Advanta India Ltd., Bangalore V. ACIT, Bangalore

ITA 820/BANG/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 60782 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-06-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 10-05-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 21-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA
• Assessee Lawyers: P J PARDIWALLA SR COUNSE L
• Keywords: Business income; Depreciation; Benefit of exemption; Revised return; Capital expenditure
• Section: 143(3); 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SHRI N BARATHVAJA SANKAR, VICE RESIDENT AND SMT. P MADHAVI DEVI, JUDICIAL MEMBER ITA NO.819 & 820/BANG/2010 (ASST. YEAR - 2003-04 & 2004-05) M/S ADVANTA INDIA LTD., 405, 4 TH FLOOR, A WING, CARLTON, TOWERS, NO.1, AIRPORT ROAD, BANGALORE. . APPELLANT PAN AACCA 7700L. VS. THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-11(4), BANGALORE. . RESPONDENT ASSESSEE BY : SHRI P.J PARDIWALLA, SR. COUNSE L RESPONDENT BY : SHRI S.K AMBASTHA, CIT DATE OF HEARING : 10-05-2012 DATE OF PRONOUNCEMENT : 29-06-2012 O R D E R PER P MADHAVI DEVI, JUDICIAL MEMBER BOTH THESE APPEALS ARE FILED BY THE ASSESSEE. T HE RELEVANT ASSESSMENT YEARS ARE 2003-04 AND 2004-05. THE APPEA LS ARE DIRECTED ITA NOS.819 & 820/B/10 2 AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TA X (APPEALS)- IV AT BANGALORE DATED 31.03.2010. THE APPEALS ARISE OUT OF THE ASSESSMENT COMPLETED U/S 143(3) OF THE INCOME-TAX ACT, 1961 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY WHICH IS ENGAGED IN DEVELOPMENT AND PRODUCTION OF BASIC A ND HYBRID SEEDS FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2003-04 ON 27.11.2003 DECLARING A LOSS OF RS.3,59,00,900/-. T HE RETURN WAS PROCESSED U/S 143(1) ON 23.1.2004. SUBSEQUENTLY A REVISED RETURN WAS FILED ON 21.10.2004 DECLARING A LOSS OF RS.2,83 ,38,977/-. THE ASSESSMENT WAS TAKEN UP FOR SCRUTINY U/S 143(3) OF THE INCOME-TAX ACT. DURING THE ASSESSMENT PROCEEDINGS, THE AO OBS ERVED THAT THERE IS NO CHANGE IN THE BUSINESS ACTIVITY OF THE ASSESS EE COMPANY COMPARED TO THE IMMEDIATELY PRECEDING YEAR I.E ASSE SSMENT YEAR 2002-03. HE OBSERVED THAT THE ASSESSEE WHICH IS EN GAGED IN THE RESEARCH, DEVELOPMENT, PROCESSING AND MARKETING OF HYBRID SEEDS IS CARRYING OUT ACTIVITIES FROM THE FIRST STAGE I.E RE SEARCH AND DEVELOPMENT INTO THE GENETIC COMPOSITION WHICH IS B EST SUITED FOR LOCAL ENVIRONMENT AND AGRONOMIC PRACTICES IN VARYIN G CLIMATIC ZONES IN INDIA. HE OBSERVED THAT THE RESEARCH AND DEVELO PMENT STARTS AT THE GERMPLASM STAGE, WHICH IS MULTIPLIED INTO NUCLEUS A ND THEN INTO PRE- ITA NOS.819 & 820/B/10 3 BASIC SEEDS AND THEN INTO BASIC SEED. HE OBSERVED THAT UP TO THE BASIC SEED ACTIVITY, ALL THE PRIMARY OPERATIONS ARE PERFO RMED BY THE ASSESSEE COMPANY ON ITS OWN LANDS OR LANDS LEASED BY IT UNDE R ITS OWN DIRECT SUPERVISION AND GUIDANCE WITH THE HELP OF CASUAL LA BOUR ENGAGED BY IT AND THEN THE BASIC SEEDS ARE GIVEN TO FARMERS FOR P RODUCING HYBRID SEEDS, WHICH ARE CARRIED OUT BY THE FARMERS ON THEI R OWN LANDS WHICH ARE LEASED TO THE COMPANY AND THE COST OF PRODUCTIO N IS REIMBURSED TO THEM AND THE PRODUCE IS TAKEN BACK BY THE COMPANY. THE COMPANY THEREUPON CLEANS THE HYBRID SEEDS I.E REMOVES THE M UD, STONES AND NON-STANDARD SIZED SEEDS AND THEN TREATS THE SEEDS WITH CHEMICALS TO PREVENT INFESTATION, PACKS THE SEEDS INTO CLOTH BAG S TO SUIT MARKET REQUIREMENTS AND DISPATCHES THE SEEDS TO CONSIGNEES AGENTS LOCATED ALL OVER THE COUNTRY FOR SALE TO THE DISTRIBUTORS. FR OM THE RECORDS OF THE ASSESSEE, THE AO OBSERVED THAT THE ASSESSEE HAS CLA IMED AN AMOUNT OF RS.3,62,21,263/- AS EXEMPT U/S 10 BEING INCOME FROM AGRICULTURE. HE OBSERVED THAT THE ASSESSEE HAS TAKEN DIFFERENT STAN DS, RELYING HEAVILY ON THE DECISIONS OF THE VARIOUS APPELLATE AUTHORITI ES AND, THEREFORE, HE HELD THAT THE ASSESSEE IS TOTALLY CONFUSED AS TO TH E HEADS OF THE INCOME UNDER WHICH THE PROFITS FROM OPERATIONS ARE TO BE D ECLARED. FOR COMING TO THIS CONCLUSION, HE PLACED RELIANCE UPON THE DECISION OF THE HONBLE ITAT, HYDERABAD BENCH IN ASSESSEES OWN CAS E FOR THE ITA NOS.819 & 820/B/10 4 EARLIER YEARS. HE ALSO CONSIDERED THE ASSESSEES C LAIM THAT THERE IS SUBSTANTIAL CHANGE IN THE ACTIVITIES CARRIED ON BY THE ASSESSEE FROM THE ASSESSMENT YEAR 2002-03 BUT ACCORDING TO HIM, THE R ECORDS REVEAL NO CHANGE IN THE ACTIVITY CARRIED ON BY THE ASSESSEE A S THE ENTIRE AGRICULTURAL OPERATIONS FOR PRODUCTION OF HYBRID SE EDS WERE CARRIED ON BY THE RESPECTIVE HOLDERS OF THE LANDS WHICH HAVE B EEN TAKEN ON LEASE UNDER THE SUPERVISION OF THE ASSESSEE. HE, THEREFO RE, HELD THAT THE SUPERVISION CARRIED ON BY THE ASSESSEE CANNOT BE TE RMED AS THAT OF A CULTIVATOR. HE PLACED RELIANCE UPON