Vibha Agrotech Ltd., Hyderabad V. DCIT, Hyderabad

ITA 480/HYD/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3121 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 2 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-06-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 08-06-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 24-03-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K TULSIYAN
• Assessee Lawyers: VASUNDHARA SINHA
• Keywords: Business income; Business expenditure
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B , HYDERABAD BEFORE SHRI N.R.S. GANESAH, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ITA NO: 469/H/2008 ASSTT. YEAR : 2 002-03 DY.CIT, CIRCLE 3(3), HYDERABAD VS M/S VIBHA AGROTECH LTD., HYDERABAD (PAN AAACV 8157) (APPELLANT) (RESPONDENT) ITA NO: 470/H/2008 ASSTT. YEAR : 2 004-05 DY.CIT, CIRCLE 3(3), HYDERABAD VS M/S VIBHA AGROTECH LTD., HYDERABAD (PAN AAACV 8157) (APPELLANT) (RESPONDENT) ITA NO: 480/H/2008 ASSTT. YEAR : 2 002-03 M/S VIBHA AGROTECH LTD., HYDERABAD (PAN AAACV 8157) VS DY.CIT, CIRCLE 3(3), HYDERABAD (APPELLANT) (RESPONDENT) ITA NO: 481/H/2008 ASSTT. YEAR : 2 004-05 M/S VIBHA AGROTECH LTD., HYDERABAD (PAN AAACV 8157) VS DY.CIT, CIRCLE 3(3), HYDERABAD (APPELLANT) (RESPONDENT) ITA NO: 76/H/2008 ASSTT. YEAR : 20 05-06 DY.CIT, CIRCLE 3(3), HYDERABAD VS M/S VIBHA AGROTECH LTD., HYDERABAD (PAN AAACV 8157) M/S VIBHA AGROTECH LTD., HYDERABAD IN ITA NO.469, & OTHER 5 APPEALS 2 (APPELLANT) (RESPONDENT) ITA NO: 234/H/2008 ASSTT. YEAR : 2 005-06 M/S VIBHA AGROTECH LTD., HYDERABAD (PAN AAACV 8157) VS DY.CIT, CIRCLE 3(3), HYDERABAD APPELLANT BY : SMT. VASUNDHARA SINHA, DR RESPONDENT BY : SHRI S.K. TULSIYAN O R D E R PER : CHANDRA POOJARI, ACCOUNTANT MEMBER THESE SIX APPEALS ARE CROSS APPEALS DIRECTED AGAINST THE DIFFERENT ORDERS OF THE CIT(A)-IV FOR THE ASSESSMENT YEA R YEARS 2002- 03, 2004-05 AND 2005-06. 2. THE REVENUE IN ITS APPEAL IN ITA NOS.469, 470/HYD /2008 AND 76/HYD/2009 RAISED THE COMMON GROUNDS AS FOLLOWS: 1. THE CIT(A) ERRED IN ALLOWING THE INCOME FROM SA LE OF FOUNDATION SEEDS AS INCOME FROM AGRICULTURAL ACTIVITY AND EXEMPTED U/S 10(1) OF THE ACT. 2. THE CIT(A) OUGHT TO HAVE CONSIDERED THAT THE PR ODUCTION OF BASIC SEEDS AND SALE OF HYBRID SEEDS IS AN INTEGRAL ACTIVITY UN DERTAKEN FOR THE ULTIMATE SALE OF HYBRID SEEDS AND INCOME SHOULD BE TREATED A S INCOME EARNED OUT OF BUSINESS ACTIVITY. 