Naranbhai P. Patel, JUNAGADH V. The Deputy Commissioner of Income Tax, Junagadh Circle, JUNAGADH

ITA 202/RJT/2012

• Counselvise Citation: 20224914 RSA 2012
• Duration Of Justice: 1 year(s) 3 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 10-06-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 24-04-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K C MATHEWS
• Assessee Lawyers: PRITESH L SHAH
• Keywords: Business income; Business expenditure; Income from undisclosed sources
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBULAL: RAJKOT BENCH: RAJKOT BEFORE SHRI T K SHARMA, JM AND SHRI D K SRIVASTAVA, AM ITA NO. 202 /RJ T/2012 ASSESSMENT YEAR : 200 7 - 0 8 NARANBHAI PRAGDAS PATEL (HUF), PROP.: N P SEEDS, S T ROAD, JUNAGADH PAN: AACHP 1524 J V. DCIT, JUNAGADH CIR - 1, JUNAGADH DATE OF HEARING : 10 .06 .2013 DATE OF PRONOUNCEMENT : 31 .0 7 .2013 ASSESSEE BY : SHRI PRITESH L SHAH , CA REVENUE BY : SHRI K C MATHEWS, DR ORDER D. K. SRIVASTAVA : THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER PASSED BY THE CIT(A) - I V , RAJKOT ON 16 . 0 2 .20 1 2. THE ASSESSEE IS A HINDU UNDIVIDED FAMILY (HUF). THE ASSESSEE FILED HIS RETURN OF INCOME ON 07.03.2008 RETURNING TOTAL INCOME AT RS.2,84,030/ - AND AG RICULTURAL INCOME AMOUNTING TO RS.10,89,494/ - . THE ASSESSING OFFICER NOTICED THAT THE AGRICULTURAL INCOME SHOWN BY THE ASSESSEE AT RS.7,89,494/ - IN THE YEAR UNDER APPEAL WAS TWICE MORE THAN THE ONE SHOWN BY THE ASSESSEE IN THE IMMEDIATELY PRECEDING YEAR. T HE ASSESSING OFFICER ALSO NOTICED THAT THE ASSESSEE HAD CREDITED THE SAID SUM OF RS.7,89,494/ - BEING AGRICULTURAL INCOME TO HIS CAPITAL ACCOUNT. AFTER HEARING THE ASSESSEE AND FOR THE REASONS GIVEN IN THE ASSESSMENT ORDER, THE AO TREATED A SUM OF RS.3,75, 771/ - OUT OF THE SAID SUM OF RS.7,89,494/ - , AS INCOME FROM OTHER SOURCES AND TAXED THE SAME ACCORDINGLY. HE ALSO NOTICED THAT THE ASSESSEE HAD CREDITED A FURTHER SUM OF RS.3,00,000/ - TO HIS CAPITAL ACCOUNT AS RENT RECEIVED FROM LETTING OUT OF AGRICULTURAL FARM. THE SAID INCOME OF RS.3,00,000/ - , ACCORDING TO THE ASSESSING OFFICER, HAS BEEN DESCRIBED AS FARM HOUSE RENTAL INCOME. THE ASSESSEE CLAIMED BEFORE THE ASSESSING OFFICER THAT THE SAID FARM HOUSE RENTAL INCOME AMOUNTING TO RS.3,00,000/ - WAS AGRICULTURAL INCOME. FOR THE REASONS GIVEN IN THE ASSESSMENT ORDER, THE AO REJECTED THE AFORESAID SUBMISSION OF THE ASSESSEE AND ACCORDINGLY TAXED THE SAME AS INCOME FROM OTHER SOURCES. THE APPEAL FILED BY THE ASSESSEE BEFORE THE CIT(A) HAS BEEN DISMISSED AGAINST WHIC H THE ASSESSEE IS NOW IN APPEAL BEFORE THIS TRIBUNAL. 2. GROUND NO.1 TAKEN BY THE ASSESSEE READS AS UNDER: 2 ITA 202 /RJT/201 2 THE LD CIT(A) HAS ERRED TO HOLD RS.3,00,000/ - NON AGRICULTURAL RENT INCOME INSTEAD OF AGRI. INCOME DISCLOSED BY THE APPELLANT WITHOUT CONSIDER ING THE FACTS/EVIDENCES OF THE CASE. THEREFORE YOUR APPELLANT PRAY TO DELETE THE SAID ADDITIONS AND TO HOLD AGRICULTURAL INCOME AFTER CONSIDERING THE FACTS/EVIDENCES OF THE CASE. 3. IT WAS SUBMITTED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER THAT THE L AND AD - MEASURING 12.81 ACRES WAS LET OUT TO M/S WESTERN AGRI SEEDS PVT LTD, GANDHINAGAR IN WHICH THE ASSESSEE HIMSELF AND HIS FAMILY MEMBERS WERE DIRECTORS. IT WAS FURTHER STATED THAT THE SAID COMPANY WAS ENGAGED IN THE BUSINESS OF RESEARCH AND DEVELOPMENT OF SEEDS. THE ASSESSING OFFICER SCRUTINIZED THE CLAIM OF THE ASSESSEE. HE HOWEVER HELD THAT THE IMPUGNED FARM RENTAL INCOME WAS NOT AGRICULTURAL INCOME WITH THE FOLLOWING OBSERVATIONS: - 3. IN ADDITION TO THE ABOVE AGRICULTURE INCOME OF RS.7,89,494/ - SEP ARATELY CREDITED TO THE CAPITAL A/C., THE ASSESSEE HAS ALSO CREDITED