Sami Labs Limited, Bangalore V. DCIT, Bangalore

ITA 417/BANG/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1516 (ITAT-BANGALORE)
• Duration Of Justice: 10 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-02-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 15-11-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 30-03-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Cost of acquisition; Commercial expediency
• Section: 10B; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO.417/BANG/2010 ASSESSMENT YEAR : 2004-05 SAMI LABS LTD., 19/1 & 19/2, 1 ST MAIN, 2 ND PHASE, PEENYA INDUSTRIAL AREA, BANGALORE 560 058. : APPELLANT VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 12(3), BANGALORE. : RESPONDENT APPELLANT BY : SHRI CHERIAN K. BABY, C.A. RESPONDENT BY : SMT. SWATHI S. PATIL, CIT-II(DR) O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THIS APPEAL INSTITUTED BY THE ASSESSEE COMPANY IS DIRECTED AGAINST THE APPELLATE ORDER OF THE LD. CIT (A)-III, BANGALO RE IN ITA NO:283/C-12(3)/ CIT(A)-III/BNG/06-07 DATED: 30.12.2009 FOR THE ASSE SSMENT YEAR 2004-05. 2. THE ASSESSEE COMPANY (THE ASSESSEE IN SHORT) HAD RAIS ED TEN GROUNDS IN AN ILLUSTRATIVE AND EXHAUSTIVE MANNER. GROUND NOS: 1 AND 10 BEING GENERAL IN NATURE, THEY HAVE BECOME NON-CONSE QUENTIAL. THE ISSUES ITA NO.417/BANG/10 PAGE 2 OF 11 RAISED IN THE REMAINING GROUNDS ARE REFORMULATED, F OR THE SAKE OF CLARITY, IN A CONCISE MANNER, AS UNDER: (1) THAT THE CIT (A) HAD ERRED IN CONCLUDING THAT KUNIG AL UNIT WAS NOT ELIGIBLE FOR DEDUCTION U/S 10-B OF THE ACT AS IT HA D NOT SATISFIED ONE OF THE CONDITIONS LAID DOWN IN S.10B(2)(III) OF THE ACT; (2) THAT THE CIT (A) HAD ERRED IN DISALLOWING CULTIVATI ON EXPENSES OF RS.90.64 LAKHS ON THE GROUND THAT THOSE EXPENSES WE RE IN FACT AGRICULTURAL EXPENSES AND WERE IN THE NATURE OF LOS SES FROM AGRICULTURAL OPERATION WHICH WERE TO BE CARRIED FOR WARD FOR SET OFF; & - ALTERNATIVELY, IF THE DISALLOWANCE OF CULTIVATION E XPENSES WERE TO BE SUSTAINED, PROPORTIONATE HIGHER DEDUCTION U/S 10B O F THE ACT OUGHT TO HAVE TO BE ALLOWED. 3. BRIEFLY, THE ASSESSEE BEING IN THE BUSINESS OF M ANUFACTURE AND EXPORT OF STANDARDIZED HERBAL EXTRACTS AND MANUFACT URE OF FINE CHEMICALS, COSMECEUTICALS ETC., HAD FURNISHED ITS INCOME, ADMI TTING A LOSS OF RS.3.43 CRORES AFTER CLAIMING EXEMPTION U/S 10-B OF THE ACT AT RS.7.10 CRORES. 