3. THE CIT(A) RELIED UPON VIZ. ADVANTAGE (INDIA) L TD. ITAT, HYDERABAD B BENCH THE BASIC QUESTION I.E. WHETHER GROWING OF BA SIC SEEDS IS AN AGRICULTURAL ACTIVITY WAS NOT BEFORE ITAT AS HELD B Y CIT(A). THE ISSUE HAS BEEN ANSWERED IN FAVOUR OF REVENUE IN THE CASE OF P RO AGRO SEEDS LTD., BY ITAT, DELHI BENCH. 3. IN ASSESSEE APPEALS IN ITA NOS.480, 481/HYD/2008 AND 234/HYD/2009, RAISED THE GROUND THAT THE LEARNED CI T(A) HAS ERRED IN M/S VIBHA AGROTECH LTD., HYDERABAD IN ITA NO.469, & OTHER 5 APPEALS 3 HOLDING THAT NO RESEARCH AND DEVELOPMENT EXPENDITURE CAN BE ALLOWED AGAINST THE BUSINESS INCOME OF THE ASSESSEE IN VIEW OF TH E PROVISIONS OF SEC.14A OF THE IT ACT AND ACCORDINGLY DIRECTED THE ASSESSIN G OFFICER TO DISALLOW THE RESEARCH EXPENDITURE CLAIMED BY THE ASSESSEE. 4. THE ISSUES RAISED IN THE REVENUE APPEALS HAS BEEN SQ UARELY COVERED BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2001-02 REPORTED IN 314 ITR (AT) 231 HYD ERABAD WHEREIN IT WAS HELD THAT : THE ASSESSEE WAS CARRYI8NG ON AGRICULTURAL OPERATIO NS AND GROWING BASIC SEEDS ON THE LANDS. IT WAS NOT THE CASE OF THE REV ENUE THAT WITHOUT PERFORMING THE BASIC OPERATIONS, THE SUBSEQUENT OPE RATIONS HAD BEEN CARRIED ON BY THE ASSESSEE. THE BASIC SEEDS WERE SOLD BY T HE ASSESSEE ONLY AS A RESULT OF THE BASIC OPERATIONS THAT HAD BEEN CARRIE D ON BY IT AND ON EXPENDING HUMAN SKILL AND LABOUR THEREON AND ONLY AFTER PERFO RMING OPERATIONS SUCH AS WEEDING, WATERING, MANURING, ETC. THE RESULTANT PRO DUCT WAS GROWN AND MADE READY FOR SALE IN THE FORM OF BASIC SEEDS. THUS TH E BASIC SEEDS SOLD BY THE ASSESSEE WERE THE RESULT OF PRIMARY AS WELL AS SUBS EQUENT OPERATIONS INVOLVING HUGE SKILL AND EFFORTS AND THE INCOME THE RE FROM WAS AGRICULTURAL INCOME AS PROVIDED U/S 2(1A) OF THE ACT TO EXEMPTIO N U/S 10(1) OF THE ACT. THE ASSESSING OFFICER WAS TO TREAT THE INCOME FROM BASIC SEEDS AS AGRICULTURAL INCOME AND ALLOW EXEMPTION U/S 10(1) OF THE ACT. 5. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE ARE INCLINED TO AGREE WITH THE FINDINGS OF THE CIT(A) ON THIS ISSUE AND ACCORDINGLY THE APPEALS OF THE REVENUE ARE DISMISSED. 6. NOW COMING TO THE ASSESSEE APPEALS, BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CLAIMED RESEARCH AND DEVELOPMENT EX PENDITURE TOWARDS CAPITAL RESEARCH AND DEVELOPMENT EXPENDITURE N OT DEBITED TO THE PROFIT AND LOSS ACCOUNT. THOUGH THE ASSESSING OFFICER HAS REJECTED THE CLAIM OF AGRICULTURE INCOME AND TREATED AND SUCH INCO ME AS BUSINESS INCOME, HE PROCEEDED TO EXAMINE THE ALLOWABILITY OF A