TaxTMI 
TaxTMI 
2014 (7) TMI 637
X X X X Extracts X X X X
X X X X Extracts X X X X
....ny is `eligible for weighted deduction u/s. 35(2AB). 3. The assessee raised the following additional ground: 1. The AO ought to have appreciated the fact that the whole income of the assessee-company at Rs. 79,67,82,429 is agricultural income which is exempt u/s. 10(1) of the IT Act, 1961. 2. The CIT(A) ought to have appreciated the fact that the provisions of section 40(a)(ia) are only applicable to the payments payable at the end of the year and not to the payments already made during the year and the addition of Rs. 1,47,52,389 ought not to have been confirmed. 4. The Revenue raised the following grounds: 1. The learned CIT(A) erred both in law and facts of the case. 2. The learned CIT(A) erred in holding that R&D expenditure to be apportioned between agricultural and commercial operations. 3. The learned CIT(A) has not appreciated the fact that the Hon'ble ITAT already held that the income from basic seed to be treated as agricultural income exempt u/s. 10(1) and, therefore, the R&D expenditure is not allowable expenditure as per the provisions of section 14A. 5. In this case ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unting to Rs. 18,19,42,296/-, including weighted deduction u/s. 35(2AB) at Rs. 6,06,47,432/-. The Assessing Officer held that the research related to the foundation seed alone and not to hybrid seeds and that if the assessee's claim of agricultural income were to be accepted, the expenditure on R&D could not be allowed. She further held that the expenses were hit by sec. 14A also, as the assessee had incurred the expenses for earning an income, which was claimed as exempt u/s. 10(1), and therefore, such expenses were not allowable. However, since the entire income of the assessee was considered by her as business income of the assessee, she allowed the expenses claimed u/s, 35 and no disallowance was made on this issue. 8. The facts of the case in the present appeal are identical to the facts in the earlier years. In its order dated 18.6.2010, in the assessee's case for assessment year 2004-05 and 2005-06, the ITAT held that the R&D expenditure incurred by the assessee was attributable to both the divisions and had to be allowed to the extent attributable to the commercial division in proportion to the turnover of the agricultural and commercial divisions. Following the or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Act 2004, it applied only to "amount payable". The words "credited/ paid" and "payable" have different connotations and the latter refers to an amount which is unpaid. The change in language between the Bill and the Act is conscious and with a purpose. The legislative intent is clear that only the outstanding amount or the provision for expense (and not the amount already paid) is liable for disallowance if TDS is not deducted. Also, s. 40(a)(ia) creates a legal fiction by virtue of which even genuine and admissible expenses can be disallowed for want of TDS. A legal fiction has to be limited to the area for which it is created. Consequently, s. 40(a)(ia) can apply only to expenditure which is "payable" as of 31st March and does not apply to expenditure which has been already paid during the year." Further, he submitted that even disallowance made u/s. 40(a)(ia) that income should be considered as business income of the assessee. In this case the assessee has agricultural income which is exempt from tax. For this purpose he relied on the order of the Tribunal in the case of Planet Online Pvt. Ltd. in ITA No. 1016/Hyd/2007 dated 29.8.2008, specifically para 11 of that order which is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....yielding hybrid seed of various commercial crops. Production process of the company is described as follows: At research stage: The germplasm is collected and planted in company research farms in crop specific growing seasons. The germplasm lines are evaluated for quality parameters. After evaluation the material is multiplied for more seeds and is moved to specific use in crop hybridization programme. The wild spices and land races are used in hybridization for genetic enhancement and development of new varieties. CMS sources and for specific traits. Hybrids developed from new germplasm are tested along with the best available commercial hybrids/varieties of other companies. The hybrids that perform better than the commercially available hybrids are selected. Nearly 5-10% of selected hybrids are rigorously tested in replicated trials at different locations and the best performing hybrid is moved to on-farm testing. At Foundation Stage: From the identified breeders, the assessee cultivated foundation seeds on its own or on leased lands. The cultivated foundation seeds are sold to the farmers, after necessary secondary operations for further c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ill they test positive in all desired traits. This activity takes six to eight years and 50 to 60 generations of plant growth." 