TaxTMI 
TaxTMI 
2018 (11) TMI 267
X X X X Extracts X X X X
X X X X Extracts X X X X
....ents of the counsels etc., we are of the opinion that allthese appeals should be heard together for passing a composite order. Forthe sake of reference, the grounds for A.Y. 2011-12 are extracted here asunder : "(a) Whether on the facts and in the circumstances of this case, assessee'sincome from its seed production activity is exempt under section 10(1) of theIncome Tax Act, 1961. (b) Whether on the facts and in the circumstances of this case, the landutilized for production of seeds can be termed as assessee's "leased land"; (c) Whether on the facts and in the circumstances of this case, grower canbe termed as representative of assessee company; (d) Whether on the fact and in the circumstances of this case, assessee'sseeds procurement from grower is its agricultural activity; (e) Whether on the facts and in the circumstances of this case, converting ofseeds into certified seeds is an agriculture activity; (f) The Appellant craves leave to amend, alter, modify, add, submitadditional ground;" 2. Revenue revised grounds during the proceedings before us and thesame are extracted as follows : "1. Whether on the facts & ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tice informing the assessee that the basic operations of agriculture were not carried out by the assessee and, therefore, the seeds procured by the assessee from the growersconstitute the trading activity of purchase of seeds. Further, the series ofprocessing activities in order to make certified seeds ready for trading,constitutes a manufacturing/business activity and when the same are sold,the income earned by the assessee become taxable. In this regard, AO alsoanalysed the land lease agreements signed by the assessee and the landowners and found that they are unregistered ones. Further, the AO foundthat certain expenses to the tune of Rs. 30.94 crores (rounded off) unrelated tothe agricultural activity were also claimed. AO held that these expenditureconstitute manufacturing expenses, research expenses, power and fuel,freight inward, Hamali & Cartage, etc., and not agricultural expenditureincurred for earning exempt agricultural income. AO came to the conclusionthat the entire activity is not agricultural activity and the same constitutes"business activity". Therefore, AO show caused the assessee as to why theincome of Rs. 6.90 crores earned by the assessee for A.Y. 2011-12 on s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ions of Pune Bench ofthe Tribunal in the case of ITO Vs. M/s.Godavari Seeds Pvt. Ltd.,M/s.Mahendra Hybrid Seeds Company Ltd., Jalna, and the decision of DelhiBench of the Tribunal in the case of M/s.Pro-agro Seeds Company Ltd. reported in 126 Taxmann 37 to support his conclusions against the claims ofthe assessee. As per the AO, these decisions advocate for treating suchactivities not as agricultural activities but they constitute the business ofmanufacturing and production of seeds. AO held that most of the seedsprocured are from the lands not owned by the assessee. Further, AO rejected the arguments of the assessee and considered thefollowing decisions relied upon by the assessee : i. Raja Binoy Kumar Sahas Roy 32 ITR 460 ii. CIT Vs. Soundarya Nursery (2000) 241 ITR 530 iii. Monsanto India Limited Vs. DCIT - ITA No.6093/Mum/2007 Eventually, AO taxed the entire claim of Agricultural income in all the seassessment years under consideration. 7. During the subsequent assessment years, AO proceeded to invoke theprovisions of section 133(6) of the Act in few select cases of growers toestablish that the assessee involved in growth of the said seeds an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the AO, the assesseefiled appeal before the CIT(A). The issue relating to the claim of Agricultural income Vs. Business income of the assessee was discussed at length by theCIT(A). CIT(A) enlisted the reasons/points arising out of the assessmentorder in Para No.5 of his order. CIT(A) also extracted the submissions givenby the assessee in Para No.6 of his order and proceeded to give his conclusionfrom Para No.7 onwards. In his order, CIT(A) examined couple of issues; namely (1) whether the income derived from the use of leasehold land whichis cultivated by the farmers under the supervisions of employees of the assessee to give rise to the hybrid seeds constitutes 'an agricultural activity'or not; and (2) subsequent activities of processing of the hybrid seeds to makethe seeds to be marketable as certified seeds amounts to business activity ornot. The CIT(A) considered the fact that the assessee engaged the landlordsand their lands through