LL RESEARCH EXPENSES IN CASE THE ASSESSEES CLAIM OF SUCH INCOME BEING ACCEPTE D AS M/S VIBHA AGROTECH LTD., HYDERABAD IN ITA NO.469, & OTHER 5 APPEALS 4 AGRICULTURE INCOME. HE THEREFORE, REQUIRED THE ASSESSEE T O EXPLAIN AS TO WHY THE CLAIM SHOULD NOT BE DISALLOWED AS RESEARCH REL ATES TO AGRICULTURAL ACTIVITY AND NOT RELATE TO ITS BUSINESS. IT HAS ARGUED BY THE ASSESSEE THAT RESEARCH PERTAINED AS MUCH TO HYBRID SEEDS AS TO FOUNDATION SEEDS AND THEREFORE RELATED TO BUSINESS AS W ELL. THE ASSESSING OFFICER HOWEVER, OPINED THAT THERE IS NO GENETI C DIFFERENCE BETWEEN A FOUNDATION SEED AND A HYBRID SEED AND THE O NLY DIFFERENCE IN NOMENCLATURE COMES FROM SCALE OF PRODUCTION. AS PER ASSESSI NG OFFICER, HYBRID SEEDS MERELY FOUNDATION SEED PRODUCED IN MASS SCALE AND WHAT THE SCIENTIST WORKS ON ITS ONLY ON THE FOUNDATION SEED WH ICH SERVES AS PROTO TYPE FOR HYBRID SEEDS. HE OBSERVED THAT IF A PRO TO TYPE IS NOT FOUND SATISFACTORY IT WOULD BE SUBJECT TO FURTHER RESEAR CH AND ONLY THEN IT WOULD BE RELEASED FOR PRODUCTION OF HYBRID SEEDS. HE , THEREFORE, FOUND THE ARGUMENT OF THE ASSESSEE THAT RESEARCH IS DONE FOR BOTH FOUNDATION SEEDS AND HYBRID SEEDS AS UNACCEPTABLE. HE FUR THER OBSERVED THAT THE EXPENSES ARE ALSO HIT BY SEC.14A AS THE SAME HAD BEEN INCURRED FOR EARNING INCOME WHICH IS CLAIMED BY T HE ASSESSEE AS EXEMPTED U/S 10(1) OF THE IT ACT. HOWEVER, SINCE THE EN TIRE INCOME OF THE ASSESSEE WAS TREATED BY HIM AS BUSINESS INCOME, THE EXPE NSES CLAIMED U/S 35 WERE ALLOWED AND NO DISALLOWANCE WAS SAID MADE. ON APPEAL TO CIT(A), SINCE HE DIRECTED THE ASSESSING OFFICER T O TREAT THE INCOME FROM BASIC SEED AS AGRICULTURE INCOME AND ALLOW E XEMPTION U/S 10(1) THEREUPON, HE DIRECTED THE ASSESSING OFFICER THAT N O R & D EXPENDITURE TO BE ALLOWED AGAINST THE BUSINESS INCOME I N VIEW OF THE PRESENCE OF 14A OF THE ACT. AGAINST THIS FINDINGS OF TH E CIT (A) THE ASSESSEE IS IN APPEAL BEFORE US. 7. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE RESEARCH ACTIVITY CARRIED ON BY THE ASSESSEE IS FOR THE PURP OSE M/S VIBHA AGROTECH LTD., HYDERABAD IN ITA NO.469, & OTHER 5 APPEALS 5 PRODUCTION OF HYBRID SEEDS WHICH IS THE END RESULT OF COMM ERCIAL ACTIVITY OF THE ASSESSEE AND THEREFORE THE ENTIRE EXPENDITURE IS RELATED TO THE ASSESSEES BUSINESS AND IT IS TO BE ALLOWED AS A DEDUCTION. T HE LEARNED AR SUBMITTED THAT THE ASSESSEE COMPANY HAS BEEN CARRYING ON AN INTEGRAL BUSINESS OF DEVELOPING AND PRODUCING HYBRID SE EDS. THE R&D ACTIVITIES