ANOTHER AMOUNT BEING RENT RECEIVED FROM LETTING OUT OF AGRICULTURE FARM AT RS.3,00,000/ - . THIS INCOME IS DESCRIBED AS FARM HOUSE RENTAL INCOME. IT IS CLAIMED THAT THE NATURE OF RECEIPT RE MAINS THE SAME I.E. AGRICULTURE INCOME EVEN IF THE RENT IS RECEIVED BECAUSE AS PER THE DEFINITION CONTAINED IN SECTION 2(1A)(A) OF THE ACT, ANY RENT OR REVENUE DERIVED FROM LAND AND USE FOR AGRICULTURE PURPOSE IS TO BE ASSESSED AS AGRICULTURE INCOME. IT IS SUBMITTED BY THE ASSESSEE THAT HIS LAND ADMEASURING 12.81 ACRE WAS GIVEN ON LEASE TO M/S. WESTERN AGRI SEEDS PVT LTD., 802/11 WESTERN HOUSE, G.I.D.C., GANDHINAGAR. THE ASSESSEE AND HIS FAMILY MEBERS ARE DIRECTORS/RELATIVE OF THE DIRECTORS OF THE SAID PVT LTD. COMPANY. THE COMPANY IS ENGAGED IN THE BUSINESS OF RESEARCH AND DEVELOPMENT OF SEEDS. THE AMOUNT OF RENT PAID IS CLAIMED AS DEDUCTION FROM THE BUSINESS INCOME OF THE SAID COMPANY. 4. IT IS SUBMITTED BY THE LEARNED A.R. THAT SIMILAR CLAIM OF RENT HAS BEEN MADE AND ACCEPTED BY THE DEPARTMENT AS AGRICULTURE INCOME AND THEREFORE THE SAID CLAIM SHOULD BE ACCEPTED. IN THE ABOVE CONNECTION IT IS, PERTINENT TO NOTE THAT THE ABOVE PVT LTD CO IS NOT PRIMARILY ENGAGED IN DERIVING INCOME FROM CULTIVATION AND SAL E OF AGRICULTURE PRODUCE. IT IS DOING RESEARCH AND 3 ITA 202 /RJT/201 2 DEVELOPMENT OF SEEDS WHICH ARE PURCHASED FROM THE AGRICULTURIST AND AFTER SUBJECTING THE SAME TO SCIENTIFIC PROCESSES, SUCH SEEDS ARE SOLD IN THE MARKET. FOR THE PURPOSE OF CARRYING OUT THE RESEARCH AND DE VELOPMENT WORK, SOME LAND MAY BE REQUIRED. HOWEVER THIS IS ONLY ANCILLARY TO THE MAIN BUSINESS ACTIVITY TO THE PVT LTD CO., AND SUCH LAND IS ONLY PART OF THE COMPANYS BUSINESS INFRASTRUCTURE. 5. IN THE ABOVE BACKGROUND, IT IS PERTINENT TO NOTE THAT THER E IS AMENDMENT IN THE PROVISION OF SECTION 2(1A) OF THE ACT DEFINING AGRICULTURE INCOME. THE EXPLANATION - 2 WHICH HAS BEEN INSERTED BY THE FINANCE ACT 2000 W.E.F. 01.04.2001 MAKES IT CLEAR THAT THE LAND USED FOR BUSINESS OR PROFESSION CANNOT BE TREATED AS A GRICULTURE INCOME. THE SAID EXPLANATION READS AS UNDER : EXPLANATION - 2 FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT INCOME DERIVED FROM ANY BUILDING OR LAND REFERRED TO IN SUB - CLAUSE (C) ARISING FROM THE USE OF SUCH BUILDING OR LAND FOR ANY PURPO SE (INCLUDING LETTING FOR RESIDENTIAL PURPOSE OR FROM THE PURPOSE OF ANY BUSINESS OR PROFESSION) OTHER THAN AGRICULTURE FALLING UNDER SUB - CLAUSE (A) OR SUB - CLAUSE (B) SHALL NOT BE AGRICULTURE INCOME. 6. IT IS CLEAR FROM THE ABOVE THAT THE LAND HAS BEEN PUT TO USE FOR BUSINESS OR PROFESSION BY THE LEASEE OF THE LAND. IT IS ALSO NOT DISPUTED THAT THE INCOME DERIVED BY THE COMPANY IS IN THE NATURE OF BUSINESS INCOME AND THE ABOVE PAYMENT OF RENT IS ALSO CLAIMED AS BUSINESS EXPENSES. ACCORDINGLY IN VIEW OF THE ABOVE EXPLANATION, I DO NOT ACCEPT THE CLAIM OF THE ASSESSEE THAT THE RENT DERIVED FROM LAND IS AGRICULTURE INCOME. ACCORDINGLY THE SAME IS TREATED AS INCOME FROM OTHER SOURCES OF THE ASSESSEE. 4 . ON APPEAL BY THE ASSESSEE, THE LD. CIT(A) HAS CONFIR MED THE ORDER OF THE AO IN THIS BEHALF WITH THE FOLLOWING OBSERVATIONS: 4.1 I HAVE GONE THROUGH THE ASSESSMENT ORDER AND SUBMISSIONS OF APPELLANT. IT IS NOT SUFFICIENT FOR APPELLANT TO JUST LET OUT A SUPPOSEDLY AGRICULTURAL LAND AND CONSIDER THE RENT RE CEIVED FROM SUCH LAND AS AGRICULTURAL 4 ITA 202 /RJT/201 2 INCOME. IT IS ESSENTIAL THAT AGRICULTURAL ACTIVITY IS CARRIED ON THIS LAND. IN CASE A LAND IS GIVEN ON LEASE TO A LESSEE, THE ACTIVITIES ARE DECIDED BY THE LESSEE AND NOT BY THE LESSOR, WHO IN PRESENT CASE IS THE APPEL LANT. THE LESSEE OF THE LAND OF APPELLANT IS M/S WESTERN AGRI SEEDS PVT LTD., GANDHINAGAR. APPELLANT