THE ASSESSEES OWN CASE FOR THE IMMEDIATELY PRECEDING YEAR AND HAS HELD THAT THE EN TIRE INCOME OF THE ASSESSEE IS INCOME FROM BUSINESS . THE CLAIM OF EXE MPTION U/S 10 WAS REJECTED AND ENTIRE INCOME WAS SUBJECTED TO THE TAX UNDER THE HEAD BUSINESS. FURTHER HE OBSERVED THAT THE BASIC SEE DS PRODUCTION EMANATES FROM GERMPLASM AND THE VARIATIONS AND GENE TIC MANIPULATIONS ACHIEVED BY THE ASSESSEE ARE BY SCIEN TIFIC RESEARCH ACTIVITY AND, THEREFORE, THE EXPENDITURE INCURRED O N EXTENSIVE RESEARCH HAS NOT BEEN CONSIDERED BY THE ASSESSEE WHILE COMPU TING THE CLAIM OF AGRICULTURAL INCOME. FURTHER HE ALSO OBSERVED THAT THE ASSESSEE IS CARRYING ON THE PRODUCTION OF BASIC SEEDS IN THE AS SESSEES O WN LANDS AND FOR THE PRODUCTION OF HYBRID SEEDS, THESE BASIC SEEDS ARE GIVEN TO THE FARMERS FOR CULTIVATION UNDER CONTRACT FARMING. A CCORDING TO HIM, ITA NOS.819 & 820/B/10 5 CULTIVATION OF HYBRID SEEDS UNDER CONTRACT FORMING CANNOT BE TERMED AS CULTIVATION DONE BY THE ASSESSEE. HE, THEREFORE, REJECTED THE ASSESSEES CLAIM OF EXEMPTION U/S 10 OF THE INCOME- TAX ACT AND TREATED THE ENTIRE INCOME AS BUSINESS INCOME. 3. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFO RE THE CIT(A) AND REITERATED THE SUBMISSIONS MADE BEFORE THE AO. THE CIT(A) AFTER CONSIDERING THE ASSESSEES CONTENTIONS AT LENGTH, O BSERVED THAT IN THE ASSESSMENT YEAR 2003-04, THE ASSESSEE HAS CLAIMED T O HAVE CHANGED ITS SYSTEM OF ACCOUNTING AND THAT THE ASSESSEE HAS ALSO RAISED ADDITIONAL GROUNDS OF APPEAL BEFORE THE CIT(A). CONSIDERING T HE SAME, THE CIT(A) CALLED FOR A REMAND REPORT FROM THE ASSESSIN G OFFICER. VIDE LETTER DATED 15.9.2009, THE AO FILED THE REMAND REP ORT ACCORDING TO WHICH THE COMPANY HAD PRODUCED PAHANI EXTRACT OF I TS OWN LANDS AND NOT OF THE FARMERS. ACCORDING TO THE AO, THE COMPA NY HAS CHANGED/RE-DRAFTED THE LEASE AGREEMENT TO SUIT TO I TS ADVANTAGE FOR CLAIMING EXEMPTION AS AGRICULTURAL INCOME BUT HAS N EVER PRODUCED THE DETAILS OF EXPENSES FOR GROWING HYBRID SEEDS ON FAR MERS LANDS AND THAT THE ASSESSEEES NAME IS ALSO NOT MENTIONED AS CULTIVATOR IN THE PAHANIS. THEREFORE, THE AO CONCLUDED THAT THE CLAI M OF LEASE TRANSACTION WITH THE FARMERS BY THE ASSESSEE IS NOT HING BUT SHAM ITA NOS.819 & 820/B/10 6 TRANSACTION AND ALL THE DOCUMENTS ARE PREPARED TO S UIT THE COMPANYS ADVANTAGE. IT WAS ALSO CONCLUDED THAT THE ASSESSEE HAS NOT SHOWN SALE OF BASIC SEEDS, HENCE NO INCOME ACCRUES BY SELLING THE BASIC SEEDS AND SALES DECLARED IN THE FINANCIAL STATEMENT ARE FROM THE SALE OF HYBRID SEEDS WHICH ARE GROWN BY THE FARMERS AND PURCHASED BY THE COMPANY FROM THEM AND, THEREFORE, COMPANIES ACTIVITIES ARE NOT AN INTEGRATED ONE AND RULE 7 OF IT RULES DOES NOT APPLY. 4. THE CIT(A) AFTER CONSIDERING REMAND REPORT OF TH E AO AND THE ASSESSEES SUBMISSIONS, HELD THAT THE CLAIM OF THE ASSESSEE THAT AS MANY AS 3946 AGRICULTURISTS HAVE LEASED THEIR LAND S TO THE ASSESSEE CREATES A DOUBT ABOUT THE GENUINENESS OF THE CLAIM AND ALSO THAT STATE GOVERNMENT HAS NOT RECOGNIZED THE ASSESSEE AS AN AG RICULTURISTS IN THEIR RECORDS. THEREFORE, ACCORDING TO THE CIT(A), IT CANNOT BE ACCEPTED THAT THE ASSESSEE IS AN AGRICULTURIST. HE, THEREFORE, REJECTED THE ASSESSEES CLAIM. FURTHER HE ALSO HELD THAT TH E ASSESSEE IS UTILIZING THE SCIENTIFIC RESEARCH ACTIVITY FOR PRODUCING THE BASIC SEEDS AND, THEREFORE, THE PRODUCTION OF HYBRID SEEDS FROM THE BASIC SEEDS CANNOT BE SAID TO BE AN AGRICULTURAL ACTIVITY. HE, THEREF ORE, TREATED THE ENTIRE INCOME AS NON-AGRICULTURAL AND, THEREFORE, TAXABLE. ON THE ISSUE AS TO WHETHER THE EXPENDITURE CLAIMED BY THE ASSESSEE IN THE ADDITIONAL ITA NOS.819 & 820/B/10 7 GROUND IS ALLOWABLE OR NOT, HE HELD THAT THE LEASIN G AGREEMENTS ARE SHAM AND NOT GENUINE AND, THEREFORE, THE SAID EXPEN DITURE CLAIMED TO HAVE BEEN INCURRED FOR CARRYING OUT AGRICULTURAL OP ERATIONS ON LEASED LANDS IS NOT ALLOWABLE. 5. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFO RE US. 6. THE LEARNED SR. COUNSEL FOR THE ASSESSEE SHRI P.J PARDIWALLA, WHILE REITERATING THE ASSESSEES SUBMISSION MADE BE FORE THE AUTHORITIES BELOW, DREW OUR ATTENTION TO THE FINDINGS OF THE AO THAT THE ACTIVITIES OF THE ASSESSEE HAVE NOT CHANGED FROM THE EARLIER Y EAR IE. FROM THE ASSESSMENT YEAR 2002-03. HE SUBMITTED THAT THE ISS UE AS TO WHETHER THE PRODUCTION OF HYBRID SEEDS BY THE FARMERS ON TH E LANDS LEASED BY THEM TO THE ASSESSEE IS TO BE TREATED AS AGRICULTUR AL INCOME OR NOT HAS ARISEN IN THE ASSESSEES OWN CASE FOR THE ASSESSMEN T YEAR 2002-03 AND THAT THE B BENCH OF TRIBUNAL VIDE ITS ORDER DATED 29.6.2010 HAS DECIDED THE ISSUE IN ITS FAVOUR. HE HAS FILED A CO PY OF THE SAID ORDER BEFORE US. AS REGARDS THE FINDINGS OF THE AO AND T HE CIT(A) THAT UP TO THE BASIC SEEDS, THE ACTIVITIES OF THE ASSESSEE ARE BASED ON SCIENTIFIC RESEARCH AND ARE NON AGRICULTURAL ACTIVITY, THE LEA RNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE PURCHASES THE GERMPLASM AND ITA NOS.819 & 820/B/10 8 CULTIVATES THE BASIC SEEDS IN ITS OWN LANDS AND, TH EREFORE, THIS ACTIVITY IS ALSO TO BE CONSIDERED AS AGRICULTURAL ACTIVITY. HE DREW OUR ATTENTION TO PAGE 2 OF THE ITAT ORDER FOR THE ASSESSMENT YEAR 2002-03, WHEREIN THIS FACT HAS BEEN RECORDED I.E THAT THE ASSESSEE P ROCURES GERMPLASM PROTOTYPE OF THE HYBRID SEEDS FROM THE LABORATORIES FOR EMPLOYING THE SAME IN ITS SUBSEQUENT OPERATIONS AND THE GERMPLASM IS SOWN IN THE FIELDS WHICH GROWS INTO WHAT IS CALLED BASIC SEED. 7. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THIS ISSUE OF CONTRACT FARMING HAD ARISEN IN THE CASE OF M/S NAMDHARI SEEDS PVT. LTD. AND THE HONBLE KARNATAKA HIGH COURT VIDE ITS ORDER DATED 24.10.201 1 HAS HELD THE ISSUE AGAINST THE ASSESSEE. HE HAS FILED COPY OF T HE SAID ORDER BEFORE US AND SUBMITTED THAT THE ASSESSEES CASE HAS TO BE DISMISSED. THE LEARNED DR HAS ALSO FILED BEFORE US A COPY OF THE M ATERIAL COLLECTED BY HIM FROM THE INTERNET ON GERMPLASM AND THE COPY OF THE SAME IS TAKEN ON RECORD. 8. IN THE REJOINDER, THE LEARNED COUNSEL FOR THE A SSESSEE HAS DRAWN OUR ATTENTION TO THE PECULIAR FACTS OF THE CASE OF M/S NAMDHARI SEEDS PVT. LTD AND SUBMITTED THAT IN THE SAID CASE, THE F ACTS ARE DIFFERENT ITA NOS.819 & 820/B/10 9 FROM THE ASSESSEES CASE. HE SUBMITTED THAT AS PER THE TERMS OF AGREEMENT BETWEEN THE M/S NAMDHARI SEEDS PVT. LTD AND THE FARMERS, THOUGH THE FARMERS HAVE LEASED OUT THEIR L ANDS TO THE ASSESSEE THEREIN, THE CULTIVATION IS DONE UNDER THE DIRECT S UPERVISION OF THE COMPANY. THEREAFTER M/S NAMDHARI SEEDS PVT. LTD., P ROCURES THE HYBRID SEEDS FROM THE FARMERS AND AFTER SEGREGATING THE SEEDS WHICH CAN BE USED AS HYBRID SEEDS, THE RESIDUE IS SOLD IN THE OPEN MARKET AND THE COMPENSATION RECEIVED FOR RESIDUE SEEDS IS PAID TO THE FARMERS AND AS PER THE AGREEMENT, THE COMPANY HAD FURTHER AGREE D TO PAY THE FARMERS THE COMPENSATION PER KG OF THE HYBRID SEEDS WHICH MEET THE SPECIFICATION SET BY THE COMPANY. HE SUBMITTED THA T IN THESE PECULIAR CIRCUMSTANCES, THE HONBLE HIGH COURT OF KARNATAKA HAS HELD THAT THE COMPANY, M/S NAMDHARI SEEDS PVT. LTD. IS NOT AN AGR ICULTURIST AS NONE OF THE NORMAL ACTIVITIES OF THE AGRICULTURIST HAVE UNDERTAKEN BY THE ASSESSEE COMPANY AND THE INPUT GIVEN BY THE ASSESSE E IS ONLY THE TECHNICAL SUPERVISION OF THE COMPANY AND IT IS THE DUTY OF THE FARMERS TO ENSURE FERTILITY OF THE LAND, SUITABILITY OF TH E LAND FOR CULTIVATION, WATERING OF THE LAND, USE OF THE SEEDS SUPPLIED BY THE ASSESSEE AND ALSO SELL THE HYBRID SEEDS AT A PRICE FIXED BY THE ASSESSEE COMPANY. HE SUBMITTED THAT THE HONBLE HIGH COURT HAS HELD T HAT THE ASSESSEE IS NOT PAYING ANY RENT PER ACRE AND IS NOT GIVING ANY THING IN KIND BUT ITA NOS.819 & 820/B/10 10 ONLY PAYS FIXED PRICE PER QUINTAL DEPENDING UPON TH E TERMS OF THE AGREEMENT. HE FURTHER SUBMITTED THAT T HE FOUNDATION SEEDS ARE GROWN BY THE FARMERS AS PER THE SPECIFICATIONS SET OUT BY THE COMPANY AND, THEREFORE, AGRICULTURAL OPERATIONS ARE CARRIED OUT BY THE FARM ERS AND ONLY THE PRODUCE WHICH MEET THE STANDARDS SET BY TH E COMPANY ARE PURCHASED FROM THE FARMERS. THUS, ACCORDING TO HIM, THE HONBLE HIGH COURT OF KARNATAKA HAS CONSIDERED THESE FACTOR S BEFORE HOLDING THAT THE ASSESSEE THEREIN M/S NAMDHARI SEEDS PVT. L TD., IS NOT A FARMER AND THE OPERATIONS CARRIED ON BY IT ON ARE NOT AGRI CULTURAL OPERATIONS. HE SUBMITTED THAT IN THE ASSESSEES CASE, THE ASSES SEE IS NOT ONLY PAYING THE RENT FOR THE LAND BUT IS ALSO REIMBURSIN G THE ENTIRE COST OF CULTIVATION TO THE FARMER AND THE FARMER IS CULTIVA TING THE SEEDS ON ITS BEHALF UNDER DIRECT SUPERVISION. THUS ACCORDING TO HIM, THE FARMER IS DISCHARGING HIS DUTIES AS AN AGENT OF THE ASSESSEE COMPANY IN PRODUCING THE HYBRID SEEDS AND THE COMPANY BEING INANIMATE PERSON, IT HAS TO CULTIVATE THROUGH ITS AGENTS ONLY. HE SU BMITTED THAT UNLIKE THE CASE OF M/S NAMDHARI SEEDS, THE ASSESSEE TAKES THE ENTIRE PRODUCE AND SELL THE PRODUCE AFTER SEGREGATING SEEDS AND TH E COMPENSATION RECEIVED IS ITS OWN INCOME, WHILE THE FARMERS GET O NLY THE RENT FOR THE LANDS AND THE REIMBURSEMENT OF COST AND NOTHING ELS E. HE SUBMITTED THAT THE ASSESSEE ALONE IS THE BENEFICIARY OR LOSER OF THE HIGHER OR ITA NOS.819 & 820/B/10 11 LOWER YIELD RESPECTIVELY AND, THEREFORE, IT CANNOT BE SAID THAT THE ASSESSEE IS PURCHASING THE SEEDS CULTIVATED BY THE FARMERS. THUS, ACCORDING TO HIM, THE DECISION OF THE TRIBUNAL IN T HE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2002-03 IS APPLICABLE AND NOT THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF M/S NAMDHARI SEEDS PVT. LTD. 