ARE EXTREMELY ESSENTIAL TO SUPPORT THE BUSIN ESS CARRIED ON BY THE ASSESSEE COMPANY. IT IS NOT TRUE TO SAY THAT THE ASSESSEE COMPANY HAS BEEN CARRYING ON THE RESEARCH ACTIVITIES TO SUPPORT TH E AGRICULTURAL ACTIVITIES. THE ASSESSEE COMPANY IS PRODUCING AND USING THE SAME PARENT SEEDS FOR BOTH THE ACTIVITIES OF DEVELOPING AND PRODUCING HYBRID SEEDS AND SELLING THE SAME TO OTHER DEALERS. A BUSINESS M AY REVOLVE VARIOUS ACTIVITIES. THAT DOES NOT MEAN, THE ASSESSEE IS CAR RYING ON DIFFERENT BUSINESS. WHAT IS CARRIED OUT BY THE ASSESSEE COM PANY IS DIFFERENT ACTIVITIES NECESSARY FOR A SINGLE BUSINESS PURSUED BY THE ASSESSEE COMPANY. THEREFORE, THE LOWER AUTHORITIES ARE N OT CORRECT IN HOLDING THAT THE TWO DIVISIONS OF THE ASSESSEE COMPANY TH AT IS AGRICULTURAL AND COMMERCIAL DIVISIONS ARE SEPARATE BUSINESS CARRIED ON BY THE ASSESSEE COMPANY. THE ASSESSEE COMPANY HAS ONLY ONE ACT IVITY. THAT IS TO DEVELOP AND SELL HYBRID SEEDS. THE VARIOUS ACTIVITIES CARRIED ON BY THE ASSESSEE COMPANY ARE DIFFERENT MANIFESTATIONS OF THE SAME BUSINESS. WITHOUT UNDERTAKING EXTENSIVE R & D ACTIVIT IES, THE ASSESSEE COMPANY COULD NOT EFFECTIVELY CARRY ON THE SAID BUSINESS. THE COMMERCIAL SEEDS PRODUCED FROM FARMERS ARE MADE OUT OF TH E PARENT SEEDS SUPPLIED ASSESSEE COMPANY. THEREFORE IT IS VERY APP ARENT THAT THERE IS CLEAR NEXUS BETWEEN THE BUSINESS INCOME AND R&D E XPENDITURE. THEREFORE, THE ASSESSEE COMPANY IS ENTITLED TO CLAIM THE SA ID EXPENDITURE AS A DEDUCTION IN COMPUTING THE BUSINESS IN COME LIABLE TO INCOME TAX. M/S VIBHA AGROTECH LTD., HYDERABAD IN ITA NO.469, & OTHER 5 APPEALS 6 7.1. THE LEARNED AR FURTHER SUBMITTED THAT THE STAT UTORY PROVISIONS ARE IN SUPPORT OF THE CLAIM MADE BY THE ASSESSE E COMPANY. AS PER SECTION 35(1)(I) THE EXPENDITURE INCURRED BY THE ASSESSEE ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS IS TO BE ALLOWE D AS DEDUCTION. AND ACCORDING TO SEC. 43(4)(I) SCIENTIFIC RESEARCH MEANS AN Y ACTIVITIES FOR THE EXTENSION OF KNOWLEDGE INCLUDING IN THE FIELD OF AGRICULTURE. THEREFORE, THE CLAIM OF THE ASSESSEE IS CLEARLY ADMISSIBLE U/S 35(1)(I) READ WITH SEC. 43(4)(I). THE LEARNED COUNSEL FURTHER SU BMITTED THAT THE SAID EXPENDITURE COULD NOT BE CONSIDERED AS AGRICULTURAL EXPENSES AS EVIDENT FROM THE RULES PRESENTED FOR COMPUTING THE AGR ICULTURAL INCOME. 