The DCIT- 1(1), Indore V. M/s. Krishidhan Seeds Limited, Indore

ITA 315/IND/2013

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 1074 (ITAT-INDORE)
• Duration Of Justice: 5 year(s) 6 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 18-10-2018
• Assessment Year: 2009-2010
• Appeal Filed On: 17-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ASHIMA GUPTA
• Keywords: Business income; Depreciation; Business expenditure; Search and seizure; Earning of tax free income; Wholly owned subsidiary; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 145; 37; 143(3); 142(1); 14A; 37(1)

Judgement Text

KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER ITA NO.37/IND/2013 ASSESSMENT YEAR 2008-09 ITA NO.84/IND/2013 ASSESSMENT YEAR 2008-09 ITA NO.231/IND/2013 ASSESSMENT YEAR 2009-10 ITA NO.315/IND/2013 ASSESSMENT YEAR 2009-10 M/S. KRISH IDHAN SEEDS PVT.LTD, 302, ROYAL HOUSE, USHAGANJ, INDORE VS. DEPUTY COMMISSIONER OF INCOME TAX-1(1), INDORE ( APPELLANT ) (RESPONDENT ) PAN NO.AHCPB6349L DEPUTY COMMISSIONER OF INCOME TAX-1(1), INDORE VS. M /S. KRISHIDHAN SEEDS PVT.LTD, 302, ROYAL HOUSE, USHAGANJ, INDORE ( REVENUE ) (RESPONDENT ) M/S. KRISHIDHAN SEEDS PVT.LTD, 302, ROYAL HOUSE, USHAGANJ, INDORE VS. DEPUTY COMMISSIONER OF INCOME TAX-1(1), INDORE ( APPELLANT ) (RESPONDENT ) PAN NO.AHCPB6349L DEPUTY COMMISSIONER OF INCOME TAX-1(1), INDORE VS. M/S. KRISHIDHAN SEEDS PVT.LTD, 302, ROYAL HOUSE, USHAGANJ, INDORE ( REVENUE ) (RESPONDENT ) KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 2 REVE NUE BY SMT. ASHIMA GUPTA, CIT ASSESSEE BY SHRI PRAKASH JAIN & MS. SHREYA JAIN,CAS DATE OF HEARING 1 8 .1 0 . 2018 DATE OF PRONOUNCEMENT 30 .11 .2018 O R D E R PER MANISH BORAD, AM. THE ABOVE CAPTIONED CROSS APPEALS FILED AT THE INST ANCE OF ASSESSEE AND REVENUE PERTAINING TO ASSESSMENT YEAR 2008-09 & 2009-10 ARE DIRECTED AGAINST THE ORDERS OF LD. COMM ISSIONER OF INCOME TAX (APPEALS)-I (IN SHORT LD.CIT(A)], INDO RE DATED 12.11.2012 AND 20.02.2013 RESPECTIVELY WHICH ARE A RISING OUT OF THE ORDER U/S 143(3) OF THE INCOME TAX ACT 1961(IN SHORT THE ACT) DATED 20.12.2010 & 28.12.2011 FRAMED BY DCIT-1(1) & ACIT, RANGE-1, INDORE. 2. AS THE ISSUES RAISED IN THESE CROSS APPEALS ARE MOSTLY COMMON RELATING TO THE SAME ASSESSEE, THESE WERE HEARD TOG ETHER AND ARE BEING DISPOSED OFF BY THIS COMMON ORDER FOR THE SA KE OF KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 3 CONVENIENCE AND BREVITY. FACTS FOR ASSESSMENT YEAR 2008-09 ARE TAKEN AS BASIS FOR ADJUDICATION OF THE COMMON ISSUE S. 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 LIC ENSEES OF MAHYCO MONSANTO BIOTECH (M.M.B) INDIA LTD, WHICH HAS COMME RCIALIZED BOLLGARD (BG-I) & BOLLGARD-II (BG-II) HYBRID COTTON SEEDS. IT IS A PIONEER IN PRODUCTION OF HYBRID SEEDS AND IS A RESE ARCH BASED AGRICULTURAL BIOTECH COMPANY ENGAGED IN DELIVERING HIGH QUALITY SEEDS FOR THE INDIAN COMMERCIAL SEED MARKET. ITS R ESEARCH AND DEVELOPMENT ACTIVITIES AND RESEARCH STATIONS ARE RE COGNIZED BY THE DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH (D SIR), GOVT. OF INDIA, MINISTRY OF SCIENCE & TECHNOLOGY, NEW DELHI AND POSSESS A CERTIFICATE OF RENEWAL BEARING NO.TU/IV-RD/2069/200 7 DATED 25.6.2009 RENEWED UP TO 31.03.2010. THE MAIN PURPOS E OF THE RESEARCH AND DEVELOPMENT (R&D DIVISION) IS TO ADD V ALUE TO THE CURRENT AND FUTURE PRODUCTS BY IMPROVING PRODUCTIVI TY, ADDING VALUE THROUGH NEW CHARACTERS, SAVING OF COST OF PRO DUCTION FOR SEEDS GROWN IN COMPANYS OWN FIELD AS WELL AS PRODUCED BY FARMERS INTO KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 4 THEIR FIELDS. THE COMPANY IS ACTIVELY INVOLVED IN RESEARCH, PRODUCTION, PROCESSING, PACKING AND MARKETING OF HI GH QUALITY SEEDS OF COTTON, CEREALS, PULSES, OIL SEEDS AND VEG ETABLES. 4. ASSESSEE COMPANYS INCOME SOURCE IS PARTLY FROM SEED PROCESSING AND TRADING THROUGH CONTRACT FARMERS AS WELL AS IN- HOUSE PLANT AND MACHINERY AND IT HAS ALSO EARNED AG RICULTURE INCOME FROM THE 109.50 ACRES OF AGRICULTURE LAND O WNED BY FOR CULTIVATING AGRICULTURAL SEEDS. 5. FOR THE ASSESSMENT YEAR 2008-09 E-RETURN FILED O N 30.9.2008 DECLARING TOTAL INCOME OF RS.7,40,75,085/-, INCOME FROM AGRICULTURE DISCLOSED AT RS. 2,90,33,798/-. CASE SELECTED FOR S CRUTINY AND NOTICES U/S 143(2) AND 142(1) WERE DULY SERVED UPON THE ASSESSEE. WRITTEN SUBMISSIONS WERE FILED. BOOKS OF ACCOUNTS WERE PRODUCED WHICH WERE EXAMINED ON TEST CHECK BASIS. LD.A.O OB SERVED THAT THE ASSESSEE CLAIMED DEDUCTION U/S 35(1)(IV) OF THE ACT FOR THE CAPITAL EXPENDITURE OF RS.2,88,51,028/- FOR THE R&D OFFICE BUILDING, GINNING PROJECT, LAB PROJECT AND OTHER MACHINERIES, FURNITURE & FIXTURE, ELECTRICAL INSTALLATION INSTALLED IN THE R ESEARCH BUILDING. KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 5 LD.A.O CALLED FOR THE DETAILED NOTE ON THE ACTIVITI ES CARRIED OUT BY THE ASSESSEE IN THE RESEARCH AND DEVELOPMENT FIELD. DETAILED SUBMISSIONS WERE GIVEN WITH STAGE-WISE ACTIVITIES F OR R&D AND AT SOME PLACES IN THE ASSESSMENT ORDER THE LD.A.O GOT CONVINCED BY THE R&D ACTIVITIES CARRIED OUT, BUT AT SOME PLACES HE IS NOT ABLE TO ACCEPT THAT WHY THE NEED OF NEW R&D BUILDING ARISED EVEN WHEN THE ASSESSEE OWNED AND POSSESSED R&D BUILDING. LD.A.O ALSO RAISED DOUBT ON THE CLARIFICATION GIVEN BY THE AUDITOR IN COLUMN 15(B) OF FORM 3CD REQUIRED TO BE GIVEN IN THE AUDIT REPORT U /S 44AB OF THE ACT WHEREIN IT WAS MENTIONED THAT SCIENTIFIC RESEAR CH ASSETS EXPENDITURE U/S 35(1)(IV) OF THE ACT NOT DEBITED TO THE PROFIT & LOSS ACCOUNT AT RS.2,88,51,028/-. LD.A.O ACCORDINGLY CA ME TO THE CONCLUSION THAT THE ALLEGED CAPITAL EXPENDITURE FOR RESEARCH AND DEVELOPMENT BUILDING AND MACHINERY AT RS.2,88,51,02 8/- NEEDS TO BE DISALLOWED. DOUBT WAS ALSO RAISED BY THE LD.A.O THAT THE ALLEGED CAPITAL EXPENDITURE IS ALSO ATTRIBUTABLE TO THE AGR ICULTURAL OPERATION OF WHICH THE ASSESSEE IS SHOWING EXEMPT INCOME. 6. LD.A.O ALSO EXAMINED THE RESEARCH DEVELOPMENT EX PENDITURE OF REVENUE IN NATURE AT RS.3,12,37,588/-. LD.A.O A FTER MAKING KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 6 DISCUSSIONS IN THE TYPE OF EXPENDITURE AND ITS NEXU S WITH THE RESEARCH AND DEVELOPMENT CONCLUDED THAT ALL THE ALL EGED R&D EXPENSES OF RS.3,72,37,588/- ARE ATTRIBUTABLE TO TH E AGRICULTURAL INCOME AND HENCE THE SAME ARE ATTRIBUTABLE FROM AGR ICULTURE INCOME ONLY. 7. LD.A.O WHILE EXAMINING THE GROSS RECEIPT FROM AG RICULTURAL OPERATIONS AND THE EXPENDITURE INCURRED TO EARN THE AGRICULTURE PROCEEDS OBSERVED THAT THE PERCENTAGE OF EXPENDITUR E 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 I NCREASE. 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. APAR T FROM THE ABOVE DISALLOWANCES, LD. A.O MADE DISALLOWANCE U/S 14A, D ISALLOWANCE 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/-. KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 7 8. SIMILAR TYPES OF ADDITION WERE ALSO MADE FOR ASS ESSMENT YEAR 2009-10 TO THE RETURNED INCOME OF THE ASSESSEE IN T HE FOLLOWING MANNER; TOTAL INCOME AS PER RETURN RS.3,61,94,331/- 1. ON ACCOUNT OF DISALLOWANCE U/S 35(1)(IV) RS. 40, 42,117/- 2. ON ACCOUNT OF R&D EXPENSES RS.4,54,34,487/- 3. ON ACCOUNT OF DISALLOWANCE U/S 14A R.W. RULE 8D RS. 42,07,107/- 4. ON ACCOUNT OF DISALLOWANCE U/S 36(1)(III) RS. 22,64,237/- 5. ON ACCOUNT OF WEALTH TAX RS. 1,57,643/ - 6. ON ACCOUNT OF PRIOR PERIOD EXPENSES RS. 1,38,439/- TOTAL INCOME ASSESSED RS.9,24,38,361/- ROUNDED OFF RS.9,24,38,360/- 9. AGGRIEVED ASSESSED FILED APPEAL BEFORE LD.CIT(A) AND PARTLY SUCCEEDED. 10. NOW BOTH THE ASSESSEE AND REVENUE ARE IN APPEAL BEFORE THE TRIBUNAL FOR ASSESSMENT YEAR 2008-09 AND 2009-10 RA ISING FOLLOWING GROUNDS OF APPEALS; 11. ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL FOR ASSESSMENT YEAR 2008-09 KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 8 1.THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-I, IS UNJUSTIFIED AND IS BEYOND THE FACTS AND CIRCUMSTANC ES OF THE CASE. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -I, HAS ERRED IN PASSING AN ORDER UNDER SECTION 250 OF THE INCOME TA X ACT, 1961, THAT THE LEARNED CIT(A)-I HAD DISPROPORTIONATELY DISALLOWED A SUM OF RS. 1,03,70,466/- OUT OF THE RESEARCH & DEVELOPMENT EXP ENDITURE (CAPITAL & REVENUE) INCURRED BY THE ASSESSEE DURING THE PREVIO US YEAR FOR WHICH HE A ELIGIBLE FOR DEDUCTION U/ S 35(1)(IV) & 37(1). 3. THE LEARNED COMMISSIONER OF INCOME TAX ( APPEALS )-I, HAS ERRED IN UPHOLDING THE ADDITION MADE BY THE AO OF RS. 10,48, 112/- ON ACCOUNT OF DISPROPORTIONATE AGRICULTURE EXPENSES. 4, THE LEANED COMMISSIONER OF INCOME TAX (APPEALS-I , HAS ERRED IN UPHOLDING THE ADDITION MADE BY THE AO OF RS. 20,84, 530/ - UNDER SECTION 14A OF I.T. ACT. 5. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -I, HAS ERRED IN UPHOLDING THE DISALLOWANCE MADE BY THE AO OF RS. 5, 32,892/- BEING EXPENDITURE INCURRED ON ACCOUNT OF DISCARDING OF LA ND. 6. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -I, HAS ERRED IN UPHOLDING THE DISALLOWANCE MADE BY THE AO OF RS. 1, 81,876/- BEING EXPENDITURE INCURRED ON ACCOUNT OF PAYMENT OF WEALT H TAX. 7. THE APPELLANT CRAVES LEAVE TO ADD, TO AMEND OR A LTER ANY OF THE GROUNDS OF APPELLANT CRAVES LEAVE TO ADD, TO AMEND OR ALTER ANY OF APPEAL AS WHEN NECESSARY. 12. REVENUE HAS RAISED FOLLOWING GROUNDS OF APPEAL FOR ASSESSMENT YEAR 2008-09; KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 9 ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) ERRED 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 TH E ASSESSEE HAD FAILED TO DISCHARGE ITS ONUS THAT EACH AND EVERY EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY ON SCIENTIFIC RESEARCH AND DEVELOPM ENT. 13. ASSESSEE HAS RAISED FOLLOWING APPEAL FOR ASSESS MENT YEAR 2009-10; 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-I, IS UNJUSTIFIED AND IS BEYOND THE FACTS AND CIRCUMSTANC ES OF THE CASE. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -I, HAS ERRED IN PASSING AN ORDER UNDER SECTION 250 OF THE INCOME TA X 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 (APPEALS) -I, HAS ERRED IN UPHOLDING THE DISALLOWANCE MADE BY THE AO OF RS. 1, 38,439/- BEING PRIOR PERIOD ITEMS. KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 10 5. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -I, HAS ERRED IN UPHOLDING THE REJECTION OF REVISED COMPUTATION OF T OTAL INCOME BY THE ADDL. COMMISSIONER OF INCOME TAX RANGE-1, WHICH IS SUBMIT TED BY THE ASSESSEE DURING THE COURSE ASSESSMENT., WHEREIN ASSESSEE HAD TREATED INCOME GENERATED FROM SALE OF SEEDS, WHETHER PRODUCED ON O WNED LAND OR ON THE LAND OWNED BY THE CULTIVATORS/FARMERS, BEING INCOME DERIVED FROM AGRICULTURAL ACTIVITIES AND CLAIMED THE SAME EXEMPT U/ S 10(1) OF THE INCOME TAX ACT, 1961. 14. REVENUE HAS RAISED FOLLOWING APPEALS FOR ASSESS MENT YEAR 2009-10. (I)ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) ERRED IN DIRECTING TO DELETE THE DISALLOWANCE OF CAPITAL EXP ENDITURE OF RS..40,42,117/- ON SCIENTIFIC RESEARCH AND DEVELOPM ENT EXPENSES U/S 35(1)(IV) AND RESTRICT THE REVENUE EXPENDITURE AMO UNTING TO RS. 4,54,34,487/- TO RS.1,83,70,760/- ON PRORATE BASI S WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAD FAILED TO DISCHARGE ITS ONUS THAT EACH AND EVERY EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVE LY ON SCIENTIFIC RESEARCH AND DEVELOPMENT. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) ERRED IN DELETING ADDITION OF RS.22,64,237/- MADE BY THE A.O U/S 36(1 )(III) R.W.S. 40A(2)(B) OF I.T. ACT (II)(A) WHILE HOLDING SO LD. CIT(A) FAILED TO APPRE CIATE THAT THERE WAS NEXUS BETWEEN INTEREST BEARING FUNDS DIVERTED TO ASSOCIAT E CONCERN ON NO INTEREST BASIS BACKED BY JUDICIAL PRONOUNCEMENTS AS RELIED UPON BY A.O KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 11 15. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE REQU ESTED FOR NOT PRESSING GROUND NO.1, GROUND NO.3, 4, 5, 6 FOR ASSE SSMENT YEAR 2008-09 AND GROUND NO.1,3,4 AND 5 FOR ASSESSMENT YE AR 2009-10. 16. AS THE REQUEST OF LD. COUNSEL FOR THE ASSESSEE FOR NOT PRESSING THE ABOVE GROUNDS HAS NOT BEEN OPPOSED BY THE DEPA RTMENTAL REPRESENTATIVE, WE DISMISS THE GROUND NO.1, 3,4,5,6 FOR ASSESSMENT YEAR 2008-09 AND GROUND NO.1,3,4&5 FOR A SSESSMENT YEAR 2009-10 RAISED BY THE ASSESSEE AS NOT PRESSED. 17. NOW THE ISSUE REMAINING FOR ADJUDICATION RELATE S TO THE FOLLOWING; (I) CAPITAL EXPENDITURE FOR SCIENTIFIC DEVELOPMENT EXPENSES U/S 35(1)(IV) OF THE ACT AT RS.2,88,51,028/- AND RS.40, 42,177/- FOR ASSESSMENT YEARS 2008-09 AND 2009-10. (II) REVENUE EXPENDITURE RELATING TO RESEARCH AND D EVELOPMENT AT RS.3,12,37,588/- FOR ASSESSMENT YEAR 2008-09 AND RS.14,54,34,487/- FOR ASSESSMENT YEAR 2009-10. KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 12 (III) ADDITION TOWARDS UN ACCOUNTED EXPENDITURE INC URRED 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. 2,8 8,51,028/- 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 AUT HORITY HAS GIVEN SUBSTANTIAL RELIEF TO THE ASSESSEE BY GIVING THE FI NDING OF FACT THAT THE ASSESSEES INVOLVEMENT IN DOING RESEARCH AND DE VELOPMENT ACTIVITY CANNOT BE DOUBTED AND SO IS THE GENUINENES S OF THE REVENUE EXPENDITURE CLAIMED. LD.CIT(A) FURTHER HELD THAT T HE BUSINESS MODEL OF THE ASSESSEE HAVING TAXABLE BUSINESS INCOM E AND EXEMPTED AGRICULTURE INCOME CERTAINLY HAVE SOME EXP ENSES COMMONLY INCURRED FOR EACH OTHER AND THE POSSIBILIT Y CANNOT BE IGNORED THAT SOME ELEMENT OF REVENUE EXPENDITURE WH ICH THOUGH HAVE BEEN CLAIMED AGAINST THE TAXABLE BUSINESS INCO ME MAY HAVE BEEN INCURRED FOR EARNING AGRICULTURE INCOME. ADOP TING THIS VIEW LD.CIT(A) PROPORTIONATELY DISALLOWED A SUM OF RS.1, 03,70,466/- AND KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 13 RS.1,83,70,760/- FOR ASSESSMENT YEAR 2008-09 AND AS SESSMENT YEAR 2009-10 OUT OF THE RESEARCH DEVELOPMENT EXPEND ITURE (CAPITAL AND REVENUE) ON THE BASIS OF THE GROSS RECEIPTS EAR NED FROM AGRICULTURE OPERATION AND TAXABLE BUSINESS OPERATIO NS. 19. LD. COUNSEL FOR THE ASSESSEE AGGRIEVED WITH THE FINDINGS OF LD.CIT(A) SUBMITTED THAT THERE IS NO ITEM OF EVIDEN CE BROUGHT IN BY THE REVENUE AUTHORITIES TO PROVE THAT RESEARCH AND DEVELOPMENT ACTIVITIES WERE NOT CARRIED OUT. THE ALLEGATION OF THE ASSESSING OFFICER ARE MERELY BASED ON SURMISES AND CONJECTURE S IGNORING THE FACT THAT THE ASSESSEE BEING A LIMITED COMPANY IS C ONSISTENTLY INVOLVED IN RESEARCH AND DEVELOPMENT ACTIVITIES AND THE REVENUE AUTHORITIES HAS NOT RAISED ANY DOUBT ON THE GENUINE NESS OF THE ALLEGED CAPITAL AND REVENUE EXPENDITURE. EVEN OTHE RWISE THE ALLEGED REVENUE EXPENDITURE THOUGH CLAIMED AS RESEA RCH AND DEVELOPMENT EXPENDITURE, WOULD HAVE BEEN ALLOWABLE U/S 37(1) OF THE ACT AS A REVENUE EXPENDITURE IS INCURRED IN THE COURSE OF BUSINESS. WRITTEN SUBMISSIONS WERE ALSO BEEN PLACE D ON RECORD AND THE RELEVANT EXTRACTS OF THE SAME IS MENTIONED BELOW; KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 14 THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX-1(1) HAS ERRED IN DISALLOWING DEDUCTION U/S 35(1)(IV) BEING CAPITAL E XPENDITURE INCURRED ON SCIENTIFIC RESEARCH AMOUNTING TO RS.2,88,51,028/- O N FOLLOWING HEADS OF ASSETS:- HEADS AMOUNT (IN RS.) RESEARCH LAB EQUIPMENT 2414039/- RESEARCH BT LAB EQUIPMENT 845606/- RESEARCH BUILDING 913063/- RESEARCH GINNING PROJECT BUILDING 14357 753/- RESEARCH GAMS DELINITING PROJECT BUILDING 61925 58/- PLANT AND ACHINERY 476749/- RESEARCH FURNITURE & FIXTURE 324856/- RESEARCH OFFICE EQUIPMENT 92396/- MOTOR CARS 2501200/- COMPUTERS 732805/- 28851028/- THE DETAIL/EXPLANATION THE ABOVE EXPENDITURE AND HE AD WISE PURPOSE OF ABOVE EXPENDITURE ARE AS UNDER:- 1. RESEARCH LAB. EQUIPMENTS RS. 24,14,039/- DURING THE YEAR UNDER APPEAL ASSESSEE HAD ACQUIRED 16 MOISTURE METERS OF RS.4,65,920/- BRUNSWICK INCUBATOR SHAKER RS.6,73 ,092/- UPRIGHT FREEZER RS.4,35.377/- REFRIGERATED CENTRIFUGE RS.4, 63,477/- COOLING MICROFUGE, DIGITAL PH METER, AUTOCLAVES AND THEIR ACCESSORIES, ANALYTICAL BALANCE AND OTHER VARIOUS EQUIPMENTS OF RS.3,74,173/-. THESE EQUIPMENTS 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 O F RS.4,84,181/- BOTH KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 15 OF THESE EQUIPMENTS CAN BE UTILIZED FOR BT COTTON L ABORATORY 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 RESE ARCH 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 HYBRI D SEEDS. HYBRID COTTON SEEDS ARE MAJOR SOURCE OF REVENUE. OUT OF T OTAL 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 B Y 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 GINNING PROJECT BUILDING, WHICH I S USED BY THE ASSESSEE FOR HYBRID COTTON RESEARCH ACTIVITIES. IN THIS BUILDING VARIOUS PLANT AND MACHINERIES INCLUDING SPECIALIZED GINNING UNITS AND GAS DELINTING PLANT ARE ALSO INSTALLED. THESE MACHINES ARE NOT THE NORMAL GINNING MACHINES AND THEY ARE SPECIALIZED GINNING M ACHINESS WHICH ARE USED FOR R&D FOR REMOVING LINT FROM THE BREEDER SEE DS, FOUNDATION SEEDS AND CERTIFIED SEEDS. THESE MACHINES ARE OF A DVANCE TECHNOLOGY USED FOR IMPROVING THE QUALITY OF HYBRID COTTON SE EDS SUPPLIED BY THE CONTRACT FARMERS. FINAL DESTINATION OF ANY COTTON PRODUCT, IS CONSUME R VIA TEXTILE INDUSTRIES. WHEN WE TAKE FACTORY ORIENTED RESEARCH , WE NEED TO ESTABLISH THAT INDIVIDUAL VARIETY/HYBRID, THE FIBRE QUALITY IS AS PER REQUIREMENT/SUITABILITY OF GINNING, SPINNING & WEA VING FACTORIES. GINNING MILLS REQUIRES THAT THE COTTON FIBRE SHOUL D BE MAXIMALLY MATURED & UNIFORMED AND ALSO THERE SHOULD BE GOOD YIELD OF LINT. THE OTHER PROCESS WHICH IS REQUIRED FOR SPINNING IS STR ENGTH OF THE COTTON KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 16 FIBRE THAT DECIDES THE SPEED WHICH CAN BE USED IN S PINNING MILLS. THE LAST IMPORTANT THING IN FIBRE IS FINENESS WHICH IS REQUIRED FOR THE QUALITY OF TEXTILE. THEREFORE IN BREEDING WE NEED TO HAVE THIS PARAMETER STUDIED ON COTTON FIBRE. FOR THE ABOVE PURPOSES WE NEED TO HAVE INDUSTRIAL R ESEARCH, WHICH ARE INCONSONANCE WITH FACTORY REQUIREMENT. THEREFORE R &D WANTED GINNING MACHINE TO HANDLE A SMALL REPRESENTATIVE SAMPLES (A BOUT 50 KG) TO PERMIT TO DRAW REPRESENTATIVE SAMPLES OF 1-1/2 KG FOR ANALYSIS DRAWN & THEREFORE THIS SPECIALIZED GINNING UNIT WAS HOUSED IN R&D. IN THE SUBSTANTIAL PART OF THIS BUILDING OTHER MOST SOPHISTICATED/ULTRA MODERN MACHINES AND EQUIPMENTS ARE INSTALLED. WITH THE HELP OF THESE MACHINES R&D WORK IS CARRIED OUT BY A TEAM OF RENO WNED SCIENTISTS AND TO ASSIST THE SCIENTISTS IN THIS BUILDING A NU MBER OF SUBORDINATE STAFF WORKS UNDER THE GUIDANCE OF BREEDERS (BREEDE RS ARE BSC AG. AND MSC. AG.) RESEARCH GAS DELINTING PROJECT BUILDING OF RS.61, 92,558/- DURING THE YEAR UNDER APPEAL, ASSESSEE HAS CONSTRUC TED RESEARCH GAS DELINTING PROJECT BUILDING COSTING RS.61,92,558/-. IN THIS BUILDING RESEARCH IS CARRIED OUT REMOVAL OF LINT FROM THE COTTON SEEDS. THE VERY PURPOSE OF THE RESEARCH IS LEAST DAMAGE TO THE HY BRID SEEDS SO THAT THEIR GERMINATION CAN BE INCREASED. IN THE SUBSTAN TIAL PART OF THESE BUILDINGS THE ASSESSEE HAS INSTALLED 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 PURCHASE D 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 US ED FOR R&D FOR KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 17 REMOVING LINT FROM THE BREEDER SEEDS, FOUNDATION S EEDS AND CERTIFIED SEEDS, THESE MACHINES ARE OF ADVANCE TEC HNOLOGY USED FOR IMPROVING THE QUALITY OF HYBRID COTTON SEEDS SUPPLI ED BY THE CONTRACT FARMERS. THESE MACHINES & EQUIPMENTS CAN BE UTILIZ ED FOR BT COTTON LABORATORY ONLY, SUCH MACHINES CANNOT BE USED BY GI NNING 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 C OTTON PRODUCT, IS CONSUMER VIA TEXTILE INDUSTRIES. WHEN WE TAKE FACT ORY ORIENTED RESEARCH, WE NEED TO ESTABLISH THAT INDIVIDUAL VARIETY/HYBRI D, THE FIBRE QUALITY IS AS PER REQUIREMENT/SUITABILITY OF GINNING, SPINNIN G & WEAVING FACTORIES. GINNING MILLS REQUIRES THAT