AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (12) TMI 1502
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..... Facts for Assessment Year 2008-09 are taken as basis for adjudication of the common issues. 3. Brief facts of the case as culled out from the records are that the assessee is a limited company engaged in seeds processing and trading. It is one amongst the first three sub licensees of Mahyco Monsanto Biotech (M.M.B) India Ltd, which has commercialized Bollgard (BG-I) & Bollgard-II (BG-II) hybrid cotton seeds. It is a pioneer in production of hybrid seeds and is a research based agricultural biotech company engaged in delivering high quality seeds for the Indian commercial seed market. Its research and development activities and research stations are recognized by the Department of Scientific and Industrial Research (DSIR), Govt. of India, Ministry of Science & Technology, New Delhi and possess a certificate of renewal bearing No.TU/IV-RD/2069/2007 dated 25.6.2009 renewed up to 31.03.2010. The main purpose of the research and development (R&D Division) is to add value to the current and future products by improving productivity, adding value through new characters, saving of cost of production for seeds grown in company's own field as well as produced by farmers into their field....
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....arch and development concluded that all the alleged R&D expenses of Rs. 3,72,37,588/- are attributable to the agricultural income and hence the same are attributable from agriculture income only. 7. Ld.A.O while examining the gross receipt from agricultural operations and the expenditure incurred to earn the agriculture proceeds observed that the percentage of expenditure have come down from 20.91% to 16.39% which in his view was not acceptable in the given facts wherein the business turnover as well as the administrative expenses registered a sharp increase. Ld.A.O therefore disallowed Rs. 10,48,112/- as the alleged expenditure wrongly claimed as business expenditure even though they were related to the earning of agriculture income. Apart from the above disallowances, Ld. A.O made disallowance u/s 14A, disallowance deduction for discarded land and wealth tax debited to profit and loss account at Rs. 20,84,530/-, Rs. 5,32,892/- and Rs. 1,81,876/- respectively and assessed the income at Rs. 13,80,11,116/-. 8. Similar types of addition were also made for Assessment Year 2009-10 to the returned income of the assessee in the following manner; Total income as per return Rs.....
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....rred in ting to restrict the disallowance of capital expenditure of Rs..2,88,,51,028/- on scientific research and development expenses u/s 35(1)(iv) Revenue expenditure amounting to Rs. 3,12,37,588/- to Rs. 1,03,70,466/- on - prorate basis without appreciating the fact that the assessee had failed to discharge its onus that each and every expenditure was incurred wholly and exclusively on scientific research and development". 13. Assessee has raised following appeal for Assessment Year 2009-10; "1. The order of the learned Commissioner of Income Tax (Appeals)-I, is unjustified and is beyond the facts and circumstances of the case. 2. The learned Commissioner of Income Tax (Appeals)-I, has erred in passing an order under section 250 of the Income Tax Act, 1961, wherein the learned CIT(A)-I has disallowed a sum of Rs. 1,83,70,760/- out of the Revenue Research & Development Expenditure incurred by the assessee, which are eligible for deduction 37(1). 3. The learned Commissioner of Income Tax (Appeals)-I, has erred in upholding the addition made by the AO of Rs. 42,07,107/- under section 14A of I.T. Act. 4. The learned Commissioner of Income Tax (....
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....esearch and development at Rs. 3,12,37,588/- for Assessment Year 2008-09 and Rs. 14,54,34,487/- for Assessment Year 2009-10. (iii) Addition towards un accounted expenditure incurred for earning agriculture income for Assessment Year 2008-09 at Rs. 10,48,122/- 18. Now we will take up the issue relating to claim of capital expenditure for research and development at Rs. 2,88,51,028/- and Rs. 40,42,117/- and revenue expenditure for Research & Development at Rs. 3,12,37,588/- and Rs. 4,54,34,487/- which have been disallowed by the Ld.A.O. First appellate authority has given substantial relief to the assessee by giving the finding of fact that the assessee's involvement in doing research and development activity cannot be doubted and so is the genuineness of the revenue expenditure claimed. Ld.CIT(A) further held that the business model of the assessee having taxable business income and exempted agriculture income certainly have some expenses commonly incurred for each other and the possibility cannot be ignored that some element of revenue expenditure which though have been claimed against the taxable business income may have been incurred for earning agriculture income. Ad....
