TaxTMI 
TaxTMI 
2011 (10) TMI 488
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....or the assessment year 1998-99. The Assessing Officer holding that the entire amount of profit was liable to tax under the provisions of the Act, denied the claim of the assessee that the entire income was agricultural income. An appeal came to be filed before the first appellate authority and the first appellate authority set aside the order of assessment and held that the entire income should be treated as agricultural income giving exemption under Section 10(1) of the Act. As against this, the Revenue went up in appeal before the Tribunal. The Tribunal opined that 10% of the net profit should be treated as business income and the balance 90% of the net profit as agricultural income exempting the same from tax. 3. So far as ITA 75/2007 and ITA 284/2007, the assessee - Namdhari Seeds Private Limited filed its income for the assessment year 2001-02 declaring an income of Rs. 7,68,860/- as taxable income and also declared Rs. 7,27,25,130/- as agricultural income generated by sale of hybrid seeds said to be obtained from agricultural operations. The assessment order came to be passed on 29.3.2004 treating a sum of Rs. 3,84,13,288/- as non-agricultural income stating that income ge....
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....me and 10% of the net profit was treated as business income. 6. Aggrieved by the order of the Tribunal, the Revenue has filed ITA 75/2007 pertaining to M/s Namdhari Seeds Private Limited and assessee has filed ITA 284/2007. ITA 76/2007 is filed by the Revenue so far as Indo American Exports. These three appeals are against the common order in ITA 3102/Bang./2004 and ITA 1040/Bang./2002 dated 14.7.2006. 7. So far as appeals pertaining to the assessment years 1998-99, 1999-2000, 2000-01, 2002-03, 2003-04 and 2004-05, the Tribunal following the order passed in ITA 3102/Bang./2004 dated 14.7.2006, disposed of the appeals. ITA Nos.389/2008, 388/2008, 748/2008, 739/2008, 387/2008 and 740/2008 had been filed by the Revenue challenging the order of the Tribunal opining 90% of the income derived by the assessee as agricultural income for the above mentioned years. 8. In respect of the abovementioned assessment years, the assessee has also filed ITA Nos. 19/2008 and 474/2008 apart from ITA 284/2007. 9. As similar questions are arising in all the above appeals, we are disposing of these appeals by a common judgment. 10. In the appeals filed by the Revenue except in ITA No.75/20....
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....by the cultivator and to that extent the income derived, could not be treated as agricultural income as defined under Section 2(1A) of the Income Tax Act. 14. ITA No.284/2007 for the assessment year 2001-02, came to be admitted on the following substantial question of law: Whether the Tribunal having held that hybrid seeds produced by the appellant was agricultural produce and income therefrom is agriculture income, was right in law in holding the process of certification of hybrid seeds produced by the appellant to make it marketable could not be held to be a process ordinarily employed by the cultivator and to that extent the income derived could not be treated as agriculture income as defined under section 2(1A) of the Act. 15. Before the Assessing Officer, the claim of the appellants assessees - Namdhari Seeds Private Limited and Indo American Exports was that the assessees were cultivating the lands which were taken either on lease or as per the 'contract farming agreement'. The Assessing Officer held that income derived by the assessees under the agreement referred to above is not agricultural income and should be treated as income from business. As already stated ab....
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....urpose must be lawful purpose. 18. According to the learned counsel for the Revenue, the entire activity of agriculture carried on by the farmers concerned would only involve research and scientific method of growing quality hybrid seeds for trading business of the appellant-assessee and this assistance of research and scientific method adopted by the staff of the appellant assessee will not make such assistance done on the land of the farmer or cultivator an activity of agriculture. An activity of agriculture starts from basic cultivation right from cleaning the land and making the land ready for sowing the seeds and it is done only by a farmer and the remote chance of appellant-assessee entering such land would be only in case of non-cooperation by the farmer as indicated in terms of the agreement and this would not give the assessee a status of agriculturist. According to the Revenue, neither the basic activity nor the subsequent activity carried on at the land either in terms of Section 2(1A)(b)(i) or (ii) is carried on by the assessee. Therefore question of any income by sale of certified seeds derived by the assessee will not attract any exemptions contemplated under Secti....