3.1. WHILE CONCLUDING THE ASSESSMENT, THE AO HAD DI SALLOWED THE EXEMPTION CLAIM OF RS.3.44 CRORES MADE U/S 10B OF T HE ACT IN RESPECT OF KUNIGAL UNIT AND ALSO CULTIVATION EXPENSES OF RS.90 .64 LAKHS FOR THE REASONS RECORDED IN HIS IMPUGNED ORDER UNDER CHALLE NGE. 4. AGGRIEVED, THE ASSESSEE TOOK UP THE ISSUES WITH THE CIT (A) FOR RE- DRESSAL. AFTER CONSIDERING THE ASSESSEES CONTENTI ONS AS WELL AS THE REASONING OF THE AO, THE LD. CIT (A) HAD OBSERVED T HAT I. IN RESPECT OF CLAIM OF DEDUCTION U/S 10-B WITH REGARD TO KUNIGAL UNIT : IN CONFORMITY WITH THE FINDING OF THE HONBLE BENCH IN ITA NOS: 3770/B/2004 & 484/B/2005 FOR THE ASSESSMENT YEAR 2001-02 AND 20 02-03 RESPECTIVELY ITA NO.417/BANG/10 PAGE 3 OF 11 IN THE ASSESSEES OWN CASE, THE BENEFIT U/S 10-B OF THE ACT CLAIMED TO THE EXTENT OF RS.3.44 CRORES WAS DENIED. II. CULTIVATION EXPENSES OF RS.90.64 LAKHS : AFTER DUE CONSIDERATION OF THE ASSESSEES SUBMISSIO NS AS WELL AS THE BOARDS CIRCULAR NO.6/2007 DATED: 11.10.2007 ON WHI CH THE ASSESSEE HAD PLACED ITS FAITH, THE CIT (A) OPINED THAT (ON PAGE 6) IN THE CONTEXT OF THE APPELLANT, I NO TE THAT THIS IS ONE OF THE CONTRACT CULTIVATION AS THEY HAVE ENTERED INTO AGRE EMENTS WITH VARIOUS FARMERS FROM WHOM THEY HAVE PROMISED TO PURCHASE CO LEUS ROOTS AT AN AGREED PRICE. THEY HAVE ALSO STATED IN THE AGREEME NT THAT IN CASES WHERE SEEDLINGS ARE SUPPLIED BY THEM, IT WILL BE RECOVERE D @ RS.2200 FOR 22000 SEEDLINGS. THE COMPANY HAS ALSO AGREED TO GIVE THE M ADVANCE OF RS.1500/- WHICH IS ALSO TO BE RECOVERED FROM THE PU RCHASES TO BE MADE FROM THEM BY WAY OF COLEUS ROOTS. THUS, IT CAN BE SEEN THAT THE COMPANY WAS CARRYING ON CONTRACT CULTIVATION ACTIVITY BUT T HE RECOVERIES AGAINST SEEDLINGS WHICH IS BY WAY OF AGRICULTURAL INCOME AR E PROBABLY ADJUSTED AGAINST THE PURCHASE COST AND NOT NETTED FROM THE A GRICULTURAL EXPENSES. IN FACT, THIS IS AGRICULTURAL INCOME WHICH OUGHT TO HAVE BEEN NETTED OFF AGAINST AGRICULTURAL EXPENSES. HENCE, I DIRECT THE AO TO VERIFY THE SAME AND IF FOUND CORRECT, TO REDUCE THE DISALLOWANCE TO THE EXTENT OF RECOVERY MADE AND REDUCE THE SAME FROM THE COST OF PURCHASES . THE REST OF THE LOSSES FROM AGRICULTURAL OPERATIONS MAY BE CARRIED FORWARD TO SET OFF AGAINST PROFITS FROM AGRICULTURAL OPERATIONS, IF AN Y, IN THE FUTURE. THE CBDT CIRCULAR ACCORDINGLY, I HOLD THAT THE DISALLOWANCE OF RS.90, 64,692/- AS AGRICULTURAL EXPENSES IS TO BE UPHELD SUBJECT TO THE MODIFICATIO N OF RECOVERY, IF ANY, FROM THE CONTRACT FARMERS WHICH HAS BEEN NETTED OFF AGAINST PURCHASES MADE BY THEM.. 5. AGITATED, THE ASSESSEE HAS COME UP WITH THE PRES ENT APPEAL. DURING THE COURSE OF HEARING, THE FORCEFUL SUBMISSIONS MAD E BY THE LD. A R ARE SUMMARIZED AS UNDER: - THE AUTHORITIES BELOW HAVE ERRED IN COMING TO THE C ONCLUSION THAT KUNIGAL UNIT WAS NOT ELIGIBLE FOR DEDUCTION U/S 10- B ON THE GROUND THAT IT HAD NOT SATISFIED ONE OF THE BASIC CONDITIO NS SET OUT IN ITA NO.417/BANG/10 PAGE 4 OF 11 S.10B(2)(III) AS THE PLANT AND MACHINERY ACQUIRED T O THE TUNE OF RS.5.2 CRORES WERE OLD MACHINERIES WHICH