DCIT, Circle-3(2), Hyd, Hyderabad V. Super Agri Seeds Pvt.Ltd.,Hyd, Hyderabad

ITA 909/HYD/2015

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3039 (ITAT-HYDERABAD)
• Duration Of Justice: 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-02-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 28-01-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 03-07-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: M SITARAM
• Assessee Lawyers: A V RAGHURAM
• Keywords: Business income
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA.NO.909/HYD/2015 ASSESSMENT YEAR 2011-2012 THE DCIT, CIRCLE 3(2) HYDERABAD. VS. M/S. SUPER AGRI SEEDS P. LTD., HYDERABAD. PAN AAICS0900J (APPELLANT) (RESPONDENT) FOR REVENUE : MR. M. SITARAM FOR ASSESSEE : MR. A.V. RAGHURAM DATE OF HEARING : 28.01.2016 DATE OF PRONOUNCEMENT : 10 .02.2016 ORDER PER SMT. P. MADHAVI DEVI, J.M. THIS IS REVENUES APPEAL FOR THE A.Y. 2011- 2012. IN THIS APPEAL, THE REVENUE IS AGGRIEVED BY T HE ORDER OF THE LD. CIT(A) IN TREATING THE INCOME FROM SALE OF FOUNDATION SEEDS AS AGRICULTURAL INCOME AND HOL DING THE SAME AS EXEMPT FROM TAXATION. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY, WHICH IS ENGAGED IN RESEARCH AND DEVELOPME NT OF HIGH QUALITY SEEDS FOR AGRICULTURAL OPERATIONS, FILED ITS RETURN OF INCOME, ADMITTING INCOME AT RS.1,97,88,27 0 BESIDES AGRICULTURAL INCOME OF RS.1,43,23,000. DURI NG THE ASSESSMENT PROCEEDINGS UNDER SECTION 143(3) OF THE ACT, 2 ITA.NO.909/HYD/2015 M/S. SUPER AGRI SEEDS P. LTD., HYD. THE A.O. OBSERVED THAT THE ASSESSEE COMPANY HAS CLA IMED EXEMPTION OF RS.1,43,23,000 AS AGRICULTURE INCOME UNDER SECTION 10(1) OF THE ACT AND HAS ALSO CLAIMED DEDUC TION OF AGRICULTURAL RESEARCH AND DEVELOPMENT EXPENSES UNDE R SECTION 35(2AB) OF THE ACT. THE A.O. ASKED THE ASSE SSEE TO SHOW CAUSE AS TO WHY THE AGRICULTURAL INCOME CLAIME D BY THE ASSESSEE SHOULD NOT BE TREATED AS BUSINESS INCO ME. IN RESPONSE TO THE SAID SHOW CAUSE NOTICE, THE ASSESSE E COMPANY SUBMITTED THAT IT HAD OBTAINED LEASE HOLD L AND FROM VARIOUS FARMERS/PLOT OWNERS AND CARRIED OUT AL L THE AGRICULTURAL OPERATIONS REQUIRED TO CULTIVATE THE C ROPS I.E., TILLING OF LAND, SOWING OF SEEDS, WEEDING, APPLICAT ION OF FERTILIZER/PESTICIDES, IRRIGATION, HARVESTING AND A LL OTHER ALLIED OPERATIONS TO PRODUCE ITS PARENT SEEDS WHICH ARE THEN SOLD TO SEED PRODUCTION ORGANIZERS / FARMERS. IT WAS SUBMITTED THAT THE INCOME EARNED FROM THE SALE OF S UCH SEEDS CULTIVATED BY THE COMPANY IS AGRICULTURAL INC OME AS DEFINED UNDER SECTION 2(1) OF THE ACT, AND EXEMPT F ROM INCOME TAX UNDER SECTION 10(1) OF THE ACT. THE A.O. HOWEVER, WAS NOT SATISFIED WITH THE ASSESSEES CONTENTIONS. BY OBSERVING THAT THE ASSESSEE IS ENGA GED IN RESEARCH, PRODUCTION AND MARKETING OF HYBRID SEEDS OF VARIOUS FIELD CROPS, AND THAT THE RESEARCH ACTIVITY OF THE ASSESSEE COMPANY INVOLVES GERMPLASM COLLECTION AND ITS EVOLUTION, MULTIPLICATION AND UTILIZATION, HYBRIDIZ ATION, INITIAL EVALUATION OF HYBRIDS AND VARIETIES, ADVANC E HYBRID TESTING AND ON-FARM TESTING AND FURTHER THAT THE PRODUCTION ACTIVITY INVOLVES PARENT SEED (BREEDER S EED) MULTIPLICATION, FOUNDATION SEED MULTIPLICATION AND 3 ITA.NO.909/HYD/2015 M/S. SUPER AGRI SEEDS P. LTD., HYD. LABELED/CERTIFIED HYBRID SEED PRODUCTION, HELD THAT ASSESSEE HAS MADE SCIENTIFIC ANALYSIS OF PARENT SEE D AND CROSSING/HYBRIDIZATION OF DIFFERENT