THE COTTON FIBRES SHOUL D BE MAXIMALLY MATURED & UNIFORMED AND ALSO THERE SHOULD BE GOOD Y IELD OF LINT. THE OTHER PROCESS WHICH IS REQUIRED FOR SPINNING IS STR ENGTH OF THE COTTON FIBRE THAT DECIDES THE SPEED WHICH CAN BE USED IN S PINNING MILLS. THE LAST IMPORTANT THING IN FIBRE QUALITY IS FINENESS W HICH IS REQUIRED FOR THE QUALITY OF TEXTILE. THEREFORE IN BREEDING WE NEED T O HAVE THIS PARAMETER STUDIED ON COTTON FIBRE. FOR THE ABOVE PURPOSES WE NEED TO HAVE INDUSTRIAL R ESEARCH, WHICH ARE INCONSONANCE WITH FACTORY REQUIREMENT. THEREFORE R &D WANTED GINNING MACHINE TO HANDLE A SMALL REPRESENTATIVE SAMPLES (A BOUT 50 KG) TO PERMIT TO DRAW REPRESENTATIVE SAMPLES OF 1-1/2 KG F OR ANALYSIS DRAWN & THEREFORE THIS SPECIALIZED GINNING UNIT WAS HOUSED IN R&D. RESEARCH FURNITURE & FIXTURE OF RS.3,24,587/- DURING THE YEAR UNDER APPEAL, ASSESSEE HAS PURCHASE D VARIOUS FURNITURE & FIXTURES OF RS.3,24,857/- TO BE USED FOR R&D SCIE NTISTS, STAFFS AND SUBORDINATES. THESE FURNITURE & FIXTURES ARE INSTA LLED IN THE RESEARCH LABORATORIES, FOR THE EXCLUSIVE USE OF R&D SCIENTI STS AND THEIR ASSISTANTS. RESEARCH OFFICE EQUIPMENTS OF RS.92,397/- KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 18 DURING THE YEAR UNDER APPEAL, ASSESSEE HAS PURCHASE D FIRE EXTINGUISHER OF RS.66,595/- AND CYBER SHOT CAMERA OF RS.13,702/ -, ONE WATER DISPENSER RS.6100/- AND AN EXHAUST FAN OF RS.6000/ -. ALL THESE MACHINES ARE INSTALLED IN ITS RESEARCH DIVISION, US E OF FIRE EXTINGUISHER IS FOR SAFETY, CYBER SHOT CAMERA IS REQUIRED FOR SECUR ITY AND VIGILANCE AND OTHER ITEMS ARE EXCLUSIVELY USED BY THE RESEARCH D IVISION. RESEARCH MOTOR CAR OF RS.25,01,201/-. DURING THE YEAR UNDER APPEAL, ASSESSEE HAS PURCHAS ED TWO MOTOR CARDS OF RS.25,01,201/-, THESE MOTOR CARS USED EXC LUSIVELY BY THE SENIOR SCIENTISTS, FOR VISITING/MONITORING PURPOSES OF R&D FARMS AND CROPS, THE ASSESSEE IS CARRYING OUT R&D ACTIVITIES AT ABOHAR (PUNJAB), RATLAM (MP), HYDERABAD (AP), PAUD, PUNE (MS), KARN AL (HARYANA), UNAVA AHEMDABAD (GUJARAT) BESIDES THESE PLACES SCIENTIST S HAS TO VISIT VARIOUS FARMS/UNIVERSITIES WHERE THE RCGM TRIALS, LST TRIAL S ARE CARRIED OUT TO MONITOR AND SUPERVISE THE R&D ACTIVITIES. AS TO THE USE OF RESEARCH FACTORY BUILDING THE LD. A.O MAINLY DISALLOWED THE DEDUCTION U/S 35( 1)(IV) BY DOUBTING THE USE OF INVESTMENT OF RS.1,43,57,753/- 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 MA CHINES AND EQUIPMENTS ARE INSTALLED, WITH THE HELP OF THESE MA CHINES R&D WORK IS CARRIED OUT AND A TEAM OF RENOWNED SCIENTISTS WORK IN THIS BUILDING. WHEREAS THE RESEARCH FACTORY BUILDING IS ADJACENT B UILDING 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 F OR EXEMPTION. KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 19 2. PART OF THE BUILDING IS USED FOR GINNING COTTON AND THEREFORE IN PRACTICE WORKMEN OF THE ASSESSEE CALL IT GINNING PR OJECT BUILDING. ACCORDING TO THE LD. A.O THERE COULD NOT BE RESEARC H IN GINNING. THIS IS FALLACIOUS. THE ASSESSEE HAS EXPERTISE IN BT COTTO N, ITS PROCESSED SEEDS ARE SUPPLIED TO SEVERAL CULTIVATORS WITH THE CONTRA CT THAT THE COTTON SO PRODUCED WOULD BE SOLD TO THE ASSESSEE ONLY. THIS COTTON IS GROWN IN DIFFERENT AREAS, IN VARIABLE CLIMATES AND CONDITION S IN THE COUNTRY. BY PROCESS OF GINNING COTTON SEEDS AND LINT ARE SEPARA TED. AGAIN RESEARCH IS MADE ON THE FIBER OF LINT TO TEST ITS LENGTH AND ST RENGTH. THE LD. A.O WITHOUT FOLLOWING THIS PROCESS SIMPLY MENTIONED (PA GE 11) THESE APPEARS NO QUESTION OF ANY ASPECT OF RESEARCH IN THE PROC ESS OF GINNING. THIS IS AGAIN A GUESS. 3. EVEN IF IT IS HELD, FOR ARGUMENTS SAKE THAT THE ONL Y A PART OF BUILDING IS USED FOR R&D EVEN THEN THE ASSESSEE IS ENTITLED TO DEDUCTION U/S 35(1)(IV) OF THE ACT IN VIEW OF THE DECISION OF HONBLE ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT V YAMUNA DIGITAL 238 ITR 717 (A.P). 4. THE LD.A.O FAILED TO APPRECIATE THAT THE APPELLANT COMPANY IS HAVING A TEAM OF RENOWNED SCIENTISTS WHOSE DETAILED BIO-DATA AND RESEARCH WORK CARRIED ON ARE GIVEN ON PAGE NO.344 T O 376. THE DETAILS OF NAME AND QUALIFICATION OF SOME OF THE SCIENTISTS WH ICH ARE IN EMPLOYMENT OF THE COMPANY IS AS UNDER; NAME EDUCATIONAL QUALIFICATION COMPILATION PAGE NUMBER DR. GOVIND KRISHNA GARG B.SC (HONS), M.SC (AGRI), PH.D (BIOCHEMISTRY) FROM IISC, BANGALORE, POST DOCTORAL (BIOCHEMICAL GENETICS) FROM UNIVERSITY OF ILLINOIS, US 344 DR.L.A. DESHPANDE PH.D INPLANT BREEDING FROM MARATHWADA AGRICULTURAL UNIVERSITY, PARBHANI (MS) 345 DR.I.S. SINGH PH.D IN PLANT BREEDING FROM INSTITUTE OF CAMBRIDGE, UK 346 - 47 KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 20 DR.RAMESHWAR SINGH B.SC & M.SC, PH.D IN GENETICS & PLANT BREEDING FROM PURDUE UNIVERSITY, USA 348 - 352 DR. PRASHANT JIWANDHAR MOHALE B.SC & M.SC, PH.D IN AGRICULTURE DEVELOPMENT 353 - 354 DR. MOHAMMAD ASADULLAH SIDDIQUI B.SC & M.SC, PH.D IN AGRICULTURE BOTANY 355 - 356 DR. VIJAY TIWARI B.SC & M.SC, PH.D IN AGRICULTURE PHILOSOPHY 357 - 359 MADHUKAR PAWAR M.SC, AGRICULTURE 360 - 361 PRASHANT P. PISE ADB (BIOINFORMATICS), M.SC (AGRICULTURE) 362 - 363 DR. SANTOSH KUMAR SINGH B.SC, M.SC, PH.D (GEN ETICS AND PLANT BREEDING) 364 - 365 ASHISH KAMBLE B.SC, M.SC (AG.) PLANT BREEDING & GENETICS 366 - 367 DR. MAHENDAR SINGH B.SC, M.SC, PH.D PLANT BREEDING & GENETICS 368 - 371 DR. LAXMAN SINGH DHAYAL B.SC, M.SC, PH.D PLANT BREEDING & GENETICS 372 - 372 THE DETAILS OF OTHER SCIENTISTS ARE GIVEN ON PAGE-3 73 TO 376 OF COMPILATION. FROM THE ABOVE IT IS CLEAR THAT IN THE GINNING BUIL DING THE APPELLANT COMPANY IS NOT ONLY EXECUTING THE WORK OF GINNING B UT ALSO DOING RESEARCH ON COTTON PRODUCED, QUALITY, QUANTITY, STR ENGTH AND LENGTH OF THE COTTON PRODUCED FROM THE COTTON SEED PREPARED B Y THE COMPANY. THUS IN THE GINNING FACTORY BUILDING ALSO REQUIRE T O SIT AND WORK IN THAT BUILDING. IT IS ALSO TO SUBMIT THAT THE COTTON REQ UIRED 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 GIN NING, PRESSING AND SELLING OF COTTON. THERE IS NO OCCASION WHEREIN AP PELLANT COMPANY HAS SOLD COTTON. THE COTTON GENE BY THE APPELLANT COMP ANY IS GIVEN FOR SAMPLE TO VARIOUS TEXTILE MILLS. REGARDING DISALLOWANCE OF RESEARCH EXPENSES WE HAVE TO SUBMIT AS UNDER; KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 21 1. IT IS NOT THE CASE OF THE LD.A.O THAT THE SCIENTIFI C RESEARCH EXPENSES AGGREGATING TO RS.3,12,37,588/- HEADWISE DETAILS AR E 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 LEAVE TRAVEL ALLOWANCE 122,994 E.S.I. COS CONTRIB UTION 529 STAFF WELFARE EXP. 97,172 STAFF ENTERTAINMENT 6,289 STAFF HOSPITALITY 469 9,648,756 2 ELISA PLATE EXPENSES 2,984,199 3 SPEED TESTING CHARGES TESTING CHARGES 2,786,931 SEED CERTIFICATION 1,200 2,788,199 4 RCGM - LST TRIAL EXP 2, 053,057 5 LABOUR WAGES LABOUR WAGES 1,971,513 SALDAR WAGES 299,118 6 GERMINATION PAPER EXPENSES 446,966 7 MEMBERSHIP & SUBSCRIPTION 1,643,585 8 RENT RENT - OFFICE 112,925 RENT - GODOWN 21,150 KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 22 RENT - REST/GUEST HOUSE 13,100 147,175 9 SEEDS (DEMONSTRATION) PURCHASE SEED (DEMO) 145,268 MODEL FARM/DEMO EXP 8,096 FIELD TEST CHARGES 4,050 CATTLE FEED 82,760 PURCHASE THREAD 7,325 FERTILIZERS & CHEMICAL PURCHASE 428,931 AGRICULTURE EXPENSES 43,068 PLY - HOUSE EXPENSES 16,575 LAND LEASE CHARGES 46,027 782,100 10 ESTABLISHMENT EXP ESTABLISHMENT EXP 149,888 PRINTING & STATIONARY 80,488 COMPUTER STATIONARY 12,754 POSTAGE & COURIER 13,748 TEL/MOBILE/FAX EXP 203,998 INTERNET EXPENSES 7,329 NEWS PAP ER BOOKS PERIODIC 5,045 473,250 11 SECURITY 408,293 12 ELECTRICITY CHARGES ELECTRICITY CHARGES 143,822 GENERATOR EXPENSES 1,976 145,798 13 STAFF TRAVELLING FARE - AIR 87,539 FARE - OTHER 229,655 LODGING & BOARDING EXP 373,538 DAILY ALLO WANCE 386,329 1,077,061 KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 23 14 STIPEND 155,561 15 VEHICLE 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 2 6,480 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 (OTH ER 144,110 REP & MAINT. (GUEST HOUSE) 600 153,746 20 LEGAL EXPENSES LEGAL & PROF EXP 94,926 LICENSE FEES 4,500 KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 24 DOCUMENTATION CHARGES 200,075 119,501 21 SEMINAR EXPENSES STAFF CONF/SEMINAR EXP. 2,500 SEMINAR EXPENSES 2,500 MEETING EXP - DEALERS 940 5,940 22 ADVERTISEMENT ADVT. PRESS MEDIA 27,000 ADVT. BANNERS & OTHERS 910 ADVT. WALL PAINTING 860 28,770 23 BOREWELL & PIPE LINE PIPELINE EXPENSES 102,133 BOREWELL EXPENSES 1,994 104,127 24 ELECTRIC FITTING MATERIAL 75 ,199 MISCELLANEOUS 25 EXPENSES/INCOMES ELEC. CHAR - RESI/GUEST 66 WATER CHARGES 2,550 PFT (ST PAYABLE) 18,987 PFT (ST EXEMPT) 80,701 OCTROI/MARKET CESS 12,630 HAMALI CHARGES - GEN 3,677 VEHICLE TOLL - TAX 420 INSURANCE - ASSETS 606 INSURANCE - STOCKS 5,097 INSURANCE - OTHERS 2,085 VAT/SALES TAX 1,085 PROPERTY TAX 2,483 MISC. EXPENSES 58,793 KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 25 COMPENSATION 2,000 GENERAL EXPENSES 128,502 DONATION & CHARITY 2,467 DR. BAL WRITTEN OFF 35,523 LUG LBLE & PRIC E LABL 1,993 BANK COMM/CHARGES 32,778 INT. ON CASH CREDIT 131 INT SHORT TERM LO 1,478 MISCELLANEOUS INCOME (131,591) FOOD COURT EXP (24,325) CUSTOM DUTY CHARGES (146,455) 91,624 TOTAL 31,237,588 2. THUS THE ABOVE EXPENDITURE ARE BUSINESS EXPENDITURE AND AS SUCH BEING REVENUE EXPENSES ALLOWABLE AS BUSINESS EXPENDITURE U/S 37 OF THE I.T.ACT IN VIEW OF THE FACT THAT THESE EXPENDITURE ARE INCURRE D FOR PRODUCING AND PROCURING THE SEEDS GIVEN TO FARMERS ON CONTRACT BA SIS 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) KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 26 (V) VIBHA AGROTECH LTD V/S DCIT INCOME-TAX ACT, 196 1, NO.1799/HYD/2012 ORDER DATED 28.05.2014 21. PER CONTRA LD. DEPARTMENTAL REPRESENTATIVE SUPP ORTED THE FINDINGS OF LD.A.O AND ALSO SUBMITTED THAT THE ASSE SSEE FAILED TO PROVE BEFORE THE ASSESSING AUTHORITY ABOUT THE USE OF THE NEW FACTORY BUILDING FOR RESEARCH AND DEVELOPMENT ACTIV ITIES. QUANTITATIVE DETAILS WERE NOT PROVIDED FOR VARIOUS TYPES OF SEEDS PRODUCED/PROCURED. LD.D.R. ALSO SUPPORTED THE FINDI NGS OF LD.A.O THAT THE BUSINESS OPERATIONS AND AGRICULTURAL OPERA TIONS ARE MIXED BY VIRTUE OF WHICH THE ASSESSEE HAVE TRIED TO EVADE TAX BY CLAIMING EXPENSES THOUGH INCURRED FOR EARNING AGRICULTURE IN COME BUT CLAIMED AGAINST THE TAXABLE BUSINESS INCOME. 22. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE RECORDS PLACED BEFORE US. THE FIRST COMMON ISSUE RAISED IN THE CROSS APPEAL FOR ASSESSMENT YEAR 2008-09 AND 2009-10 RELATES TO RESEARCH AND DEVELOPMENT EXPENDITURE OF CAPITAL NATURE AT RS.2,8 8,51,028/- FOR ASSESSMENT YEAR 2008-09 AND RS.40,42,117/- FOR ASSE SSMENT YEAR 2009-10 AND REVENUE EXPENDITURE FOR R&D AT RS.3,12, 37,588/- AND KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 27 RS.4,54,34,487/- FOR ASSESSMENT YEAR 2008-09 AND 2 009-10 RESPECTIVELY. 23. WE OBSERVE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF GROWING SEEDS WHICH IS SUPPLIED TO THE FARMERS ON CONTRACT BASIS WITH THE UNDERSTANDING THAT SEED GRO WN BY THEM IS TO BE SOLD TO THE ASSESSEE COMPANY WHICH AFTER PROC ESSING, GRADING, TAGGING ETC. SOLD TO THE DEALERS. THE ASSESSEE IS P IONEER IN PRODUCTION OF HIGH BREED SEEDS IT IS RESEARCH BASED , DYNAMIC AGRICULTURAL BIOTECH COMPANY DELIVERING HIGH QUALIT Y SEEDS FOR THE INDIAN COMMERCIAL SEED MARKET. ITS R&D ACTIVITIES A ND RESEARCH STATIONS ARE RECOGNIZED BY THE DEPARTMENT OF SCIENT IFIC AND INDUSTRIAL RESEARCH (DSIR), GOVT OF INDIA, MINISTRY OF SCIENCE & TECHNOLOGY, NEW DELHI, A CERTIFICATE OF RENEWAL BEA RING NO. TI/IV/RD/2069/2007 DATED 25 TH JUNE, 2009 RENEWED UP TO 31 ST MARCH ,2010 IS ISSUED TO THE COMPANY. 24. THE MAIN PURPOSE OF HAVING AN R & D DIVISION WI THIN A SEED COMPANY AND COMMITTING SIGNIFICANT EXPENDITURE IS T O ADD VALUE TO THE CURRENT AND FUTURE PRODUCTS BY IMPROVING PRODUC TIVITY , ADDING VALUE THROUGH NEW CHARACTERS, SAVING OF COST OF PRO DUCTION OF SEEDS KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 28 GROWN IN COMPANYS OWN FILED AS WELL AS PRODUCED BY FARMERS INTO THEIR FIELDS. 25. THE COMPANY IS ACTIVELY INVOLVED IN RESEARCH, P RODUCTION, PROCESSING, PACKING AND MARKETING OF HIGH QUALITY S EEDS OF COTTON, CEREALS, PULSES, OIL SEEDS AND VEGETABLES. THE APPE LLANT COMPANY IS A PIONEER IN PRODUCTION OF BT COTTON SEEDS, THE SEE DS PRODUCED BY THE COMPANY GUARANTEES AT LEAST 200% PRODUCTION THA N THE CONVENTIONAL COTTON SEEDS USED BY THE INDIAN FARMER S, WITHIN A PERIOD OF THE 3 YEARS YOU WILL SURPRISE TO NOTE THA T MORE THAN 80% OF THE FARMERS ARE SOWING BT COTTON SEEDS. ASSESSEE IS ALSO DEVELOPING A NUMBER OF BT/ GMO SEEDS. THE COMPANY I S FIRST TO APPLY FOR BT BRINJIL, GMO SOYABEAN, APPROVALS ARE P ENDING UNDER VARIOUS OFFICES OF GOVERNMENT OF INDIA. 26. COMPANYS RESEARCH SEEDS ARE THE SEEDS, DEVELOP ED BY THE COMPANY, WITH THEIR IN-HOUSE RESEARCH DEPARTMENT. K SL 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 COMPA NYS RESEARCH IS TO DEVELOP ELITE VARIETIES AND HYBRIDS THAT WOUL D ATTRACT FARMERS KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 29 ATTENTION BECAUSE OF HIGH YIELD AND QUALITY. IT IS PERTINENT TO STATE THAT NORMALLY, RESEARCH AND DEVELOPMENT OF ONE VARI ETY (VARIOUS VARIETIES FALLS WITHIN A CROP) OF ANY CROP TAKES 3 TO 5 YEARS. THE ASSEESSEE IS ONE AMONGST THE FIRST THREE SUB-LICENS EES OF MADHYCO MONSANTO BIOTECH (M.M.B) INDIA LTD, WHICH HAS COMME RCIALIZED 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 HIG H QUALITY SEEDS FOR THE INDIAN COMMERCIAL SEED MARKET. 27. ITS R&D ACTIVITIES AND RESEARCH STATIONS ARE RE COGNIZED BY THE DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH (D SIR), GOVT. OF INDIA, MINISTRY OF SCIENCE & TECHNOLOGY, NEW DELHI, A CERTIFICATE OF RENEWAL BEARING NO.NU/IV/RD/2069/2007 DATED 25 TH JUNE 2009 RENEWED UP TO 31 ST MARCH 200 IS ISSUED TO THE COMPANY (COPY OF THE SAME AVAILABLE ON PAPER BOOK PAGE 151. THE MAIN PU RPOSE OF HAVING AN R&D DIVISION WITHIN A SEED COMPANY AND CO MMITTING SIGNIFICANT EXPENDITURE IS TO ADD VALUE TO THE CURR ENT AND FUTURE PRODUCTS BY IMPROVING PRODUCTIVITY, ADDING VALUE TH ROUGH NEW CHARACTERS, SAVING OF COST OF PRODUCTION FOR SEEDS GROWN IN KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 30 COMPANYS OWN FIELD AS WELL AS PRODUCED BY FARMERS INTO THEIR FIELDS. 28. THE COMPANY IS ACTIVELY INVOLVED IN RESEARCH, P RODUCTION, PROCESSING, PACKING AND MARKETING OF HIGH QUALITY S EEDS OF COTTON, CEREALS, PULSES, OIL SEEDS AND VEGETABLES. 29. THE ASSESSEE IS A PIONEER IN PRODUCTION OF BT C OTTON SEEDS, THE SEEDS PRODUCED BY THE COMPANY GUARANTEES AT LEAST 2 00% PRODUCTION THAN THE CONVENTIONAL COTTON SEEDS USED BY THE INDIAN FARMERS, WITHIN A PERIOD OF THE 3 YEARS YOU WILL SU RPRISE TO NOTE THAT MORE THAN 80% OF THE FARMERS ARE SOWING BT COTTON S EEDS. ASSESSEE IS ALSO DEVELOPING A NUMBER OF BT/GMO SEED S HE IS FIRST TO APPLY FOR BT BRINJIL, GMO SOYABEAN, APPROVALS OF WHICH WERE PENDING AT THE TIME OF ASSESSMENT PROCEEDINGS BEFOR E THE VARIOUS GOVERNMENT OFFICES, HOWEVER NOW APPROVAL ARE RECEIV ED WHICH ARE AVAILABLE ON PAPER BOOK PAGE-381 TO 408. 30. WE ALSO FIND THAT THE LD.CIT(A) AFTER THOROUGHL Y EXAMINING THE BUSINESS MODEL OF THE ASSESSEE AS WELL AS ITS RESEA RCH AND KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 31 DEVELOPMENT ACTIVITIES CAME TO THE CONCLUSION THAT UNDOUBTEDLY THE ASSESSEE IS REGULARLY CARRYING OUT RESEARCH AND DEVELOPMENT ACTIVITIES AND THE ALLEGED CAPITAL EXPENDITURE INCU RRED TOWARDS RESEARCH AND DEVELOPMENT ACTIVITIES HAVE CERTAINLY BEEN INCURRED. IN COMING TO THIS CONCLUSION LD.CIT(A) OBSERVED AS FOLLOWS; 4.2.1 BEFORE ME, THE DETAILED SUBMISSIONS ON THESE ISSUES WERE FILED WHICH FIND S PLACE IN PARA 3 OF THIS ORDER. FROM TH ESE SUBMISSIONS AND THE ASSESSMENT ORDER, IT IS NOTED THAT THE ASSESSEE IS A SEED DEVELOPMENT COMPANY. IT HAS TWO DIVISIONS - ONE AGRICULTURE DIV ISION AND THE OTHER COMMERCIAL DIVISION. THE COMPANY IS ALSO HAVING IN- HOUSE SCIENTIFIC RESEARCH DEPARTMENT FOR DEVELOPMENT OF HYBRID SEEDS . THE INCOME ON PRODUCTION OF SEEDS IN ITS OWN AGRICULTURAL LAND HA VE BEEN SHOWN AS AGRICULTURAL INCOME [ WHICH IS EXEMPT FROM TAX]; WH EREAS THE INCOME ON SALE OF SEEDS PRODUCED THROUGH CONTRACT FARMERS ARE SHOWN AS TAXABLE INCOME. IT HAS BEEN SUBMITTED THAT THE ASSESSEE IS ONE AMONGST THE FIRST THREE 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 AGRICUL TURAL BIOTECH COMPANY DELIVERING HIGH QUALITY SEEDS FOR THE INDIAN COMMER CIAL 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 & TECHN OLOGY, NEW DELHI, A CERTIFICATE OF RENEWAL BEARING NO TU/IV/-RD/2069/20 07 DATED 25TH JUNE 2009 RENEWED UP TO 31ST MARCH 2010 IS ISSUED T O THE COMPANY; THAT THE MAIN PURPOSE OF HAVING AN R & D DIVISION W ITHIN A SEED KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 32 COMPANY AND COMMITTING SIGNIFICANT EXPENDITURE IS T O ADD VALUE TO THE CURRENT AND FUTURE PRODUCTS BY IMPROVING PRODUCTIVI TY, ADDING VALUE THROUGH NEW CHARACTERS, SAVING OF COST OF PRODUCTIO N 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, PRODU CTION, PROCESSING, PACKING, AND MARKETING OF HIGH QUALITY SEEDS OF COT TON, CEREALS, PULSES, OIL SEEDS AND IS A PIONEER IN PRODUCTION OF BY THE COTTON SEEDS, THE SEEDS PRODUCED BY THE COMPANY GUARANTEES A TLEAST 2 00% PRODUCTION THAN THE CONVENTIONAL COTTON SEEDS USED BY THE INDI AN FARMERS; AND THAT WITHIN A PERIOD OF THE 3 YEARS MORE THAN 80% OF THE FARMERS WOULD BE SOWING BT COTTON SEEDS; AND FURTHER SUBMITTED ILIA: ~ ASSESSEE IS ALSO DEVELOPING A NUMBER OF BT /GMD SEEDS AND IS FIRST T O APPLY FOR BY THE BT BRINJIL, GMD SOYABEAN; AND THAT APPROVALS ARE PE NDING UNDER VARIOUS OFFICES OF. GOVERNMENT OF INDIA. IT IS ALSO SUBMITTED THAT THE COMPANY'S RESEARCH SE EDS ARE THE SEEDS, DEVELOPED BY THE COMPANY, WITH THEIR IN-HOUSE RESEA RCH DEPARTMENT; THAT THE ASSESSEE ( KSL) SINCE ITS INCEPTION HAD RE COGNIZED THE NEED FOR A ROBUST R&D AND TECHNOLOGY BASE, TO ENSURE ITS CONTI NUED GROWTH AND COMPETITIVE EDGE IN THE SEEDS BUSINESS; AND THAT TH E MAIN FOCUS OF COMPANY'S RESEARCH IS TO DEVELOP ELITE VARIETIES AN D HYBRIDS THAT WOULD ATTRACT FARMER'S ATTENTION BECAUSE OF HIGH YIELD AN D QUALITY. IT HAS BEEN POINTED OUT THAT NORMALLY, RESEARCH AND DEVELOPMENT OF ONE VARIETY (VARIOUS VARIETIES FALLS WITHIN A CROP) OF ANY CROP TAKES 3 TO 5 YEARS. 4.2.2 IN THE CONTEXT OF ADDITION ON FIXED ASSETS FO R SCIENTIFIC RESEARCH & DEVELOPMENT, THE AD HAD NOTED THAT THE ASSESSEE POS SESSED SUFFICIENT PREMISES FOR ITS RESEARCH WORK AT THE BEGINNING OF ACCOUNTING PERIOD; AND TOOK THE VIEW THAT FURTHER ADDITION TOTALING TO RS 2,88,51,028/- ( DURING THE YEAR UNDER CONSIDERATION) WAS RIOT LINKED TO AN Y RESEARCH ACTIVITY FOR KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 33 THE BUSINESS OF THE ASSESSEE [ INDIRECTLY MEANING T HEREBY TO BE LINKED WITH ON AGRICULTURAL OPERATIONS AND THUS AGRICULTUR AL INCOME]. HE ACCORDINGLY HELD THAT THE SUCH EXPENDITURE OF CAPIT AL NATURE [ USED FOR SCIENTIFIC RESEARCH DEVELOPMENT] WAS DEDUCTIBLE FRO M AGRICULTURAL INCOME ONLY. FURTHER WHILE EXAMINING THE ISSUE FROM THE PO INT OF USE OF THOSE ASSETS [ I.E WHETHER FOR RESEARCH OR NOT] THE AD TO OK NOTE OF THOSE ASSETS (I.E. WHETHER FOR RESEARCH OR NOT) THE AO TOOK NOTE OF THE BREAK UP DETAILS OF THE ADDITION 2,88,51,028/- [BEING THE COST ON AC COUNT OF RESEARCH FACTORY BUILDING AT RS 2,05,50,312/- AND ONE RESEAR CH BUILDING AT RS 9,13,063/-; AND THE BALANCE ON ACCOUNT OF EXPENDITU RE ON PLANT & MACHINERY] AND FURTHER BREAK-UP DETAILS OF THE SAID RESEARCH FACTORY BUILDING [BEING RESEARCH GINNING PROJECT AT RS 1,43 ,57,753/- AND RESEARCH DELENTING PROJECT AT RS 61,92,558/] AND IN FERRED THAT THE SAID RESEARCH FACTORY BUILDING, BEING FOR GINNING PROJEC T, COULD NOT HAVE BEEN USED FOR ANY RESEARCH PURPOSE; AND AFTER TAKIN G 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 GENUINENE SS ALSO AND HELD THAT THE BALANCE RS.75,61,431/- WAS DEDUCTIBLE AGAI NST AGRICULTURE INCOME. TO SUM UP, FINALLY AO MADE ENTIRE DISALLOW ANCE OF RS.2,88,51,028/- (CLAIMED BY ASSESSEE U/S 35(1)(IV) TOWARDS CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH & DEVELOPMENT] F ROM ITS BUSINESS INCOME. DURING THE APPEAL PROCEEDINGS, IT HAS BEEN SUBMITTE D THAT PART OF THE SAID BUILDING [RESEARCH FACTORY BUILDING] IS USED F OR GINNING COTTON AND THEREFORE IN PRACTICE, WORKMEN OF THE ASSESSEE CALL IT GINNING PROJECT BUILDING. IT IS EXPLAINED THAT THE ASSESSEE HAS EXP ERTISE IN BT COTTON; ITS PROCESSED SEEDS ARE SUPPLIED TO SEVERAL CULTIVATORS WITH THE CONTRACT THAT THE COTTON SO PRODUCED WOULD BE SOLD TO THE ASSESSE E ONLY; AND THIS KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 34 COTTON IS GROWN IN DIFFERENT AREAS IN VARIABLE CLIM ATE S AND CONDITIONS IN THE COUNTRY; THAT BY PROCESS OF GINNING COTTON SEED S AND LINT ARE SEPARATED AND AGAIN RESEARCH IS MADE ON THE FIBER O F LINT TO TEST ITS LENGTH AND STRENGTH ; AND THAT .THE AD WITHOUT APPR ECIATING THIS PROCESS SIMPLY OBSERVED THAT THERE APPEARS NO QUESTION OF A NY ASPECT OF 'RESEARCH IN THE PROCESS OF GINNING.' 