Dy.CIT, Circle-16(3), Hyderabad V. M/s Prabhat Agri Biotech Limited, Hyderabad

ITA 752/HYD/2014

• Counselvise Citation: 75222514 RSA 2014
• Duration Of Justice: 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 25-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MOHAN REDDY
• Assessee Lawyers: K VISWANATHAM
• Keywords: Earning of tax free income; Retrospective amendment
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA.NO.752/HYD/2014 ASSESSMENT YEAR 2010-11 DCIT CIRCLE - 16(3) HYDERABAD VS. M/S. PRABHAT AGRI BIO TECH LTD. HYDERABAD PAN NO.AABCP 8801C (APPELLANT) (RESPONDENT) FOR REVENUE : MR. MOHAN REDDY FOR ASSESSEE : MR. K. VISWANATHAM DATE OF HEARING : 14.08.2014 DATE OF PRONOUNCEMENT : 28.08.2014 ORDER PER SAKTIJIT DEY, J.M. THIS APPEAL IS PREFERRED BY THE DEPARTMENT AGAINST THE ORDER DATED 6.12.2013 OF THE CIT(A)-V, HYDERABAD RE LATING TO THE ASSESSMENT YEAR 2010-11. THE DEPARTMENT HAS RA ISED THE FOLLOWING GROUNDS: 1. THE ORDER OF THE CIT(A) IS ERRONEOUS BOTH IN LAW AN D IN FACTS OF THE CASE. 2. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF EXEMPTION OF RS.35,33,117/- MADE U/S 10(1) OF THE ACT. 3. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.1,77,371/- MADE U/S 14A OF THE I.T. ACT. 4. THE CIT(A) ERRED IN HOLDING THAT THE ASSESSEE IS EL IGIBLE FOR DEDUCTION U/S 10(1) THOUGH THE MAIN ACTIVITY OF THE ASSESSEE IS DEVELOPMENT OF HIGH YIELDING HYBRID SEE DS THROUGH RESEARCH AND DEVELOPMENT AND MARKETING THE PRODUCTS FOR COMMERCIAL PURPOSE. 5. THE CIT(A) OUGHT TO HAVE TAKEN INTO CONSIDERATION T HAT SECTION 2(1A) HAS DEFINED THE TERM AGRICULTURAL INC OME THE REFERENCE IS TO A CULTIVATOR WHOSE PRODUCTS IS FIT TO BE TAKEN TO MARKET WITHOUT ANY PROCESSING AS HELD B Y 2 ITA.NO.752/HYD/2014 M/S. PRABHAT AGRI BIOTECH LTD., HYDERABAD THE HONBLE ITAT, D BENCH, DELHI IN THE CASE OF M/S . PRO AGRO SEEDS. 2. GROUND NOS.1 & 6 BEING GENERAL IN NATURE ARE NOT REQUIRED TO BE ADJUDICATED. GROUND NOS.2,4 & 5 BAS ICALLY RELATE TO A COMMON ISSUE OF CIT(A) DELETING THE ADD ITION MADE BY AO BY DISALLOWING EXEMPTION CLAIMED OF RS.35,33, 117/- U/S 10(1) OF THE INCOME-TAX ACT. 3. BRIEFLY THE FACTS RELATING TO THE ISSUE IN DISPU TE ARE, THE ASSESSEE, A COMPANY IS ENGAGED IN THE BUSINESS OF S EED PRODUCTION RESEARCH, MARKETING OF FIELD AND VEGETAB LE CROPS, WIND POWER GENERATION, ETC. ASSESSEE FILED ITS RE TURN OF INCOME FOR THE ASSESSMENT YEAR UNDER DISPUTE ON 14. 