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....ents are use ony for R&D purposes, and these equipments cannot be used by the Ginning Industry. 2. Research BT Lab. Equipments Rs. 8,45,606/- During the year under appeal assessee has acquired Gene Pulser Electro Porator of Rs. 3,60,425/- and visible spectrometer of Rs. 4,84,181/- both of these equipments can be utilized for BT cotton laboratory only, such equipments cannot be used by ginning industry. 3. Research Building of Rs. 9,13,063/- During the year under appeal, assessee has incurred capital expenditure of Rs. 9,13,063/- on account of construction of research building. This expenditure is incurred for extension/alteration of this building, which is used for R&D activities. 4. Research Ginning Project Building of Rs. 1,43,57,753/- The business of the assessee is production of hybrid seeds. Hybrid cotton seeds are major source of revenue. Out of total sales of Rs. 1,92,87,61,485/- sale of hybrid cotton seeds is Rs. 83,45,62,059/- i.e. more than 43% of total sales is contributed by sales of hybrid cotton seeds. During the year under appeal, assessee has incurred capital expenditure of Rs. 1,43,57,753/- for construction of research building, named as Research ....
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....alled several other most sophisticated/ultra modern machines and equipments with the help of these machines R&D work is carried out. Research Plant & Machinery Rs. 4,76,750/- During the year under appeal, assessee has purchased cotton ginning machines of Rs. 3,70,770/-, besides these machines assessee has also purchased other small equipments of Rs. 1,05,980/- mainly equipment for Delinting. These machines are not the normal ginning machines they are specialized ginning machines which are used for R&D for removing lint from the Breeder Seeds, Foundation seeds and certified seeds, these machines are of advance technology used for improving the quality of Hybrid cotton seeds supplied by the contract farmers. These machines & equipments can be utilized for BT cotton laboratory only, such Machines cannot be used by ginning industry because these specialized machines cannot give mass production, these machines are used for R&D purposes so as to improve the quality of the hybrid BT cotton seeds. Final destination of any cotton product, is consumer via textile industries. When we take factory oriented research, we need to establish that individual variety/hybrid, the fibre quality i....
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..../- made in the construction of research Ginning Project Building and Rs. 61,92,558/- in the Research Gas Delinting Project Building without appreciating following facts; 1. That research building is different than the other one, in this building all the most sophisticated/ultra modern machines and equipments are installed, with the help of these machines R&D work is carried out and a team of renowned scientists work in this building. Whereas the research factory building is adjacent building where all the research approved/certified by the scientists are implemented, in this building a number of subordinate staff works under the guidance of Breeder (breeders are the BSCAg. And MSC.Ag.), thus both of the buildings are research buildings and are eligible for exemption. 2. Part of the building is used for ginning cotton and therefore in practice workmen of the assessee call it ginning project building. According to the Ld. A.O there could not be research in ginning. This is fallacious. The assessee has expertise in BT Cotton, its processed seeds are supplied to several cultivators with the contract that the cotton so produced would be sold to the assessee only. This cotton....
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....ot only executing the work of ginning but also doing research on cotton produced, quality, quantity, strength and length of the cotton produced from the cotton seed prepared by the company. Thus in the Ginning factory building also require to sit and work in that building. It is also to submit that the cotton required voluminous place to store. It is also to submit that it is not the case of the Ld.A.O that appellant company is engaged in the business of ginning, pressing and selling of cotton. There is no occasion wherein appellant company has sold cotton. The cotton gene by the appellant company is given for sample to various textile mills. Regarding disallowance of research expenses we have to submit as under; 1. It is not the case of the Ld.A.O that the scientific research expenses aggregating to Rs. 3,12,37,588/- headwise details are as under is capital expenditure or bogus expenditure; S.No. Head of Expenses Amount Amount 1 Salaries Salaries 8,160,084 Bonus 960,150 Leave Encashment 67,723 Medical Exp Reimbursement 233,346 ....