31. FURTHER AS REGARDS THE ALLEGED REVENUE EXPENDIT URE INCURRED TOWARDS RESEARCH AND DEVELOPMENT WORK, LD.CIT(A) AP PRECIATED BY GIVING THE FINDING OF FACT THAT THE GENUINENESS OF THE EXPENDITURE IS NOT DOUBTED AND SO IS THE INVOLVEMENT OF THE ASSESS EE IN THE RESEARCH AND DEVELOPMENT ACTIVITIES AND PRIMARILY T HE CLAIM OF THE ASSESSEE SEEMS TO BE ON THE SOUND FOOTING. IN OBSER VING SO LD.CIT(A) MENTIONED AS FOLLOWS; 4.2.3 SIMILARLY IN THE CONTEXT OF REVENUE EXPENSES ON SUCH RESEARCH & DEVELOPMENT WHICH WAS CLAIMED AT RS 3,12,37,588 U/S 37(1), THE AO TOOK THE VIEW THAT THE EXPENSES WERE TO BE CONSIDER ED IN THE AGRICULTURAL ACCOUNT AND IN. VIEW THEREOF HE DISALLOWED THE ENTI RE CLAIM OF DEDUCTION FROM ITS BUSINESS INCOME. IN ITS REPLY, THE ASSESSE E HAS LISTED THE VARIOUS HEADS AND GIVEN THE BREAK-UP OF EXPENDITURE AND DET AILED EXPLANATION ONTO THE NATURE OF THE EXPENSES [REFER PAR A 3.5]. IN THE FACTS OF THE CASE, IT CANNOT BE HELD THAT ASSESSEE HAD NOT DONE R&D WO RK AND OR NOT INCURRED ANY REVENUE EXPENDITURE ON SUCH R&D WORK. 4.2.4 THUS ON THE SUBJECT ISSUE, WHAT I FIND THAT O N THE ONE SIDE ASSESSEE HAS CLAIMED THE ENTIRE DEDUCTION [2,88,51, 028 + 3,12,37,588] KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 35 FROM ITS BUSINESS INCOME AND THEREBY REDUCED ITS TA X LIABILITY WHEREAS THE AO HAS ATTRIBUTED & LINKED SUCH EXPENDITURE WIT H ITS AGRICULTURAL INCOME WHICH IS EXEMPT FROM TAX] AND THAT RESULTED INTO HIGHER TAXABLE INCOME. I HAVE CAREFULLY CONSIDERED THE POINT OF VI EW & THE BASIS ADOPTED BY THE AO AS WELL AS ASSESSEE BOTH AND FIND THAT BO TH HAD TAKEN THE EXTREME APPROACH WHEREAS THE ACTUAL STATE OF AFFAIR S LIES SOMEWHERE IN BETWEEN. 32. MOVING FURTHER THE ACTIVITIES OF THE ASSESSEE O F DEVELOPING THE SEEDS AT VARIOUS STAGES I.E. NUCLEUS SEEDS, BREEDER SEED, FOUNDATION SEED AND CERTIFIED SEEDS AND THE ACTIVITIES BEING C ARRIED OUT BY CONTRACT FORMING AS WELL AS THE SEEDS GROWN AND PRO DUCED IN THE 109.5 ACRE LAND OWNED BY THE ASSESSEE COMPANY TO VA RIOUS STAGES OF THE COMPANYS BUSINESS MODEL HAVE BEEN NOTED BY THE LD.CIT(A) IN THE FOLLOWING MANNER; THE SEEDS ARE DEVELOPED IN VARIOUS STAGES. THE FIR ST STAGE IS SEED (IN SHORT NS), THE SECOND IS BREEDER SEED (BS), THE THI RD IS FOUNDATION SEED (FS) AND THE LAST IS CERTIFIED SEEDS. (II) THE NUCLEAR SEEDS ARE DEVELOPED BY THE ASSESSE E IN ITS LABORATORIES (R & D CENTERS) BY SEVERAL PERMUTATIONS AND COMBINATIO NS OF VARIOUS GERM PLASMAS (HELD BY THE COMPANY). THE COMPANY ALSO ACQ UIRES GERM PLASTMA FROM VARIOUS UNIVERSITIES AND OTHER SOURCES FOR R&D PURPOSES. IT REQUIRES SEVERAL STEPS. THE NUCLEAR SEEDS SO PRO DUCED ARE SENT FOR VARIOUS TRIALS TO DESIGNATED GOVERNMENT AUTHORITIES /UNIVERSITIES FOR APPROVAL OF VARIETY. (REFER ASSESSEE'S SUBMISSION - PARA-3 OF THIS ORDER - KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 36 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 FOU NDATION SEED. WHICH IN- TURNS ARE USED FOR PRODUCTION OF CERTIFIED SEEDS. (V) THE FUNCTIONS UPTO FOUNDATION SEED PRODUCTION R EQUIRES SPECIAL SKILLS AND ARE HANDLED BY ITS R&D DIVISION. (V) R&D UNIT ALSO PURCHASES SEED OF VARIOUS QUALITI ES FROM AGRICULTURE UNIVERSITIES AND OTHER GOVERNMENT INSTITUTIONS AND PERFORMS EXPERIMENT BY SOWING, BREEDING AND HARVESTING THE SAID SEEDS I N VARIOUS KINDS OF SOILS AND CLIMATES AND ATMOSPHERE. IN R&D DIFFERENT TYPES OF EXPERIMENTS ARE ALSO PERFORMED LIKE GERMINATION OF SEEDS POLLINATION OF FLOWERS AND PLANTS IN DIFFERENT CONDITIONS AND MATC HING OF DIFFERENT PARTS OF PLANT OF DIFFERENT GENUS. STUDENTS FROM AGRICULT URE UNIVERSITIES COME TO THE R&D DEPARTMENT FOR TRAINING AND THEY ARE PAI D STIPEND. (VI) DURING THE YEAR UNDER CONSIDERATION, AROUND 77 ACRES OF LAND R TAKEN ON LEASE) WAS USED FOR R&D PURPOSES. THE LAND IS SI TUATED AT VARIOUS PLACES. LAND IS UTILIZED FOR COTTON - ABOHAR PANJA B (8 ACRES) FOR NORTH ZONE COTTON, RATLAM (MP) (8 ACRES) FOR HXB COTTON; HYDERABAD (AP) (32.5 ACRES) FOR RICE, COTTON & MAIZE; PAUD PUNE (MS) (10 ACRES) & KRUNAL (HARYAN A ) (3 ACRES) FOR RICE AND UNAVA AHEMDABAD (GUJARAT) (15 ACRES) FOR WHEAT, MUSTARD, BAJRAAND CASTOR. (VII) THE BREEDER SEEDS & FOUNDATION SEEDS ARE GROW N AND PRODUCED IN ITS OWN AGRICULTURAL LAND [109 ACRES] AS WELL AS TH ROUGH CONTRACT FORMING. KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 37 (VIII) THE CERTIFIED SEEDS ARE ULTIMATELY MADE THRO UGH CONTACT FORMING ONLY. (IX) IN THE CONTRACT FORMING, THE ASSESSEE ENTERS I NTO THE CONTRACT WITH FORMERS [GENERALLY THROUGH GROWERS & ORGANISERS]. T HE COMPANY SELLS ITS SEEDS AT PREDETERMINED PRICES AND PROVIDES REQUIRED KNOW HOW. '!'HE FORMERS, AFTER HARVESTING THE CROP, SALES BACK THE PRODUCE [ NEXT STAGE OF MULTIPLIED SEEDS] TO THE ASSESSEE. THE SEEDS GROWN OUT OF FOUNDATION SEED ARE THE FINAL SEED , WHICH AFTER REQUIRED CERT IFICATION, ARE SOLD BY ITS BUSINESS DIVISION IN THE MARKET, AFTER PACKING AND LEVELLING. (X) THE INCOME OF THE AGRICULTURAL DIVISION, BEING OUT OF AGRICULTURA1 OPERATIONS, ARE EXEMPT FROM TAX. WHEREAS THE INCOME ARISEN TO THE BUSINESS DIVISION THROUGH THE CONTRACT FORMING IS S HOWN AS TAXABLE INCOME [ HERE AGRICULTURAL OPERATIONS ARE DONE BY T HOSE FORMERS ON THEIR LAND AND THUS INCOME ARISING THROUGH CONTRACT FORMI NG BECOMES ITS ( I.E, ASSESSEE'S) TAXABLE INCOME] (XI) THE PRODUCE OF ITS AGRICULTURAL LAND [ I.E. TH E BREEDER SEED & FOUNDATION SEED] ALSO SOLD TO THE CONTRACT FORMERS. THE MULTIPLIED SEEDS PRODUCED BY THE CONTRACT FORMERS, OUT OF FOUNDATION SEED OF AGRICULTURAL DIVISION IS PURCHASED BACK BY ITS COMMERCIAL DIVISI ON. IN THE FACTS OF THE CASE, IT HAS TO BE ACCEPTED THA T 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 ASS ESSEE HAS EMPLOYED NUMBER OF SCIENTISTS. ITS IN-HOUSE R&D HAS ALSO BEEN TECHNOLOGY. HOWEVER, THE BENEFIT FROM THE EXPENDITU RE MADE IN THE R&D ARISES IN BOTH THE DIVISIONS (AGRICULTURE DIVISION & COMMERCIAL DIVISION) THEREFORE, IN MY CONSIDERED VIEW, THE R&D EXPENDITU RE WILL HAVE TO BE KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 38 ALLOCATED -BETWEEN BOTH THE DIVISIONS. IN THE FACTS OF THE CASE, THE PROPER CRITERION &ALLOCATION WOULD BE THE NET INCOME OF TH E TWO DIVISIONS, PRIOR TO DEDUCTION OF R&D EXPENSES. FOR THIS PURPOSE, I H AVE LOOKED INTO THE INCOME SHOWN AS AGRICULTURAL INCOME. WHAT I FIND TH AT, THAT BEING EXEMPT FROM TAX; ASSESSEE HAS SHOWN THAT ON THE HI GHER SIDE. SO THAT REQUIRES ADJUSTMENT. 33. AFTER GOING THROUGH THE SYSTEMATIC ANALYSIS, DE EP STUDY OF THE BUSINESS MODEL AND THE USE OF RESEARCH & DEVELOPMEN T ACTIVITIES IN THIS PROCESS AS OBSERVED BY LD.CIT(A), WE PERUSE D THE FINDINGS OF LD. ASSESSING OFFICER AND OBSERVED THAT AT PAGE-9 OF THE IMPUGNED ASSESSMENT ORDER, LD.A.O HAS OBSERVED THAT THE ASSE SSEE POSSESSED RESEARCH LAB, RESEARCH POLY HOUSE AND RESEARCH BUIL DING WHICH ARE QUITE OLD. DURING THE INSTANT ASSESSMENT YEAR UNDER APPEAL 2008-09 RESEARCH FACTORY BUILDING, FURNITURE & FIXT URE AND PLANT & MACHINERY RELATED THERE TO HAVE BEEN CLAIMED AS CAP ITAL EXPENDITURE. THERE SEEMS MERIT IN THE CONTENTION O F THE LD. COUNSEL FOR THE ASSESSEE THAT THE NEW RESEARCH BUIL DING IS DIFFERENT FROM THOSE EXISTING AS THEY ARE MORE SOPHISTICATED AND EQUIPPED WITH BETTER MODERN MACHINES WHICH HELPS THE TEAM OF RENOWNED SCIENTISTS TO DO RESEARCH AND DEVELOPMENT WORK. IT IS ALSO SURPRISING TO NOTE THAT LD.A.O WHO IS NOT AN EXPERT IN THE FIELD OF RESEARCH AND DEVELOPMENT OF THE ACTIVITIES CARRIED OUT BY THE ASSESSEE GAVE CONTRADICTORY FINDINGS AT MANY PLACES . SOME TIMES IT EMERGES FROM HIS FINDING THAT ASSESSEE IS DOING THE RESEARCH AND DEVELOPMENT ACTIVITIES BUT ALLEGED NEW BUILDING HAS NOT BEEN USED FOR THIS WORK. SOMEWHERE IT IS MENTIONED THAT THE BUSINESS PROCESS KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 39 IS VERY COMPLICATED AND NOT UNDERSTANDABLE BY A COM MON MAN BUT IN THE NEXT FEW LINES GIVES CATEGORICAL FINDING THA T THE ALLEGED RESEARCH BUILDING CANNOT BE USED FOR RESEARCH WORK IN GINNING. 34. LD.A.O FAILED TO APPRECIATE THAT ONLY PART OF T HE BUILDING IS USED FOR GINNING COTTON. THE ASSESSEE HAS EXPERTIS E IN BT COTTON, ITS PROCESSED SEEDS ARE SUPPLIED TO SEVERAL CULTIVA TORS WITH A CONTRACT THAT THE COTTON SO PRODUCED WOULD BE SOLD TO THE ASSESSEE ONLY. THIS COTTON IS GROWN IN DIFFERENT AREAS IN VA RIABLE CLIMATES IN THE COUNTRY. BY PROCESSING GINNING COTTON, SEEDS A ND LINK ARE SEPARATED. RESEARCH IS MADE ON THE FIBRE OF LINT T O TEST ITS LENGTH AND STRENGTH. IT SEEMS THAT THE LD.A.O HAS MERELY MADE A GUESS WORK MENTIONING THAT THERE APPEARS NO QUESTION OF A NY ASPECT OF RESEARCH IN THE PROCESS OF BUILDING. EVEN FOR SAKE OF DISCUSSION IT IS PRESUMED THAT SOME PART OF THE RESEARCH BUILDING IS ALSO USED FOR THE AGRICULTURAL OPERATIONS FOR EARNING EXEMPT INCO ME BUT THIS FACT CANNOT BE DENIED THAT THE ALLEGED CAPITAL EXPENDITU RE FOR THE BUILDING, FURNITURE & MACHINERY HAVE BEEN USED FOR RESEARCH AND DEVELOPMENT ACTIVITY. 