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....ity of the assessees is in the nature of business and not agriculture, but however the Revenue itself has accepted a part of the income as agricultural income insofar as the income derived from the agricultural operations outside the State of Karnataka for the assessment year 2000-01. According to the learned counsel Mr. Shankar, when concurrent finding of both the appellate authorities point out the activity of the assessees as agriculture, in the absence of assailing the orders of the appellate authorities on the ground of perversity by the Revenue, this Court cannot entertain the controversy as it would be nothing but finding of fact. 21. According to the learned counsel for the assessee, Section 2(1A) of the Act does not envisage that in order to derive income from lands by an assessee, assessee should own the land. As long as the activity performed by the assessee has agriculture in nature, income derived from said activity on the agricultural lands qualifies as agricultural income. According to him, the three parts of Section 2(1A)(b) of the Act clarifies the position as Section-2(1A)(b)(iii) refers to ownership and the word, 'ownership' is absent in Sections 2(1A)(b)(i) a....
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....sequences of such contravention. Hence, according to him Assessing Officer cannot travel beyond the ambit of the Income Tax Act and decide regarding the contravention of other Acts. In the absence of any authorised authority opining that there has been a violation of some other law, Income Tax Officer lacks inherent jurisdiction to decide such issue. He places reliance on the decision in the case of Manasa Housing Co-operative Society Ltd. v. Marikellaiah AIR 2006 Kar. 273. 24. While repelling the arguments of the learned counsel for the Revenue that Explanation to Section-37 of the Act would come in the way of the assessee because the income derived from the so-called agricultural operations is prohibited by law, Mr. Shankar submits that Section-37 refers to expenditure in general which is not in the nature of capital expenditure or personal expenditure of the assessee and relevant section is 28 of the Act. Section-37 deals with allowance of expenses. In the present case, it is not a question of claiming any expenditure, but the Revenue treating the income earned under Section 28 as non-agricultural income. Hence, Explanation to Section 37 cannot be read into the provisions of ....
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....00] 108 Taxman 167 (SC) to contend that the hi-tech activity in the present case has to be treated as an ordinary activity either due to acquaintance by the massess or by mandate of law. According to the assessee, a small section of the growers are engaged in process of converting the crop to be sold as seeds in the market and the process undertaken by them is normal process carried on in agricultural activity. What is normal and ordinary in one part of the country may be a rare process or not ordinary in the other part. This alone will not change the character of the income earned by employing process to convert agricultural produce into marketable produce. 29. Learned counsel for the assessee places reliance on Section-7 of the Seeds Act with reference to certain prohibitions for sale of seeds to contend that certain activity has to be done by an assessee to make the seeds marketable in accordance with law to have certification. The Tribunal ought to have made enquiry to know exact activity of the assessee for conversion of the hybrid seeds or foundation seeds to certification seeds. It had to understand whether there was necessity for the assessee to adopt this process to con....
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....greement and Annexure-1 of the agreement reads as under: "AGREEMENT This agreement entered into between Namdhari Seeds Pvt. Ltd., hereinafter referred to as the company and Sri Mahadevappa Mallappa Chikkalli s/o Mallappa Chikkalli aged about 30 years residing at Hirehali hereinafter referred to as farmer. Whereas the company is in the business of cultivation, production and marketing of open-hybrid seeds both for domestic and international market and desires to take up the production of open-hybrid tomato seeds for its own benefit or/on behalf of its overseas principals. Whereas the farmer is the person owning land suitable for cultivation of hybrid tomato seeds for and on behalf of the company or the Company's overseas principals by sowing the stock/foundation seeds to be supplied by the company. Now therefore this deed witnesseth, the terms and conditions agreed to between the parties for their mutual advantage. (1) The farmer agrees to place at the total disposal of the company in terms of this agreement one acre of land, earmarked for the purpose of cultivation of hybrid tomato seeds, out of the land belonging to him and more particularly described in the sche....
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.... thereof, the company shall have all rights to possession, cultivation and harvesting of hybrid seeds on the land earmarked in terms of this agreement, as if the company is a Lessee although all parties agree that no lease is created in terms of this agreement. The terms of this contract to the extent that is not consistent with the Karnataka Land Reforms Act shall be considered as null and void. (9) The farmer while agreeing to abide by the terms and conditions contained in the Annexure hereto more particularly, assures the company that the foundation seeds supplied by the company would be fully sowed for cultivation and none of them would be misused, or parted with to others not entitled to it. Any unutilised foundation seeds would be returned to the company. (10) The farmer further assumes that he would hand over to the company at such place/s as may be specified all the hybrid seeds cultivated by him and not sell or part with or retain for himself any portion of the seeds cultivated by him. (11) Foundation seeds/stock seeds, and seeds derived out of this are the property of the company/company's overseas principals. The farmer only undertakes multiplication of this mat....