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS, WE FIND THAT ACCORDING TO THE AO, THE ASSESSEE IS UNDERTAKING THE ACTIVITY OF PRODUCING THE BASIC SE EDS IN ITS OWN LANDS AND HYBRID SEEDS ON THE LANDS LEASED BY IT. ACCOR DING TO THE AO, THE FOREMOST OBJECTION IS THAT THE GERMPLASM IS GENERA TED OUT OF SCIENTIFIC RESEARCH AND, THEREFORE, IT IS NOT AGRICULTURAL ACT IVITY AND FURTHER THAT THE EXPENDITURE INCURRED FOR SUCH SCIENTIFIC RESEAR CH HAS NOT BEEN CONSIDERED BY THE ASSESSEE WHILE COMPUTING THE AGRI CULTURAL INCOME. AS REGARDS THE PRODUCTION OF BASIC SEEDS IS CONCERN ED, THE SECOND OBJECTION OF THE AO IS THAT THE BASIS SEEDS ARE NOT FIT FOR HUMAN CONSUMPTION, AND, THEREFORE, IT CANNOT BE AGRICUL TURAL PRODUCE AND FURTHER THAT THEY ARE NOT ONLY GROWN ON OWN LANDS B UT ALSO ON LEASED LANDS AND, THEREFORE, LEASE RENTALS SHOULD ALSO BE CONSIDERED FOR COMPUTING THE AGRICULTURAL INCOME AS REGARDS THE P RODUCTION OF ITA NOS.819 & 820/B/10 12 HYBRID SEEDS, THE ONLY OBJECTION OF THE AO IS THAT THE HYBRID SEEDS ARE CULTIVATED BY THE FARMERS ON A CONTRACT BASIS AND, THEREFORE, THE ASSESSEE CANNOT BE SAID TO HAVE CULTIVATED THE HYBR ID SEEDS AND, THEREFORE, THE ENTIRE OPERATION CANNOT BE CONSIDERE D AS AGRICULTURAL OPERATIONS. AS REGARDS THE OBJECTION OF THE AO AND THE CIT(A) THAT THE GERMPLASM GENERATED IS OUT OF SCIENTIFIC RESEAR CH ACTIVITY, WE FIND THAT THE AO HAS ALREADY HELD THAT THERE IS NO CHANG E IN THE ACTIVITIES OF THE ASSESSEE AS COMPARED TO THE EARLIER ASSESSMENT YEAR I.E 2002-03. FOR THE ASSESSMENT YEAR 2002-03, THE TRIBUNAL IN IT S ORDER HAS OBSERVED THAT THE ASSESSEE PROCURES GERMPLASM FROM LABORATORIES AND DOES NOT GENERATE THE SAID GERMPLASM IN ITS OWN LA BORATORIES. THEREFORE, THE CONTENTION OF THE AO AND THE CIT(A) THAT SOME SCIENTIFIC ACTIVITY IS CARRIED ON BY THE ASSESSEE A ND THE EXPENDITURE INCURRED BY THE ASSESSEE ON SUCH SCIENTIFIC ACTIVIT Y SHOULD BE CONSIDERED WHILE COMPUTING THE AGRICULTURAL INCOME DOES NOT HOLD GOOD. NOW, WHETHER THE CONVERSION OF GERMPLASM INT O BASIC SEEDS ALSO INVOLVES ANY SCIENTIFIC ACTIVITY IS THE QUESTI ON BEFORE US. FROM THE MATERIAL FILED BY THE LEARNED DR, WHICH IS PROC URED FROM THE INTERNET, WE FIND THAT GERMPLASM IS LIVING TISSUE F ROM WHICH NEW PLANTS CAN BE GROWN AND THAT IT CAN BE A SEED OR PA RT OF ANOTHER PLANT, A LEAF, A PIECE OF STEM, POLLEN OR EVEN JUST A FEW CE LLS THAT CAN BE TURNED ITA NOS.819 & 820/B/10 13 INTO A WHOLE PLANT. IT IS THE CASE OF THE ASSESSEE THAT THIS GERMPLASM IS SOWN INTO LAND WHICH GROWS INTO PLANTS FOR PRODUCTI ON OF BASIC SEEDS. FROM THIS SIMPLE OPERATION, IT CAN BE SEEN THAT NO SCIENTIFIC RESEARCH ACTIVITY IS INVOLVED AND ALL THE ACTIVITIES ARE CAR RIED ON BY THE ASSESSEE IN ITS OWN LANDS OR ON THE LANDS TAKEN ON LEASE BY IT. THEREFORE, THIS ACTIVITY ALSO CANNOT BE CONSIDERED AS NON-AGRICULTU RAL ACTIVITY. SIMPLY BECAUSE THE BASIC SEEDS ARE NOT FIT FOR HUM AN CONSUMPTION, IT CANNOT BE SAID THAT THE PRODUCE IS NOT AGRICULTURAL PRODUCE. THE DEFINITION OF AGRICULTURE GIVEN IN SEC. 2(1A) OF THE INCOME-TAX ACT DOES NOT SPECIFY THAT THE PRODUCE SHOULD BE FIT FOR HUMAN CONSUMPTION. ONLY REQUIREMENT IS THAT THE PRODUCE SHOULD BE OUT OF CULTIVATION BY USAGE OF LAND. HENCE THIS FINDING OF THE AO IS ALSO NOT CORRECT. COMING TO THE LAST STAGE I.E PRODUCTION O F HYBRID SEEDS, THE BONE OF CONTENTION BETWEEN THE REVENUE AND THE ASSE SSEE IS THAT THE ASSESSEE IS NOT CARRYING ON THE AGRICULTURAL ACTIVI TY BUT IT IS THE FARMERS WHO ARE CARRYING THE AGRICULTURAL ACTIVITY AND, TH EREFORE, THE ASSESSEE CANNOT BE TERMED AS AN AGRICULTURIST. AS RIGHTLY P OINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, COMPANY IS AN INA NIMATE PERSON AND CANNOT BE EXPECTED TO DO THE CULTIVATION BY ITSELF. THE CULTIVATION CAN BE DONE BY ITS AGENTS OR BY LABOURERS, TO WHOM THE ASSESSEE PAYS THE WAGES. IN THE CASE BEFORE US, THE ASSESSEE HAS TAK EN THE LANDS ON LEASE ITA NOS.819 & 820/B/10 14 FROM THE FARMERS AND IN TURN THE FARMERS ARE EMPLOY ED BY THE ASSESSEE COMPANY TO CULTIVATE AND PRODUCE THE SEEDS. THEREFO RE, THE FARMERS CAN BE SAID TO BE THE AGENTS OF THE ASSESSEE COMPAN Y AND THE PRODUCTION OF HYBRID SEEDS BY THE FARMERS CANNOT B E SAID TO BE NOT ON BEHALF OF THE ASSESSEE COMPANY. THIS ISSUE HAD ARI SEN IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2002-03 AND THE TRIBUNAL AFTER CONSIDERING THE ISSUE AT LENGTH HAS HELD AS U NDER :- 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF PRODUCTION AND SALE OF HYBRID SEEDS. THE COMPANY I S ENGAGED IN THE RESEARCH, DEVELOPMENT, PROCESSING AN D MARKETING OF HYBRID SEEDS. THE ASSESSEE COMPANY CA RRIED OUT STUDIES AND RESEARCHES TO FIND OUT THE MOST SUI