35. SECTION 35(1)(IV)OF THE ACT PROVIDES THAT THE D EDUCTION CAN BE CLAIMED IN RESPECT OF ANY EXPENDITURE OF CAPITAL NA TURE ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE. HONBLE HIGH COURT OF ANDHRA PRADESH IN THE CASE OF CIT V YAMUNA DIGITAL ELECTRONICS(P) LTD (1999) 103 TAXMAN 46/238 ITR 717 HELD THAT THE EXPENDITURE NEED NOT WHOLLY RELATE TO RES EARCH AND KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 40 DEVELOPMENT. SECTION 35(1)(IV) DOES NOT SAY THAT TH E EXPENDITURE SHOULD BE WHOLLY AND EXCLUSIVELY USED FOR RESEARCH AND DEVELOPMENT. AS LONG AS THE EXPENDITURE IS OF A CAP ITAL NATURE AND IT IS USED FOR SCIENTIFIC RESEARCH RELATING TO THE BUS INESS CARRIED ON BY THE ASSESSEE, THE ASSESSEE IS ENTITLED TO CLAIM DED UCTION. LD.A.O ALSO FAILED TO APPRECIATE THAT THE ASSESSEE HAS BEE N ISSUED A CERTIFICATE BY THE DEPARTMENT OF SCIENTIFIC AND IND USTRIAL RESEARCH, GOVT. OF INDIA, MINISTRY OF SCIENCE AND TECHNOLOGY, NEW DELHI FOR ITS RESEARCH AND DEVELOPMENT ACTIVITY AND RESEARCH STAT IONS. 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 DELINT ING IS THE LATEST TECHNOLOGY WHICH ASSURE LOWEST DAMAGE TO THE SEED. IN TURN THE GERMINATION OF HYBRID SEED IS IMPROVED BECAUSE EARL IER ACID DELINTING WAS POPULAR WHEREIN THE LOSSES OF GERMINA TION WERE VERY HIGH. THUS FOR RESEARCH & DEVELOPMENT NEW MACHINES WERE INSTALLED TO IMPROVE/INCREASE THE QUALITY AND PROFI TABILITY. 36. ON PERUSAL OF THE ASSESSMENT ORDER REVEALS THAT LD.A.O FAILED TO TAKE ANY PAINS TO DEPUTE A TEAM TO VISIT THE SIT E AND TO UNDERSTAND THE BUSINESS PROCESS. RATHER HE TRIED TO COME TO A CONCLUSION MERELY BY VISITING THE WEBSITE OF THE AS SESSEE COMPANY AND LINKING VARIOUS ACTIVITIES SEPARATELY CARRIED O UT BY THE ASSESSEE BY TREATING THEM AS INTERLINKED WITHOUT GIVING ANY BASIS. LEARNED DCIT, WHO HAS GONE THROUGH HUNDRED PAGES OF THE KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 41 SUBMISSION, VERIFIED BOOKS OF ACCOUNTS IN THOUSANDS PAGES, HAS FOUND NEGLIGIBLE SALE OF LINT (END PRODUCT OF GINNI NG INDUSTRY), WHICH IS THE END PRODUCT OF THE GINNING INDUSTRY. B EFORE PASSING THESE COMMENTS HE SHOULD HAVE SEEN WHAT ASSESSEE IS DOING OF ITS END PRODUCT, IF HE IS ASSESSED AS GINNING UNIT, WHA T ABOUT THE FINISHED PRODUCT, AND WHAT IS BY-PRODUCT. IN FACT IN THE PRODUCTION 'OF HYBRID COTTON SEED, FINISHED PRODUCT IS BT COTT ON SEED AND LINT IS BY PRODUCT WHICH' IS OF NEGLIGIBLE COMMERCIAL VA LUE, WHEREAS IN THE GINNING UNIT LINT IS THE FINISHED PRODUCT AND C OTTON SEED IS BY- PRODUCT. LEARNED DCIT COULD NOT DIFFERENTIATE BETWE EN GINNING UNIT AND HYBRID COTTON SEED PRODUCTION. SIR, YOUR HONOUR HAS ASSESSED A NUMBER OF UNITS ENGAGED IN GINNING, BEFORE GOING TO THE POINT OF R&D CARRIED BY THE ASSESSEE IT IS PERTINENT TO KNOW WHAT IS GINNING INDUSTRY. GINNING INDUSTRY IS AN INDUSTRY, WHERE COTTON IS SE PARATED IN TWO PARTS (LINT AND COTTON SEED) THE MAIN PRODUCT I S LINT AND BY PRODUCT IS COTTON SEED (SARKI). OUT OF THE COTTON ( PRESENT RATE RS. 6000 PER QUINTAL) GINNED, ABOUT 34% IN QUANTITY LIN T IS PRODUCED (PRESENT RATE IS RS. 16500 PER QUINTAL OR RS. 58000 PER CANDY), AND 65% COTTON SEED (HAVING PRESENT MARKET RATE OF RS. 1250 PER QUINTAL). 37. BY THE APPLICATION OF RESEARCH AND DEVELOPMENT ACTIVITY ASSESSEE IS ABLE TO FETCH MUCH HIGHER PRICE FOR THE COTTON SEEDS PREPARED BY IT AS AGAINST THE COTTON SEEDS SOLD BY THE GINNING UNITS. KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 42 IN OUR VIEW FOR PRODUCTION OF HYBRID SEEDS RESEARCH AND DEVELOPMENT ACTIVITY IS MUST FOR WHICH NECESSARY IN FRASTRUCTURE IS REQUIRED AND THE REVENUE AUTHORITIES CANNOT ENFORCE OR DIRECT THE ASSESSEE OR OTHER CONCERN RUNNING SIMILAR BUSINESS TO ADOPT A PARTICULAR PATTERN OF THE RESEARCH AND DEVELOPMENT APPARATUS INCLUDING BUILDING AND MACHINERY. IT IS THE PREROG ATIVE OF THE ASSESSEE TO DO THE BEST IN THE INTEREST OF THE BUSI NESS AND IF THERE IS A NEED 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 T HE 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 EXP ENDITURE CLAIMED AS DEDUCTION BUT NOT DEBITED TO PROFIT AND LOSS ACC OUNT AND AUDITOR HAS SPECIFICALLY MENTIONED THAT THE CAPITAL EXPENDI TURE 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 ASSE SSEE HAS EXPLAINED ABOUT THE METHOD OF PRODUCTION, EVALUATIO N OF CROP THROUGH INITIAL STATION TRIALS, ADVANCED STATION TR AILS, MULTI STATION KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 43 TRAILS. ASSESSEE HAS ALSO ESTABLISHED A PRODUCT EV ALUATION AND REGULATORY TRIAL DEPARTMENT AS REQUIRED BY GENETIC ENGINEERING, MINISTRY OF ENVIRONMENT & FOREST, GOVT. OF INDIA. IT IS ALSO ON RECORD THAT ASSESSEE HAS GIVEN A DETAILED NOTE ABOU T THE PROCESS OF DEVELOPMENT OF SEED NAMELY GERM PLASM COLLECTION, C ONVERSION, CHARACTERIZATION AND DOCUMENTATION AND THE ROLE OF R&D IN DEVELOPMENT OF SEEDS. 40. TO CONCLUDE OUR DISCUSSION, WE FIND THAT THE AS SESSEE IS REGULARLY DOING THE RESEARCH AND DEVELOPMENT ACTIVI TY. THE CLAIM OF THE CAPITAL EXPENDITURE OF THE OLD RESEARCH BUILDIN GS STANDS DULY ALLOWED. THE ALLEGATION OF THE LD. ASSESSING OFFIC ER THAT THE CAPITAL EXPENDITURE INCURRED DURING THE YEAR UNDER APPEALS HAVE NOT BEEN USED FOR RESEARCH AND DEVELOPMENT ACTIVITIES SEEMS COMPLETELY BASELESS AND BASED ON SURMISES AND CONJUNCTIONS AND CAN BE TERMED AS A GUESS WORK, JUST TO TAKE A VIEW OF DENY ING THE BENEFIT OF SECTION 35(1)(IV) OF THE ACT FOR CAPITAL EXPENDITUR E INCURRED FOR RESEARCH AND DEVELOPMENT ACTIVITY. WE ALSO FIND TH AT THE ALLEGED CONNECTION OF THE RESEARCH BUILDING AND MACHINERIES WITH AGRICULTURAL OPERATIONS IS ALSO A GUESS WORK AND IS NOT SUPPORTED BY ANY FACT. WE THEREFORE ARE OF THE CONSIDERED VIEW THAT THE CLAIM OF THE ASSESSEE U/S 35(1)(IV) OF THE ACT AT RS.2,88,51 ,028/- AND RS.40,42,117/- FOR ASSESSMENT YEAR 2008-09 AND 2009 -10 FOR THE CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH AND DEVE LOPMENT EXPENDITURE WAS FULLY JUSTIFIED AND LD.A.O ERRED IN DENYING THE SAME. WE ACCORDINGLY ALLOW THE CLAIM OF CAPITAL EXP ENDITURE U/S KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 44 35(1)(IV) OF THE ACT CLAIMED BY THE ASSESSEE FOR AS SESSMENT YEAR 2008-09 AND 2009-10 AT RS. 2,88,51,028/- AND RS.40, 42,117/- RESPECTIVELY. 41. NOW COMING TO THE ISSUE OF THE REVENUE EXPENDIT URE OF RS.3,12,37,588/- AND RS.4,54,34,487/- CLAIMED AS EX PENSES FOR SCIENTIFIC AND RESEARCH DEVELOPMENT WORK, WE HAVE P ERUSED THE DETAILS FILED BY THE ASSESSEE, OBSERVATION BY BOTH THE LOWER AUTHORITIES AND FIND THAT GENUINENESS OF THE ALLEGE D REVENUE EXPENDITURE HAS NOWHERE BEEN DOUBTED AT ANY STAGE. LD.A.O HAS TRIED TO LINK THE ALLEGED REVENUE EXPENDITURE WITH THE EXPENDITURE INCURRED IN CONNECTION TO AGRICULTURAL PROCEEDS WHI CH AGAIN HAS NO BASIS BECAUSE THE TURNOVER OF AGRICULTURAL RECEIPTS IS RATHER LESS THAN THE ALLEGED REVENUE EXPENDITURE WHICH PROVES T HAT THE OBSERVATION OF THE ASSESSING OFFICER IS MERELY BASE D ON SURMISES AND CONJUNCTIONS. EVEN LD. CIT(A) HAS GIVEN A CATE GORICAL FINDING OBSERVING THAT THERE IS NO DOUBT THAT THE RESEARCH AND DEVELOPMENT EXPENSES OF BOTH CAPITAL AND REVENUE NA TURE HAS BEEN INCURRED. IT CANNOT BE HELD THAT THE ASSESSEE HAD N OT DONE RESEARCH AND DEVELOPMENT WORK AND NOT INCURRED/ANY REVENUE E XPENDITURE FOR SUCH RESEARCH AND DEVELOPMENT WORK. LD.CIT (A) FURTHER HELD THAT BOTH THE ASSESSEE AND ASSESSING OFFICER HAVE T AKEN THE EXTREME APPROACH WHEREAS THE ACTUAL STATE OF AFFAIR S LIES SOMEWHERE IN BETWEEN. THEREAFTER LD.CIT(A) TAKING THE BASIS OF THE TURNOVER FROM COMMERCIAL ACTIVITY AS WELL AS FROM THE AGRICU LTURAL ACTIVITY APPORTIONED THE EXPENDITURE OF ALLEGED RESEARCH AN D DEVELOPMENT KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 45 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 AG RICULTURAL DIVISION] TO CONTRACT FORMERS TOTALLING TO.RS 2,90,33,798/-. AS AGAINST THAT THE EXPENDITURE ON AGRICULTURAL OPERATION IS SHOWN AT R S 47,58,649/-. THIS AMOUNTS TO ONLY 16.4% WHICH IS VERY LOW. IN THE IMM EDIATELY PRECEDING YEAR, THE TOTAL SALE WAS 2,52,47,283/- AND THE EXPE NSE 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, LABOUR WAG ES, STAFF TRAVELLING & VEHICLE FUEL EXPENSES AND THUS NATURE OF EXPENSES B EING SAME, IT WAS QUITE POSSIBLE THAT PART OF DIRECT EXPENSES WERE DE BITED AS REVENUE EXPENSES ON R&D. THE ASSESSEE HAD ALSO ADMITTED THA T THE FUNCTIONS UPTO FOUNDATION SEED PRODUCTION REQUIRES SPECIAL SK ILLS AND ARE HANDLED BY ITS R&D DIVISION. WHILE EXAMINING THE DETAILS OF SUCH EXPENSES [I.E REVENUE R&D EXPENSES], MIXED ACCOUNTING WAS NOTED. THE REPRESENTATIVES OF THE ASSESSEE FAIRLY CONCEDED THE OBSERVATION. IN MY VIEW THE REASONABLE NORMAL AGRICULTURAL EXPENSES SH OULD HAVE BEEN AT LEAST 35%. THIS WOULD WORK OUT AGRICULTURAL EXPENSE S AT RS 1,01,61,829/OUT OF WHICH ASSESSEE HAS SHOWN RS 47,5 8,649/- ONLY. THUS THE BALANCE AMOUNT OF RS 54,03,180/- WOULD HAV E TO BE EXCLUDED FROM R&D REVENUE EXPENSES, AND WOULD BE TREATED AS NORMAL AGRICULTURAL EXPENSES. AS A RESULT THEREOF, THE AGR ICULTURAL INCOME WOULD BE REDUCED TO RS 1,88,71,968/-, WHICH NEED TO BE TA KEN FOR PROPORTIONATE ALLOCATION OF R&D EXPENSES. IT IS NOT ED THAT THE AO HAS ALREADY MADE DISALLOWANCE OF RS 10,48,112/- CONSIDE RING THAT DIVERTED INTO ITS BUSINESS EXPENSES[ REFER GROUND NO 41. THE BALANCE AMOUNT OF RS 43,55,068/- WOULD BE TAKEN FURTHER AS DIVERTED I NTO ITS BUSINESS EXPENSES AND AS SUCH TO THAT EXTENT BUSINESS INCOME WOULD BE TAKEN KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 46 HIGHER THEN SHOWN BY THE ASSESSEE. THE R&D REVENUE EXPENSES WOULD THEN BE TAKEN AT RS.2,58,34,408/- (I.E. 3,12,37,588 54,03,180/-) AND THE SAME WOULD BE CONSIDERED FOR FURTHER ALLOCATION BETWEEN AGRICULTURAL INCOME & COMMERCIAL INCOME. IT IS FURTHER NOTED THAT THE P & L ACCOUNT REFLECTS INCOME AT RS 11,07,40,723(AFTER DEDUCTION OF DEPRECIATION FROM I TS AGRICULTURAL, COMMERCIAL & R&D ACTIVITIES. THE INCOME SHOWN INCLU DES THE AGRICULTURAL INCOME ALSO. THUS THE TOTAL INCOME ( A GRICULTURE & COMMERCIAL 1 BEFORE THE DEDUCTION OF R&D EXPENSES W OULD WORKOUT TO BE RS 7 8.29339/- [ I.E. 11,07,40,723/- + 3,12,37,588 + 2,88,51,028 }.THE AGRICULTURE INCOME HAS ALREADY BEEN WORKED AT RS 1, 88,71,.968/- ACCORDINGLY 11 % OF R&D EXPENSES NEED TO BE ALLOCAT ED TOWARDS AGRICULTURE INCOME, THE BALANCE 89% WILL HAVE TO BE ALLOCATED TOWARDS COMMERCIAL ACTIVITY. IN OTHER WORDS, THE RATIO FOR ALLOCATION OF R&D EXPENSES BETWEEN ,EXEMPTED AGRICULTURAL) & TAXABLE (COMMERCIAL) INCOME WOULD BE 11 : 89. THUS OUT OF THE R&D EXPENSES OF R S 5,46,85,436 (2,88,51,028 + 2 58: 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 1,0 3,70,466 [ 43,55,068/- + 60,15,398], OVER AND ABOVE THE DISALLOWANCE OF RS , 10,48,112/- MADE SEPARATELY [REFER GROUND NO 4], IS FURTHER SUSTAINE D. 