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.... one acre cultivation. Land measuring Village-Hirohalli Survey No. 15 Sub-Division District Bounded on the 4 sides as under: East - Malashappa-Hulihalli West - Malarayappa Kassambi South - Maralangappa Govorapur North - Suresh Vasanada For Namdhari Seeds Pvt. Ltd. (1) -sd- (M.S. Subramanya) (2) -sd- (M.M. Chikkalli) (Name of the Farmer) Witness: (1) (2) ANNEXURE-1 Conditions forming part of the agreement for cultivation of open pollinated/hybrid _________ seeds. (a) The farmer will carry out all instructions of the company in the matter of hybrid seed cultivation. Whether herein contained or conveyed/communicated separately from time to time by the company or through its representative/s orally or in writing. (b) He will ensure that there is sufficient water for raising the_________ crops. (c) He will ensure that the land should have not been used for Tomato crops cultivation during the previous season. Preferably the land should have been used for cultivation o....
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....penditure incurred by an assessee for any purpose which is an offence or which is prohibited by 'law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. (2) omitted (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party." 34. Section-2(1A) of the Act is relevant for the purpose of understanding and analyzing whether the income derived by the assessee-company is from agriculture operations and it amounts to agricultural income. Section-2(1A) reads as under: "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....
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....ion of crop such as removing the weeds, cleaning and loosening soil around crop, prevention of crops from insects and pests etc. Therefore both the basic and subsequent operations together form the integrated activity of an agriculturist. In order to call basic and subsequent activity as integrated activity of a farmer, the subsequent activity should be in conjunction with or in continuation of the basic operation i.e. preparation of land and sowing of the seeds or such similar activity. It is well-settled that preparation of the soil and sowing of the seeds need not necessarily be by tilling of the land using a plough and it could be by use of mechanical apparatus also. The basic operation should be on the land itself and it cannot be outside the land. 38. One has to understand why agricultural income was kept outside the purview of income tax. Section-10(1) of the Act totally exempts agricultural income from income tax. However, no agricultural income subsequent to 1974-75 has to be added to the total non-agricultural income for the purpose of determining the tax on non-agricultural income of an individual although the agricultural income will remain fully exempted. While Sect....
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....s in such land receives income from the above persons, then the income from the land by the performance of agricultural operations on it can be termed as agricultural income. 39. Learned counsel for the appellant-assessee challenging the appeals of the Revenue regarding the opinion of the Tribunal that 90% of the income of the assessee is agricultural income refers to the following decisions on different aspects of the matter like nature of income, interest in land and nature of produce: (i) Raja Benoy Sahas Roy's case (supra) (ii) CIT v. K.E. Sundara Mudaliar [1950] 18 ITR 259 (Mad.) (iii) CIT v. Associated Metals Co. [1989] 177 ITR 428 (All.) (iv) Jugal Kishore Arora v. Dy. CIT [2004] 269 ITR 133 (All.) (v) CIT v. Soundarya Nursery [2000] 241 ITR 530 (Mad.) (vi) Consolidated Coffee Estates Ltd. [1943] v. CAGIT [1970] 76 ITR 29 (Mys.) (vii) Williamson Financial Services case (supra) (viii) CIT v. Green Gold Tree Farmers (P.) Ltd. [2008] 299 ITR 262 (Uttarakhand) (ix) A.S. Karachi v. Commissioner of Agricultural Income-tax [1978] 115 ITR 629 (Ker.) (x) U.P. Krishi Utpadan Adhiniyam [2004] (13) ILD 1144 (sic) (xi) Havakkal Estate....