WERE ALREA DY PUT TO USE; - IN THE CASE OF THE ASSESSEE, A NEW UNDERTAKING HAD COME INTO EXISTENCE WITH MORE THAN 80% NEWLY ACQUIRED PLANT A ND MACHINERY AND, THUS, SATISFIES THE TEST PRESCRIBED BY THE HON BLE MADRAS HIGH COURT IN THE CASE OF CIT V. GOPAL PLASTICS PRIVATE LIMITED - 215 ITR 136 (MAD); - THE AUTHORITIES BELOW ERRED IN DISALLOWING THE CULT IVATION EXPENSES OF RS.90.64 LAKHS WHICH WERE IN FACT AGRICULTURAL EXPENSES AND WERE IN THE NATURE OF LOSSES FROM AGRICULTURAL OPER ATIONS, IF ANY, IN FUTURE; - THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF M ANUFACTURE AND EXPORT OF HERBAL PRODUCTS AND, THUS CULTIVATION EXP ENSES WERE INCURRED AS AN INTEGRAL PART OF THE BUSINESS; THAT THE MAIN PURPOSE OF CULTIVATION WAS TO INDUCE FARMERS TO GROW MEDICI NAL PLANTS AND FOR ASSESSEES OWN RESEARCH AND DEVELOPMENT ACTIVIT IES FOR FINDING NEW VARIETIES OF MEDICINAL PLANTS AND ARRIVING AT A CCEPTABLE STANDS OF CULTIVATION BY ADOPTING DIFFERENT COMBINATION OF METHODS AND SYSTEMS IN ORDER TO MAKE LARGE SCALE CULTIVATION OF SUCH HERBS AN ECONOMICALLY VIABLE PROPOSITION; - THAT THE ASSESSEE WAS NOT EARNING ANY AGRICULTURAL INCOME FROM SUCH CULTIVATION SINCE IT WAS NOT SELLING THE AGRIC ULTURAL PRODUCE AS THE SAME WAS BEING USED IN ITS RESEARCH AND DEVELOP MENT ACTIVITIES AND AS A RAW MATERIAL FOR PRODUCING INDUSTRIAL PROD UCTS, THAT THOUGH THERE WAS AN INTENTION TO SUPPLY THE SEEDLIN GS FROM ITS NURSERY TO FARMERS WHO WERE ON CONTRACT WITH THE AS SESSEE TO THE FARMERS @ 10PS PER SEEDLING WHICH WAS TO BE RECOVER ED AT THE TIME OF PURCHASE OF COLEUS ROOTS FROM THEM, AFTER THEY H AVE GROWN THEM USING THOSE SEEDLINGS, THE ASSESSEE WAS NOT ABLE TO MAKE ANY SUCH RECOVERY SINCE IT WAS NOT ABLE TO GENERATE SUFFICIE NT QUANTITIES OF COLEUS IN ITS FARMS AND HAD TO RESORT TO LARGE SCAL E PURCHASE OF COLEUS SEEDLINGS FROM OTHER FARMERS; THAT ON THE BA SIS OF REPRESENTATIONS FROM THE FARMERS AND ALSO CONSIDERI NG COMMERCIAL EXPEDIENCY, NO RECOVERY WAS EFFECTED FROM THE FARME RS; - THAT THE ASSESSEE HAD INCURRED CULTIVATION EXPENSES FOR GETTING INPUTS REQUIRED FOR CARRYING ON ITS BUSINESS ACTIVI TIES WHERE THE END PRODUCTS WERE NOT AGRICULTURAL PRODUCE; THAT THE EX PENDITURE INCURRED WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OUT OF COMMERCIAL EXPEDIENCY AND, HENCE, OUGHT TO HAVE BEEN ALLOWED IN FULL ITA NO.417/BANG/10 PAGE 5 OF 11 - RELIES ON BOARDS CIRCULAR NO.6/2007 DATED: 11.10.2 007; - DURING THE PREVIOUS YEAR CORRESPONDING TO THE AY UN DER DISPUTE, THE ASSESSEE HAD INCURRED EXPENDITURE TO CARRY ON C ULTIVATION ON ITS OWN IN ORDER TO DEVELOP PROPER STANDARDS WHICH COUL D THEN BE GIVEN TO FARMERS FOR INDUCING THEM TO TAKE UP LARGE SCALE CULTIVATION OF