7.2. HE RELIED ON THE FOLLOWING JUDGEMENTS: 1.ACIT VS. KANCHANGANGA SEEDS CO. P LTD. 81 ITD 152 (HYD.) 2. WATERFALL ESTATES LTD. VS. CIT (1996) 219 ITR 56 3 3. CIT VS. MAHARASHTRA SUGAR MILLS LTD. (1971) 82 I TR 452 4. CIT VS, KCP LTD. (1991) 192 ITR 648 (SC) 5. ADDL. CIT VS. CHALLAPALLI SUGARS LTD. (1979) 116 ITR 255 (AP). 8. THE DR SUBMITTED THAT THE RESEARCH ACTIVITY IS AIME D AT DEVELOPMENT OF FOUNDATION SEED. ONCE THE FOUNDATION SEED IS DEVELOPED AND TESTED, THEN ONLY IT IS PRODUCED ON A MASS SCALE AS PER THE PRODUCTION PROCESS, OUT OF VARIOUS HYBRID SEEDS DEVELOPED, THE ONE WHICH PERFORMS BETTER THAN THE COMMERCIALLY AVAILABLE H YBRID ONLY IS SELECTED, FROM WHICH FOUNDATION SEEDS ARE CULTIVATED FURT HER. THESE CULTIVATED FOUNDATION SEEDS ARE SOLD TO THE FARMERS TO P RODUCE HYBRID SEEDS. THE HYBRID SEED IS MERELY FOUNDATION SEED PRODUC ED ON A MASS SCALE. THE RESEARCH AND DEVELOPMENT PROCESS ENDS WITH THE PRODUCTION OF FOUNDATION SEEDS ONLY. SINCE THE INCOME OF THE ASSESSEE WAS M/S VIBHA AGROTECH LTD., HYDERABAD IN ITA NO.469, & OTHER 5 APPEALS 7 BIFURCATED INTO AGRICULTURAL INCOME AND BUSINESS INCOME A S HELD BY ITAT IN THE RELEVANT ASSESSMENT YEAR 2001-02, NO R & D EXPE NDITURE COULD BE ALLOWED AGAINST SUCH INCOME IN VIEW OF THE PROVISION S OF SEC.14A. FURTHER SHE SUBMITTED THAT PROVISIONS OF SEC.43(4)(I) IS NOT AT ALL APPLICABLE TO ASSESSEE CASE. SO ALSO ORDER OF THE TRIBUNAL IN THE CASE OF ACIT VS. KANCHANAGANGA SEEDS (P) LTD. 81 ITD 152 (HYD. ) BECAUSE IN THAT CASE, THERE WAS FREE SUPPLY OF PARENT SEEDS TO THE W ILLING FARMERS AND THEREAFTER IT WAS SUPPORTED BY THE R & D ACTIVITIE S CARRIED ON BY THE ASSESSEE. AND THERE WAS DIRECT NEXUS BETWEEN THE R & D ACT IVITIES AND COMMERCIAL ACTIVITIES CARRIED ON BY THE ASSESSEE. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED MATER IAL ON RECORD. THE GENERAL PRINCIPLES TO BE APPLIED IN SIMI LAR CIRCUMSTANCES HAVE BEEN LAID DOWN BY THE COURTS IN THE DECISIONS CITED BEFORE US. IN THE DECISION CITED BY THE LEARNED REPRESENTATIVE OF THE ASSESSEE IN WATERFALL ESTATES LTD. CASE (SUPRA), THE ASSESSEE COMPANY W AS DERIVING INCOME FROM TEA AND COFFEE ESTATES AND COFFEE COMPANY WAS DERIVING INCOME FROM TEA AND COFFEE ESTATES AND CURING WORKS. THA T COMPANY WAS MANAGED BY MANAGING AGENTS. IN THIS CASE, THE ASSESSEE HAD TO WORK OUT THE NET INCOME FROM TAXABLE AND NON TAXABLE SOURCES. FOR THE ASSESSMENT YEAR 1968-69, THE ASSESSEE COMPANY CLAIMED THE WH OLE OF THE MANAGING AGENCY COMMISSION AGAINST INCOME FROM TEA. THE TRIBUNAL HELD THAT PROPER ALLOCATION OF THE MANAGING COMMISSION WAS CALLED FOR IN PROPORTION TO THE EXPENDITURE