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....s is not so important in cases where the agriculturist performs these operations as a part of his integrated activity in cultivation of the lands. Irrespective of the nature of the produce or product of the land, whatever is grown on the land with the assistance of human labour and effort whatever does not grow wild or spontaneously on the soil without human labour and effort would be an agricultural product and the process of producing it would be 'agriculture' within the meaning of the expression in Section-2(1A) of the Act. Agriculture would also include horticulture, floriculture, arboriculture and sylviculture. Cultivation of flora and fauna which has artistic and decorative value can be termed as agricultural activity. The seeds were clearly a product of agriculture and the income derived from the sale of seeds can be agriculture income. Agricultural income not only exempted from taxable income but also from the total income of the assessee. These incomes are different from the tax-free incomes under Chapter VI-A. The definition of agricultural income in Article-366(1) indicates that it is open to the income-tax enactments in force from time-to-time to define agri....
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....ed as agricultural income and when it would not amount to agricultural income. 1. Malabar Industrial Co. Ltd.'s case (supra) 2. Raja Benoy Kumar Sahas Roy's case (supra) 42. The gist of the above citations is as under: The amount received by the assessee (vendor) from purchaser of rubber estate in consideration for modification/relaxation of payment schedule which was not fixed or quantified as loss of agricultural income could not be treated as agricultural income. Therefore it has to be an income from other sources. The term 'agriculture' cannot be confined merely to production of grain and food products for human beings and beasts. It needs further activity which is useful for the land. Therefore certain activities which are necessary and are in connection with the land would come within the term, 'agriculture'. Therefore other operations which are absolutely necessary for an agriculturist for effective raising of the produce on the land are also called agricultural operations. The above decisions relied upon by the learned counsel for the assessee as well as Revenue would show, when income of a particular nature becomes agricultural income. According to the le....
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....re the produce has to be dumped. For the purpose of making a produce marketable or fit for sale, some process may have to be undertaken. The section does not contemplate the sale of an item or a commodity which is different from what is cultivated and processed. If mulberry leaves are subjected to some process and sold in the market as such, then certainly income derived therefrom would be regarded as agricultural income. Section-2(1b) includes instances of income derived from performance of some process. The process must be one which is usually employed by the cultivator or receiver of rent in kind; it may be simple manual process or it may involve the use and assistance of machinery. The first requirement is the process must be one which is usually employed by the cultivator and the second requirement is said process must have been employed with the object of making the produce marketable. The basic requirement of section 80HHC is earning in foreign exchange and retention of profit for export business. Earning of income depends on sale of goods and services. The difference between the two is getting blurred with globalization and cross- border transaction. With technolog....
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....ercially a different article or commodity results after processing, then it would be a manufacturing activity. The assessee distributes foundation seeds to farmers, who are none other than the shareholders in the company. After the seeds are sown by the shareholders, the seed production assistants of the company inspect the fields and advise the farmers regarding the mechanical use, pesticides etc. After the produce is harvested, seed samples are collected by the officers of the company, and tested for purity, viability and moisture content in the laboratory of the University. On the samples meeting the required standard, the farmers are asked to supply their produce. The seeds supplied are again tested, and if found suitable, approved for processing. The seeds are then graded and cleaned by mechanical processes, and sorted out in three categories. The assessee on the sale of these seeds derived income in respect of which deduction under Section 80J has been claimed. In such situation, the process or converting foundation seeds to certified seeds amounts to manufacture or production of the article sold by the assessee. By process of coating and applying insecticides, other ch....
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....He must assure the assessee-company that his land is fit for cultivation of open-hybrid tomato seeds The farmer undertakes to observe all the conditions regarding the cultivation and other incidental matters as set out in the agreement with reference to preparation of land, sowing of male and female seeds, fertiliser application, weeding, irrigation, pollination, harvesting or seed extraction, seed cleaning and other agricultural operations necessary for the cultivation of hybrid-seeds. The farmer agrees to allow the personnel of the company to operate on the land, machinery, implements and accessories in order to achieve best results envisaged under the agreement. The farmer also agrees that if during the operation of the agreement, the company is not satisfied with the manner in which the farmer conducts himself or conducts the cultivation, the assessee-company is entitled to enter upon the land, so set apart for open pollinated/hybrid seed cultivation and take over the agricultural operations. Company is also entitled to appoint another licences on similar terms and conditions. 50. According to the agreement, during the term of the agreement, Company has all rights to possess....