THE HERB, THAT THE ASSESSEE HAD COMMERCIALIZED THE PROJECT IN THE SUBSEQUENT YEARS WHEN FARMERS TOOK UP LARGE SCALE C ULTIVATION OF THIS HERB FOR SALE TO THE ASSESSEE; THAT THE EXPEND ITURE INCURRED DURING THE PERIOD UNDER CHALLENGE, WAS IN THE NORMA L COURSE OF BUSINESS FOR ENTERING INTO A NEW PRODUCE; - ALTERNATIVELY, IF THE DISALLOWANCE OF CULTIVATION E XPENSES WERE TO BE SUSTAINED, HIGHER DEDUCTION U/S 10B OF THE ACT IS T O BE ALLOWED PROPORTIONATELY; THAT DUE TO UPHOLDING THE DISALLOW ANCE OF THE CLAIM OF THE ASSESSEE BY THE CIT (A), THE TOTAL INCOME OF THE ASSESSEE HAD INCREASED TO THAT EXTENT , HOWEVER, SUCH INCREASED INCOME WAS NOT CONSIDERED WHILE DETERMINING THE EXEMPTION ELIGIBLE U/S 10B IN RESPECT OF NELAMANGALA UNIT FOR WHICH DEDUCTION WA S ALLOWED. 5.1. TO REINFORCE HIS ARGUMENT, THE LD. AR HAD F URNISHED A PAPER BOOK CONTAINING 1 35 PAGES WHICH CONSISTS OF INTER ALI A COPIES OF (I) TRIBUNALS ORDERS; (II) SAMPLE LEASE AGREEMENT; (III) BOARDS CIRCULAR NO.6/2007 ETC. 5.2. ON HER PART, THE LD. D R WAS EMPHATIC IN HE R URGE THAT THE AO HAD ANALYZED THE ISSUES IN DEPTH AND ALSO EXTENSIVELY Q UOTING VARIOUS JUDICIAL PRONOUNCEMENTS INCLUDING THAT OF THE HONBLE TRIBUN ALS FINDINGS IN THE ASSESSEES OWN CASE FOR THE EARLIER YEARS AND CAME TO THE CONCLUSION IN A JUDICIOUS MANNER WHICH HAS BEEN RIGHTLY RATIFIED BY THE FIRST APPELLATE AUTHORITY. IT WAS, THEREFORE, ADVOCATED THAT THE F INDINGS OF THE LD. CIT (A) REQUIRE TO BE SUSTAINED IN TOTO. 6. WE HAVE DULY CONSIDERED THE RIVAL SUBMISSIONS, A TTENTIVELY PERUSED THE RELEVANT CASE RECORDS AND ALSO THE EVIDENCES PR ODUCED DURING THE COURSE OF HEARING BY THE LD. A R IN THE SHAPE OF A PAPER BOOK. ITA NO.417/BANG/10 PAGE 6 OF 11 6.1. WITH REGARD TO THE ASSESSEES CANVASSING FOR CLAIM OF DEDUCTION U/S 10B OF THE ACT IN RESPECT OF KUNIGAL UNIT, WE WOULD LIKE TO RECALL THAT AN IDENTICAL ISSUE HAD CROPPED UP IN THE EARLIER ASSES SMENT YEARS IN THE CASE OF THE ASSESSEE BEFORE THE HONBLE BENCH, SPECIFICA LLY, FOR THE AYS 2001-02 & 2002-03 AND AFTER PERUSING THE RIVAL CONTENTIONS, THE HONBLE BENCH WAS VERY SPECIFIC IN ITS ENDEAVOUR THAT 5. AFTER HEARING BOTH THE SIDES, WE FIND FORCE I N THE SUBMISSION MADE BY THE LEARNED DR. THE MADRAS HIGH COURT IN THE CASE OF GOPAL PLASTICS (SUPRA) HAS HELD THAT EVEN AT SUBSEQUENT STAGE, AFT ER THE FORMATION OF THE EXPORT ORIENTED UNDERTAKING, SOME MORE NEW MACHINER IES WHICH WERE NOT USED EARLIER ARE INTRODUCED. IN THAT EVENT, IT WIL L BE DEEMED THAT THE REQUIREMENT OF LAW WAS SATISFIED. SIMILAR VIEW WAS TAKEN BY THE GUJARAT HIGH COURT IN THE CASE OF SATELLITE ENGINEERING LTD ., (SUPRA). THE JURISDICTIONAL HIGH COURT IN THE CASE OF NIPPON ELE CTRONICS (SUPRA) RESPECTFULLY DISAGREED