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.... Vehicle Fuel charge 2,567,027 Vehicle Maintenance 11,978 Vehicle Repairs - 2 wheeler 18,576 Vehicle Repairs - 4 wheeler 239,179 Insurance - Vehicle 11,296 Int. - 2 W wheeler loan 26,480 Int. - 4 W Vehicle loan 101,073 2,975,605 16 Travelling Other Travelling Exp. 43,966 Travel Exp (others) 42,702 Vehicle Hire charges 74,633 Local conveyance 139,379 300,680 17 Laboratory Expenses Laboratory Expenses 1,195,684 Laboratory Chemical 339,739 Chemicals Purchase 51,285 Laboratory Consumables 713,941 2,300,648 18 Repairs & Maintenance Rep & Maintenance (P&M) 57,265 19 Repairs and Maintenance Rep & Maintenance (Building) 9,036 Rep & Maintenance (....
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....ew of the fact that these expenditure are incurred for producing and procuring the seeds given to farmers on contract basis which the company are selling in the market." 20. Ld. Counsel for the assessed placed reliance on following judgments; (i) Rajasthan State Warehousing Corporation V/s CIT ( 2000) 242 ITR 0450 (SC). (ii) CIT V/s Maharashtra Sugar Mills Ltd. (1971) 82 ITR 0452 ( SC), (iii) In the case of CIT V/s Indian Bank Ltd (1965) 56 ITR 0077 (SC) (iv) CIT v/s Engineering Innovation Ltd (2010) 327 ITR 0392 (Himachal) (v) Vibha Agrotech Ltd V/s DCIT Income-tax Act, 1961, No.1799/Hyd/2012 order dated 28.05.2014 21. Per contra Ld. Departmental Representative supported the findings of Ld.A.O and also submitted that the assessee failed to prove before the assessing authority about the use of the new factory building for research and development activities. Quantitative details were not provided for various types of seeds produced/procured. Ld.D.R. also supported the findings of Ld.A.O that the business operations and agricultural operations are mixed by virtue of which the assessee have tried to evade tax by claiming expenses ....
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....h Seeds are the seeds, developed by the company, with their in-house research department. KSL since its inception had recognized the need for a robust R & D and Technology base, to ensure its continued growth and competitive edge in the seeds business. The main focus of company's research is to develop elite varieties and hybrids that would attract farmer's attention because of high yield and quality. It is pertinent to state that normally, research and development of one variety (various varieties falls within a crop) of any crop takes 3 to 5 years. The asseessee is one amongst the first three sub-licensees of Madhyco Monsanto Biotech (M.M.B) India Ltd, which has commercialized Bollgard (BG-I) & Bollgard-II (BG-II) hybrid cotton seeds in India, it is a pioneer in production of hybrid seeds, it is a research based, dynamic agricultural biotech company delivering high quality seeds for the Indian commercial seed market. 27. Its R&D activities and research stations are recognized by the Department of Scientific and Industrial Research (DSIR), Govt. of India, Ministry of Science & Technology, New Delhi, a certificate of renewal bearing No.NU/IV/RD/2069/2007 dated 25th June 2009 ren....