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.... the registration fee, advances and the other inputs, if any paid to him. Farmer also undertakes not to create any third party right during the subsistence of the agreement. 52. Apart from the above agreement, farmer also executes Annexure-1 and it contains conditions forming part of the agreement and they are as under: That the farmer will carry out all instructions of the company in the matter of hybrid seeds cultivation. That he would ensure that there is sufficient water for raising the crops. He would also ensure that land should not have been used for tomato crop cultivation during the previous season and he will ensure that within a radius of 800 meters/feet, there would not be any other variety crops raised either for seed or for commercial production. He will ensure that (and is prepared for sowing by applying 5- 10 cart loads of farmyard manure per acre and the land ploughed thoroughly. He undertakes to apply soil amendments like lime, gypsum etc. He also undertakes to intimate the company officials the locations and his requirements of foundation seeds one day in advance of sowing. He will ensure that the foundation seeds supplied by the company are sown for cultiv....
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....c as well as subsequent operations in the process of agriculture and the raising on the land of products which have some utility either for consumption or for trade and commerce, it will be seen that the term "agriculture" receives a wider interpretation both in regard to its operations as well as the results of the same. Nevertheless there is present all throughout the basic idea that there must be at the bottom of it cultivation of land in the sense of tilling of the land, sowing of the seeds, planting, and similar work done on the land itself. This basic conception is the essential sine qua non of any operation performed on the land constituting, agricultural operation. If the basic operations are there, the rest of the operations found themselves upon the same. But if these basic operations are wanting the subsequent operations do not acquire the characteristic of agricultural operations. 11. The terms "agriculture" and 'agricultural purpose" not having been defined in the Indian IT Act, we must necessarily fall back upon the general sense in which they have been understood in common parlance. "Agriculture" in its root sense means ager a field and culture, cultivation, culti....
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....ate these basic operations altogether and say that even if these basic operations are not performed in a given case the mere performance of these subsequent operations would be tantamount to the performance of agricultural operations on the land so as to constitute the income derived by the assessee therefrom agricultural income within the definition of that term? We are of the opinion that the mere performance of these subsequent operations on the products of the land, where such products have not been raised on the land by the performance of the basic operations which we have described above would not be enough to characterise them as agricultural operations. In order to invest them with the character of agricultural operations, these subsequent operations must necessarily be in conjunction with and a continuation of the basic operations which are the effective cause of the products being raised from the land. It is only if the products are raised from the land by the performance of these basic operations that the subsequent operations attach themselves to the products of the land acquire the characteristic of agricultural operations. The cultivation of the land does not compr....
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....egard to the process of agriculture and the products which are raised upon the land, there is no warrant at all for extending it to all activities which have relation to the land or are in any way connected with the land. The use of the word agriculture in regard to such activities would certain be a distortion of the term. 84. A critical examination of the definition of "agricultural income' as given in section 2(1) of the Indian IT Act and the relevant provisions of the several Agrl. IT Acts of the various States also lends support to this position. In the first instance, it is defined as rent or revenue derived from land which is used for agricultural purposes; and it is next defined as income derived from such land by agriculture or by the activities described in clauses (ii) and (iii) of section 2(1)(b) of the Act. These activities are postulated to be performed by the cultivator or received of rent-in-kind of such land in regard to the products raised or received by him which necessarily means the produce raised on the land either by himself or by the actual cultivator of the land who pays such rent-in-kind to him. If produce raised or received by the cultivator or receive....
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....as under: "8, During the period stipulated in para one above or any extension thereof, the company shall have all rights to possession, cultivation and harvesting of hybrid seeds on the land earmarked in terms of this agreement, as if the company is a lessee although all parties agree that no lease is created in terms of this agreement. The terms of this contract to the extent that is not consistent with the Karnataka Land Reforms Act shall be considered as null and void." 55. Though the company says it has all the rights of cultivation, possession and harvesting of the hybrid seeds on the land earmarked, both the parties agree that the terms and conditions which are inconsistent with the Karnataka Land Reforms Act shall be considered as null and void. The terms and conditions which are in violation of the provisions of Karnataka Land Reforms Act would not bind the farmer and the assessee can never call himself as cultivator or lessee of the land. Except one stray clause that assessee can enter the land if the conduct of the farmer is not satisfactory or if he violates the terms and conditions of the agreement, no other terms of the agreement, would indicate that the assessee....