TABLE GENETIC COMPOSITION OF SEEDS IN THE RESPECTIVE LOCA L ENVIRONMENT. THE ASSESSEE PROCURES GERMPLASM PROTO TYPE OF THE HYBRID SEEDS FROM THE LABORATORIES FOR EMPLO YING THE SAME IN ITS SUBSEQUENT OPERATIONS. THE GERMPLASM I S SOWN IN FIELDS WHICH GROWS INTO WHAT IS CALLED THE BASIC SEED. THE BASIC SEEDS ARE AGAIN REPLANTED TO GROW THE HYB RID SEEDS. THE HYBRID SEEDS ARE SOLD BY THE ASSESSEE C OMPANY, TO FARMERS AT LARGE. THIS IS THE FRAME OF OPERATIO N CARRIED ON BY THE ASSESSEE DURING THE PREVIOUS YEAR RELEVAN T TO THE ASSESSMENT YEAR IN APPEAL. IN THE PAST, THE ASSESSE E HAD CARRIED OUT THE BUSINESS IN DIFFERENT FORMULATIONS LIKE DISTRIBUTING BASIC SEEDS TO FARMERS TO GROW INTO HY BRID SEEDS AND BUYING IT BACK FROM THE FARMERS, ETC., B UT THOSE ITA NOS.819 & 820/B/10 15 BUSINESS DYNAMICS ARE NOT RELEVANT FOR THE IMPUGNED ASSESSMENT YEAR. AS FAR AS THE IMPUGNED ASSESSMENT YEAR IS CONCERNED, ASSESSEE ITSELF IS GROWING BASIC SEEDS A S WELL AS HYBRID SEEDS. 4. UP TO BASIC SEED ACTIVITY, ALL THE PRIMARY OPERA TIONS ARE PERFORMED BY THE ASSESSEE IN ITS OWN LANDS OR L ANDS LEASED BY IT, UNDER ITS OWN DIRECT SUPERVISION AND GUIDANCE BY ENGAGING CASUAL LABOUR. THE HYBRID SEEDS ARE GR OWS BY THE FARMERS IN THEIR OWN LANDS BUT LEASED OUT TO TH E ASSESSEE COMPANY. THE ENTIRE COST OF PRODUCTION WAS TO BE REIMBURSED BY THE ASSESSEE TO THE FARMERS. THEREFO RE, DEFACTO SPEAKING THE HYBRID SEED OPERATIONS WAS CAR RIED ON BY THE ASSESSEE IN ITS LEASEHOLD LANDS. 5. IN THE COMPUTATION OF TOTAL INCOME, THE ASSESSEE CLAIMED DEDUCTION OF RS.1,88,38,838/- UNDER RULE 7 OF THE IT RULES. THE DEDUCTION HAS BEEN CLAIMED BY THE ASSES SEE ON THE GROUND THAT THE INCOME IS PARTLY AGRICULTURAL A ND PARTLY FROM BUSINESS. BUT IN THE NOTE ENCLOSED TO THE COM PUTATION OF INCOME, THE ASSESSEE HAS FURTHER STATED THAT THE COMPANY RESERVES THE RIGHT TO CONTEND AT THE TIME OF HEARIN G THAT THE ENTIRE INCOME OF THE COMPANY IS FULLY EXEMPT SINCE IT IS AGRICULTURAL INCOME AS PER THE INCOME-TAX ACT. 6. THE ASSESSING OFFICER RELYING ON THE DECISION OF THE ITAT, DELHI IN THE CASE OF PROAGRO SEEDS COMPANY LT D., V. JCIT IN ITA NO.90/DEL/2000, DATED11.11.2002, NOTICE D THE ITA NOS.819 & 820/B/10 16 ASSESSEE WHY THE CLAIM FOR PARTIAL DEDUCTION SHOULD NOT BE DENIED. THE ASSESSEE REPLIED THAT THE ENTIRE INCOM E WAS IN THE NATURE OF AGRICULTURAL INCOME AND RELIED ON THE JUDGEMENT OF THE HON'BLE SUPREME COURT RENDERED IN THE CASE OF RAJA BENOY KUMAR SAHAS ROY (32 ITR 466) AND OTHER CASES. 7. BUT ANYHOW THE ASSESSING OFFICER DID NOT ACCEPT ANY OF THE CONTENTION OF THE ASSESSEE AND TREATED THE E NTIRE INCOME AS BUSINESS INCOME MAINLY ON THE FOLLOWING P REMISES : I) THE PROFIT DERIVED BY THE ASSESSEE AROSE MAINLY ON ACCOUNT OF INTERNATIONAL TECHNOLOGY, MARKETING EXPE RTISE ASSISTED BY THE AGRICULTURAL OPERATIONS CARRIED ON BY THE GROWERS MAINLY ON THEIR OWN LANDS. II) THE ASSESSEE DOES NOT UNDERTAKE ANY AGRICULTURA L ACTIVITY BY RELYING ON THE DECISION OF THE ITAT, DE LHI IN PROAGRO SEEDS COMPANY LTD., V. JCIT IN ITA NO.90/DEL/2000, DATED11.11.2002. 8. ON THE ISSUE OF AGRICULTURAL CHARACTER OF INCOME , THE CIT(A) CONFIRMED THE ORDER OF THE ASSESSING AUTHOR ITY. THE COMMISSIONER OF INCOME-TAX(A) HELD THAT THE INCOME OF THE ASSESSEE IS NEITHER WHOLLY NOR PARTIALLY AGRICULTUR AL INCOME. IT IS AGAINST THE ABOVE, THE ASSESSEE HAS COME IN S ECOND APPEAL BEFORE US. ITA NOS.819 & 820/B/10 17 9. EVEN THOUGH THE ASSESSEE HAS RAISED TWENTY TWO GROUNDS OF APPEAL, THE ISSUE IN SHORT IS WHETHER TH E ENTIRE INCOME EARNED BY THE ASSESSEE OUT OF PRODUCTION OF HYBRID SEEDS IS AGRICULTURAL IN CHARACTER OR NOT. THE ALT ERNATIVE CONTENTION OF THE ASSESSEE IS THAT AT LEAST INCOME ATTRIBUTABLE TO THE PRODUCTION OF BASIC SEEDS IS AGRICULTURAL IN NATURE. 10. WE HEARD SHRI. P. J. PARDIWALA, THE SENIOR COUN SEL APPEARING FOR THE ASSESSEE AND SMT. SWATHI S. PATIL , THE LEARNED COUNSEL APPEARING FOR THE REVENUE. 11. AN EXACTLY SIMILAR ISSUE WAS CONSIDERED BY ITAT , 'B' BENCH OF BANGALORE IN THE CASE OF INDO AMERICAN EXP ORTS AND M/S. NAMDHARI SEEDS PVT. LTD., IN THEIR COMMON ORDER DATED 14.7.2006, PASSED IN ITA NO.1040/BANG/2002 AN D ITA NO.3102/BANG/2004. AFTER CONSIDERING THE FACTS AND RIVAL CONTENTIONS IN DETAIL, THE TRIBUNAL HELD AS FOLLOWS : '5.4. AFTER HEARING BOTH THE SIDES, WE ARE OF THE VIEW THAT THE ONLY QUESTION TO BE DECIDED BY THE TRIBUNAL IS AS TO WHETHER THE SEEDS PRODUCED BY THE ASSESSEE AND SOLD IN MARKET GENERATES AGRICULTURAL INCOME OR IS IT A BUSINESS INCOME. THE PROVISION OF SECTION 2(1A) OF THE I. T ACT IS QUOTED BELOW : (1A) 'AGRICULTURAL INCOME' MEANS :- (A) ANY RENT OR REVENUE DERIVED FROM LAND WHICH IS SITUATED IN INDIA AND IS USED FOR AGRICULTURAL PURPOSES ; ITA