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.... sub-licensees of Mahyco Monsanto Biotech (M.M.B) India Ltd., which has commercialized Bollgard (BG-I) & Bollgard-Il (BG-II) hybrid cotton seeds in India; and that it is a pioneer in production of Hybrid seeds; that it is a research-based, dynamic agricultural biotech company delivering high quality seeds for the Indian commercial seed market. It has been further submitted that its R&D activities and research stations are recognized by the Department of Scientific and Industrial Research (DSIR), Govt. of India, Ministry of Science & Technology, New Delhi, a certificate of renewal bearing No TU/IV/-RD/2069/2007 dated 25th June 2009 renewed up to 31st March 2010 is issued to the company; that the main purpose of having an R & D Division within a Seed Company and committing significant expenditure is to add value to the Current and future products by improving productivity, adding value through new characters, saving of cost of production for seeds grown in company's own field as well as produced by farmers into their fields; that the company is actively involved in research, production, processing, packing, and marketing of high quality seeds of Cotton, Cereals, Pulses, Oil Seeds....
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....ing Project at Rs. 61,92,558/] and inferred that the said Research Factory building, being for Ginning project, could not have been used for any research purpose; and after taking into account the cost shown to have incurred on plant and machinery installed in that Research factory building, he disallowed the claim of Rs. 2,12,89,597/- [ out of Rs. 2,88,51,028/-] on the ground of genuineness also and held that the balance Rs. 75,61,431/- was deductible against agriculture income. To sum up, finally AO made entire disallowance of Rs. 2,88,51,028/- (claimed by assessee u/s 35(1)(iv) towards capital expenditure on scientific research & development] from its business income. During the appeal proceedings, it has been submitted that part of the said building [Research Factory Building] is used for ginning cotton and therefore in practice, workmen of the assessee call it ginning project building. It is explained that the assessee has expertise in BT Cotton; its processed seeds are supplied to several cultivators with the contract that the cotton so produced would be sold to the assessee only; and this cotton is grown in different areas in variable climate s and conditions in the....
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.... in various stages. The first stage is seed (in short NS), the second is Breeder Seed (BS), the third is Foundation Seed (FS) and the last is certified seeds. (ii) The Nuclear Seeds are developed by the assessee in its laboratories (R & D centers) by several permutations and combinations of various germ plasmas (held by the company). The company also acquires germ plastma from various universities and other sources for R&D purposes. It requires several steps. The Nuclear seeds so produced are sent for various trials to designated government authorities/universities for approval of variety. (Refer assessee's submission - para-3 of this order - for further details on Nuclear Seeds) (iii) The next in the chain for seed production is the breeder seed. The selected nuclear seeds are taken up and shown. The plants are raised in open fields either in isolation or strictly selfed. (iv) The breeder seed is used for production of foundation seed. which inturns are used for production of certified seeds. (v) The functions upto foundation seed production requires special skills and are handled by its R&D division. (v) R&D unit also purc....
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.... its commercial division. In the facts of the case, it has to be accepted that the assessee has been doing R & D and incurred the expenditure thereof by way of addition of building & plant and machinery used in R&D. The assessee has employed number of scientists. Its in-house R&D has also been Technology. However, the benefit from the expenditure made in the R&D arises in both the divisions (agriculture division & commercial division) Therefore, in my considered view, the R&D expenditure will have to be allocated -between both the divisions. In the facts of the case, the proper criterion &allocation would be the net income of the two divisions, prior to deduction of R&D expenses. For this purpose, I have looked into the income shown as agricultural income. What I find that, that being exempt from tax; assessee has shown that on the higher side. So that requires adjustment". 33. After going through the systematic analysis, deep study of the business model and the use of Research & Development activities in this process as observed by Ld.CIT(A), we perused the findings of Ld. Assessing Officer and observed that at page-9 of the impugned assessment order, Ld.A.O h....
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.... Digital Electronics(P) Ltd (1999) 103 Taxman 46/238 ITR 717 held "that the expenditure need not wholly relate to research and development. Section 35(1)(iv) does not say that the expenditure should be wholly and exclusively used for research and development. As long as the expenditure is of a capital nature and it is used for scientific research relating to the business carried on by the assessee, the assessee is entitled to claim deduction". Ld.A.O also failed to appreciate that the assessee has been issued a certificate by the Department of Scientific and Industrial Research, Govt. of India, Ministry of Science and Technology, New Delhi for its research and development activity and research stations. It is well established from the records that the assessee is a pioneer in production of BT cotton seeds in India. Process of ginning is used for separation of lint from cotton seed. Gas delinting is the latest technology which assure lowest damage to the seed. In turn the germination of hybrid seed is improved because earlier acid delinting was popular wherein the losses of germination were very high. Thus for Research & Development new machines were installed to improve/increase th....