18. The AO also relied on the judgement of the Supreme Court in CIT vs. Raja Benoy Kumar Sahas Roy (32 ITR 466) held that the primary sense in which the term agriculture is understood is cultivation of the field. Agriculture is an integrated activity of cultivating, planting, growing and harvesting. According to the AO, in the case of assessee, the integrated activity is disturbed and basic agricultural operations of tilling, cultivating are minimal. As income from agriculture research is not covered by the exemption under section 10(1), thus the Assessing Officer has included it in the total income. 19. Further he observed that what is material is not merely whether some operations have been carried out on land but whether these processes are such as are "ordinarily employed' by a cultivator. In the case or Pro-Agro Seeds Limited in its common order dt. 11.11.2002, the ITAT, Delhi D-Bench on similar and identical facts held that the parent seed production (foundation seed production in our case) is not agriculture and sale proceeds there from cannot....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e AO that even though, the assessee's activities may be akin to agriculture but the interruption of the natural agricultural process by technological inputs involved in seed production like inbreeding, artificial self-pollination, artificial crossing between male and female lines and sale of foundation seed render it non-agricultural. Therefore, the income from sale of foundation seed cannot be said to be its agricultural income. 21. The assessee has argued that the nature of produce has no relevance in deciding whether a particular activity is agriculture. In this regard, it relied on the case of Raja Benoy Kumar Sahas Roy ((32 ITR 466) (SC). According to the AO the operations of the assessee are not such so as to qualify as 'cultivation' or 'agriculture'. The assessee has failed to take note of the following observations of the Supreme Court in the very same judgment reported at page No. 467. "There is no warrant at all for extending the term' agriculture' to all activities which have some relation to the land or are in any way connected with the land, for the term agriculture cannot be disassociated from the primary significance t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ds the objection of the AO and the CIT(A) that the germplasm generated is out of scientific research activity, we find that the AO has already held that there is no change in the activities of the assessee as compared to the earlier assessment year i.e., 2002-03. For the assessment year 2002-03, the Tribunal in its order has observed that the assessee procures germplasm from laboratories and does not generate the said germplasm in its own laboratories. Therefore, the contention of the AO and the CIT(A) that some scientific activity is carried on by the assessee and the expenditure incurred by the assessee on such scientific activity should be considered while computing the agricultural income does not hold good. Now, whether the conversion of germplasm into basic seeds also involves any scientific activity is the question before us. From the material filed by the learned DR, which is procured from the internet, we find that germplasm is living tissue from which new plants can be grown and that it can be a seed or part of another plant, a leaf, a piece of stem, pollen or even just a few cells that can be turned into a whole plant. It is the case of the assessee that this germplasm i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s which grows into what is called the Basic Seed. The Basic Seeds are again replanted to grow the Hybrid Seeds. The Hybrid Seeds are sold by the assessee company, to farmers at large. This is the frame of operation carried on by the assessee during the previous year relevant to the assessment year in appeal. In the past, the assessee had carried out the business in different formulations like distributing Basic Seeds to farmers to grow into Hybrid Seeds and buying it 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, assessee itself is growing Basic Seeds as well as Hybrid Seeds. 4. Up to 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 by engaging casual labour. The Hybrid Seeds are grows 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....duction of Hybrid Seeds is agricultural in character or not. The alternative contention of the assessee is that at least income attributable to the production of Basic Seeds is agricultural in nature. 10. We heard Shri. P. J. Pardiwala, the Senior Counsel appearing for the Assessee and Smt. Swathi S. Patil, the learned counsel appearing for the Revenue. 