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 EXPENDITUR E IS NOT DOUBTED FOR ITS GENUINENESS AND BEING SPENT PURELY FOR BUSI NESS PURPOSES, KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 47 WHETHER THE FINDING OF LD.CIT(A) APPORTIONING THE E XPENDITURE ON THE BASIS OF THE TURNOVER CAN BE HELD TO BE JUSTIFI ED OR NOT NEEDS TO BE DEALT WITH. WE FIND THAT THE ASSESSEE IS A LIMI TED COMPANY WORKING SINCE MANY YEARS AND IS A PIONEER IN THE BU SINESS OF PRODUCTION OF HYBRID SEEDS. BOOKS OF ACCOUNTS ARE REGULARLY MAINTAINED AND DULY AUDITED. REVENUE RECEIPTS BY T HE 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 A RE DULY VERIFIABLE FROM THE BOOKS OF ACCOUNTS REGULARLY MAINTAINED. ME RELY FOR THE REASON THAT THE ALLEGED R&D REGULAR EXPENDITURE INC LUDES THE EXPENDITURE FOR SALARY, LABOUR WAGES, STAFF TRAVELL ING, VEHICLE FUEL EXPENSES AND OTHERS, ONE CANNOT DRAW INFERENCES THA T THEY HAVE BEEN INCURRED FOR BOTH THE TYPE OF ACTIVITY. LD.CI T(A) HAS ONLY MENTIONED AND APPRECIATED THAT IT WAS QUITE POSSIB LE THAT PART OF DIRECT EXPENSES WERE DEBITED AS REVENUE EXPENSES ON R&D. 43. APPORTIONMENT OF THE EXPENDITURE WITHOUT BRINGI NG ANY MATERIAL ON RECORD TO SPECIFICALLY PROVE THAT THE E XPENDITURE CONNECTED WITH AGRICULTURAL OPERATIONS HAVE BEEN IN TENTIONALLY KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 48 CLAIMED AGAINST THE COMMERCIAL ACTIVITY TO EVADE TA X, ONE CANNOT JUST MAKE A GUESS WORK OF MAKING AN AD-HOC APPROPRI ATION THEREBY CHALLENGING THE GENUINENESS OF THE DULY AUDITED BO OKS OF ACCOUNTS REGULARLY MAINTAINED. THIS IS NOT THE CASE BEFORE US THAT THE LD. A.O REJECTED THE BOOK RESULTS U/S 145 OF THE ACT. 44. IT IS SETTLED LAW THAT WHEN AN ASSESSEE IS CARR YING INDIVISIBLE BUSINESS IN VARIOUS VENTURES AND SOME AMONG THEM YI ELD TAXABLE INCOME AND OTHERS DO NOT, THEN THE ENTIRE EXPENDITU RE IS PERMISSIBLE WITHOUT ANY APPORTIONMENT. WE FIND SU PPORT FROM FOLLOWING JUDGMENTS DEALT IN FORTHCOMING PARAGRAPH. 45. IN THE CASE OF RAJASTHAN STATE WAREHOUSING CORP ORATION V/S CIT ( 2000) 242 ITR 0450 (SC). HONBLE APEX COURT HELD AS UNDER:- 10. MR. SHUKLA HAS FAIRLY CONCEDED THAT IF THE EXE MPTED INCOME AND THE TAXABLE INCOME ARE EARNED FROM ONE AND INDIVISIBLE BUSINESS THEN THE APPORTIONMENT OF THE EXPENDITURE CANNOT BE SUSTAINE D. BUT, SUBMITS THE LEARNED COUNSEL, IN THIS CASE THE TRIBUNAL DID NOT RECORD A FINDING THAT THE BUSINESS OF THE ASSESSEE IS ONE INDIVISIBLE, THEREF ORE, THE APPORTIONMENT OF THE EXPENDITURE IS VALID. WE ARE AFRAID, WE CANNOT ACCEDE TO THE CONTENTION OF THE LEARNED COUNSEL INASMUCH AS A PLAIN READING OF THE QUESTION ITSELF SHOWS THAT IT EMBODIES'THE BUSINESS OF THE ASSESSEE BEIN G ONE AND INDIVISIBLE'. THIS BEING THE POSITION, IT IS NOT OPEN TO THE REVE NUE TO CONTEND THAT THE KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 49 BUSINESS IS NOT ONE AND INDIVISIBLE. IN VIEW OF THE FACT THAT A PERUSAL OF THE QUESTION ITSELF DISCLOSES THAT INCOME FROM VARIOUS VENTURES IS EARNED IN THE COURSE OF ONE AND INDIVISIBLE BUSINESS, THE IMPUGNE D ORDER UPHOLDING THE APPORTIONMENT OF THE EXPENDITURE AND ALLOWING DEDUC TION OF ONLY THAT PROPORTION OF IT WHICH IS REFERABLE TO TAXABLE INCO ME; IS UNSUSTAINABLE. WE, THEREFORE, ANSWER THE QUESTION IN THE NEGATIVE, THAT IS, IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. THE ORDER UNDER A PPEAL 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 HONBLE 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 I S 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 CONSISTE D OF TWO PARTS, NAMELY, (1) CULTIVATION OF SUGAR-CANE AND (2) MANUFACTURE O F SUGAR. THE FORMER PART BEING AGRICULTURAL OPERATION, THE INCOME THERE FROM IS NOT ELIGIBLE TO TAX AND THEREFORE ANY EXPENDITURE INCURRED IN RESPECT OF TH AT ACTIVITY IS NOT DEDUCTIBLE. THIS CONTENTION PROCEEDS ON THE BASIS T HAT ONLY EXPENDITURE INCURRED IN RESPECT OF A BUSINESS ACTIVITY GIVING R ISE 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 OUT WHETHER A DEDUCTION CLAIMED IS PERMISSIBLE UNDER THE ACT OR NOT, ALL THAT WE HAVE TO DO IS TO EXAMINE THE RELEVANT PROVISIONS OF THE ACT. EQUITABLE CONSIDERA TIONS ARE WHOLLY OUT OF PLACE IN CONSTRUING THE PROVISIONS OF A TAXING STAT UTE. WE HAVE TO TAKE THE PROVISIONS OF THE STATUTE AS THEY STAND. IF THE ALL OWANCE CLAIMED IS PERMISSIBLE UNDER THE ACT THEN THE SAME HAS TO BE D EDUCTED FROM THE GROSS KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 50 PROFIT. IF IT IS NOT PERMISSIBLE UNDER THE ACT, IT HAS TO BE REJECTED. AS MENTIONED EARLIER, IT IS NOT DISPUTED THAT THE CULT IVATION OF SUGAR-CANE AND THE MANUFACTURE OF SUGAR CONSTITUTED ONE SINGLE AND IND IVISIBLE BUSINESS. SEC. 10(2) SAYS THAT THE PROFITS UNDER S. 10(1) IN RESPE CT OF A BUSINESS SHOULD BE COMPUTED AFTER DEDUCTING THE ALLOWANCES MENTIONED T HEREIN. ONE OF THE ALLOWANCES ALLOWED IS THAT MENTIONED IN S. 10(2)(XV ) WHICH SAYS THAT ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY AND EXCLUSI VELY FOR THE PURPOSE OF SUCH BUSINESS SHALL BE DEDUCTED AS AN ALLOWANCE. TH E MANDATE OF S. 10(2)(XV) IS PLAIN AND UNAMBIGUOUS. UNDOUBTEDLY, TH E ALLOWANCE CLAIMED IN THIS CASE WAS LAID OUT OR EXPENDED FOR THE PURPOSE OF THE BUSINESS CARRIED ON BY THE ASSESSEE. THE FACT THAT THE INCOME ARISING F ROM A PART OF THAT BUSINESS IS NOT ELIGIBLE TO TAX UNDER THE ACT IS NOT A RELEV ANT CIRCUMSTANCE. FOR THE FOREGOING REASONS WE AGREE WITH THE VIEW TAKEN BY T HE HIGH COURT. 47. HONBLE APEX COURT IN THE CASE OF CIT V/S INDI AN BANK LTD (1965) 56 ITR 0077 (SC) THE HONBLE APEX COURT HELD AS UNDER :- IN ALLOWING A DEDUCTION WHICH IS PERMISSIBLE ONE N EED NOT LOOK BEHIND THE EXPENDITURE AND SEE WHETHER IT HAS THE QUALITY OF D IRECTLY OR INDIRECTLY PRODUCING TAXABLE INCOME. THIS IS FOR TWO REASONS : FIRST, PARLIAMENT HAS NOT DIRECTED THIS ENQUIRY. THERE ARE NO WORDS IN S. 10(2) OF 1922 ACT TO THAT EFFECT. ON THE OTHER HAND, INDICATIONS ARE TO THE C ONTRARY. IN S. 10(2)(XV), WHAT PARLIAMENT REQUIRES TO BE ASCERTAINED IS WHETH ER THE EXPENDITURE HAS BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FO R THE PURPOSE OF THE BUSINESS. THE LEGISLATURE STOPS SHORT AT DIRECTING THAT IT BE ASCERTAINED WHAT WAS THE PURPOSE OF THE EXPENDITURE. IF THE ANS WER IS THAT IT IS FOR THE PURPOSE OF THE BUSINESS, PARLIAMENT IS NOT CONCERNE D TO FIND OUT WHETHER THE EXPENDITURE HAS PRODUCED OR WILL PRODUCE TAXABL E INCOME. SECONDLY, THE REASON MAY WELL BE THAT PARLIAMENT ASSUMES THAT MOST TYPES OF EXPENDITURE WHICH ARE LAID OUT WHOLLY AND EXCLUSIVE LY FOR THE PURPOSE OF KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 51 BUSINESS WOULD DIRECTLY OR INDIRECTLY PRODUCE TAXAB LE INCOME, AND IT IS NOT WORTH THE ADMINISTRATIVE EFFORT INVOLVED TO GO FURT HER AND TRACE THE EXPENDITURE TO SOME TAXABLE INCOME. THEREFORE, IT SEEMS THAT THERE IS NOTHING IN THE LA NGUAGE OF S. 10 FROM WHICH IT CAN BE FAIRLY IMPLIED THAT AN EXPENDITURE OR ALLOWANCE FALLING WITHIN THE SECTION MUST FULFILL SOME OTHER CONDITIO N BEFORE IT CAN BE ALLOWED. THEREFORE ON THE FACTS AND CIRCUMSTANCES O F THE CASE THE BANK WAS ENTITLED TO CLAIM THE DEDUCTION OF THE ENTIRE I NTEREST 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; PRO VIDENT 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 HA S NOT BEEN DOUBTED ON ITS GENUINENESS THEN THE SAME EVEN IF NO T HAVING CONNECTION WITH THE RESEARCH AND DEVELOPMENT ACTIVI TY, IS STILL ALLOWABLE AS BUSINESS EXPENDITURE U/S 37(1) OF THE ACT BECAUSE THE EXPENDITURE HAS BEEN INCURRED FOR BUSINESS PURPOSES . HONBLE HIGH COURT OF MUMBAI IN THE CASE OF CIT V/S SALES MAGNESITE (P) LTD (1995) 214 ITR 01 HELD THAT COMMERCIAL EXPEDIENCY MUST BE DECIDED FROM BUSINESSMENS POINT OF VIEW. EVEN EXPENDITURE INCURRED VOLUNTARILY ON THE GROUND OF C OMMERCIAL EXPEDIENCY AND IN ORDER INDIRECTLY TO FACILITATE TH E CARRYING ON OF THE BUSINESS WOULD BE DEDUCTIBLE UNDER THIS SECTION. T HE QUESTION WHETHER IT WAS NECESSARY OR COMMERCIALLY EXPEDIENT OR NOT IS A KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 52 QUESTION THAT HAS TO BE DECIDED FROM THE POINT OF V IEW OF THE BUSINESSMAN AND NOT BY THE SUBJECTIVE STANDARD OF REASONABLENESS OF THE REVENUE. HONBLE APEX COURT IN THE CASE OF CIT V/S DHANRAJGI RJI RAJA NARASASINGIRJI (1973)91 544 HELD THAT IT IS NOT OPEN TO THE DEPARTMENT TO PRESCRIBE WHAT EXPENDITURE AN ASSESSE E SHOULD INCUR AND IN WHAT CIRCUMSTANCES HE SHOULD INCUR THAT EXPE NDITURE. HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF H EMRAJ NEBHOMAL V CIT (2005) 146 TAXMAN 278 ITR 345 HELD T HAT ONCE THE CONDITIONS LAID DOWN IN SECTION 37(1) ARE FOUND SATISFIED, IT IS NOT PROPER ON THE PART OF THE TAXING AUTHORITIES TO PRO BE INTO THE QUESTION AS TO WHETHER THE EXPENDITURE IS LEGITIMATE OR NECE SSARY ETC. THIS TYPE OF INQUIRY IS NEITHER CONTEMPLATED NOR CALLED FOR. IT IS ONLY WHEN THE ASSESSING OFFICER FINDS THAT THE CLAIM MADE IS BOGUS OR FALSE OR NOT INCURRED AS A FACT, IT CAN BE DISALLOWED, OTHER WISE NOT VALID. 