INCURRED IN VARIOUS ACTIVITIES SUCH AS TEA PLANTATION, COFFEE PLANTATION AND COFFEE CUR ING WORKS. THE TRIBUNAL HELD THAT THE SEVERAL ACTIVITIES CARRIED ON BY THE ASSESSEE CONSTITUTED SEPARATE AND DISTINCT ACTIVITIES. CONFIRMING THE FINDINGS OF THE TRIBUNAL, HELD THAT THE SEVERAL ACTIVITIES CARRIED ON THE ASSESSEE CONSTITUTED SEPARATE AND DISTINCT ACTIVITIES. CONFIRMING THE FINDINGS OF M/S VIBHA AGROTECH LTD., HYDERABAD IN ITA NO.469, & OTHER 5 APPEALS 8 THE TRIBUNAL, THE HONBLE SC HELD THAT VARIOUS ACTIVI TIES INCOME FROM SOME OF WHICH WAS NOT TAXABLE DID NOT CONSTITUTE A SINGLE BUSINESS AND THEREFORE, COMMON EXPENSES HAVE TO BE ALLOCATED IN BETW EEN DIFFERENT ACTIVITIES ON A GOOD PROPORTION. IN MAHARASHTRA SUGAR MILLS LTD. CASE (SUPRA) AGAINST THE ISSUE WAS THE DEDUCTIBILITY OF MANAGI NG AGENCY COMMISSION. IN THAT CASE, THE ASSESSEE COMPANY OWNED EXTENSIV E LANDS ON WHICH IT GREW SUGAR CANE AND USED THE SUGAR CASE FOR MA NUFACTURE OF SUGAR IN ITS FACTORY. THE QUESTION WAS WHETHER A PART OF THE MANAGING AGENCY COMMISSION PAID BY THE ASSESSEE COMPANY COULD BE DISAL LOWED ON THE GROUND THAT THE PART RELATED TO MANAGEMENT O F SUGAR CANE CULTIVATION, INCOME FROM WHICH WAS EXEMPTED FROM TAX AS AGRICULTURAL INCOME. THE TRIBUNAL FOUND THAT THE CULTIVATION OF SU GAR CANE AND THE MANUFACTURE OF SUGAR BY THE ASSESSEE COMPANY CONSTITUTED O NE SINGLE AND INDIVISIBLE BUSINESS AND, THEREFORE, THE ENTIRE MAN AGING AGENCY COMMISSION WAS LAID OUT OR EXPENDED FOR THE PURPOSE OF T HE BUSINESS CARRIED OR, BY THE ASSESSEE AND THEREFORE, THE ENTIRE MA NAGING AGENCY COMMISSION WAS LAID OUT OR EXPENDED FOR THE PURPOSE OF B USINESS CARRIED ON BY THE ASSESSEE AND WAS ALLOWABLE AS DEDUCTION. UPHOLD ING THE SAID FINDING, THE HONBLE SC HELD THAT THE FACT THAT INCOME FROM A PART OF THE BUSINESS WAS NOT ELIGIBLE TO TAX UNDER THE ACT WAS NOT R ELEVANT CIRCUMSTANCES. AS POINTED OUT BY THE LEARNED COUNSEL FOR T HE ASSESSEE, THE COURT OBSERVED IN THAT CASE THAT THERE IS NO BASIS FO R THE VIEW THAT ONLY EXPENDITURE INCURRED IN RESPECT OF BUSINESS ACTIVITY GIVING RISE TO INCOME, PROFIT OR GAIN TAXABLE UNDER THE INCOME TAX A CT, CAN BE ALLOWED AS DEDUCTION AND NOT OTHERWISE. THE COURT HELD THAT T O FIND OUT WHETHER A DEDUCTION CLAIMED IS PERMISSIBLE UNDER THE ACT OR NOT, ALL THAT HAS TO BE DONE IS TO EXAMINE THE RELEVANT PROVISIONS OF THE A CT. THAT EQUITABLE CONSIDERATION ARE WHOLLY OUT OF PLACE IN CONSTRUCTING THE PROVISIONS OF TAXING STATUTE AND PROVISIONS