10.2010 DECLARING TOTAL INCOME OF RS.65,32,268/- AFTER CLAI MING DEDUCTION OF RS.22,24,602/- U/S 80IA(2) OF THE ACT SO FAR AS INCOME DERIVED FROM WIND POWER PROJECT. DURING THE SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER WHILE EXAMINING THE RETURN OF INCOME FILED BY THE ASSESSEE NOTICED THAT ASSESSEE HAD CLAIMED DEDUCTION U/S 10(1) OF THE ACT AN AMOUNT OF RS.35,33,117/- STATED TO HAVE BEEN DERIVE D FROM PRODUCTION OF BASIC SEEDS. ON NOTICING THIS, THE A SSESSING OFFICER ASKED THE ASSESSEE TO SUBSTANTIATE ITS CLAI M OF EXEMPTION OF THE AFORESAID AMOUNT. IN REPLY, ASSES SEE SUBMITTED THE ACTIVITY OF GROWING BASIC SEEDS BEING PART OF AGRICULTURAL OPERATION/ACTIVITY INCOME DERIVED THER EFROM IS EXEMPT U/S 10(1) OF THE ACT. THE ASSESSEE ALSO BRO UGHT TO THE NOTICE OF THE ASSESSING OFFICER THAT IN THE EARLIER ASSESSMENT YEARS, THE ITAT IN ASSESSEES OWN CASE HAS ACCEPTED THE CLAIM OF EXEMPTION. THE ASSESSING OFFICER HOWEVER DID NO T ACCEPT THE SUBMISSIONS OF THE ASSESSEE AND PROCEEDED TO HOLD T HAT THE AMOUNT OF RS. 35,33,117/- REPRESENTING THE SALE PRO CEEDS OF BASIC SEEDS CANNOT BE TREATED AS AGRICULTURAL INCOM E, HENCE, NOT EXEMPT U/S 10(1) OF THE ACT. THE ASSESSING OFF ICER ALSO 3 ITA.NO.752/HYD/2014 M/S. PRABHAT AGRI BIOTECH LTD., HYDERABAD REASONED THAT AS THE DECISION OF THE ITAT HAS BEEN CHALLENGED BEFORE THE HONBLE HIGH COURT OF A.P., THE EXEMPTIO N CLAIMED BY THE ASSESSEE HAS TO BE DISALLOWED AND ACCORDINGL Y MADE ADDITION OF AN AMOUNT OF RS.35,33,117/-, THOUGH THE ASSESSING OFFICER DID OBSERVE THAT THE COLLECTION OF DEMAND I N RESPECT OF SAID ADDITION WILL NOT BE ENFORCED TILL THE ISSUE R EACHES FINALITY. 4. BEING AGGRIEVED OF SUCH ADDITION MADE BY THE ASS ESSING OFFICER, ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A ). 5. THE CIT(A) TAKING INTO COGNIZANCE THE FACT THAT IN ASSESSEES OWN CASE FOR THE PRECEDING ASSESSMENT YE ARS THE ITAT HAS CONSISTENTLY HELD THAT INCOME GENERATED ON CULTIVATION OF BASIC/FOUNDATION SEEDS IS AGRICULTUR AL INCOME AND AS SUCH IS EXEMPT U/S 10(1) OF THE ACT, THE AD DITION MADE BY THE ASSESSING OFFICER CANNOT BE SUSTAINED. ACCO RDINGLY, THE CIT(A) DELETED THE ADDITION MADE BY THE ASSESSING OFFICER BY ACCEPTING THE CLAIM OF EXEMPTION OF THE ASSESSEE. 6. BEING AGGRIEVED OF SUCH DECISION OF THE CIT(A), THE DEPARTMENT IS BEFORE US. 7. WE HAVE HEARD THE AUTHORITIES AND PERUSED THE MA TERIALS ON RECORD. AT THE VERY OUTSET, THE LD. A.R. BROUGH T TO OUR NOTICE THAT THE ISSUE STANDS COVERED IN FAVOUR OF T HE ASSESSEE NOT ONLY BY THE ORDERS OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR THE PRECEDING ASSESSMENT YEARS BUT ALSO BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008-09. IN THIS CONTEXT, THE LD. A.R. SUBMITTED BEFORE US THE JUDGEMENT DATED 21.2.2014 O F THE HONBLE A.P. HIGH COURT IN ITA NO.88 OF 2014 IN ASS ESSEES OWN CASE. THIS FACT COULD