WITH THE AFORESAID DECISION. THE HONBLE HIGH COURT WAS CONSIDERING THE ELIGIBILITY OF EXEMPTION UNDER SECTION 80J OF THE ACT. UNDER SECTION 80J(4)(II), A CRITERIA WAS LAID DOWN THAT THE UNDERTAKING MUST NOT HAVE BEEN FORMED BY TRANSFER O F MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE TO THE NEW BUSINESS . IN THAT CASE, THE HONBLE HIGH COURT HELD THAT THE ELIGIBILITY CRITER IA HAS TO BE SEEN IN THE FIRST YEAR ITSELF WHEN THE UNDERTAKING WAS FORMED A ND WHETHER IT WAS ENTITLED FOR RELIEF UNDER SECTION 80J OF THE ACT. SUBSEQUENT FULFILLMENT OF CRITERIA BY INVESTMENT IN NEW MACHINERIES WILL NOT BE TREATED AS SUFFICIENT COMPLIANCE. 6. IN VIEW OF THE AFORE SAID CIRCUMSTANCES, WE FIND THAT A SUBSTANTIAL PORTION OF MACHINERIES WERE UTILIZED IN THE ELIGIBL E UNDERTAKING WHICH WERE USED EARLIER. THEREFORE, WE DO NOT FIND ANY R EASON TO TAKE A DIFFERENT VIEW. HENCE, THIS GROUND OF APPEAL IS REJECTED. 6.2. YET AGAIN, THE HONBLE BENCH, WHILE CONSIDE RING THE ASSESSEES PLEA FOR THE SUBSEQUENT A.Y IN ITA NO:1036(BNG)/08 DATED: 31.12.2008 ON A SIMILAR ISSUE, HAD OBSERVED THUS 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ON OUR CAREFUL PERUSAL OF THE FACTS AND CIRCUMSTANCES AS PER THE CONTENTION OF THE LEARNED COUNSEL, THE ISSUE OF DENIAL OF EXEMPTION U/S 10-B HAS BEEN CONSIDERED BY THE AUTHORITIES BELOW O N THE BASIS OF THE ITA NO.417/BANG/10 PAGE 7 OF 11 DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE EARLIER YEAR AGAINST WHICH NO SUBSTANTIVE MATERIAL HAS BEEN BROUGHT ON R ECORD, THEREFORE REQUIRES NO FURTHER INTERFERENCE.. 6.3. IN CONFORMITY WITH THE FINDINGS OF THE HON BLE BENCH CITED SUPRA ON AN IDENTICAL ISSUE, WE ARE OF THE CONSIDERED VIEW T HAT THE AUTHORITIES BELOW WERE JUSTIFIED IN DENYING THE ASSESSEES CLAI M ON THIS SCORE. 7. IN RESPECT OF THE ASSESSEES CLAIM FOR ALLO WANCE OF CULTIVATION EXPENSES OF RS.90.64 LAKHS WHICH HAS BEEN DENIED BY THE FIRST APPELLATE AUTHORITY, WE HAVE SCRUPULOUSLY PERUSED THE SUBMISS ION OF THE ASSESSEE AS WELL AS THE REASONING OF THE AUTHORITIES BELOW FOR HAVING TURNED DOWN THE ASSESSEES PLEA. 7.1. THE PLEADING BEFORE THE AO WAS THAT IT HAD TO INCUR EXPENSES FOR CULTIVATION OF THE FARMERS ON TRIAL BASIS AND ON IT S COMPLETION, THE ASSESSEE WILL PROCURE THE PRODUCES FROM THE FARMERS ON PAYME NTS. ON A PERUSAL OF THE LEASE DEEDS [THE ASSESSEE HAD ENTERED INTO WITH FARMERS FOR RISING OF HERBAL PLANTS], THE AO RECORDED THAT THE FARMERS WE RE REQUIRED TO SELL THEIR HERBAL PLANTS TO THE ASSESSEE AND THE ASSESSEE HAD UNDERTAKEN TO PURCHASE THE SAME ON COST. THUS, THE AOS WAS OF THE VIEW THAT THE FARMERS, WITHOUT INCURRING ANY EXPENDITURE ON CULTI VATION, WERE SELLING THEIR PRODUCES TO THE ASSESSEE ON A PRICE, AND, THUS, HE OPINED THAT THE ASSESSEE WAS NOT REQUIRED TO INCUR SUCH EXPENSES ON BEHALF OF THE FARMERS AND, ACCORDINGLY, DISALLOWED THE ASSESSEES CLAIM. 