the written contracts and held that such activityconstitutes agricultural activity. Relying on the decision of Bangalore Benchof the Tribunal in the case of M/s.Advanta India Ltd. Vs. DCIT 5 ITR 57(Bang. Trib.), the CIT(A) observed that assessee is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e stands purchasedthe said hybrid seeds grown by them for further processing and certification. Resultantly, as per AO, the assessee remained to be a trader of thehybrid/certified seeds. Eventually, the AO for the A.Y. 2012-13 gave hisconclusion on page 11 of the assessment order and the same is extractedhere as under : "Therefore, seed and grain both are different type of produce and seedsproduction activity is not similar that of production of grain. Seeds areproduced by scientific method any by investing huge money and skilledmanpower, whereas grain is produced on conventional method and by lowerinvestment and average skilled manpower. Further, agricultural produce suchas grain are fit for human consumption, whereas when seeds are processedthey are chemically treated and coated with pesticides, fungicides to protect itand if seeds are not sold for germination they are sold for animal foods only, asit is not fit for human consumption. Hence, seed production activity cannot betreated as agriculture activity. In the light of above facts and judicial pronouncement, assessee company hasneither performed the basic agricultural operation or subsequent operationsord....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Rs. 53.64 crores(rounded off). AO did not disturb the claim relating to the claim of tradingactivities over the years. 14. Aggrieved with the conclusions of the CIT(A), both on account of claim of agricultural income as well as claim of expenditure u/s.14A r.w. Rule 8Dfor the A.Yrs. 2013-14 and 2014-15), the Revenue filed all the four appealsunder consideration before the Tribunal. BEFORE THE TRIBUNAL 15. Revenue Contentions : Shri Rajiv Kumar, Ld. CIT-DR for the Revenuerelied heavily on the orders of the AO in all these 4 assessment years. Ld. DRread out the contents of the assessment orders in all these appeals andsubmitted that conclusions of the AO needs to be confirmed by reversing thedecisions of the CIT(A)s. Further, Ld. DR made various submissions and thesaid submissions are summarized in the following paragraphs : (a) When the assessee made a claim of exemption u/s.10(1) of theAct, the onus is on the assessee and the assessee failed to demonstratethat there is an agricultural activity or there is any expert supervisionin the agricultural activities undertaken by the assessee on theleasehold lands. (b) Referring to the imperfect land-lease agreem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s to thefinal consumers etc., Ld. Counsel for the assessee submitted that theturnover of Rs. 92.39 crores was registered during the year by the assesseeand the same stand undisturbed by the AO. This performance is not possiblebut for the whole list of agricultural activities undertaken by the assesseeduring the years on one hand and on account of direct and indirectexpenditure on the other. Further, Ld. AR for the assessee filed 3 paper books. Paper Book No.1contains the financial statements, returns of income and the copies of theleasehold agreement for production of the seeds and the copies of theconfirmation of the rejected seeds which are used as Fodder to the cattle. Paper Book No.2 contains the correspondence between the AO and the assessee, details of agricultural expenditure, copies of the agreements withthe farmers etc. Finally the Paper book No.3 contains the compiles the copiesof the 7/12 extracts of the leasehold lands taken by the assessee forproduction of seeds. He also furnished the compilation of the said 7/12extracts showing the extent of land utilized, details of crops grown in the saidland, details of the growers, crop price etc. Further, the conveyance and....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Depreciation/Amortization except amortization of brands and marketing right 47465745 ix. Interest and other Farm Expenses 18753582 Total 334548897 Referring to the aforesaid evidence from a grower of seeds, elaboratingthe same, Ld. Counsel for the assessee submitted that barring a letter from asolitary farmer gathered by the AO during the later assessment yearsu/s.133(6) of the Act, all the other farmers confirmed the Agricultural activityof the assessee. Otherwise, no adverse information was available with theAO on the genuineness of the claim of agricultural income. Other specificarguments of the Ld. Counsel for the assessee are specifically discussed inthe following