SUBMITTED THE COPY OF RETURN OF INCOME OF M/S WESTERN AGRI SEEDS PVT LTD. FOR ASSESSMENT YEAR 2007 - 08 WHERE THE ONLY INCOME IS THE BUSINESS INCOME. THEREF ORE, THE FACTS ARE CONTRARY TO THE STAND TAKEN BY THE APPELLANT THAT THE OPERATIONS OF M/S WESTERN AGRI SEEDS PVT LTD IN THE LAND LEASED OUT BY APPELLANT ARE NOT BUSINESS OPERATIONS BUT AGRICULTURAL OPERATIONS. THE LEASE AGREEMENT BETWEEN APPELLANT AND M/S WESTERN AGRI SEEDS PVT LTD SHOWS THAT M/S WESTERN AGRI SEEDS PVT LTD HAD TAKEN THE LAND FROM APPELLANT TO DEVELOP SEEDS AND DO RESEARCH AND DEVELOPMENT RELATED WORK ON SEEDS. THE WORK OR RESEARCH ON SEEDS IS GENERALLY RELATED TO THE WORK OF DEVELOPING NEW AND HYBRID VARIETY OF SEEDS. REGENERATING SEEDS BY WAY OF REPEATED CULTIVATION AFTER DIFFERENT SEEDS ARE PRODUCED AND THEN CROSSED TO OBTAIN A HYBRID SEEDS OF DESIRED QUALITY UNTIL A DESIRED RESULT OR TRAIT IS ACHIEVED MAY BE A RESEARCH WORK IN THE FIELD OF SEEDS. THE LAND MAY BE USED TO PRODUCE SEEDS OR MODIFIED AND REFINED VARIETY OF SEEDS. HOWEVER, THE ACTIVITY OF RESEARCH AND DEVELOPMENT AS MENTIONED ABOVE, IS NOT EQUIVALENT TO THE SIMPLE ACTIVITY TO MAKE THE PRIMARY PRODUCE FIT TO BE TAKEN TO THE MARK ET. IT IS A REITERATIVE ACTIVITY TO ACHIEVE SEEDS OF DESIRED QUALITY AFTER MANY ITERATIONS AND EXPERIMENTATIONS. THE ACTIVITY, WHICH IS NOT A SIMPLE ACTIVITY OF MAKING A PRIMARY AGRICULTURAL PRODUCE SALEABLE, CANNOT BE AN AGRICULTURAL ACTIVITY AS PER CLAUS E (B) OF SECTION 2(1A) OF THE I.T. ACT. IN FACT, THE PRICE THAT A RESEARCH COMPANY WOULD CHARGE FOR THE SEEDS FINALLY PREPARED THROUGH A RESEARCH AND DEVELOPMENT WOULD BE THE COST OF REITERATIONS AND RESEARCH RATHER THAN SIMPLY GROWING SEEDS AND MAKING THE M FIT TO SELL. THEREFORE, THE INCOME ATTRIBUTABLE TO THE OPERATIONS OF RESEARCH AND DEVELOPMENT OF SEEDS CANNOT BE TREATED AS AGRICULTURAL INCOME AND SHOULD BE TREATED AS BUSINESS INCOME THE ABOVE VIEW IS SUPPORTED BY HBLE ITAT IN CASE OF PIONEER OVERSEAS CORP. V. DY. DIRECTOR OF IT (INTERNATIONAL TAXATION) : (2010) 127 TTJ 5 ITA 202 /RJT/201 2 0640 (ITAT, DELHI). IN PRESENT CASE, M/S WESTERN AGRI SEEDS PVT LTD HAS ITSELF NOT CONSIDERED ITS RESEARCH AND DEVELOPMENT ACTIVITY ON THE LAND OF APPELLANT AS AGRICULTURAL ACTIVITY AND THEREFORE HOW CAN APPELLANT CLAIM THAT HIS ACTIVITY IS AGRICULTURAL ACTIVITY. THE RETURN OF BUSINESS INCOME BY M/S WESTERN AGRI SEEDS PVT LTD IS ITSELF AN EVIDENCE AGAINST THE CLAIM OF APPELLANT THAT THE LAND LEASED OUT BY HIM TO M/S WESTERN AGRI SEEDS PV T LTD IS USED FOR AGRICULTURAL ACTIVITY. I THEREFORE HOLD THAT THE ASSESSING OFFICER HAS CORRECTLY TAXED THE RENT OF RS.3,00,000/ - RECEIVED BY APPELLANT FROM M/S WESTERN AGRI SEEDS PVT LTD AS INCOME FROM OTHER SOURCES AND NOT AS AGRICULTURAL INCOME. 5. A GGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE IS NOW IN APPEAL BEFORE THIS TRIBUNAL. IN SUPPORT OF APPEAL, THE LD AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS FILED DETAILED WRITTEN SUBMISSIONS. RELEVANT PORTIONS OF THE SAID WRITTEN SUBMISSIONS READ AS UNDER: - 06. THE ASSESSING OFFICER HAS TREATED THE RENT OF RS.3,00,000/ - RECEIVED FROM AGRI SEEDS PVT. LTD. AS NON - AGRICULTURAL INCOME WITH MAINLY THREE CONTENTIONS BEING : - 6.1 THAT THE PVT. LTD. COMPANY IS NOT PRIMARILY ENGAGED IN DERIVING INCOME FR OM CULTIVATION AND SALE OF AGRICULTURE PRODUCE AND 6.2 IT IS DOING RESEARCH AND DEVELOPMENT OF SEEDS WHICH ARE PURCHASED FROM THE AGRICULTURISTS AND AFTER SUBJECTING THE SAME TO SCIENTIFIC PROCESSES, SUCH SEED ARE SOLD IN THE MARKET. 6.3 THIS IS ONLY AN CILLARY TO THE MAIN BUSINESS ACTIVITY OF THE PVT. LTD. COMPANY AND SUCH LAND IS ONLY PART OF THE COMPANYS BUSINESS INFRASTRUCTURE. 