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....eed for strengthening R&D work and more than one research building or purchasing more machineries, furniture and fixtures is necessary, then it should not be taken as something adverse to revenue. 38. As regards the note given by the Auditor in the tax audit report it seems that the Ld.A.O has misunderstood the note because while preparing tax audit report u/s 44AB of the Act the auditor has to fill annexure in Form 3CD and under the column 15(b) is required to mention that the amount of expenditure claimed as deduction but not debited to profit and loss account and auditor has specifically mentioned that the capital expenditure of Rs. 2,88,51,028/- has not been debited to profit and loss account. It does not mean that he qualified the report nor can it be inferred that no such expenditure is allowable. 39. Ld. A.O also failed to appreciate that the assessee has explained about the method of production, evaluation of crop through initial station trials, advanced station trails, multi station trails. Assessee has also established a product evaluation and regulatory trial department as required by Genetic Engineering, Ministry of Environment & Forest, Govt. of India. It is also....
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....incurred. It cannot be held that the assessee had not done research and development work and not incurred/any revenue expenditure for such research and development work". Ld.CIT(A) further held that both the assessee and Assessing Officer have taken the extreme approach whereas the actual state of affairs lies somewhere in between. Thereafter Ld.CIT(A) taking the basis of the turnover from commercial activity as well as from the agricultural activity apportioned the expenditure of alleged research and development in the ratio of 89:11 making following observation for 2008-09. "4.2.5 During the year, the assessee has shown sale of its agriculture produce I[~ of breeder & foundation seeds in its agricultural division] to contract formers totalling to.Rs 2,90,33,798/-. As against that the expenditure on agricultural operation is shown at Rs. 47,58,649/-. This amounts to only 16.4% which is very low. In the immediately preceding year, the total sale was 2,52,47,283/- and the expense Rs. 52,79,626/- and that amounted 21%. Even that was also on lower side. This fact was pointed to the representatives. It was noted that R&D revenue expenses included the expenditure such as salary....
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....I 408), the expenditure of Rs. 60,15,398/ - would be allocated to agricultural division & the balance of Rs. 4,86,70,038/- towards commercial division. In the result, the addition to the extent of Rs. 1,03,70,466 [ 43,55,068/- + 60,15,398], over and above the disallowance of Rs , 10,48,112/- made separately [refer ground no 4], is further sustained. The. assessee would accordingly get a relief of Rs. 4,97,18,150/- [2,88,51,028 + 3,12,37,588 - 1,03,70,466]". 42. In the given facts where the alleged expenditure is not doubted for its genuineness and being spent purely for business purposes, whether the finding of Ld.CIT(A) apportioning the expenditure on the basis of the turnover can be held to be justified or not needs to be dealt with. We find that the assessee is a Limited Company working since many years and is a pioneer in the business of production of hybrid seeds. Books of accounts are regularly maintained and duly audited. Revenue receipts by the assessee are of the commercial as well as agricultural activity. All the details relating there to are being separately maintained. The expenditure incurred in connection of both type of activities are duly verifiable fro....