NOS.819 & 820/B/10 18 (B) ANY INCOME DERIVED FROM SUCH LAND BY - (I) AGRICULTURE; OR (II) THE PERFORMANCE BY A CULTIVATOR OR RECEIVER OF RENT-IN-KIND OF ANY PROCESS ORDINARILY EMPLOYED BY A CULTIVATOR OR RECEIVER OF RENT-IN- KIND TO RENDER THE PRODUCE RAISED OR RECEIVED BY HIM FIT TO BE TAKEN TO MARKET; OR (III) THE SALE BY A CULTIVATOR OR RECEIVER OF RENT- IN-KIND OF THE PRODUCE RAISED OR RECEIVED BY HIM, IN RESPECT OF WHICH NO PROCESS HAS BEEN PERFORMED OTHER THAN A PROCESS OF THE NATURE DESCRIBED IN PARAGRAPH (II) OF THIS SUB-CLAUSE ; (C) ANY INCOME DERIVED FROM ANY BUILDING OWNED AND OCCUPIED BY THE RECEIVER OF THE RENT OR REVENUE OF ANY SUCH LAND, OR OCCUPIED BY THE CULTIVATOR OF THE RECEIVER OF RENT-IN-KIND, OF ANY LAND WITH RESPECT TO WHICH, OR THE PRODUCE OF WHICH, ANY PROCESS MENTIONED IN PARAGRAPHS (II) AND (III) OF SUB-CLAUSE (B) IS CARRIED ON : PROVIDED THAT - (I) THE BUILDING IS ON OR IN THE IMMEDIATE VICINITY OF THE LAND, AND IS A BUILDING WHICH THE RECEIVER OF THE RENT OR REVENUE OR THE CULTIVATOR, OR THE RECEIVER OF RENT-IN-KIND, BY REASON OF HIS CONNECTION WITH THE (II) LAND REQUIRES AS A DWELLING HOUSE, OR AS A STORE-HOUSE, OR OTHER OUT-BUILDING, AND ITA NOS.819 & 820/B/10 19 (III) THE LAND IS EITHER ASSESSED TO LAND REVENUE IN INDIA OR IS SUBJECT TO A LOCAL RATE ASSESSED AND COLLECTED BY OFFICERS OF THE GOVERNMENT AS SUCH OR WHERE THE LAND IS NOT SO ASSESSED TO LAND REVENUE OR SUBJECT TO A LOCAL RATE, IT IS NOT SITUATED -- IT MAY BE APPRECIATED THAT AGRICULTURAL INCOME INCLUDES ANY RENT OR REVENUE DERIVED FROM THE LAND WHICH IS USED FOR AGRICULTURAL PURPOSES. THE ISSUE IS WHETHER THE REVENUE DERIVED FROM SUCH LAND BY THE ASSESSEE IS AGRICULTURAL INCOME OR NOT. FOR THE PURPOSE OF DERIVING INCOME FROM AGRICULTURAL LAND THERE IS NO NECESSITY THAT SUCH LAND SHOULD BE OWNED BY THE ASSESSEE. IF THE ASSESSEE HAS DERIVATIVE INTEREST IN THE LAND FOR THE PURPOSE OF CONDUCTING AGRICULTURAL OPERATIONS ON THE SAID LAND, THEN THE REVENUE GENERATED FROM SUCH LAND WOULD BE AGRICULTURAL INCOME. THIS HAS BEEN SO HELD BY THE HON'BLE MADRAS HIGH COURT IN 20 ITR 151 (COMMISSIONER OF INCOME-TAX V. MADDI VENKATASUBBAYYA). HERE IT MAY BE APPRECIATED THAT THE ASSESSEE ENTERED INTO LEASE AGREEMENT WITH VARIOUS AGRICULTURE LAND OWNERS FOR THE PURPOSE OF OBTAINING LANDS FOR DOING THE PROCESS OF AGRICULTURAL OPERATIONS. THE GOVERNMENT OF KARNATAKA HAS ALSO GRANTED REGISTRATION TO THE ASSESSEE THEREBY PERMITTING ITA NOS.819 & 820/B/10 20 THE ASSESSEE TO TAKE UP PRODUCTION AND DISTRIBUTION OF VARIOUS SEEDS AND CROPS. THE ASSESSEE'S REPRESENTATIVES ARE THERE ON THE LAND TO SUPERVISE THE MANUAL LABOUR OPERATIONS AND TO PROTECT THE ASSESSEE'S INTEREST AND IT MAY BE APPRECIATED THAT THE SOWING, GROWING AND PROTECTING THE CROP AND THE PRODUCE IS ALSO TAKEN BY THE ASSESSEE AND THE ASSESSEE ALONE. HERE THE KIND ATTENTION OF THE HON'BLE TRIBUNAL IS DRAWN TO THE DECISION OF THE ALLAHABAD HIGH COURT REPORTED IN 177 ITR 428 (COMMISSIONER OF INCOME-TAX V. ASSOCIATED METALS CO.) (ALL) WHEREIN IT HAS BEEN HELD THAT THE ASSESSEE COMPANY THEREIN HAD ENTERED INTO AGREEMENT WITH BHUMIDHARS OF LAND FOR SOWING AND GROWING AND PROTECTING CROPS AND THEREAFTER THE MAJOR SHARE OF THE PROFIT WAS TO BE OF THE COMPANY THEREIN. IN THAT CASE IT WAS HELD THE INCOME OF THE COMPANY WAS AGRICULTURAL INCOME. THE ASSESSEE'S CASE HEREIN STANDS ON A MUCH BETTER FOOTING. IT MAY ALSO BE APPRECIATED BY THE HON'BLE TRIBUNAL THE ASSESSING AUTHORITY HIMSELF DOES NOT DISPUTE THE FACT THAT THE ASSESSEE IS UNDERTAKING THE AGRICULTURAL OPERATIONS. IN FACT THE ASSESSING AUTHORITY HIMSELF HAS ACCEPTED THE AGRICULTURAL INCOME DECLARED BY THE ASSESSEE ON THE CONTRACT PRODUCTION DONE OUTSIDE THE STATE OF KARNATAKA. ITA NOS.819 & 820/B/10 21 IT IS ONLY IN REGARD TO THE STATE OF KARNATAKA THAT THE ASSESSING AUTHORITY HAS HELD THAT AS PER THE LAND REFORMS ACT THE ASSESSEE IS NOT ENTITLED TO THE BENEFIT OF EXEMPTION U/S.2(1A) OF THE ACT. THE BAR LEVIED BY THE KARNATAKA LAND REFORMS ACT WOULD BE MORE HOLD GOOD IN SO FAR AS THE GOVERNMENT OF KARNATAKA HAS GRANTED CERTIFICATE TO THE ASSESSEE FOR PRODUCTION AND DISTRIBUTION OF THE SPECIFIED HYBRID SEEDS AND PLANTS. HERE IT MAY ALSO BE APPRECIATED THAT THE NEXUS BETWEEN THE INCOME CLAIMED BY THE ASSESSEE AS NOT INCLUDIBLE IN THE TOTAL INCOME AND THE AGRICULTURAL OPERATIONS CONDUCTED BY THE ASSESSEE AND THE LANDS FROM WHICH THE INCOME AS SO GENERATED HAVE NOT BEEN DISPUTED BY THE REVENUE. THE IMMEDIATE SOURCE OF THE INCOME IS THE AGRICULTURAL OPERATIONS CONDUCTED BY THE ASSESSEE ON THE LAND AND LAND ALONE AND CONSEQUENTLY THE SAME IS LIABLE TO BE TREATED ONLY AS AGRICULTURAL INCOME.' 