07. IN ADDITION TO THE SAME, THE ASSESSING OFFICER FURTHER RELIED ON EXPLANATION 2 TO SECTION 2(IA) OF THE INCOME TAX ACT, 1961 WHICH IS APPLICABLE IN CASE OF CLAUSE (C) OF SECTION 2 (IA) WITHOUT APPRECIATING THE FACT THAT SUCH CLAUSE IS NOT APPLICABLE IN OUR CASE. IT MAY PLEASE BE NOTED THAT THE ASSESSEE HAS GIVEN AGRICULTURAL LAND FOR THE PURPOSE OF AGRICULTURAL ACTIVITY. 6 ITA 202 /RJT/201 2 08. WESTERN AGRI SEED PVT. LTD. PURCHASE THE RAW SEEDS FROM THE MARKET. IN SOME OF RAW SEEDS RESEARCH, EXPERIMENTS, DEVELOPMENT ETC. ARE BEING DONE. THE SEEDS ARE CONVERTED IN TO HYBRID SEEDS AND ARE BEING SOLD IN THE OPEN MARKET TO THE FARMERS ETC. SUC H HYBRID SEEDS ARE USEFUL TO THE FARMERS FOR BETTER CROP. THIS RESULTS IN TO INCREASE IN PRODUCTION OF AGRICULTURAL CROP ETC. , AND ARE BEING ACCEPTED BY THE FARMERS. THUS, THE ACTIVITY OF THE COMPANY RESULTS IN MORE PRODUCTION OF AGRICULTURAL PRODUCTS IN THE COUNTRY. THERE ARE VARIOUS LANDS AS PER THE SURVEY NUMBERS MENTIONED ABOVE. 09. THE COMPANY WESTERN AGRI SEEDS PVT. LTD. HAS WRITTEN IN ITS PROFIT AND LOSS ACCOUNT IN SCHEDULE M OTHER EXPENSES. SR.NO.31 RESEARCH FARM AND DEVELOPMENT EXPENSES RS. 7,11,701/ - SR. NO.32 - RESEARCH FARM RENT EXPENSE - RS. 6,10,000/ - (OUT OF WHICH RS.3,00,000/ - HAS BEEN PAID T O THE APPELLANT HUF) SR.NO.35 - SEED PROCESSING EXPENSES - RS.19,50,507/ - . THE ABOVE FACTS CONSPICUOU SLY REVEALS THE FACT THAT THE COMPANY HAS DONE RESEARCH, PROCESSING ETC. ACTIVITIES ON THE LAND. THE WORD BUILDING HAS NOT USED ANYWHERE. 10. IN THIS REGARD, WE MENTION THE FACT THAT TAX AUDIT REPORT OF THE COMPANY VIZ. WESTERN AGRI SEEDS PVT. LTD. SUB - CLAUSE (A) OF CLAUSE 8 OF FORM: 3CD IN WHICH THE TAX AUDITOR HAS STATED THE NATURE OF BUSINESS OF THE COMPANY AS HYBRID SEEDS TRADING/PRODUCING . IT IS EVIDENT FROM THE ABOVE THAT M/S. WESTERN AGRI SEEDS PVT. LTD. IS ENGAGED IN THE BUSINESS OF THE AGRI CULTURE ACTIVITY ON THE LEASED LAND OBTAINED FROM THE NARANBHAI PRAGDAS PATEL - H.U.F. IT IS HEREBY CLARIFIED THAT M/S. WESTERN AGRI SEEDS PVT. LTD. HAS DEBITED THE TOTAL RESEARCH FARM EXPENSES WAS RS.6,10,000/ - AS SHOWN IN ANNEXURE M OF THE AUDITED PROF IT AND LOSS A/C OUT OF WHICH ONLY RS.3,00,000/ - IS ONLY BELONG TO THE NARANBHAI PRAGDAS PATEL - H.U.F. AND BALANCING RS.3,00,000/ - IS BELONGING FOR OTHER LEASED LAND TAKEN FROM OTHER PERSON. 7 ITA 202 /RJT/201 2 11. FOR SAKE OF CONVENIENCE, WE REPRODUCE HEREWITH THE RELEVANT PO RTION OF SECTION 2 (IA) OF THE INCOME TAX ACT, 1961. 2(IA) . AGRICULTURAL INCOME MEANS ( A ) ANY RENT OR REVENUE DERIVED FROM LAND WHICH IS SITUATED IN INDIA AND IS USED FOR AGRICULTURAL PURPOSES;] ( B ) ANY INCOME DERIVED FROM SUCH LAND BY ( I ) AGRICULTURE; OR ( II ) THE PERF ORMANCE BY CULTIVATOR OR RECEIVER OF RENT - IN - KIND OF ANY PROCESS ORDINARILY EMPLOYED BY A CULTIVATOR OR RECEIVER OF RENT - IN - KIND TO RENDER THE PRODUCE RAISED OR RECEIVED BY HIM FIT TO BE TAKEN TO MARKET; OR ( III ) THE SALE BY A CULTIVATOR OR RECEIVER OF RENT - IN - K IND OF THE PRODUCE RAISED OR RECEIVED BY HIM, IN RESPECT OF WHICH NO PROCESS HAS BEEN PERFORMED OTHER THAN A PROCESS OF THE NATURE DESCRIBED IN PARAGRAPH (II) OF THIS SUB - CLAUSE ; ( C ) ANY INCOME DERIVED FROM ANY BUILDING OWNED AND OCCUPIED BY THE RECEIVER OF T HE RENT OR REVENUE OF ANY SUCH LAND, OR OCCUPIED Y THE CULTIVATOR OR THE RECEIVER OF RENT - IN - KIND, OF ANY LAND WITH RESPECT TO WHICH, OR THE PRODUCE OF WHICH, ANY PROCESS MENTIONED IN PARAGRAPHS (II) AND (III) OF SUB - CLAUSE (B) IS CARRIED ON : EXPLANATION 2. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT INCOME DERIVED FROM ANY BUILDING OR LAND REFERRED TO IN SUB - CLAUSE (C) ARISING FROM THE USE OF SUCH BUILDING OR LAND FOR ANY PURPOSE (INCLUDING LETTING FOR RESIDENTIAL PURPOSE OR FOR THE PURPOSE OF ANY BUSINESS OR PROFESSION) OTHER THAN AGRICULTURE FALLING UNDER SUB - CLAUSE (A) OR SUB - CLAUSE (B) SHALL NOT BE AGRICULTURAL INCOME . 12. THUS, THE ASSESSING OFFICER HAS SIMPLY GONE BY NOMENCLATURE OF THE WORD FAR HOUSE RENT INCOME BUT IN FACT THE INCOME HAS BEEN RECEIVED ON AGRICULTURAL LAND AND NOT THE BUILDING. IN ADDITION TO THE SAME, THE LEASE AGREEMENT NOWHERE MENTIONS THE EXISTENCE OF ANY BUILDING. ONLY LANDS HAVE BEEN GIVEN ON RENT. 8 ITA 202 /RJT/201 2 13. IT MAY BE MISTAKE ON THE PART OF ACCOUNTANT TO WRITE THE F ARM HOUSE RENT INCOME INSTEAD OF AGRICULTURAL LAND RENT INCOME. 14. IT MAY FURTHER BE NOTED THAT THE RENT HAS ALSO BEEN PAID DURING THE LAST FINANCIAL YEAR AND THAT YEAR WAS ALSO UNDER ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961, WHERE T HE SAME AO HAS ALLOWED SUCH RENT INCOME AS AGRICULTURAL INCOME. FOR REFERENCE, WE ENCLOSE HEREWITH THE COPY OF SUCH ASSESSMENT ORDER AND THE COPY OF ACCOUNT OF RENT INCOME RECEIVED BY THE APPELLANT HUF FROM WESTERN AGRI SEEDS PVT. LTD. THE ASSESSING OFFI CER HAS NOT PUT SINGLE EVIDENCE ON RECORD THAT THE NATURE OF ACTIVITY DONE BY WESTERN AGRI SEEDS PVT. LTD. WERE DIFFERENT IN YEAR UNDER CONSIDERATION AS COMPARED TO THE PREVIOUS YEAR. 6 . IN SUPPORT OF HIS SUBMISSIONS, T HE LD. AUTHORISED REPRESENTATIVE FO R THE ASSESSEE HAS RELIED UPON THE FOLLOWING DECISIONS: - A ) VIBHA AGROTECH LTD V. ITO, 120 ITD 182 B ) K. SAMRATHMUL V. CIT, 64 ITR 166 (MAD) C ) CIT V. RANA GURJIT SINGH, 340 ITR 108 (P&H) D ) CIT V. H G DATE, 82 ITR 71 (BOM) 7 . IN REPLY, THE LD DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE ORDER PASSED BY THE LD CIT(A). HE ALSO RELIED UPON THE JUDGMENT OF THIS TRIBUNAL IN THE CASE OF PIONEER OVERSEAS CORP. V. DY. DIRECTOR OF IT (INTERNATIONAL TAXATION), 127 TTJ 0640 (ITAT, DELHI) AND JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT IN CIT V. NAMDHARI SEEDS P. LTD ., 341 ITR 342 (KARN.). 8 . WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CONSIDERED THEIR SUBMISSIONS INCLUDING THE AUTHORITIES REFERRED TO BY THEM . THE ASSESSEE HAS FILED ENGLISH TRANSLATION OF LEASE AGREEMENT DATE D 10.04.2006, EXECUTED BETWEEN M/S WESTERN AGRI SEEDS PVT LIMITED AND (I) SHRI NARANBHAI PRAGDAS PATEL, BEING THE ASSESSEE & (II) SMT NARMADABEN NARANBHAI PATEL, WHICH CONTAINS FOLLOWING RECITAL: FARMERS LAND SURVEY NOS.(1) 811 - 11129 (2) 967/1 - 7100 (3) 8 10 - 6307 TOTALLING TO 12 - 81 ACRES AT PLACE - LIMBODRA, TALUKA KALOL, DISTRICT GANDHINAGAR HAVE BEEN GIVEN TO M/S WESTERN AGRI SEEDS PVT LIMITED , GANDHINAGAR FOR RESEARCH AND DEVELOPMENT OF AGRICULTURAL SEEDS PLOTS AND SEEDS. RS.3,00,000 (THREE LAKHS ONLY ) WILL BE PAYABLE ANNUALLY TOWARDS 9 ITA 202 /RJT/201 2 USAGE OF AGRICULTURAL LAND FOR AGRICULTURAL PURPOSES OF CONSOLIDATED LAND OF 12. 8 1 ACRES 9 . IT IS NOT ONLY ADMITTED BY THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BUT IT IS ALSO QUITE APPARENT FROM THE MAT ERIALS AVAILABLE ON RECORD THAT THE LAND WAS GIVEN ON RENT FOR RESEARCH AND DEVELOPMENT OF COMMERCIALLY LUCRATIVE HYBRID SEEDS. THE LE S SEE HAS USED THE LAND FOR RESEARCH AND DEVELOPMENT OF HYBRID SEEDS AND NOT FOR GROWING AGRICULTURAL CROPS AND SELLING THE M AS SUCH . WHAT HAS BEEN SOLD BY THE LE S SEE IS COMMERCIALLY DEVELOPED HYBRID SEEDS AND NOT THE AGRICULTURAL PRODUCE RAISED FROM THE AGRICULTURAL LAND LEASED BY THE ASSESSEE. IT IS SCIENTIFIC KNOWLEDGE WHICH IS A PREDOMINANT FACTOR IN DEVELOPMENT OF HYBRID SEEDS. THE ACTIVITY OF DEVELOPMENT OF HYBRID SEEDS IS ESSENTIALLY A COMMERCIAL ACTIVITY. THE DEVELOPMENT OF HYBRID SEEDS IS NOT IN THE NATURE OF RAISING AGRICULTURAL PRODUCE ON THE LAND. THE JUDGMENT OF THIS TRIBUNAL IN PIONEER OVERSEAS CORP. V. DY. DIRECT OR OF IT (INTERNATIONAL TAXATION) (SUPRA) IS QUITE APPOSITE. IN OUR VIEW, THE LD CIT(A) HAS CORRECTLY APPRECIATED THE FACTUAL AND LEGAL ASPECTS OF THE CASE. WE ARE IN AGREEMENT WITH HIS DECISION AND THEREFORE CONFIRM THE SAME. GROUND NO.1 TAKEN BY THE ASS ESSEE IS DISMISSED. 