49. RESPECTFULLY FOLLOWING ABOVE JUDGMENTS AS WELL AS IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE WE ARE OF THE C ONSIDERED VIEW THAT THE ALLEGED REVENUE EXPENDITURE INCURRED AT RS .3,12,37,588/- AND RS.4,54,34,487/- NEEDS TO BE ALLOWED AS BUSINES S EXPENDITURE INCURRED FOR SCIENTIFIC RESEARCH AND DEVELOPMENT AC TIVITY U/S 35(1)(IV) OF THE ACT AND WE THEREFORE SET ASIDE THE FINDING OF LD.CIT(A) MAKING AN APPROPRIATION OF THE EXPENDITUR E BETWEEN COMMERCIAL AND AGRICULTURAL ACTIVITY COMPLETELY IGN ORING THE FACT THAT SEPARATE DETAILS WERE MAINTAINED BY THE ASSESS EE INCLUDING KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 53 QUANTITATIVE DETAILS OF GOODS PRODUCED UNDER BOTH T HE ACTIVITIES, NO MAJOR ABNORMALITY IN THE PERCENTAGE OF EXPENDITURE OF THE TOTAL AGRICULTURAL PROCEEDS CONSISTENTLY SHOWN IN THE PRE CEDING YEARS AND MOST IMPORTANTLY NO MATERIAL EVIDENCE HAS BEEN PLACED BEFORE US WHICH COULD PROVE THAT THE ASSESSEE HAS INTENTIO NALLY 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 A ND 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 2 008-09 & 2009-10 OF THE ASSESSEES APPEAL ARE ALLOWED AND GR OUND NO.1 RAISED BY THE REVENUE AUTHORITIES FOR THE ASSESSMEN T YEAR 2008-09 AND 2009-10 ARE DISMISSED. 51. NOW WE TAKE UP GROUND NO.3 RAISED BY THE ASSESS EE CHALLENGING THE FINDING OF LD.CIT(A) UPHOLDING THE ADDITION MADE BY THE LD.A.O OF RS.10,48,112/-ON ACCOUNT OF DISPROPO RTIONATE AGRICULTURAL EXPENSES. WE FIND THAT LD.A.O DISALLOW ED THIS AMOUNT BY TAKING THE BASIS OF PERCENTAGE OF EXPENSE OF THE AGRICULTURAL PROCEEDS OF THE PRECEDING YEAR AND APPLIED IT TO AS SESSMENT YEAR 2008-09 WHEREIN THE ASSESSEE CLAIMED LOWER PERCENTA GE OF THE EXPENDITURE. LD.CIT(A) SUSTAINED THIS ADDITION. 52. NOW THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUN AL. KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 54 53. LD. COUNSEL FOR THE ASSESSEE RELIED ON THE WRIT TEN SUBMISSION MADE BY IT WHICH READS AS FOLLOWS; IN THIS REGARD IT IS SUBMITTED THAT THE REASON FOR DECREASING AGRICULTURAL EXPENSES IN COMPARISON TO EARLIER YEARS IS THAT IN THE PRECEDING ASSESSMENT YEAR THE EXPENDITURE WAS 20.91 % OF THE GROSS RECEIPT AND FOR THE ASSESSMENT YEAR IN QUESTION IS 16.39 % . TH E REASON FOR SAME ARE AS UNDER :- 1] DURING THE YEAR ASSESSEE COMPANY HAS USE HYBRID SEEDS WHICH REQUIRED LESSER PESTICIDE, FERTILIZERS ETC. THUS TH E EXPENSE ON THESE HEADS WERE REDUCED. 2] DUE TO USE OF HIGH YIELD THE QUANTITY OF CROP G ROWN INCREASED , THUS GROSS RECEIPT FROM AGRICULTURAL ACTIVITIES IS INCREASED. 3] THE SELLING RATE OF CROP PER KG / PER QUINTAL INCREASED IN COMPARISON TO RATE PROCURE IN THE IMMEDIATELY PRECE DING YEAR. FROM ALL THESE REASONS THE PERCENTAGE AGRICULTURA L EXPENDITURE IS REDUCED , THUS IT IS PRAYED THE DISALLOWANCE OF RS. 10,48,112 MADE BY THE L.D A.O. BE DELETED. 54. LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED THE O RDERS OF LOWER AUTHORITIES. 55. WE FIND THAT THE EXPENDITURE CLAIMED BY THE ASS ESSEE AGAINST THE AGRICULTURAL ACTIVITIES COMES TO 20.91% FOR AS SESSMENT YEAR 2007-08 AND IT DECREASED TO 16.39% IN ASSESSMENT YE AR 2008-09. THE REASON FOR THE DECREASE IN THE PERCENTAGE IN EX PENDITURE GIVEN BY THE ASSESSEE ARE GENERAL IN NATURE AND THE SUBMI SSIONS MAINLY INCLUDED THE REASON FOR INCREASE IN REVENUE DUE TO BETTER SELLING PRICE AND USE OF VARIETIES OF HYBRID SEEDS. NOTHIN G CONCRETE HAS KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 55 BEEN PLACED ON RECORD TO SHOW THAT WHY THE EXPENSES DECREASED DURING THE YEAR EVEN WHEN OTHER EXPENDITURE ON COMM ERCIAL ACTIVITIES HAVE INCREASED IN COMPARISON TO PRECEDIN G YEARS. NO PLAUSIBLE REASON WITH DOCUMENTARY EVIDENCES WERE PL ACED BEFORE US. WE THEREFORE FIND NO REASON TO INTERFERE IN TH E FINDING OF LD.CIT(A) AND THEREFORE CONFIRM THE ADDITION OF RS. 10,48,112/- MADE BY THE LD.A.O ON ACCOUNT OF DISPROPORTIONATE AGRICULTURAL EXPENSES. ACCORDINGLY GROUND NO.3 OF THE ASSESSEE FOR ASSESSMENT YEAR 2008-09 IS DISMISSED. 56. NOW WE ARE LEFT WITH GROUND NO.2 OF THE REVENUE S APPEAL FOR ASSESSMENT YEAR 2009-10 RELATING TO DELETION OF ADD ITION OF RS.22,64,237/- BY LD.CIT(A) DELETED THE ADDITION W HICH WAS MADE BY THE LD.A.O U/S 36(1)(III) R.W.S. 40A(2)(B) OF TH E ACT. THE BRIEF FACTS RELATING TO THIS GROUND ARE THAT THE LD.A.O D URING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT CERTAIN LOA NS AND ADVANCES TO THE TUNE OF RS.3245.38 CRORES STOOD GIV EN 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 I T CANNOT BE CONSTRUED THAT THE INTEREST FREE LOAN HAS BEEN GIVE N TO THE SUBSIDIARIES AND HENCE NO DISALLOWANCE U/S 36(1)(II I) OF THE ACT IS KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 56 WARRANTED. 57. THE SUBMISSIONS OF THE ASSESSEE WERE NOT SUFFIC IENT TO CONVINCE THE LD.A.O AS HE OBSERVED THAT IN THE REGU LAR COURSE OF BUSINESS THE ASSESSEE IS PAYING THE INTEREST ON TH E 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 ASS ESSEE IS PAYING HUGE INTEREST TO THE BANK AND OTHERS, LD.A.O APPLIE D 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 PREFE RRED APPEAL BEFORE THE LD.CIT(A) AND SUCCEEDED. 59. NOW THE REVENUE IS IN APPEAL BEFORE THE TRIBUNA L. 60. LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED THE O RDER OF LD.A.O. 61. LD. COUNSEL FOR THE ASSESSEE RELIED ON THE FIND ING OF LD.CIT(A) AND ALSO SUBMITTED THAT THE ALLEGED LOANS AND ADVAN CES WERE GIVEN TO ITS 100% SUBSIDIARY COMPANIES OF THE ASSESSEE AR E FOR THE BUSINESS EXPEDIENCY WITH THE LONG TERM PLANNING OF BENEFITS FOR THE PROPOSED IPO PROJECT. RELIANCE WERE PLACED ON THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF S.A. BUILDERS VS. CIT (2006) 206 CTR 631 (SC). KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 57 62. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE RECORDS PLACED BEFORE US. THE ISSUE RELATES TO DISALLOWANC E OF INTEREST U/S 36(1)(III) R.W.S 40A(2)(B) OF THE ACT, WE FIND THAT THERE STOOD LOANS AND ADVANCES TO THE TUNE OF RS.3245.38 CRORES GIVEN TO FIVE ASSOCIATES/SUBSIDIARY COMPANIES OF THE ASSESSEE. T HE ALLEGED AMOUNT ALSO INCLUDES AMOUNT RECEIVABLE FOR SALES TO THE SUBSIDIARY DURING THE YEAR AMOUNTING TO RS.95,34,908/- AND THE ALLEGED AMOUNTS ALSO INCLUDES THE AMOUNT RECEIVABLE TOWARDS RENT AS WELL AS ADVANCES GIVEN TO THE SEED DISTRIBUTORS FOR FINA NCING THE CULTIVATORS. THE CYCLE FOR SEED PLANTATION AND HAR VEST GENERALLY RANGES FROM 4-6 MONTHS AND AS STATED BY THE LD. COU NSEL FOR THE ASSESSEE DURING THE HEARING BEFORE THE LOWER AUTHOR ITIES THAT THE SEED DISTRIBUTOR HAS TO GIVE ADVANCE TO SEED CULTIV ATORS/FARMERS BEFORE THE PLANTATION SEASON AND IN TURN THE SEED C ULTIVATOR/FARMER COMMITS THEIR OBLIGE AS PROCEEDS OF SEED TO THE SAI D DISTRIBUTOR. FURTHER FOR PROCURING THE CONFIRMED SEED PRODUCTION SUB DISTRIBUTOR IS REQUIRED TO FINANCE THE CULTIVATION CYCLE AND FOR THIS PURPOSE IT IS REQUIRED TO GIVE ADVANCE FOR SEED PUR CHASE TO THE VENDORS WHICH IS A STANDARD INDUSTRY PRACTICE. THE ALLEGED SUBSIDIARY COMPANY HAVE ALSO INDULGED IN THE SEED C ULTIVATORS AND HAVE SPECIALIZATION IN SCIENTIFIC RESEARCH OF SPEC IFIC SEED VARIETY AND SOURCING OF SEEDS. DETAILS WERE ALSO PACED BEF ORE THE LOWER AUTHORITIES FOR THE PURCHASES MADE DURING THE FINAN CIAL YEAR 2009- 10 WHICH WERE ADJUSTED AGAINST THE ADVANCES STOOD G IVEN AS ON 31.03.2009. THESE DETAILS CLEARLY INDICATE THAT TH E ALLEGED LOANS KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 58 AND ADVANCES ARE PURELY IN THE REGULAR COURSE OF BU SINESS WITH THE INTENT OF MAXIMIZATION OF PROFIT AS WELL AS THE REV ENUE. AS REGARDS DIVERSION OF BORROWED FUND TO THE SISTER CONCERNS IS CONCERNED, WE FIND THAT THE HONBLE APEX COURT IN THE CASE OF S.A . BUILDERS V/S CIT (2006) 206 CTR HELD THAT BORROWED FUNDS ADVANCE TO A THIRD PARTY SHOULD BE FOR COMMERCIAL EXPEDIENCY, IF IT IS SOUGHT TO BE ALLOWED U/S 36(1)(III). IT CAN BE SAID TO BE ADVAN CED TO THE SISTER CONCERN FOR COMMERCIAL EXPEDIENCY WHERE HOLDING COM PANY (ASSESSEE) HAS A DEEP INTEREST IN ITS SUBSIDIARY AN D THE HOLDING COMPANY HOLDS ADVANCES THE BORROWED MONEY, THE SUBS IDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINES S PURPOSES, THE HOLDING COMPANY WOULD ORDINARILY BE ENTITLED FOR DE DUCTION OF INTEREST ON ITS BORROWED FUNDS. WE ALSO FINDS THAT LD.A.O FAILED TO APPRECIATE THE FACT THAT SIMILAR TYPE OF ADDITION W AS MADE IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2003-04 WH ICH WAS DELETED BY LD.CIT(A) AND SUBSEQUENTLY THE REVENUE C OULD NOT SUCCEED BEFORE THE TRIBUNAL AS THE DECISION OF THE LD.CIT(A) WAS UPHELD. WE THEREFORE RESPECTFULLY FOLLOWING THE JU DGMENT OF HONBLE APEX COURT AS WELL AS THE DECISION OF TRIBUNAL IN T HE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2003-04 ARE OF THE CONSIDERED OPINION THAT NO DISALLOWANCE WAS CALLED FOR U/S 36( 1)(III) R.W.S. 40A(2)(B) OF THE ACT AT RS.22,64,237/- AND NO INTER FERENCE IS THEREFORE CALLED FOR IN THE FINDINGS OF LD.CIT(A). WE ACCORDINGLY DISMISS GROUND NO.2 RAISED BY THE REVENUE FOR THE A SSESSMENT YEAR 2009-10. KRISHIDHAN SEEDS LIMITED ITANOS.37/IND/2013, 84/IND/2013, ITA NOS. 231/IND/2013 & 315/IND/2013 59 63. THE OTHER GROUNDS ARE GENERAL IN NATURE WHICH NEEDS NO ADJUDICATION. 64. IN THE RESULT THE APPEAL OF THE ASSESSEE FOR 20 08-09 & A.Y. 2009-10 IS PARTLY ALLOWED AND THAT OF REVENUE FOR B OTH THE YEARS I.E. 2008-09 AND 2009-10 ARE DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 30.11.20 18. SD/- ( KUL BHARAT) SD/- (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER / DATED : 30 NOVEMBER, 2018 /DEV COPY TO: THE APPELLANT/RESPONDENT/CIT CONCERNED/CIT (A) CONCERNED/ DR, ITAT, INDORE/GUARD FILE. BY ORDER, ASSTT.REGISTRAR, I.T.A.T., INDORE