paragraphs. Cross Examination : Referring to the said stray and a solitary case of a letterby Shri Bhuma Bala Narasimha Reddy, (the farmer-cum-landlord) andreferring to the principles of cross examination, Ld. Counsel for the assesseesubmitted that AO failed to put the said Shri Bhuma Bala Narasimha Reddybefore the assessee for cross examination. Ld. Counsel for the assesseesubmitted that the AO invoked the provisions of section 133(6) of the Act forthe A.Y. 2012-13 in respect of 3 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... years, the assessee is into both activities ofagriculture as well as trading activity of seeds. The earlier AOs accepted theclaims of the assessee over the years. Therefore, on this principle ofconsistency, the claim needs to be accepted in these assessment years too. Activities of assessee constitutes agricultural activities - a decided issuein favour of the assessee: Further, he submitted that AO failed to appreciatethat the certified seeds produced by the grower of the assessee on contractualbasis are of superior quality involving high levels of innovation andtechnological inputs and they are different from the natural seeds available inthe market. For getting the certified seeds produced, there is requirement oftreating the seeds procured from the growers with insecticides and chemicalsby the scientific processes. Referring to the manner of generation of suchhybrid/breeder, Ld. Counsel for the assessee submitted that these seeds aregenerated out of cross pollination and the said seeds being named asfoundation seeds and the same are supplied for mass production. Accordingto Ld. Counsel, it is not the case of producing seeds ordinarily for use. Further, explaining the proc....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... legal. Referring to theKarnataka High Court in the case of Namdhari Seeds Pvt. Ltd. reported in341 ITR 342 (Kar.), Ld. Counsel submitted that the same is distinguishable inview of the fact that in the present case the payment of rent is undoubted. The distinguishable features are enlisted as under : Sl. No. Nath Bio Genes India Ltd. Namdhari Seeds Pvt. Ltd. 1. Land taken on lease and paid lease Rs. 6,21,35,400/- Does not take on lease 2. Engages farmers for cultivation of land & for production/agricultural activity Engages farmers for production of hybrid seeds 3. Takes entire produce from farmers Purchases hybrid seeds, if only as per specification from farmers 4. Reimbursed entire cultivation expenses, Land Preparation-Rs.2,59,09,610 Fertilizer & Pesticide-Rs.4,76,21,370/- Farm Expenses-Rs.3,31,46,970/- Labour Charges - Rs. 7,10,45,020/- Not concerned with expenditure 5. Entire risk of crop failure is with assessee Risk of quantity, quality, failure & cost remains with farmers Further, heavily relying on the jurisdictional High Court judgment inthe case of ACIT Vs. Ajeet Seeds Ltd. (supra), Ld. Counsel submitted that th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ents : (i) Growers are contract employees of the assessee for which they are paidwages. (ii) Appellant simply grows crops which is in itself the seed. Then the seedsare treated and not used as raw material for seed but are sold as it is. It issubmitted that treating the seed and then selling is not a separate activity. Theappellant ultimately sells the seeds as it is. It is submitted that subsequentprocesses done by the appellant does not alter the character of seed. iii. It is like removing mud from wheat and then selling the same; or ripeningof Mango, or Banana, or like keeping the product in cold storage and selling athigher price; or selling the crop by packing them and selling through retailchains at higher margins. All are cases of agricultural income. iv. The appellant has ensured quality of product by just sorting them outand has not done any material subsequent operation on the produce. Details offurther operation after seeds are received, performed by company areexplained. v. Decision of Hon'ble SC in the case of State of Madras Vs. Raman & Co. and others 93 STC 185 is important for this issue. In that case, the assesseehad pur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e earned on sale ofsuch certified seeds constitute exempt agricultural income. Merely drawingthe leasehold agreement and not registering them as per the provisions ofsection 17(1)(d) of the Registration Act, 1908 does not take away the benefitsgiven by the statute to the assessee. The grounds created by the AOconstitute frivolous and unsustainable legally. Referring the orders of theCIT(A) in all these assessment years, Ld. Counsel submitted that the saidorders are fair and reasonable and the same