1 0 . GROUND NO.2 TAKEN BY THE ASSESSEE READS AS UNDER: THE LD. C.I.T.(A) HAS ERRED TO HOLD RS.3,75,771/ - NON AGRICULTURAL INCOME INSTEAD OF AGRI INCOME DISCLOSED BY THE APPELLANT WITHOUT CONSIDERING THE FACTS/EVIDENCES OF THE CASE. TH EREFORE YOUR APPELLANT PRAY TO DELETE THE SAID ADDITIONS AND TO HOLD AGRICULTURAL INCOME AFTER CONSIDERING THE FACTS/EVIDENCES OF THE CASE. 1 1 . AS ALREADY STATED EARLIER, THE AGRICULTURAL INCOME SHOWN BY THE ASSESSEE IN THE ASSESSMENT YEAR UNDER APPEAL W AS TWICE MORE THAN THE ONE SHOWN BY THE ASSESSEE IN THE IMMEDIATELY PRECEDING YEAR. THE ASSESSING OFFICER CALLED UPON THE ASSESSEE TO PROVIDE THE NECESSARY EVIDENCE IN SUPPORT OF HIS CLAIM. IN REPLY, THE ASSESSEE FILED UNSIGNED COPIES OF PURCHASE VOUCHERS INDICATING THE PURCHASES OF AGRICULTURAL PRODUCE BY M/S GREEN INDIA SEEDS CO. THE ASSESSING OFFICER NOTICED THAT M/S GREEN INDIA SEEDS CO. WAS A FAMILY CONCERN OF THE ASSESSEE HIMSELF AND THEREFORE IT WAS NOT DIFFICULT FOR THE ASSESSEE TO PROCURE SIGNED VOUCHERS AS 10 ITA 202 /RJT/201 2 EVIDENCE FROM THE SAID COMPANY. HE THEREFORE RESTRICTED THE QUANTUM OF AGRICULTURAL INCOME TO RS.4,13,723/ - AND ACCORDINGLY TAXED THE REMAINING AMOUNT OF RS.3,75,771/ - AS INCOME FROM UNDISCLOSED SOURCES WITH THE FOLLOWING OBSERVATIONS: 7. AS CAN BE SEEN FROM THE ABOVE, THE ASSESSEE HAS SHOWN HUGE AGRICULTURE INCOME. THE ASSESSEE HAS STATED THAT THE SALE OF AGRICULTURE PRODUCE IS DULY SUPPORTED BY THE BILLS OF M/S GREEN INDIA SEEDS CO. THE ASSESSEE HAS FILED UNSIGNED COPY OF PURCHASE VOUCHERS OF THE SAID COMPANY. A PHOTOCOPY OF SUCH VOUCHERS OF IS ENCLOSED WITH THE ORDER. THE ABOVE REFERRED M/S GREEN INDIA SEEDS CO IS APPARENTLY A FAMILY CONCERN OF THE ASSESSEE HIMSELF AND THEREFORE IT IS NOT DIFFICULT TO PROCURE SUCH VOUCHERS. KEEPING IN VIEW THE PAST RECORDS IT IS REASONABLE TO CONSIDER THE AGRICULTURE INCOME AT THE AVERAGE OF THE TWO PRECEDING YEARS. SUCH AVERAGE COMES TO RS.4,13,723/ - . IN OTHER WORDS THE DIFFERENCE OF RS.3,75,771/ - IS TREATED AS THE ASSESSEES INCOME FROM UNDISCLOSED SOURCE S. AS I AM SATISFIED THAT THE ASSESSEE HAS FURNISHED INACCURATE PARTICULARS OF INCOME, PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT IS INITIATED SEPARATELY. 12 . AGGRIEVED BY THE ORDER PASSED BY THE ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER IN AP PEAL BEFORE THE LD CIT(A) WITHOUT SUCCESS. THE LD . CIT(A) HAS DECIDED THE ISSUE AGAINST THE ASSESSEE WITH THE FOLLOWING OBSERVATIONS: - 4. I HAVE GONE THROUGH THE ASSESSMENT ORDER AND SUBMISSIONS OF APPELLANT. IT APPEARS FROM THE PURCHASE VOUCHERS OF M/ S GREEN INDIA SEEDS CO THAT THEY PURCHASED THE RESEARCH SEEDS FROM APPELLANT AT A RATE OF RS.60 PER KG. APPELLANT HAS SOLD COTTON AND CASTOR TO M/S. AMBICA TRADING CO., WHICH APPEARS TO BE NORMAL AGRICULTURAL SALE. APPELLANT HAS MADE A SALE OF ABO UT RS.9.5 LAKH TO M/S GREEN INDIA SEEDS CO. AND BALANCE SALE TO M/S. AMBIKA TRADING CO AND OTHERS OUT OF TOTAL SALE OF RS. 11,58,919/ - . APPELLANT HAS CLAIMED EXPENDITURE OF RS. THE MAIN REASON FOR HIGHER RECEIPT HAS BEEN ADMITTED BY APPELLANT AS INCREASE I N PRICES AND YIELD OF HYBRID SEEDS. I HAVE ALREADY DISCUSSED IN GROUND NO.1 OF THE APPEAL ABOVE THAT THE ACTIVITY OF MAKING HYBRID SEEDS IS NOT EQUIVALENT T THE SIMPLE ACTIVITY TO MAKE THE PRIMARY AGRICULTURAL PRODUCE FIT TO BE TAKEN TO THE MARKET. 