7.2. ON HIS PART, THE LD. CIT(A) HAD ARRIVED AT A CONCLUSION THAT THE ASSESSEE WAS CARRYING ON CONTRACT CULTIVATION ACTIV ITY, BUT, THE RECOVERIES ITA NO.417/BANG/10 PAGE 8 OF 11 AGAINST THE SEEDLINGS SUPPLIED EARLIER BY THE ASSES SEE WERE PROBABLY ADJUSTED AGAINST THE PURCHASE COST OF HERBAL PLANTS AND WERE NOT NETTED FROM THE AGRICULTURAL EXPENSES. IN A NUTSHELL, HE UPHELD THE DISALLOWANCE ON THE CLAIM OF AGRICULTURAL EXPENSES WITH A RIDER TO REDUCE THE DISALLOWANCE TO THE EXTENT OF RECOVERY MADE ON THE COST OF SEEDLINGS SUPPLIED TO THE FARMERS (AND ALSO REDUCE THE SAME F ROM THE COST OF PURCHASES). 7.3. ON A CLOSE SCRUTINY OF THE FACTS AND CIRCUMST ANCE OF THE ISSUE, IT EMERGES THAT THE COLEUS HAS BEEN A RARE H ERBAL PLANT WHICH COMMENDS PRECIOUS VALUE IN MEDICINAL FRATERNITY FOR RESEARCH. THE ASSESSEE HAS BEEN IN THE BUSINESS OF MANUFACTURE AN D EXPORT OF HERBAL PRODUCES INCLUDING THAT OF COLEUS. TO MAXIMIZE TH E PRODUCTION AND SALE OF HERBAL EXTRACTS, THE ASSESSEE HAD TO INCUR CERTAIN EXPENDITURE ON CULTIVATION ACTIVITIES FOR THE DEVELOPMENT OF COLEUS. ACCORDIN G TO THE ASSESSEE, THE COLEUS PLANT WAS GROWN IN THE WILD AND VAST RESEA RCH WAS REQUIRED TO MAKE A COMMERCIAL CULTIVATION OF THIS PLANT. TO CU LTIVATE THIS RARE PLANT AND TO MAKE A SUCCESSFUL VENTURE, THE ASSESSEE HAD TO U NDERTAKE FARM TRIALS TO OPTIMIZE IN DIFFERENT FIELDS, SUCH AS (I) OPTIMIZAT ION OF THE RIGHT SEASON FOR CULTIVATION, (II) STANDARDIZATION OF THE RIGHT FERT ILIZER APPLICATION, (III) OPTIMIZATION OF THE RIGHT SOIL CONDITIONS, (IV) USE OF VARIOUS ORGANIC FERTILIZERS, (V) USE OF BIO-CONTROLS AND OTHER CONT ROL MEASURES FOR DISEASE CONTROL. HOWEVER, THE EXERCISE DONE BY THE ASSESSEE DURING THE PERIOD UNDER CONSIDERATION TO MAXIMIZE ITS YIELD DID NOT R ESULT IN A DESIRED EFFECT. IN ORDER TO PROMOTE THE CULTIVATION OF COLEUS, THE FARMERS WERE ROPED IN TO ITA NO.417/BANG/10 PAGE 9 OF 11 CULTIVATE THIS RARE HERBAL PLANT AND TO ENCOURAGE T HEM TO OPT FOR THIS CROP, THE ASSESSEE HAD TO INCUR EXPENDITURE FOR (I) SUPPLY OF PLANTING MATERIALS TO THE FARMERS FRE E OF COST; (II) SUPPLY OF FARM INPUTS FREE OF COST; & (III) ALSO ARRANGING PAYMENTS TO THEM ETC., TO PROPAGATE ITS INTENTION TO SUPPLY SEEDLINGS FROM ITS NURSERY TO OTHER FARMERS, IT HAD PERHAPS ENTERED INTO AGREEMENTS AND SUPPLIED COLEUS SEEDLINGS TO THE FARMERS WITH A CONDITION TO RECOVE R THE COST OF COLEUS SEEDLING AT 10PS PER SEEDLING AT THE HARVEST TIME. IN REALITY, THE ASSESSEE COULD NOT BE ABLE TO ACHIEVE ITS DESIRE OF GENERATI NG SUFFICIENT QUANTITIES OF COLEUS, IN STEAD; IT HAD RATHER GONE IN PURCHASE SP REE OF COLEUS SEEDLINGS IN A LARGE SCALE FROM OTHER FARMERS. 