2017 (12) TMI 1058 - AT - Income Tax

Tribunal upholds denial of agricultural income exemption and disallows deductions.

The Tribunal dismissed all appeals filed by the assessee, upholding the denial of agricultural income exemption under Section 10(1) of the Income-tax Act, ... Entitled for exemption u/s 10(1) - agriculture income - proof of carrying agricultural operations - supervision activity - Held that:- The factual matrix of the present case reveals that the farmer had entered into lease agreement with the assessee company and the farmer is the lawful owner of the land. The said farmers had leased the farm land to the assessee company which has handed it back to the farmer to carry out cultivation of seeds on behalf of the assessee company. The parent seeds are provided free of cost to the farmer by the assessee company. The farmer is paid, amount for procurement of seeds by the assessee at fixed rate, which is bifurcated under the heads, land lease rent, fertilizers & chemicals and labour & services charges. We find from the arrangement between the farmer and the assessee that the assessee is not carrying any agricultural operations required in terms of tests laid in the judgment of the Hon’ble Supreme Court in the case of CIT Vs Raja Benoy Kumar Sahas Roy (1957 (5) TMI 6 - SUPREME Court). The actual cultivation on the land is done by the farmer like tilling, sowing, etc. The mere supervision by the assessee without the carrying of the basic operations would leave no manner of doubt that no agricultural income arose in the hands of the assessee. The argument of the assessee that the company is an artificial person and could not have conducted the agricultural operations by itself and, therefore, required such kind of an arrangement with the farmers for earning agricultural income does not have any merit. The farmers are not the employees of the assessee company. Had it been the case where the actual agricultural operations were carried out by the employees of the assessee company, it would have been a different case altogether. - Decided against assessee. Issues Involved:1. Denial of exemption under Section 10(1) of the Income-tax Act, 1961.2. Disallowance of contribution to the superannuation fund.3. Disallowance of bad debts.Issue-wise Detailed Analysis:1. Denial of Exemption under Section 10(1) of the Income-tax Act, 1961:The primary issue in these appeals was whether the income derived by the assessee from its operations could be classified as agricultural income and thus be exempt under Section 10(1) of the Income-tax Act, 1961. The assessee, a subsidiary of a US-based corporation, claimed that its main activity involved procuring seeds from growers, processing, packing, and subsequent sale, and argued that these activities qualified as agricultural operations.The Assessing Officer (AO) rejected this claim, stating that the assessee did not engage in the basic agricultural operations such as tilling and sowing, which were performed by the farmers. The AO cited the Supreme Court judgment in CIT Vs. Raja Benoy Kumar Sahas Roy, which defined agricultural operations as including both basic and subsequent operations performed on the land. The AO concluded that the assessee's activities were more akin to those of a business entity rather than an agricultural operation, and thus denied the exemption under Section 10(1).The CIT(A) upheld the AO's decision, reiterating that the basic agricultural operations were carried out by the farmers, not the assessee. The Tribunal also supported this view, noting that the agreements between the assessee and the farmers indicated that the farmers were responsible for the actual cultivation, while the assessee provided supervision and technical guidance. The Tribunal referenced the Karnataka High Court's decision in CIT Vs. Namdhari Seeds Pvt. Ltd., which held that similar arrangements did not qualify for agricultural income exemption.2. Disallowance of Contribution to the Superannuation Fund:For the assessment year 2003-04, the assessee claimed a deduction for contributions to the superannuation fund amounting to Rs. 3,23,767/-. The AO and CIT(A) disallowed this deduction, stating that since the assessee's income was not agricultural, the contribution could not be deducted from the total income. The Tribunal upheld this disallowance, noting that the assessee had failed to establish that the contribution was allowable under the Companies Act.3. Disallowance of Bad Debts:In the appeals for the assessment years 2005-06 and 2009-10, the assessee claimed deductions for bad debts amounting to Rs. 25,26,958/-. The CIT(A) disallowed these claims, stating that the assessee had not demonstrated that the debts arose from business activities. The Tribunal upheld this decision, finding no evidence to support the assessee's claim that the advances were related to its business operations.Conclusion:The Tribunal dismissed all the appeals filed by the assessee, affirming the decisions of the AO and CIT(A) on all counts. The Tribunal found that the assessee did not qualify for the agricultural income exemption under Section 10(1) of the Income-tax Act, 1961, as the basic agricultural operations were performed by the farmers, not the assessee. Additionally, the Tribunal upheld the disallowances of the superannuation fund contributions and bad debts due to lack of sufficient evidence linking these expenses to the assessee's business activities. The Tribunal also dismissed the department's appeal concerning the provision for bad debts for the assessment year 2009-10 as infructuous.