hyderabad
2. Dy. Commissioner of Income-tax Circle 16(1) Hyderabad
3. Commissioner of Income-tax(Appeals) V Hyderabad
4. Commissioner of Income-tax I, Hyderabad
5. Departmental Representative, ITAT, Hyderabad.
B.V.S