OF THE STATUTE HAVE TO BE TAKEN AS THEY M/S VIBHA AGROTECH LTD., HYDERABAD IN ITA NO.469, & OTHER 5 APPEALS 9 STAND. IN KCP LTD. CASE (SUPRA) WHILE AFFIRMING THE DE CISION OF AP HIGH COURT IN CHALLAPPALI SUGAR LTD. CASE (SUPRA), THE HON BLE SC REITERATED THE SAME VIEW BY APPLYING THE EARLIER DECISION IN THE CASE. 9.1. NOW WE HAVE TO EXAMINE THE FACTS OF THE PRESENT CASE IN THE LIGHT OF THE ABOVE RULINGS GIVEN BY VARIOUS COURTS. WE HAVE ALREADY CONFIRMED THE FACT THAT THE ASSESSEE HAS BEEN CARRYING TWO ACTIVITIES VIZ., AGRICULTURAL ACTIVITIES AND COMMERCIAL ACTIVITIE S. THE OBJECTIVITIES OF AGRICULTURAL ACTIVITIES IS PURSUED BY DEVELOPMENT O F PARENT SEEDS AND COMMERCIAL ACTIVITIES PURSUED BY DEVELOPMENT OF HYBRID S EEDS FROM THE PARENT SEEDS. THE PARENT SEED IS DEVELOPED BY ASSESSEE BY AN ACT OF AGRICULTURE. THEREAFTER THE ASSESSEE SELLING THE FOUNDA TION SEEDS TO THE FARMERS FOR FURTHER MULTIPLICATION AND THE FARMERS CULT IVATE AND MULTIPLY THESE SEEDS AND THE HYBRID SEEDS SO PRODUCED BY THEM ARE SO LD BACK TO THE ASSESSEE COMPANY. THE ASSESSEE COMPANY PROCESS THE HYBRID SEEDS SO PURCHASED TO SUIT THE DESIRED QUALITY AND SELL AS F INISHED SEEDS. THESE TWO ARE DIFFERENT TRANSACTION, THERE IS NO FORMA L AGREEMENT WITH THE FARMER WHEREIN THE FARMER IS PROHIBITED FROM SELL ING THE SEEDS SO PRODUCED BY THEM IN THE OPEN MARKET. FROM THIS, IT IS CLEAR THAT THE FIRST TRANSACTION OF SALE IS CONCLUDED, ONCE THE SALE IS TO OK PLACE. ONCE THERE IS A SALE AND ALSO A PURCHASE OF PRODUCT, THEN IT CA NNOT BE TERMED AS INTEGRAL OR COMPOSITE ACTIVITY. THUS, THE SOURCE OF PR OCUREMENT FOR PARENT SEED IS OWN PRODUCTION I.E. AGRICULTURAL ACTIVITY . THE SOURCES OF PROCUREMENT OF HYBRID SEED IS THE FARMERS. THE POLICY A ND STRATEGY FOR AGRICULTURAL ACTIVITY IS DIFFERENT FROM COMMERCIAL ACTIV ITIES. ONE ACTIVITY IS CANNOT BE SAID TO BE ANCILLARY TO OTHER ACTIVITY. BO TH ARE GENERATE INDEPENDENT SOURCE OF INCOME AND FORMULATE DISTINCT BUSI NESS. M/S VIBHA AGROTECH LTD., HYDERABAD IN ITA NO.469, & OTHER 5 APPEALS 10 9.2. THE NEXT POINT TO BE CONSIDERED IS WHETHER THE R&D EXPENDITURE IS EXCLUSIVELY ATTRIBUTABLE EITHER TO AGR ICULTURE OR COMMERCIAL DIVISION OR ATTRIBUTABLE TO BOTH THE ACTIVIT IES/DIVISIONS. IN OUR OPINION, THE ACTIVITIES CARRIED ON BY THE ASSESSEE COM PANY AS CONSTITUTED DISTINCT BUSINESS ACTIVITIES OF THE ASSESSEE COMPANY AND THE R&D EXPENDITURE INCURRED BY THE ASSESSEE ATTRIBUTABLE T O BOTH THE DIVISIONS. IN SUCH