7.4. CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D ALSO LOOKING INTO THE FACTS OF THE ISSUE, WE ARE OF THE CONSIDER ED VIEW THAT THERE IS FORCE IN THE CONTENTION OF THE ASSESSEE THAT IT HAD NOT G ENERATED ANY AGRICULTURAL INCOME OUT OF THIS VENTURE AND AS A MATTER OF FACT, THE ASSESSEE HAD NOT ENGAGED ANY AGRICULTURAL ACTIVITY, BUT, FOR CULTIVA TION OF COLEUS PLANTS TO FACILITATE ITS BUSINESS AND DUE TO COMMERCIAL EXPED IENCY, IT HAD INCURRED CULTIVATION EXPENSES TO THE TUNE OF RS.90.64 LAKHS. WE HAVE ALSO PERUSED THE DETAILS OF DIRECT EXPENSES INCURRED BY THE ASSE SSEE UNDER CULTIVATION EXPENSES. 7.5. IN THIS CONNECTION, WE WOULD LIKE TO IMPRESS THAT THE CONCEPT OF CIRCULAR NO.6/2007 DATED: 11.10.2007 OF THE BOAR D IS VERY MUCH APPLICABLE TO THE FACTS OF THE ISSUE ON HAND. IT H AS BEEN CLARIFIED BY THE ITA NO.417/BANG/10 PAGE 10 OF 11 BOARD IN ITS CIRCULAR CITED SUPRA THAT 2THESE EXPENSES ARE INCURRED BY THE SUGAR MILLS FOR ENSURING AN ADEQUAT E AND SUSTAINED SUPPLY OF FRESHLY CUT SUGARCANE THAT IS AN ESSENTIAL INPUT FOR THE CONTINUOUS RUNNING OF SUCH MILLS. THESE EXPENSES ARE, THEREFORE, INCU RRED FOR A COMMERCIAL EXPEDIENCY AND ARE PRIMA FACIE WHOLLY AND EXCLUSIVE LY FOR THE PURPOSE OF BUSINESS. SUCH EXPENSES ARE, THEREFORE, ALLOWABLE .. 7.6. LIKE SUGAR MILLS, THE PRESENT ASSESSEE HAD TO INCUR CULTIVATION EXPENSES TO ENSURE ADEQUATE AND STEADY SUPPLY OF CO LEUS PLANTS FROM THE FARMERS WHICH WERE AN ESSENTIAL INPUT FOR THE CONTI NUOUS PROCESSING IN RESEARCH AND DEVELOPMENT ACTIVITIES OF THE ASSESSEE . THUS, THESE EXPENSES INCURRED BY THE ASSESSEE FOR A COMMERCIAL EXPEDIENCY AND WERE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSIN ESS. IN ESSENCE, THE AUTHORITIES BELOW WERE NOT JUSTIFIED IN DISALLOWING THE CULTIVATION EXPENSES OF RS.90.64 LAKHS CLAIMED BY THE ASSESSEE. IT IS O RDERED ACCORDINGLY. 8. THE ASSESSEES CLAIM OF CULTIVATION EXPENSES TO THE TUNE OF RS.90.64 LAKHS HAS SINCE BEEN CONCEDED BY THIS BENC H FOR THE REASONS RECORDED SUPRA, THE ASSESSEES ALTERNATIVE PLEA THA T IF THE DISALLOWANCE OF CULTIVATION EXPENSES WERE TO BE SUSTAINED, PROPORTI ONATE HIGHER DEDUCTION U/S 10B OF THE ACT OUGHT TO HAVE TO BE ALLOWED BECAME REDUNDANT AND, THUS, IT HAS NOT BEEN ADDRESSED TO. 9. IN THE RESULT , THE ASSESSEES APPEAL IS PARTLY ALLOWED . ITA NO.417/BANG/10 PAGE 11 OF 11 PRONOUNCED IN THE OPEN COURT ON THIS 25 TH DAY OF FEBRUARY, 2011. SD/- SD/- ( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 25 TH FEBRUARY, 2011. DS/- COPY TO: BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE. 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE