TaxTMI 
TaxTMI 
2023 (11) TMI 798
X X X X Extracts X X X X
X X X X Extracts X X X X
....lowing grounds:- "a) On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in denying the claim of agricultural exemption under section 10(1) of the Act. b) On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in not following the order passed by the Bombay High Court in the Appellant's own case for earlier years which has binding effect as there was no change in facts or in the manner in which the agricultural activity has been carried out by the Appellant in the current year as compared to the earlier years. c) On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) further erred in denying the claim of exemption by relying upon the decision of the Karnataka High Court in the case of Namdhari Seeds Private Limited (341 ITR 342). D) On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in making various observations which are factually incorrect and contrary to the facts available on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as also submitted that the agricultural operations are carried out with the help of the farmers and it has total control in respect of agricultural operations carried out by it jointly with the farmers. Further, it was submitted that the agricultural activities were carried out under the control and supervision of the assessee. The assessee also explained the sequence of operations undertaken by it for the growing of hybrid seeds, as noted in the assessment order from pages 12-14. In support of its submission, the assessee placed reliance upon the decisions of the Hon'ble jurisdictional High Court and the coordinate bench of the Tribunal, whereby the assessee's claim of exemption in respect of agricultural income was allowed in the earlier years. 5. The Assessing Officer ("AO") vide order dated 28/03/2013, passed under section 143(3) of the Act did not agree with the submissions of the assessee and held that the assessee could not produce any document to support its claim in the form of record of rights that either the assessee was an agriculturist or tenant or occupant of the land. The AO further held that the agricultural equipments are owned and used by the farmers and not by....
X X X X Extracts X X X X
X X X X Extracts X X X X
....upreme Court against the order passed by the Hon'ble jurisdictional High Court is under consideration and not yet decided. Accordingly, the AO held that the assessee has not carried out agriculture operations ordinarily undertaken by the cultivator within the meaning of section 2(1A) of the Act and thus is not entitled to claim exemption under section 10(1) of the Act. 6. The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee and held that the year under consideration is different from the earlier years, wherein the similar claim made by the assessee was allowed, as in the year under consideration the AO has brought on record material to prove that the assessee had not carried out any agriculture operations. The learned CIT(A) further held that the AO has brought new facts on record that were not there before the Tribunal while adjudicating the case of the assessee, as the AO has recorded the statements of the farmers and the representative of the assessee and brought new facts on record. The learned CIT(A) also placed reliance upon the decision of the Hon'ble Karnataka High Court in Namdhari Seeds Pvt. Ltd. (supra) and held that the decision which f....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was further submitted that the cultivation of crops is also done under the active and close supervision of the production supervisors and through coordinators. The learned AR further submitted that the process of detasseling is performed by the assessee through the coordinator who engages casual labour for this purpose. Further, the cost of pesticides, insecticides, and other chemicals is borne by the assessee and supplied to the farmers free of cost. The learned AR submitted that the Seed Production Agreement clearly provides that the entire produce belongs to the assessee and not to the farmers. It was further submitted that the statements of the farmer, CFO, and production supervisor of the assessee, recorded during the assessment proceedings, also support the claim of the assessee, as they have accepted cultivation of hybrid seeds with continuous involvement of the assessee in the entire process. The learned AR further submitted that the manner in which the agricultural process was undertaken by the assessee is the same since the assessment year 1990-91 when exemption under section 10(1) of the Act was allowed in favour of the assessee by the learned CIT(A), which order was no....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... were all of the farmers. The learned DR further submitted that the decisions of the coordinate bench of the Tribunal, which were upheld by the Hon'ble jurisdictional High Court, are based on the order of the Bangalore bench of the Tribunal in M/s Namdhari Seeds Pvt. Ltd. (ITA No.3102/Bang./2004) which has been reversed by the Hon'ble Karnataka High Court. It was also submitted that the detailed investigation undertaken by the AO and facts highlighted in the assessment order and the impugned order clearly shows that the assessee is not undertaking the agricultural operations in the year under consideration and therefore the decisions rendered in preceding years are not applicable because of change in facts. In the alternative, the learned DR submitted that even for a moment it is presumed that the assessee was engaged in joint agricultural operation with farmers, the said jointness of the agricultural operation was limited till the assessee procured the "wet ears" from the farmers under the Seed Production Agreement. Accordingly, the learned DR submitted that the exemption under section 10(1) of the Act has rightly been disallowed in the present case. 9. We have considered the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the desired quality of land and are willing to work jointly with the assessee to carry out agricultural operations for the production of hybrid seeds. (d) The assessee's employee/production supervisor conducts meetings with the farmers and evaluates parameters like quality of land, quality of soil, location of the village, climatic conditions, undertakes soil testing, etc. (e) Once the farmer is selected, the assessee enters into a Seed Production Agreement with the farmer for joint agricultural operations being carried out over the agricultural land. (f) The foundation seeds are handed over to the farmers through the production supervisors for the purpose of sowing and the assessee provides necessary inputs, such as pesticides and insecticides, etc. to facilitate the cultivation of hybrid seeds. (g) The assessee carries out various detailed tests on the farm soil and provides necessary guidance to the farmers for soil bed preparation and planting/sewing of foundation seeds to ensure that there is no loss of yield and quality. 10. Thus, as per the assessee, it is in complete control of all aspects of the sowing activities, namely determining ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd that in the appeal against the aforesaid assessment order, the learned CIT(A) vide order dated 28/04/1993, for the assessment year 1990-91, forming part of the paper book from pages 900-915, allowed the appeal filed by the assessee and held that on going through the Seed Production Agreement it is clear that the assessee had some interest in the agricultural land which has been utilised by it for production of hybrid seeds. The learned CIT(A) further held that all the produce from the land resulting from the production shall exclusively belong to the assessee and the agricultural operations on the land are carried out by the assessee with the assistance of the farmers. The learned CIT(A) further held that the variation in the price at which the assessee sells the seeds is due to the superior quality of the hybrid seeds and not because of any value addition resulting from the processing of the seeds after being harvested. Accordingly, the learned CIT(A) came to the conclusion that the assessee has used the agricultural land and has carried out various agricultural operations starting from cultivation onwards, which satisfies the conditions of having carried out the basic agricult....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oduction period shall exclusively belong only to the company. The landowner cum farmer shall have no right and shall have no lien over the produce. h) The company shall have total access to the land at any time to supervise the agricultural activities, inspection and testing of the activities. the farmer shall not obstruct the servants, agents and the officers of the company to have access to the land. i) The land owner cum farmer shall at all time be liable to pay all taxes, cesses and such other impositions including the land revenue that may arise from time to time on the land." 14. We find that the aforesaid order passed by the learned CIT(A) was affirmed by the coordinate bench of the Tribunal vide common order dated 26/11/2007 passed in ITO v/s M/s Monsanto India Ltd., ITA No.307-309/Bang./2002, etc., for the assessment years 1993-94 to 2000-01. The relevant findings of the Tribunal, in the aforesaid order, are reproduced as under:- "10 We have heard rival submissions and considered them carefully. After examining the orders of the Assessing Officer and CIT(A), we do not find any infirmity in the findings of the ld CIT(A). These are undisputed fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e. In these cases also the assessee have entered into identical contract with agriculturists and provide them with hybrid vegetable seeds. The land holdings of the agriculturist extend from 0.75 acres to a maximum of 2 acres. The agriculturists are required to undertake cultivation of the seeds in their land in order to multiply them. The contract period was also mentioned. The assessee company supplies the parents of the hybrid viz the male and female seeds or seedling to the contract grower. The receipts shown by the assessee were shown as agricultural receipts. The Assessing Officer negated the claim of these assessee by observing that the land belonging to the farmer in their own right as owner/term lessee and was in the possession and cultivation. By further observing that the contract entered contrary to the provisions of Karnataka Land Reforms Act, 1961(KLRA) and such conditions prevailed under KLRA prescribed in the contract will not prevail over the provisions of the Act. The Assessing Officer while negating the claim of the assessee also observed certain further objections. The assessee preferred appeal before the CIT(A), who allowed the claim of these assesses by observi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 13. The Allahabad High Court in the case of Associated Metal (supra) has decided identical issue in favour of the assessee. In that case also the land was cultivated by the farmers as per agreement clauses and whatever the produces were there that were treated in the hands of the lessor. 14. All other cases relied upon by the Id AR have already taken into consideration by the Tribunal while deciding the appeal in case of M/s Namdhari Seeds (supra), therefore, without going into detail further, we hold that the receipts shown by the assessee are agricultural receipts and the Id CIT(A) was justified in allowing the claim of the assessee. 15. In view of rule of consistency also the assessee deserves to succeed as for AY 1990-91 to 92-93 the department has accepted the claim of the assessee itself. There is no change in facts or in circumstances; therefore, rule of consistency will be applicable on the facts of the present case. 16. The Hon'ble Supreme Court in the case of Radhaswamy in 193 ITR 325 has held that if there is no change in facts then rule of consistency will prevail upon. Many High Courts have also held so. 17. Respectfully ....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., except the assessment year 2002-03 wherein it is submitted that the appeal was settled under the VSV Act, the Hon'ble jurisdictional High Court has affirmed the findings of the coordinate bench of the Tribunal that the assessee is entitled to claim exemption under section 10(1) of the Act. Further, it is an accepted position that the Revenue's appeals against the aforesaid decisions of the Hon'ble jurisdictional High Court are currently pending before the Hon'ble Supreme Court. 17. The discussion on the litigation history, in the case of the assessee, on this issue is relevant as it is the claim of the Revenue that in the year under consideration, the AO has brought new facts on record that had not been there before the Tribunal while adjudicating the case of the assessee. In this regard, much emphasis has been laid on the statements of the farmers and representatives of the assessee recorded during the assessment proceedings. We find that on page no. 26-27 of the assessment order, in the present case, the AO placed reliance upon the statement of Shri D. Satyanarayana Reddy, who is a farmer, to come to the conclusion that the assessee has not undertaken any basic agricultural ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... A.4 Once I know the targeted volumes, then we decide how many acres we need, which location is suitable for seed production and crop agronomic data, water source, weather data and location background etc. Once I am satisfied with that information, then we get back to those villages by tying up with the farmers, take up seed production as per our instructions. From the land preparation to crop harvesting, we monitor, supervise the crop and take up the activities of crop agronomy, irrigation, weed management, pollinations, harvest with the support from respective farmer. Once the crop is harvested, the produce will be moved to our seed conditioning facilities for drying, cleaning, treating, packing and delivering to the distribution channel." ....... Q18 Please give the details of pre-germination, germination, post germination, maturity of the crop, post maturity and harvesting activities undertaken by the company? A.18 We take seed to the farmer field, attend plantings with the farmer by making sure that we follow planting ratios, populations per acre, irrigation channels, adequate isolation distance, confirming water source, and by applying basi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is ordinarily undertaken by the farmer. From the aforesaid statements recorded during the assessment proceedings, it is also evident that the manner in which the agricultural process was undertaken by the assessee in the year under consideration is similar to the preceding years, wherein this issue was decided in favour of the assessee and exemption under section 10(1) of the Act was allowed. Further, as noted above, the Hon'ble jurisdictional High Court in assessee's own case held that it is not necessary that the assessee must own the land. Therefore, we find no merits in the findings of the AO, as upheld by the learned CIT(A) vide impugned order, that ownership or possession of the land is a pre-condition for claiming the agricultural operations to be carried out and in the absence of same the claim of the assessee under section 10(1) of the Act is not sustainable. 21. We find that the assessee entered into a similar Seed Production Agreement with Shri Y. Reddi Ramu on 29/10/2004, as was entered in the year under consideration with Shri D. Satyanarayana Reddy on 08/11/2008. From the perusal of the copy of the aforesaid agreement dated 29/10/2004, with Shri Y. Reddi Ramu, furn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mer i.e. the second party, agreed to permit the first party, i.e. the assessee to produce hybrid seeds as per the terms and conditions specified therein and also agrees to restrict its operations of the land exclusively for the purpose of production of hybrid seeds. It was further agreed that the assessee shall in collaboration with the farmer carry out such operations on the land as the farmer deems necessary. Further, it was also agreed that all the produce from the land resulting from production during the production period exclusively belongs to the assessee. The relevant clauses of the agreement dated 08/11/2008, in this regard, are reproduced as under:- "2e WHEREAS the SECOND PARTY has offered to permit the FIRST PARTY to produce Hybrid Seeds as per the terms and conditions specified herein. ...... 3a The FIRST PARTY agrees to restrict its operations on the land exclusively for the purpose of production of MONSANTO Hybrid Seeds during the production period commencing on the date of execution of this Agreement. 3b. The FIRST PARTY shall in collaboration with the SECOND PARTY carry out such operations on the land as the FIRST PARTY deems nece....
X X X X Extracts X X X X
X X X X Extracts X X X X
....convey any meaning. Therefore, in view of the above, we find no merits in the submission of the learned DR by placing reliance upon clause 2(f) of the agreement dated 08/11/2008, with Shri D. Satyanarayana Reddy. 26. Further, during the hearing, learned DR submitted that the entire transaction was of manufacturing of hybrid seeds in India using the patented hybrid seeds imported by the assessee from its parent company located overseas, but the agreement made with farmers for the stated joint agricultural operation is only to mislead the Income Tax Authority/Appellate Authorities for availing the benefit of tax exemption provided under the Act, with respect to income from agricultural operation. The learned DR, in the alternatively, submitted that even for a moment it is presumed that the assessee was engaged in joint agricultural operation with farmers, the said jointness of the agricultural operation was limited upto the period till the assessee procured the "wet ears" from the farmers under the Seed Production Agreement against the price paid per Kg. Therefore, it is the assessee who has solely carried out further value addition to the agricultural produce procured from the fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the eligibility of exemption under section 10(1) of the Act. As noted above, in the assessee's own case, the Hon'ble jurisdictional High Court affirmed the findings of the coordinate bench of the Tribunal granting benefit of section 10(1) of the Act to the assessee in respect of income earned from growing and selling of hybrid seeds jointly with the farmers. Therefore, reliance on any other decision is not of much importance in the present case, as the issue has been consistently considered in assessee's own case for the past 18 years, i.e. from the assessment year 1990-91. As noted above, in the present case, the lower authorities came to the conclusion that the AO has brought on record material to prove that the assessee has not carried out any agricultural operations, therefore this year is different from the preceding years. However, as we have found above, the new material as sought to be relied upon by the AO does not support the case of the Revenue and therefore we are of the considered view that the said material cannot be the basis to deviate from the previous decisions rendered in assessee's own case, wherein similar allegations of the Revenue were rejected. Further, it ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 2) On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in treating proportionate ESOP valuation done by the assessee as an expense when in fact as per the ESOP Scheme the actual liability in this regard as well as the quantification thereof would only arise in future as and when and if the employee exercises option for purchasing shares of foreign holding company of the assessee. 3) On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in treating payment on account of ESOP made by the assessee to its holding company as business expense for the current year when in fact it can best be treated as an Advance paid proportionately for the contingent liability that may arise in future as per the ESOP Scheme in this case. 4) On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in treating payment on account of ESOP made by the assessee to its holding company as business expense for the current year despite the fact that the underlying shares of the foreign holding company which is the subject matter of ESOP has not been transferred or allotted by the foreign holding company....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n amount of Rs. 2,58,53,254 was debited by the assessee to the profit and loss account. It was further submitted that as the cost borne by the assessee is in connection with providing incentive through stock options-related benefits to the employees, expenses incurred by it were claimed as a deduction under section 37(1) of the Act. 32. The AO vide order dated 29/01/2016 passed under section 143(3) of the Act did not agree with the submissions of the assessee and held that the loss towards the cost of ESOP although reimbursed to its parent company is notional in nature and thus not allowable as deduction under the provisions of the Act. Accordingly, the AO disallowed the amount of Rs. 2,58,53,254 and added the same to the total income of the assessee. The learned CIT(A), vide impugned order, following the decision of the Special Bench of the Tribunal in Biocon Ltd v/s DCIT, 35 taxmann.com 335 (Bangalore Trib.) decided the issue in favour of the assessee. Being aggrieved, the Revenue is in appeal before us. 33. We have considered the submissions of both sides and perused the material available on record. As evident from the record, the AO disallowed the deduction primarily on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....than the current market price. The employees are given stock options at discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vest with the employees. 