11 ITA 202 /RJT/201 2 IT IS A REITERATIVE ACTIVITY TO ACHIEVE SEEDS OF DESIRED QUALITY AFTER MANY ITERATIONS AND EXPERIMENTATIONS. THE ACTIVITY, WHICH IS NOT A SIMPLE ACTIVITY OF MAKING A PRIMARY AGRICULTURAL PRODUCE SALEABLE, CANNOT BE AN AGRICULTURAL ACTIVITY AS PER CLAUSE (B) OF SE CTION 2(1A) OF THE I.T. ACT. IN FACT, THE PRICE THAT APPELLANT WOULD CHARGE FOR THE HYBRID SEEDS, FINALLY PREPARED THROUGH REITERATIONS, WOULD BE THE COST OF REITERATIONS AND RESEARCH RATHER THAN SALE OF SIMPLE AGRICULTURAL PRODUCE. THEREFORE, THE INCOME A TTRIBUTABLE TO THE PROCESS OF MAKING HYBRID SEEDS CANNOT BE TREATED AS AGRICULTURAL INCOME AND SHOULD BE TREATED AS BUSINESS INCOME. THE ABOVE VIEW IS SUPPORTED BY HBLE ITAT IN CASE OF PIONEER OVERSEAS CORP V. DY. DIRECTOR OF IT (INTERNATIONAL TAXATION): (2010) 127 TTJ 0640 (ITAT, DELHI). IN FACT THIS VIEW IS SUPPORTED IN PARA 27 OF THE ORDER OF ITAT - HYD, RELIED UPON BY APPELLANT IN CASE OF VIBHA AGROTECH LTD VS. ITO (2008) 20 (I) ITCL 45 (HYD TRIB.). HOWEVER, HBLE ITAT - DELHI HAD HELD IN CASE OF PIONEER OVERSEAS CORP V. DY. DIRECTOR OF IT (INTERNATIONAL TAXATION) (SUPRA) THAT THE INCOME WHICH CAN BE ATTRIBUTED TO THE VERY FIRST ACTIVITY OF PRODUCING SEEDS RAISED IN THE VERY FIRST CROP BEFORE THE TWO SEEDS ARE CROSSED CAN BE ESTIMATED AT 10 PER CENT OF TH E TOTAL INCOME FROM ITS SINGLE INTEGRATED ACTIVITY OF SALE OF HYBRID SEEDS. I FIND THAT THE ESTIMATION OF INCOME OF RS.3,75,771/ - OUT OF THE TOTAL INCOME OF RS.7,89,494/ - AS INCOME PERTAINING TO THE PROCESS OF HYBRIDIZATION OF SEEDS IN THE PRESENT CASE IS JUSTIFIED BECAUSE THE INCREASE IN SUCH INCOME FROM PAST YEARS HAS BEEN ATTRIBUTED TO SALE OF HYBRID SEEDS BY THE APPELLANT HIMSELF. THIS ACTIVITY CANNOT BE HELD AS AGRICULTURAL ACTIVITY AS DECIDED BY HBLE ITAT - DELHI AND HYDERABAD. THEREFORE THE ADDITION M ADE BY THE ASSESSING OFFICER TO THE TOTAL INCOME OF RS.3,75,771/ - IS SUSTAINED BUT ON THE GROUND OF SUCH INCOME BEING NON - AGRICULTURAL INCOME RATHER THAN UNEXPLAINED INCOME. 1 3 . AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE IS NOW IN APPEAL BEFORE T HIS TRIBUNAL. IN SUPPORT OF APPEAL, THE LD AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS FILED WRITTEN SUBMISSIONS WHICH READ AS UNDER: - 12 ITA 202 /RJT/201 2 20. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSING OFFICER NOTED THAT THERE HAS BEEN AN INCREASE IN THE AGRICULT URAL INCOME AS COMPARED TO LAST YEAR. HE OBSERVED THE FOLLOWING SCANNED PORTION REPRODUCED. A.Y. GROSS INCOME EXPENSES NET INCOME 2005 - 06 703266 215962 487704 2006 - 07 527525 187783 339742 2007 - 08 1158917 371423 789494 21. WITHOUT GOING INTO THE ME RITS, THE ASSESSING OFFICER SIMPLY COMPARED THE INCREASE AS COMPARED TO THE LAST YEAR. THE ASSESSEE ASKED FOR EXPLANATION AND IN RESPONSE TO THE SAME, ASSESSEE EXPLAINED THAT THE PRODUCTS HAVE BEEN SOLD TO VARIOUS PERSONS INCLUDING TO GREEN INDIA SEEDS CO . IN SUPPORT OF THE SAME, THE PURCHASE VOUCHERS OF GREEN INDIA SEEDS CO. WERE SUBMITTED TO ASSESSING OFFICER. THE ACCOUNT OF ASSESSEE IN GREEN INDIA SEEDS CO. WAS ALSO SUBMITTED BUT THE SAME WAS ALSO NOT APPRECIATED BY THE ASSESSING OFFICER. AO TOOK THE CONTENTION THAT THE VOUCHERS HAVE NOT BEEN SIGNED. THE UNSIGNED VOUCHER DOES NOT MAKE THE AGRICULTURAL INCOME AS NON AGRICULTURAL INCOME. 22. WHILE TAKING THE AVERAGE OF PRECEDING TWO YEARS BEING [RS.4,87,704 (A.Y. 2005/06) + RS. 3,39,742 (A.Y. 2006/07 ) ] / 2 = RS.4,13,723/ - BY AO AND THE CIT (A) WHILE CONFIRMING THE SAME FAILED TO APPRECIATE & / OR CONSIDER THE FOLLOWING. 