should be confirmed withoutamending the same for all the 4 years. DECISION OF THE TRIBUNAL 17. There are couple of common issues for adjudication before us in these 4appeals by the Revenue involving . They are : (1)issue of granting exemption u/s.10(1) of the Act in respect of the incomeearned by the assessee out of production of certified seeds and relatedactivities. This is common issue for all the 4 assessment years underconsideration and; (2) the issue of making disallowance u/s.14A r.w. Rule8D(2) of the I.T. Rules, 1962. This issue is relevant for A.Yrs. 2013-14 and2014-15 only. 18. We heard both the sides and perused the orders of the Revenue. Wehave also perused the paper ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ocess, the written lease deeds were acted uponby the parties of the agreement in their true spirit. We find it is a case thatthat assessee supplied all the needs required for agricultural activities, i.e. money, seeds, lease lands and met all the expenditure and collected the seedsgrown in the said lands using the services of the landowners-cum-growers. Itis not a case of buying of seeds from the landlords. Assessee paid to thelandlords for the services as well as the rent of the lands. 18.1 Further, regarding the rule of consistency, we find that otherundisputed facts include that the assessee's claim of agricultural income onsimilar facts were accepted by the Revenue over the years. This is for the firsttime the Revenue disturbed the claim of the assessee from the A.Y. 20-11-12onwards. Further also, on the sales undoubted, the various processes inpreparation of the certified seeds and sale of the same through retail outletsare also undisputed by the Revenue. The objection of the Revenue is that thesaid lease documents were not registered in accordance with the provisions ofsection 17(1A) of the Registration Act, 1908. Considering the above, theobjections of the AO are mere pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l with a case on hand wherethe assessee leased the lands for agricultural activity at a larger scale andboth the assessee and the landlords-cum-growers acted each of terms of theagreement in bonafide belief. Accordingly, this part of arguments of Ld. DRis dismissed. 20.B. Decision on said confirmation letter from Mr. Bhuma BalaNarasimha Reddy - Failed to provide copy of the same to assessee andallow the benefit of cross examination if desired : Relevant facts arediscussed in the preceding paragraphs of this order. During the assessmentproceedings for the A.Y.2012-13, for the first time, AO conducted theenquiries by invoking the provisions of section 133(6) of the Act in respect ofthe select cases of land owners-cum-growers on sample basis. Barring asolitary case in respect of Mr. Bhuma Bala Narasimha Reddy, all other casesconfirmed the genuine claim of agricultural activities and also the contents ofthe said land-lease Agreements. In the solitary case of Mr. Bhuma BalaNarasimha Reddy, there is no positive confirmation in favour of the assessee. It indicated the sale of seeds grown in his land. The quantity of seeds is verysmall and negligible vis-à-vis the turnover of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e: We have perused the decisions relied upon bythe Ld. Counsel for the assessee on the issue of agriculture nature of theactivities of growing breeder/foundation/certified seeds and the exemptnature of the income u/s.10(1) of the Act. 21.1 The Pune Bench of the Tribunal in the case of ACIT Vs. Ajeet Seeds Ltd. in ITA Nos. 90 to 115/PN/2012, dated 22-03-2013 for the A.Yrs. 2002-03 to2008-09 adjudicated similar issue and held that growing of breeder andfoundation seeds and finally making of the certified seeds on the lands ownedby the landlords-cum-growers amounts to agricultural activity. OperationalPara No.6.2 of the said order of the Tribunal is relevant and the same isextracted here as under : "6.2. The CIT(A) having considered the same, observed that foundation seeds,breeder hybrid seeds produced by the assessee himself results into agriculturalincome or non-agricultural income has been decided in favour of the assesseeby the ITAT Bangalore Bench in the case of Advanta India Ltd. vs. DCIT (2010)5 ITR 57 (Bang.Trib). In the said case, reasons pointed out by the AssessingOfficer to deny the claim of exemption made by the assessee were thatassessee was following interna....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... other substratum where theseeds are sown. An agriculturist while growing his crops, is known to haveused conventional as well as scientific method for reducing hostile interplay ofnatural forces on his crop. When such activity is taken to highest standard, itwould still not make the growing operation, a synthetic one. Thus, growingseeds can never be non agricultural. In view of this, we do not see anysubstantial question of law in these appeals." 