9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, right....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oned reasons, the decision rendered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in A. Gajapathy Naidu,Morvi Industries Ltd. and Keshav Mills Ltd.(supra) support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of account. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd.'case (supra). 13. It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang v. CIT, [1992] 60 Taxman 248/193 ITR 321, the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question. In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismiss....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssioner of Income-tax (Appeals) further erred in holding that there is no necessity of recording explicit satisfaction by the Assessing Officer before invoking Rule 8D read with section 14A of the Act." 37. The issue arising in grounds no. (a) - (d), raised in assessee's appeal, is pertaining to the denial of exemption claimed under section 10(1) of the Act. The learned representatives of both sides placed reliance upon their submissions made in assessee's appeal for the assessment year 2009-10, as the facts are similar. Since a similar issue has already been decided in assessee's appeal for the assessment year 2009-10, therefore our findings/conclusions rendered therein shall apply mutatis mutandis. Accordingly, the assessee is entitled to claim exemption under section 10(1) of the Act in respect of income earned from growing and selling hybrid seeds. As a result, the issue raised in grounds no. (a) - (d) is decided in favour of the assessee. 38. The issue arising in ground no. (e) - (g), raised in assessee's appeal, is pertaining to disallowance made under section 14A read with Rule 8D of the Income Tax Rules, 1962. 39. The brief facts of the case pertaining to this issu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... whatsoever including management or an administrative expenses. The AO further held that the investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. The AO further held that the assessee could not establish that the expenses debited to the profit and loss account have been wholly and exclusively incurred for the purpose of business and no portion of the said expenditure was related to investment activity. Accordingly, the AO came to the conclusion that the provisions of section 14A of the Act are to be invoked for working out the disallowance relatable to the exempt income. It was further held that the disallowance under section 14A of the Act is required to be mandatorily worked out as per the method prescribed in Rule 8D. Accordingly, the AO computed the disallowance of Rs. 97,22,355 being total of Rs. 10,43,743 under Rule 8D(2)(ii) and Rs. 86,78,612 under Rule 8D(2)(iii). Since the assessee has already disallowed an amount of Rs. 86,78,612 under section 14A of the Act, the AO added the balance amount of Rs. 10,43,743. 41. The learned CIT(A), vide impugned order, accepted the submission of the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment activities and accordingly, 25% of the cost of the Treasury Department was considered for disallowance under section 14A of the Act. In this regard, the assessee submitted the suo moto working of expenditure disallowable under section 14A vide its submission dated 15/10/2015 before the AO, which forms part of the paper book on page 103. 45. It is the plea of the assessee that the AO without recording its satisfaction as to the correctness of the claim of the assessee rejected the suo moto disallowance offered by the assessee and made an addition of Rs. 86,78,612 under section 14A read with Rule 8(2)(iii). However, from the perusal of the assessment order, particularly pages 54-58, we find that the AO specifically considered the submission of the assessee in para 9.4. Further, after rejecting the submissions of the assessee that substantial dividend income was earned without incurring any expenditure whatsoever including management or administrative expenses, the AO held that the investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. The AO further held that the assessee could not establish that the ....