22.1 THE ASSESSEE HAS BEEN HAVING SO MANY AGRICULTURAL LANDS AND THE DETAILS WERE ALREADY BE SUBMITTED TO AO. 22.2 THE AGRICULTURA L PRODUCTION DEPENDS ON RAIN AND OTHER FACTORS, SO THE VARIATION IN THE PRODUCTION IS USUAL. THE SALE WAS LESS IN THE A.Y. 2006/07 AS COMPARED TO THE SAME IN A.Y. 2005/06. SUCH REDUCTION WAS ACCEPTED BY AO BUT THE SUBSEQUENT INCREASE WAS NOT ACCEPTED BY AO TO FULL EXTENT. 22.3 THE PRICE OF AGRICULTURAL PRODUCTS ARE INCREASING DAY BY DAY WHICH WILL NATURALLY INCREASE IN SALE PRICES AND ULTIMATELY THE PROFIT. 22.4 THE ASSESSEE IS NOT NEW IN THE AGRICULTURAL MARKET BUT HAS BEEN DOING SUCH ACTIVITIES SINCE MANY YEARS. 13 ITA 202 /RJT/201 2 22.5 THE KARTA OF HUF MR. NARANBHAI PRAGDAS PATEL IS AGRICULTURE GRADUATE. HE IS EXPERT IN HYBRID AND OTHER SEEDS PRODUCTION AND FARMERS UTILIZE HYBRID SEEDS FOR MORE PRODUCTION. 22.6 THE SEEDS WORTH OF RS.3,87,217/ - WERE SOLD IN THE PERIOD O F 9 TH APRIL 2006 TO 9 TH JUNE, 2006 WHICH WAS THE CLOSING STOCK OF THE LAST YEAR. THE BREAK UP IS AS UNDER: - SALE DATE SOLD TO AMOUNT RS. 09/04/2006 GREEN INDIA SEEDS 103428 20/04/2006 AMBICA SEEDS 29860 09/05/2006 GREEN INDIA SEEDS 86000 09/06/2006 G REEN INDIA SEEDS 109525 09/06/2006 GREEN INDIA SEEDS 378217 22.7 IN THIS REGARD, IT MAY BE NOTED THAT THE ACCOUNTING YEAR STARTS FROM 01/04/2006 AND IT IS NOT POSSIBLE TO PRODUCE THE SEEDS WITHIN SHORT PERIODS OF 8 DAYS, 19 DAYS, 38 DAYS ETC. FROM T HE COMMENCEMENT OF THE ACCOUNTING YEAR. THE FACT THAT THE SALES HAVE BEEN MADE IS FROM THE UNFINISHED CLOSING STOCK OF THE LAST YEAR. 22.8 IF THE AO HAS DOUBT ABOUT THE INCREASE IN THE PRODUCTION, THEN HE COULD HAVE MADE FURTHER INQUIRES BY SUMMONING TO THE PERSONS TO WHOM THE SAME HAVE BEEN MADE BUT INSTEAD OF DOING SUCH HARD WORK, THE ASSESSING OFFICER SIMPLY TOOK THE AVERAGE WHICH IS PURELY ON AD HOC BASIS AND ON ARBITRARY BASIS. 1 4 . IN REPLY, THE LD . DR SUPPORTED THE ORDER PASSED BY THE LD CIT(A). 1 5 . WE HAVE HEARD BOTH THE PARTIES. THERE IS ABNORMAL INCREASE IN THE QUANTUM OF INCOME CLAIMED BY THE ASSESSEE AS AGRICULTURAL INCOME. SUCH ABNORMAL INCREASE IS NOT ATTRIBUTABLE TO AGRICULTURAL ACTIVITIES BUT TO THE ACTIVITIES OF RESEARCH WHICH HAS LED TO THE DEVELOPMENT OF COMMERCIALLY LUCRATIVE HYBRID SEEDS AND THEIR SALE. ACCORDING TO THE LD. CIT(A), THE ASSESSEE HAS SOLD RESEARCH SEEDS (I.E., COMMERCIALLY DEVELOPED HYBRID SEEDS) TO M/S GREEN INDIA SEEDS CO AT THE RATE OF RS.60 PER KG. IN ADDITION TO SELLING COTTON AND CASTOR TO M/S AMBICA TRADING CO. THE LD. CIT(A) HAS TREATED THE INCOME FROM SALE OF COMMERCIALLY DEVELOPED RESEARCH SEEDS AS NON - AGRICULTURAL INCOME WHILE INCOME FROM SALE OF COTTON 14 ITA 202 /RJT/201 2 AND CASTOR AS AGRICULTURAL INCOME. HE HAS TRE ATED A SUM OF RS.3,75,771/ - OUT OF RS.7,89,494/ - AS REPRESENTING INCOME FROM SALE OF COMMERCIALLY DEVELOPED HYBRID SEEDS AND THEREFORE NON - AGRICULTURAL INCOME . WE HAVE ALREADY HELD THAT THE SALE OF COMMERCIALLY DEVELOPED HYBRID SEEDS IN THE LABORATORIES (W HICH INCLUDES RESEARCH FARM ALSO) IS NOT IN THE NATURE OF AGRICULTURAL INCOME. IN THIS VIEW OF THE MATTER, WE CONFIRM THE ORDER PASSED BY THE LD CIT(A). GROUND NO.2 TAKEN BY THE ASSESSEE IS DISMISSED. 1 6 . IN VIEW OF THE FOREGOING, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON 31 . 0 7 . 201 3 SD/ - SD/ - (T. K. SHARMA) ( D. K. SRIVASTAVA) JUDICIAL MEMBER ACCOUNTANT MEMBER RAJKOT: 31 .0 7 .2013 B T COPY OF ORDER FORWARDED TO: - 1 . APPELLANT NARANBHAI PRAGDAS PATEL (HUF), JUNAGADH 2 . RESPONDENT - DCIT, JUNAGADH CIR - 1, JUNAGADH 3 . CONCERNED CIT - II I, RAJKOT 4 . CIT (A) - I V , RAJKOT 5 . DR, ITAT, RAJKOT 6 . GUARD FILE. BY ORDER TRUE COPY PRIVATE SECRETARY, ITAT, RAJKOT