NOT BE CONTROVERTED BY THE LD. D.R. ON A PERUSAL OF THE FACTS AND MATERIALS ON RECORD, WE FIND THAT THIS 4 ITA.NO.752/HYD/2014 M/S. PRABHAT AGRI BIOTECH LTD., HYDERABAD PARTICULAR ISSUE WAS ALSO SUBJECT MATTER OF DISPUTE IN THE PRECEDING ASSESSMENT YEARS AND WAS CARRIED IN APPEA L BY THE DEPARTMENT BEFORE THE ITAT. THE ITAT IN A SERIES O F ORDERS PASSED IN ITA NO.652/HYD/2007 DATED 2.9.2008 FOR TH E A.Y. 2003-04, ITA NO.94/HYD/2008 DATED 8.8.2008 FOR THE A.Y. 2004-05, ITA NO.1717/HYD/2008 DATED 9.11.2009 FOR T HE A.Y. 2005-06, ITA NO.528/HYD/2010 DATED 23.9.2010 FOR TH E A.Y. 2006-07 AND ITA NOS.1214 & 1215/HYD/2010 DATED 13.4.2012 FOR THE A.YS. 2008-09 & 2009-10. IN FACT , WHEN THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE IN ITA NOS.1288 & 1289/HYD/2012 DATED 4.1.2013 BY THE ITAT THE DEPART MENT CHALLENGED THE SAME BEFORE THE HONBLE HIGH COURT. THE HONBLE HIGH COURT VIDE ITS JUDGEMENT DATED 21.2.20 14 IN ITA NO.88 OF 2014 HELD AS UNDER: WE ARE UNABLE TO ACCEPT THE FARFETCHED IDEA THAT AR TIFICIAL PRODUCTION OF SEEDS CAN BE SOLD OR USED FOR COMMERC IAL PURPOSE. MAY BE A FEW HYBRID SEEDS COULD BE PRODUC ED BY ARTIFICIAL METHOD IN A LABORATORY. HE SEEDS SO PRODUCED WITH NON-AGRICULTURAL ACTIVITY AGAIN WILL HAVE TO BE SOWN IN THE AGRICULTURE FILED TO HAVE A LARGER Q UANTITY FOR SALE IN THE MARKET. ACCORDINGLY, WE HOLD THAT THE SEED IS A PRODUCT OF AGRICULTURAL ACTIVITY. THEREFORE, THE SALE OF THE SAME CANNOT BE BROUGHT UNDER THE PROVISIONS OF THE INCOME-TAX ACT. WE, THEREFORE, UPHOLD THE DECISION OF THE LEARNED TRIBUNAL IN THIS MATTER. 8. SINCE THE ISSUE HAS BEEN CRYSTALISED IN FAVOUR O F THE ASSESSEE BY THE JUDGEMENT OF THE HONBLE HIGH COURT EXTRACTED HEREIN ABOVE, WE RESPECTFULLY FOLLOW THE SAME AND HOLD THAT THERE IS NO INFIRMITY IN THE ORDER OF THE CIT(A) IN ALLOWING THE EXEMPTION CLAIMED BY THE ASSESSEE U/S 10(1) OF THE ACT. ACCORDINGLY, WE UPHOLD THE ORDER OF THE CIT(A) ON T HIS ISSUE BY DISMISSING THE GROUNDS RAISED BY THE DEPARTMENT. 9. THE NEXT ISSUE AS RAISED IN GROUND NO.3 RELATES TO DELETION OF ADDITION OF AN AMOUNT OF RS.1,77,371/- MADE BY 5 ITA.NO.752/HYD/2014 M/S. PRABHAT AGRI BIOTECH LTD., HYDERABAD THE ASSESSING OFFICER ON ACCOUNT OF DISALLOWANCE OF EXPENDITURE FOR EARNING OF EXEMPTED INCOME IN TERMS WITH SECTIO N 14A OF THE ACT READ WITH RULE 8D. 10. BRIEFLY THE FACTS ARE, DURING THE ASSESSMENT P ROCEEDING, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS INVESTED HUGE SUMS IN MUTUAL FUND, THE INCOME FROM WHICH IS EXEMPT FROM TAX. THE ASSESSING OFFICER THEREFORE WAS OF T HE OPINION THAT EXPENDITURE ATTRIBUTABLE DIRECTLY OR INDIRECTL Y FOR EARNING OF SUCH INCOME IS NOT ALLOWABLE AS PER PROVISIONS O F SECTION 14A OF THE ACT. ACCORDINGLY, APPLYING THE PROVISIO NS OF RULE 8D THE ASSESSING OFFICER WORKED OUT THE DISALLOWANCE A T 0.5% ON THE AVERAGE INVESTMENTS OF RS.3,54,74,224/- WHICH W ORKED OUT TO RS.1,77,371/-. 