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....to taxable income; is unsustainable. We, therefore, answer the question in the negative, that is, in favour of the assessee and against the Revenue. The order under appeal is accordingly set aside and the appeal is allowed with costs". 46. In the case of CIT V/s Maharashtra Sugar Mills Ltd. (1971) 82 ITR 0452 (SC), in the instant case the Hon'ble Apex Court held as under :- "3. The finding of the Tribunal that the cultivation of sugar-cane as well as the manufacture of sugar constitutes one business is a finding of fact. That finding has not been challenged before us. What was urged on behalf of the Department is that the assessee's business consisted of two parts, namely, (1) cultivation of sugar-cane and (2) manufacture of sugar. The former part being agricultural operation, the income there from is not eligible to tax and therefore any expenditure incurred in respect of that activity is not deductible. This contention proceeds on the basis that only expenditure incurred in respect of a business activity giving rise to income, profit or gains taxable under the Act can be given deduction to and not otherwise. We see no basis for this contention. To find ou....
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....re which are laid out wholly and exclusively for the purpose of business would directly or indirectly produce taxable income, and it is not worth the administrative effort involved to go further and trace the expenditure to some taxable income. Therefore, it seems that there is nothing in the language of s. 10 from which it can be fairly implied that an expenditure or allowance falling within the section must fulfill some other condition before it can be allowed. Therefore on the facts and circumstances of the case the bank was entitled to claim the deduction of the entire interest paid by it on fixed deposits.-Indian Bank Ltd. vs. CIT (1961) 41 ITR 552 (Mad) : TC15R.982 affirmed; S.A.S.S. Chellappa Chettiar vs. CIT (1937) 5 ITR 97 (Mad) : TC15R.995 approved; CIT vs. N.S.A.R. Concern (1938) 6 ITR 194 (Rang) overruled; CIT vs. Somasundaram Chettiar AIR 1928 Mad 487; Provident Investment Co. Ltd. vs. CIT (1931) 6 ITC 21 : (1932) 2 Comp Cas 312 and Indore Malwa United Mills vs. CIT (1962) 45 ITR 210 (SC) distinguished". 48. Further when the alleged revenue expenditure has not been doubted on its genuineness then the same even if not having connection with the research and ....
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....at the assessee has intentionally claimed the expenditure relating to agricultural operations against the revenue from commercial activity just to evade tax. We therefore set aside the finding of Ld.CIT(A) to this effect and allow the claim of R&D revenue expenses made for Assessment Year 2008-09 and 2009-10. 50. In the result Ground No.2 for Assessment Year 2008-09 & 2009-10 of the assessee's appeal are allowed and Ground No.1 raised by the Revenue authorities for the Assessment Year 2008-09 and 2009-10 are dismissed. 51. Now we take up Ground No.3 raised by the assessee challenging the finding of Ld.CIT(A) upholding the addition made by the Ld.A.O of Rs. 10,48,112/-on account of disproportionate agricultural expenses. We find that Ld.A.O disallowed this amount by taking the basis of percentage of expense of the agricultural proceeds of the preceding year and applied it to Assessment Year 2008-09 wherein the assessee claimed lower percentage of the expenditure. Ld.CIT(A) sustained this addition. 52. Now the assessee is in appeal before the Tribunal. 53. Ld. Counsel for the assessee relied on the written submission made by it which reads as follows; "In this re....
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.... to the associate concerns of the assessee and the assessee was asked to explain the nature of loans and advances made by it and whether any interest has been charged. Detailed reply was submitted through which the assessee tried to assert that the alleged advances relates to the regular transactions for purchase/sales/rent with the associate concerns and these balances are in the normal course of business and it cannot be construed that the interest free loan has been given to the subsidiaries and hence no disallowance u/s 36(1)(iii) of the Act is warranted. 57. The submissions of the assessee were not sufficient to convince the Ld.A.O as he observed that in the regular course of business the assessee is paying the interest on the advances of dealers for advance booking and dealership business but ironically no interest has been charged to the advances given to sister concerns. Further looking to the fact that the assessee is paying huge interest to the bank and others, Ld.A.O applied the rate of 12% and calculated the disallowance of interest u/s 36(1)(iii) r.w.s. 40A(2)(b) at Rs. 22,64,237/-. 58. Against the alleged disallowance assessee preferred appeal before the Ld.CIT(....