12. FINALLY THE TRIBUNAL IN THE SAID ORDER HAS CONC LUDED AS FOLLOWS : 'IN VIEW OF SUCH DISCUSSION, FOUNDATION SEEDS OR HYBRID SEEDS PRODUCED IN OWN LAND OR LANDS TAKEN ON LEASE I.E., ON CONTRACT FARMING WILL BE THE RESULT OF AGRICULTURAL OPERATIONS AND THE ITA NOS.819 & 820/B/10 22 PROFIT ARISING OUT OF SUCH ACTIVITIES SHALL BE TREATED AS AGRICULTURAL INCOME.' 13. THEREFORE, IT IS TO BE SEEN THAT THE ISSUE RAIS ED IN THE PRESENT APPEAL IS SQUARELY COVERED BY THE ABOVE MEN TIONED DECISION OF THE BANGALORE 'B' BENCH IN THE CASE OF INDO AMERICAN EXPORTS AND M/S. NAMDHARI SEEDS P. LTD., 14. THE HON'BLE SUPREME COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. RAJA BENOY KUMAR SAHA S ROY (32 ITR 466) HAS CONSIDERED COMPREHENSIVELY THE CONCEPT OF AGRICULTURAL INCOME FOR THE PURPOSE OF I NCOME- TAX ACT. THE COURT HELD THAT AGRICULTURE IN ITS PR IMARY SENSE DENOTES THE CULTIVATION OF THE FIELD AND IS RESTRIC TED TO CULTIVATION OF THE LAND IN THE STRICT SENSE OF THE TERM MEANING THEREBY TILLING OF THE LAND, SOWING OF THE SEEDS, P LANTING AND SIMILAR OPERATIONS ON THE LAND. THESE ARE BASIC OP ERATIONS AND REQUIRE THE EXPENDITURE OF HUMAN SKILL AND LABO UR UPON THE LAND ITSELF. THE COURT FURTHER HELD THAT THE P ERFORMANCE OF SUBSEQUENT OPERATIONS LIKE TENDING, PRUNING, CUT TING, HARVESTING ETC., WOULD NOT BE ENOUGH T O CHARACTERI ZE THEM AS AGRICULTURAL OPERATIONS. IN ORDER TO INVEST THE M WITH THE CHARACTER OF AGRICULTURAL OPERATIONS, SUBSEQUENT OP ERATIONS MUST NECESSARILY TAKEN IN CONJUNCTION WITH AND IN CONTINUATION OF THE BASIC OPERATIONS WHICH ARE THE EFFECTIVE COST OF THE PRODUCE BEING RAISED FROM THE LAND. ITA NOS.819 & 820/B/10 23 15. IF WE EXAMINE THE OPERATIONS CARRIED OUT BY THE ASSESSEE IN THE PREVIOUS YEAR RELEVANT TO THE ASSES SMENT YEAR IN APPEAL, WE FIND THAT THE PRODUCTION OF BASIC SEE DS AS WELL AS HYBRID SEEDS ARE THE RESULTS OF BASIC OF AGRICUL TURAL OPERATIONS CARRIED ON BY THE ASSESSEE COMPANY IN IT S OWN LAND AS WELL AS IN LEASEHOLD LAND. THE METHOD OF C ONTRACT FARMING DOES NOT TAKE AWAY THE CHARACTER OF THE BAS IC OPERATIONS CARRIED OUT BY THE ASSESSEE COMPANY WHIC H ARE AGRICULTURAL IN NATURE. THE ASSESSEE COMPANY PROCU RES GERMPLASM AND SOWS IN ITS OWN FIELD, AND CARRIES ON ALL AGRICULTURAL OPERATIONS AND PRODUCES THE BASIC SEED S. THE BASIC SEEDS SO HARVESTED ARE AGAIN PUT THROUGH AGRI CULTURAL OPERATIONS INTIMATELY CONNECTED WITH LEASEHOLD LAND FOR FINALLY BRINGING OUT THE HYBRID SEEDS. ONLY FOR TH E REASON THAT THE BASIC SEEDS ARE SOWN IN LEASEHOLD LAND AND THE MANPOWER REQUIRED ARE ARRANGED THROUGH CONTRACT FAR MING, IT DOES NOT MEAN THAT THE OPERATIONS CARRIED OUT BY THE ASSESSEE COMPANY ARE NOT AGRICULTURAL OPERATIONS. AS A MATTER OF FACT, IT IS TO BE SEEN THAT THE ASSESSEE COMPANY HAS CARRIED OUT BASIC AS WELL AS SECONDARY AGRICULTURAL OPERATIONS. THEREFORE, WITHOUT ANY FEAR OF CONTRAD ICTION, IT IS POSSIBLE FOR US TO HOLD THAT ENTIRE SUCH INCOME OF THE ASSESSEE IS AGRICULTURAL IN NATURE WHICH IS TO BE E XCLUDED FROM THE NATURE OF TOTAL INCOME. 16, THE ASSESSEE IS SUCCESSFUL IN ITS APPEAL. ITA NOS.819 & 820/B/10 24 17. AS THE MAIN GROUND OF THE ASSESSEE ITSELF IS DE CIDED IN ITS FAVOUR, WE HAVE NOT CONSIDERED THE ALTERNATIVE CONTENTION REGARDING APPLICATION OF RULE 7 AND PROPORTIONATE EXEMPTION OF INCOME. 18. THE REASONS POINTED OUT BY THE ASSESSING AUTHOR ITY TO DENY THE CLAIM OF EXEMPTION MADE BY THE ASSESSEE CO MPANY ARE THAT THE ASSESSEE IS FOLLOWING INTERNATIONAL TE CHNOLOGY, MARKETING EXPERTISE, INTEGRATED SCIENTIFIC AND COMM ERCIAL ACTIVITY ETC., THESE ARE ALL MATTERS STRANGE TO THE STRICT CODE OF INCOME-TAX. THOSE PREMISES DO NOT HAVE ANY ROLE IN DECIDING THE NATURE OF INCOME WITHIN THE FRAMEWORK OF INCOME-TAX ACT, 1961. THE REASONS POINTED OUT BY T HE ASSESSING OFFICER ARE BY AND LARGE ISSUES TO BE DEC IDED BY THE POLICY MAKERS IN THE GOVERNMENT. 10. HOWEVER, NOW WE HAVE TO SEE WHETHER THE CASE O F THE ASSESSEE IS COVERED BY THE DECISION OF THE TRIBUNAL IN THE A SSESSEES OWN CASE OR BY THE DECISION OF THE HONBLE KARNATAKA HIGH CO URT IN THE CASE OF M/S NAMDHARI SEEDS PVT. LTD.. A JUDGMENT OF THE HO NBLE HIGH COURT IS APPLICABLE ONLY IF THE FACTS AND CIRCUMSTA NCES ARE SIMILAR. THE FOLLOWING DIFFERENCES IN THE FACTS AND CIRCUMST ANCES OF THE ASSESSEES OWN CASE AND THE CASE OF M/S NAMDHARI SE EDS ARE WORTH NOTING. ITA NOS.819 & 820/B/10 25 M/S NAMDHARI SEEDS PVT. LTD. M/S ADVANTE I NDIA LTD. 1. IT DOES NOT TAKE LAND ON LEASE FROM FARMERS IT TAKES LANDS ON LEASE FROM FARMERS 2. IT ENGAGES THE FARMERS FOR PRODUCTION OF HYBRID SEEDS IT ENGAGES SERVICES OF THE FARMERS FOR PRODUCTION OF HYBRID SEEDS. 3. IT PURCHASES THE HYBRID SEEDS WHICH CATER TO ITS SPECIFICATIONS AT FIXED PRICES IT TAKES ENTIRE PRODUCE FROM THE FARMERS. 4. IT IS NOT CONCERNED WITH EXPENDITURE INCURRED BY THE FARMERS IT REIMBURSES THE ENTIRE EXPENDITURE OF CULTIVATION TO THE FARMERS. 5. THE SEEDS WHICH DO NOT MEET THE SPECIFICATION SET OUT BY M/S NAMDHARI SEEDS ARE SOLD BY THE COMPANY IN THE OPEN MARKET AND THE CONSIDERATION RECEIVED IS GIVEN TO THE FARMERS. THE FARMERS ARE NOT GIVEN PRICE FOR THE PRODUCE EXCEPT REIMBURSEMENT OF THE ENTIRE CHARGES AND REPAYMENT THE LABOUR CHARGES. 11. TAKING THE ABOVE DIFFERENCES INTO CONSIDERATIO N, IT CAN BE SEEN THAT THE DECISION OF THE HONBLE HIGH COURT OF KARN ATAKA IN THE CASE ITA NOS.819 & 820/B/10 26 OF M/S NAMDHARI SEEDS PVT. LTD., IS BASED ON THE PE CULIAR FACTS AND CIRCUMSTANCES OF ITS CASE. THE HONBLE HIGH COURT HAS HELD THAT THE ASSESSEE THEREIN, I.E M/S NAMDHARI SEEDS PVT. LTD., IS IN FACT PURCHASING THE HYBRID SEEDS PRODUCED BY THE FARMERS AND THE CONTRACT IS TO PRODUCE HYBRID SEEDS AS PER THE SPECIFICATIO NS. IN THE CASE ON HAND, WE FIND THAT THE FARMERS THOUGH ARE EMPLOYED TO CULTIVATE THE LANDS ARE ACTING ON BEHALF OF THE ASSESSEE COMPANY UNDER ITS SUPERVISION AND THE ENTIRE PRODUCE IS TAKEN BY THE ASSESSEE ONLY. 12. IN VIEW OF THE SAME, WE ARE OF THE OPINION THA T THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF M/S NAMDHARI SEEDS IS NOT APPLICABLE IN ITS ENTIRETY TO THE FACTS OF T HE CASE BEFORE US. THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSM ENT YEAR 2002-03. RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDIN ATE BENCH TO WHICH ONE OF US I.E J.M IS A SIGNATORY, THE GROUND S OF APPEAL RELATING TO THE CLAIM OF EXEMPTION U/S 10 OF THE INCOME-TAX ACT ARE ALLOWED. 13. AS REGARDS GROUND NO.6 RELATING TO THE NON ADM ISSION OF GROUND OF APPEAL IN RESPECT OF NON-GRANTING OF DEPRECIATIO N ON TECHNICAL KNOW-HOW FEES TREATED AS CAPITAL EXPENDITURE IN AN EARLIER YEAR, THE ITA NOS.819 & 820/B/10 27 LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THI S ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBU NAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1995-96. THE LEAR NED COUNSEL FOR THE ASSESSEE HAS ENCLOSED COPY OF THE SAID ORDER BE FORE US ALONG WITH THE PAPER BOOK. 14. THE LEARNED DR HOWEVER SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 15. HAVING HEARD BOTH THE PARTIES AND HAVING CONSI DERED THE RIVAL CONTENTIONS, WE FIND THAT THE TRIBUNAL FOR THE ASSE SSMENT YEAR 1995-96 HAS DIRECTED THE AO TO CONSIDER THE ALTERNATE PLEA OF THE ASSESSEE FOR ALLOWANCE OF DEPRECIATION ON TECHNICAL KNOW-HOW FEE S, IF CLAIM IS IN ACCORDANCE WITH LAW. 16. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSE E HAS ALSO FILED A COPY OF THE LETTER OF DCIT DATED 24.8.2009, WHEREIN IT IS MENTIONED THAT THE DEPRECIATION ON TECHNICAL-KNOW-HOW FEES TR EATED AS CAPITAL EXPENDITURE HAS BEEN ALLOWED. IN VIEW OF THE SAME, WE REMAND THIS ISSUE ALSO TO THE FILE OF THE ASSESSING OFFICER TO ALLOW DEPRECIATION ON TECHNICAL-KNOW-HOW FEES AS IT IS TREATED AS CAPITAL EXPENDITURE. ITA NOS.819 & 820/B/10 28 17. AS REGARDS, THE LAST GROUND RELATING TO NON EX CLUSION OF PROFIT ON SALE OF ASSETS WHILE COMPUTING THE TOTAL INCOME, WE FIND THAT THE CIT(A) HAS FAILED TO ADJUDICATE THE SAME AND GIVE A NY FINDING. IN VIEW OF THE SAME, WE DEEM IT FIT AND PROPER TO REMA ND THE ISSUE BACK TO THE FILE OF THE CIT(A) WITH A DIRECTION TO CONSI DER THE GROUND RAISED BY THE ASSESSEE IN ACCORDANCE WITH LAW BUT NEEDLESS TO MENTION THAT THE ASSESSEE SHALL BE GIVEN A FAIR OPPORTUNITY OF H EARING. 18. IN THE RESULT, THE GROUNDS NO.1 TO 5 ARE ALLO WED AND GROUND NO.6 IS ALLOWED FOR STATISTICAL PURPOSES. 19. FOR THE ASSESSMENT YEAR 2004-05, THE ASSESSEE H AS RAISED GROUNDS NO.1 TO 4 RELATING TO THE DISALLOWANCE OF C LAIM OF EXEMPTION U/S 10(1) OF THE INCOME-TAX ACT IN RESPECT OF AGRIC ULTURAL INCOME. IN VIEW OF OUR DETAILED FINDINGS IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003-04 IN THE ABOVE PARAGRAPHS, T HESE GROUNDS OF APPEAL ARE ALLOWED. 20. GROUND NO. 5 IS SIMILAR TO GROUND NO. 6 IN THE ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2003-04. FOR THE RE ASONS GIVEN ITA NOS.819 & 820/B/10 29 THEREIN, THIS ISSUE IS ALSO SET ASIDE TO THE FILE O F THE AO FOR RECONSIDERATION IN ACCORDANCE WITH LAW. 21. THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES . 22. IN THE RESULT, GROUNDS NO.1 TO 4 ARE ALLOWED AND GROUND NOS. 5 & 6 ARE ALLOWED FOR STATISTICAL PURPOSES. THE APPEALS FOR THE ASSESSMENT YEARS 2003-04 AND 20 04-05 ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29TH JUNE, 2012. SD/- SD/- (N BARATHVAJA SANKAR) (P MADHAVI DEVI ) VICE PRESIDENT JUDICIAL MEMBER VMS.F BANGALORE DATED : 29/06/2012 COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER SENIOR PRIVATE SECRETARY , ITAT, BANGALORE.