11. BEING AGGRIEVED OF SUCH DISALLOWANCE, THE ASSES SEE PREFERRED APPEAL BEFORE THE CIT(A). 12. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE IN THE LIGHT OF FACTS AND MATERIALS PLACED BEFORE HIM NOTED THAT THE ASSESSEE WAS HAVING SHARE CAPITAL OF RS.2,26,44,000/- AS ON 31.3.2009 AND 31.3.2010. SI MILARLY, THE ASSESSEE WAS HAVING RESERVES AND SURPLUS OF RS. 4,79,06,873/- AS ON 31.3.2010 AND RS.4,22,88,547/- AS ON 31.3.2009. THEREFORE, THE ASSESSEE WAS HAVING A TO TAL AMOUNT OF RS.7,05,50,873/- UNDER THE HEADS SHARE CAPITAL & RESERVE AND SURPLUS ON 31.3.2010 AND AMOUNT OF RS.6,49,32,5 47/- AS ON 31.3.2009, OUT OF WHICH THE ASSESSEE HAD INVESTE D IN MUTUAL FUNDS AN AMOUNT OF RS.1,79,38,931/- AS ON 1. 4.2009 AND AMOUNT OF RS.5,30,09,516/- AS ON 31.3.2010. FU RTHER, THE CIT(A) ALSO NOTICED THAT THE ASSESSEE HAS NOT D EBITED ANY EXPENDITURE TO THE P&L ACCOUNT FOR EARNING EXEMPT I NCOME (DIVIDEND) TOWARDS INVESTMENT IN MUTUAL FUND. FROM THE 6 ITA.NO.752/HYD/2014 M/S. PRABHAT AGRI BIOTECH LTD., HYDERABAD AFORESAID FACTS, THE CIT(A) INFERRED THAT THE INVES TMENTS MADE IN MUTUAL FUNDS WERE OUT OF SURPLUS FUNDS AND THE A SSESSEE HAS NOT INCURRED ANY EXPENDITURE TOWARDS EARNING TH E DIVIDEND INCOME. APPLYING THE RATIO LAID DOWN BY DIFFERENT HIGH COURTS AS WELL AS THE ITAT, THE CIT(A) HELD THAT AS THE AS SESSEE HAS NOT INCURRED ANY EXPENDITURE FOR EARNING THE EXEMPT INCOME THE ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING D ISALLOWANCE U/S 14A READ WITH RULE 8D. ACCORDINGLY, HE DELETED THE ADDITION OF RS.1,77,371/-. 13. BEING AGGRIEVED OF THE AFORESAID DECISION OF TH E CIT(A), THE DEPARTMENT IS BEFORE US. 14. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD AS WELL AS ORDERS O F THE REVENUE AUTHORITIES ON THIS ISSUE. SECTION 14A OF THE ACT WHICH PROVIDES FOR DISALLOWANCE OF EXPENDITURE INCU RRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME W AS INTRODUCED TO THE INCOME TAX ACT BY FINANCE ACT, 20 01 WITH RETROSPECTIVE EFFECT FROM 1.4.1962. THE AFORESAID PROVISION UNDERWENT A SIGNIFICANT CHANGE BY VIRTUE OF AMENDME NT MADE BY FINANCE ACT, 2006 W.E.F. 1.4.2007. AS PER THE A MENDED PROVISION, NO DEDUCTION IS TO BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. SUB- SECTION-2 OF THE AFORESAID AMENDED PROVISION PROVIDES THAT IF TH E ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF TH E CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE INCURRED IN RELATION TO EARNING OF EXEMPT INCOME, THEN HE CAN COMPUTE THE DISALLOWANCE OF SUCH EXPENDITURE AS PER THE METHOD PRESCRIBED. SUB-SECTION 3 OF THE SECTION 14A OF THE ACT EMPOWERS THE ASSESSING OFFICER TO DISALLOW EXPENDIT URE FICTIONALLY EVEN IF THE ASSESSEE CLAIMS THAT NO EXP ENDITURE HAS 7 ITA.NO.752/HYD/2014 M/S. PRABHAT AGRI BIOTECH LTD., HYDERABAD BEEN CLAIMED BY HIM IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME. RULE 8D INSERTED INTO TH E STATUTE WITH EFFECT FROM 24/03/2008 LAYS DOWN THE MODE AND MANNER OF DETERMINING EXPENDITURE RELATING TO EXEMPTED INC OME. ON A CAREFUL READING OF RULE 8D, IT IS CLEAR THAT WHILE RULE 8D(2)(I) SPEAKS OF EXPENDITURE DIRECTLY RELATING TO EXEMPT I NCOME, RULE 8D(2)(II) SPEAKS OF INTEREST EXPENDITURE. WHEREAS, RULE 8D2(III) SPEAKS OF COMPUTATION OF EXPENDITURE FICTIONALLY @ 0.5% OF THE AVERAGE VALUE OF INVESTMENT GIVING RISE TO EXEMPT I NCOME AS APPEARING IN THE BALANCE SHEET ON THE FIRST DAY AND LAST DAY OF THE PREVIOUS YEAR. IN THE PRESENT CASE, ADMITTEDLY ASSESSEE HAS NOT DISALLOWED ANY EXPENDITURE U/S 14A READ WITH RU LE 8D(2) BY CLAIMING THAT IT HAS NOT INCURRED ANY EXPENDITUR E FOR EARNING EXEMPT INCOME. LD. CIT(A) HAS ACCEPTED ASSE SSEES CLAIM BY CONCLUDING THAT INVESTMENTS IN MUTUAL FUND S HAVE BEEN MADE OUT OF SURPLUS FUND AND NO BORROWED FUND HAS BEEN USED. HOWEVER, PERUSAL OF THE ASSESSMENT ORDER CLEA RLY REVEALS THAT AO IN TERMS WITH SECTION 14A(3) HAS WORKED OUT EXPENDITURE DEEMED TO BE INCURRED BY THE ASSESSEE @ 0.5% OF THE INVESTMENT AS PROVIDED UNDER RULE 8D(2)(III). T HEREFORE, IT IS IMMATERIAL WHETHER OR NOT ASSESSEE HAS ACTUALLY INC URRED ANY EXPENDITURE FOR EARNING EXEMPT INCOME. THE PROVISIO NS CONTAINED U/S 14A READ WITH RULE 8D BEING CLEAR AND UNAMBIGUOUS, CANNOT BE INTERPRETED DIFFERENTLY. THE AO HAVING COMPUTED THE DISALLOWANCE STRICTLY IN TERMS WITH SE CTION 14A(3) READ WITH RULE 8D(2)(III), THE SAME, IN OUR VIEW NEEDS TO BE SUSTAINED. ACCORDINGLY, WE SET ASIDE THE ORDER O F LD. CIT(A) ON THIS ISSUE AND SUSTAIN THE ADDITION OF RS. 1,77, 371 MADE BY AO. THIS GROUND IS ALLOWED. 8 ITA.NO.752/HYD/2014 M/S. PRABHAT AGRI BIOTECH LTD., HYDERABAD 15. IN THE RESULT, THE DEPARTMENTS APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH AUGUST , 2014. SD/- SD/- (P.M. JAGTAP) (SAKTIJIT DEY) ACOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATE 28 TH AUGUST, 2014 VG/SPS COPY TO : 1. DCIT CIRCLE-16(3), HYDERABAD 2. M/S. PRABHAT AGRI BIOTECH LTD., 6-3-540/10, OPP. SBH PUNJAGUTTA, HYDERABAD-500 082. 3. THE CIT(A)-V, HYDERABAD 4. THE CIT-IV, HYDERABAD 5. D.R. ITAT, B BENCH, HYDERABAD.