CIRCUMSTANCES, THE PRINCIPLE LAID DOWN BY THE HONBLE SUPREME COURT IN WATERFALL ESTATES LTD. (SUPRA) SHOULD APPLY TO THIS CASE IN AS MUCH AS THE R&D EXPENDITURE HAS TO BE APPORTIO NED BETWEEN AGRICULTURAL AND NON AGRICULTURAL ACTIVITIES AND THE PO RTION ATTRIBUTABLE TO NON AGRICULTURAL ACTIVITIES ALLOWED, AS DEDUCTION IN COM PUTING THE TAXABLE INCOME. IN THE DECISIONS CITED BY THE LEARNED COUNSEL FOR THE ASSESSEE VIZ., IN MAHARASHTRA SUGAR MILLS LTD. (SUPRA) AND KC P LTD. CASE (SUPRA) THE FACT WERE DIFFERENT. IN THOSE CASES, THE ASSESSEE WAS NO T GROWING SUGAR CANES AS A DISTINCT ACTIVITY AND INDEPENDENT SOURCE O F INCOME. GROWING OF SUGAR CANE AND MANUFACTURE OF SUGAR CONSTITU TED SINGLE AND INDIVISIBLE BUSINESS. THEREFORE, THOSE DECISIONS ARE NOT APPLICABLE TO THE PRESENT CASE. THE DECISION OF THE LEARNED CIT(A) IS IN CONTRAVENTION OF THE PROVISIONS CONTAINED IN SEC.35(1)(I) AND SECTION 43(4 )(I) OF THE IT ACT IN VIEW OF THESE PROVISIONS THAT THE CIT(A) SHOULD H AVE ALLOWED THE PROPORTIONATE EXPENDITURE AS A DEDUCTION IN COMPUTING THE TAXABLE INCOME. REVENUE INSISTED NOTHING TO BE DEDUCTED WHE REAS ASSESSEE COMPANY CANVASSED FOR THE DEDUCTION OF THE WHOLE OF R&D EXPENDITURE. IN OUR OPINION, THE ASSESSEE COMPANY IS ENTITLED TO DEDU CTION ON ACCOUNT OF R&D EXPENDITURE BUT THE SAME HAS TO BE RESTRI CTED IN PROPORTION TO THE TURNOVER BETWEEN THE AGRICULTURAL DIVISION AND THE COMMERCIAL DIVISION, AND THE AMOUNT RELATABLE TO COMME RCIAL DIVISION CAN ALONE BE ALLOWED AS BUSINESS EXPENDITURE. IN THE FA CTS AND CIRCUMSTANCES, WE DIRECT THE ASSESSING OFFICER TO ALLOW EXPEND ITURE M/S VIBHA AGROTECH LTD., HYDERABAD IN ITA NO.469, & OTHER 5 APPEALS 11 ATTRIBUTABLE TO COMMERCIAL DIVISION IN PROPORTION TO T HE TURNOVER BETWEEN THE AGRICULTURAL DIVISION AND THE COMMERCIAL DI VISION. THIS VIEW OF OURS IS FORTIFIED BY THE ORDER OF THE TRIBUNAL IN THE CASE OF ACIT VS. KANCHANGANGA SEEDS CO.(P) LTD. (81 ITD 152 (HYD.) ACCORD INGLY, THIS GROUND IN ASSESSEE IS PARTLY ALLOWED. 10. IN THE RESULT, THE APPEALS OF THE REVENUE DISMISSE D AND THOSE OF ASSESSEES ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT 18.6.2010 SD/- SD/- N.R.S. GANESAN CHANDRA POOJARI JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 18 TH JUNE, 2010 COPY FORWARDED TO: 1. THE DY.CIT, CIRCLE 3(3), HYDERABAD 2. M/S VIBHA AGROTECH LTD., 501, SUBHAN SIRI SAMPADA, 6-3- 1090/A/1, RB ROAD, HYDERABAD 3. CIT(A)-IV HYDERABAD. 4. CIT, HYDERABAD 5. THE D.R., ITAT, HYDERABAD. NP