11. An exactly similar issue was considered by ITAT, 'B' Bench of Bangalore in the case of Indo American Exports and M/s. Namdhari Seeds Pvt. Ltd., in their common order dated 14.7.2006, passed in ITA No. 1040/Bang/2002 and ITA No.3102/Bang/2004. After considering the facts and rival contentions in detail, the Tribunal held as follows : "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 IT Act is quoted below:  ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Bench in the case of Indo American Exports and M/s. Namdhari Seeds P. Ltd., 14. The Hon'ble Supreme Court in the case of Commissioner of Income-tax v. Raja Benoy Kumar Sahas Roy (32 ITR 466) has considered comprehensively the concept of agricultural income for the purpose of 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 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 characterize them as agricultural operations. In order to invest them with the character of agricultural operations, subsequent operations must necessarily taken in conjunction with and in continuation of the basic operations which are the effective cost of the produce being raised from the land. 15.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al in the assessee's own case or by the decision of the Hon'ble Karnataka High Court in the case of M/s Namdhari Seeds Pvt. Ltd.. A judgment of the Hon'ble High Court is applicable only if the facts and circumstances are similar. The following differences in the facts and circumstances of the assessee's own case and the case of M/s Namdhari Seeds are worth noting. M/s Namdhari Seeds Pvt. Ltd. M/s Advante India Ltd. 1. It does not take land on lease from farmers It takes lands on lease from farmers 2. It engages the farmers for production of hybrid seeds It engages services of the farmers for production of hybrid seeds 3. It purchases the hybrid seeds which cater to its specifications at fixed prices It takes entire produce from the farmers. 4. It is not concerned with expenditure incurred by the farmers It reimburses the entire expenditure of cultivation to the farmers. 5. The seeds which do not meet the specification set out by M/s Namdhari Seeds are sold by the company in the open market and the consideration received is given to the farmers. The farmers are not given price for the produce except reimbursement of the entire charges and repayment the labour charges. &....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the same will apply to appeal before Tribunal Hon'ble Allahabad High Court in the case of CIT v. Mohd. Ayyub & Sons Agency (197 ITR 637) has held that the power of the Tribunal to permit any party to the appeal to raise the question of jurisdiction, which goes to the root of the matter and does not involve further investigation into facts, cannot be disputed on the plain reading of Rule 11 of the ITAT Rules, 1963. Indeed on such a plea being taken, the Tribunal is under a statutory obligation not only to entertain the plea but also to decide the same after providing sufficient opportunity of being heard to the other side. Similar views have been taken by Hon'ble Delhi High Court (i) in the case of CIT v. Mahalakhshmi Sugar Mills Co. Ltd., (200 ITR 275), (ii) Hon'ble Bombay High Court in the case of Ahmedabad Electricity Co. Ltd. v. CIT (199 ITR 351) and (iii) Hon'ble Rajasthan High Court in the case of Mewar Sugar Mills Ltd. v. CIT (203 ITR 45). Hon'ble Bombay High Court in the case of Baby Samuel v. Asstt. CIT (263 ITR 385) has held that when an issue was not specifically taken in the memorandum and grounds of appeal but mentioned in the written submissions fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....artmental Representative that this issue was not challenged before the AO, therefore, assessment was correctly made by the AO. We concede to the request of the learned Departmental Representative that the matter may be restored for reverification and fresh adjudication on the issues in view of our above discussion on the issue of scope and ambit "of power of Tribunal to admit additional ground on the reason that the assessee is not aware of the order of the Tribunal in the case of Advanta India Ltd. (cited supra) which was delivered on 29.6.2012 though the assessee filed the appeal before this date on 13.12.2012. It cannot be expected that every assessee is aware of all the decisions of the Tribunal though it was pronounced. Being so, considering the plea of the assessee and judgement of the Supreme Court in the case of National Thermal Power Co. Ltd. vs. CIT (229 ITR 383), we are inclined to admit the second additional ground also. 27. However, since this issue has been raised for the first time by the assessee before us, the AO has no occasion to examined this ground of the assessee. Being so, in view of this, it is appropriate to remit the issue to the file of the AO to see whe....