21.3 In the process, the Hon'ble High Court considered the applicability ofthe judgment of Tribunal in the case of Advanta India Ltd. Vs. Dy.CIT 5 ITR57 (Bangalore Tribunal). Regarding the reference made by the Ld. Counselsto the Bangalore Bench of the Tribunal in the case of Advanta India Ltd. (supra) and Karnataka High Court judgment in the case of CIT Vs. NamdhariSeeds Pvt. Ltd. 341 ITR 342 (Kar.), the Hon'ble High Court distinguished thesaid judgment in the case of Namdhari Seeds Pvt. Ltd. (supra). Relevant ParaNos. 5 and 6 of the judgment in the case of Ajeet Seeds Ltd. are extractedhere as under : "5. The learned Counsel for the appellant tells us, that the view taken by theauthorities below is erroneous and was based....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eement for foundation seeds grown by the farmer. Theentire reading of the terms of the agreement would only indicate that the assessee was interested only to have healthy foundation seeds grown for theprocess of converting them to certified seeds. The entire income amounted tobusiness income of the assessee and the Assessing Officer was justified intreating the entire income as business income." 21.5 From the above, it is evident that, under an agreement, the NamdhariSeeds Pvt. Ltd. (supra) assessee purchases the seeds grown by otherlandlords at a fixed rate per quintal. In the language of the Hon'ble HighCourt, the NSPL is considered interested only to have healthy foundationseeds grown for the process of converting them to certified seeds and the assessee cannot be held as an agriculturist as the concerned agriculturalactivities are undertaken by the owner of the land. This ratio is entirelyinapplicable to the facts of the present case. In the case on hand, the assessee paid rent to the farmers, bore other expenditure relating to the landdevelopment/ploughing/tilling/cultivation, fertilizers, pesticides, labour,transportation of seeds etc. In the present case, assessee monitor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pesticides, transportation etc., whenthe assessee pays the land rent and also for the labour, when the landlordacts only as a grower and hands over the entire agricultural produce offoundation and breeder seeds to the assessee at the end. Grower never soldthe agricultural produce to the assessee etc. Thus, the activity constitutesagricultural activity as the assessee constitutes an agriculturist and theentire activity of production and growing of said seeds becomes anagricultural activity. The solitary evidence gathered by the AO in the solitarycase of Shri Bhuma Bala Narasimha Reddy does not hold good consideringthe fact that the said evidences was not put to the assessee in a settledperspective of legal proceedings. Therefore, procurement of seeds from thelandlords-cum-growers is not the transaction of purchase of seeds for tradingactivity. Further, the judgment of Coordinate Bench of the Tribunal in thecase of Ajeet Seeds Ltd. (supra) was confirmed by the Hon'ble Court ofjudicature Bombay, Aurangabad Bench in the said case. Therefore, we are ofthe opinion that the claim made by the assessee is proper. The decision ofCIT(A) is fair and reasonable and does not call for any interfe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vt. Ltd. toderive the exempt income i.e. dividend income. The AO held that the provisionsof section 14A r.w.r 8D were applicable to the assessee company as it hadincurred substantial interest expenditure of Rs.3,36,30,440/- in the year underreference. The AO had, therefore, worked out the disallowance u/s. 14Ar.w.Rule-8D at Rs.7,71,422/-. On careful consideration of facts & circumstancesin the present case, it is seen that the appellant company has not earned anydividend income from investment made in the shares of Paithan Mega FoodPark Pvt. Ltd. It has been held in many judicial pronouncements that thedisallowance u/s 14A has to be restricted to the amount of exempt income. Theabove proposition of law is supported by the following decisions : (1) Daga Global Chemicals Vs. ACIT in ITA No.5592/2012 order dated01-01-2015. (2) Jeevraj Tea Ltd. Vs. DCIT (2014) (AY 2008-09) 41 CCH 047(Ahmedabad Tribunal) (3) ACIT Vs. Punjab Cooperative Marketing Federation in ITANo.548/CHD/2011 (Chandigarh Tribunal) In the case where the assessee has not earned any dividend income oninvestment made in the shares whose dividend is exempt then nodisallowance can be made....