LINES OF PARENT SEEDS SO AS TO DEVELOP THE HIGH YIELDING VARIETY OF HYBRID S EEDS, AND THEREFORE, IS INVOLVED IN A SCIENTIFIC AND TECHNOLO GICAL PROCESS WHICH A FARMER CANNOT DO. HE HELD THAT FROM THE ABOVE PROCESS, THE HYBRID SEEDS ARE SO ENGINEERED T HAT WHEN THE CROPS FROM IT IS USED AS SEEDS, THE YIELDS ARE MUCH LESS DUE TO LOSS OF HYBRID VIGOUR AND THEREFOR E, A FARMER HAS TO AGAIN REVERT BACK TO THE PRODUCER OF HYBRID SEEDS FOR SUBSEQUENT CROPS IF HE WANTS SIMILAR RESU LTS OF HIGH PRODUCTION IN THE SUBSEQUENT CROPS WHICH INDIC ATES THAT THE ASSESSEE COMPANY HAS A WELL DEFINED IDENTIFICATION PROCESS OF PARENT SEEDS FROM WHICH H YBRID SEEDS CAN BE GENERATED THROUGH THIS PROCESS WHICH F ACT IS ALSO SUPPORTED BY THE R & D EXPENSES INCURRED FOR PRODUCING THE PARENT SEEDS OF HIGH YIELDING VARIETI ES. THEREFORE, HE HELD THAT IT IS NOT COVERED BY THE AC TIVITY OF AGRICULTURE UNDER SECTION 2(1A) OF THE I.T. ACT. HE ACCORDINGLY, TREATED THE NET AGRICULTURAL INCOME OF RS.1,43,23,000 AS BUSINESS INCOME AND BROUGHT IT TO TAX. 2.1. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFOR E THE LD. CIT(A) WHO BY FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF PRABHAT AG RI BIOTECH LTD., (ITTA.NO.88 OF 2014 DATED 21.02.2014 (A.P.) (HC) AND ALSO THE COORDINATE BENCH DECISION OF ITAT IN THE CASE OF DCIT VS. VIBHA AGROTECH LTD., 40 SOT 55 8 (HYD.) HELD THE SUM OF RS.1,43,23,000 AS AGRICULTUR E 4 ITA.NO.909/HYD/2015 M/S. SUPER AGRI SEEDS P. LTD., HYD. INCOME BUT WITH REGARD TO THE ASSESSEES CLAIM OF R & D EXPENSES, HE REMITTED THE ISSUE TO THE FILE OF THE A.O. WITH A DIRECTION TO ALLOW THE EXPENDITURE ON RESEARCH AN D DEVELOPMENT IN THE RATIO OF THE TURNOVER OF THE AGR ICULTURE PRODUCE AND BUSINESS ACTIVITIES. AGGRIEVED BY THE O RDER OF THE LD. CIT(A), IN HOLDING THE INCOME AS AGRICULTUR AL INCOME, THE REVENUE IS IN APPEAL BEFORE US. 3. THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF THE A.O. AND SUBMITTED THAT ASSESSEE IS INVOLVED IN THE ACTIVITY OF RESEARCH AN D DEVELOPMENT OF PARENT/FOUNDATION SEEDS, WHICH ARE THEREAFTER GIVEN TO THE FARMERS TO GET THE HYBRID S EEDS READY FOR MARKETING. HE HAS SUBMITTED THAT INITIAL ACTIVITY OF RESEARCH AND DEVELOPMENT IS NOT CARRIED IN THE AGRICULTURAL FIELDS BUT IS CARRIED OUT IN THE LABOR ATORIES OF THE ASSESSEE AND THEREFORE, THE INCOME FROM THE SAL E OF THE PARENT SEEDS TO GET THE HYBRID SEEDS WHICH IS CONSEQUENT TO THE RESULT OF THE EARLIER PROCESS HAS TO BE CONSIDERED AS BUSINESS INCOME OF THE ASSESSEE AS RI GHTLY DONE BY THE A.O. 4. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, SUPPORTED THE ORDER OF THE LD. CIT(A) AND REI TERATED THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW AND ALSO PLACED RELIANCE UPON THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE O F PRABHAT AGRI BIOTECH LTD., (ITTA.NO.88 OF 2014 DATE D 21.02.2014 (A.P.) (HC) (CITED SUPRA) AND ALSO THE 5 ITA.NO.909/HYD/2015 M/S. SUPER AGRI SEEDS P. LTD., HYD. COORDINATE BENCH DECISION OF ITAT IN THE CASE OF DC IT VS. VIBHA AGROTECH LTD., (CITED SUPRA), BY FILING THE COPIES OF THE SAID ORDERS BEFORE US. 5. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT ASSESSEE IS INVOLV ED IN THE ACTIVITY OF RESEARCH AND DEVELOPMENT OF HIGH QU ALITY SEEDS AND ALSO IN PRODUCTION, PROCESSING AND MARKET ING OF HYBRID/IMPROVED VARIETY OF SEEDS. FROM THE ABOVE DESCRIPTION AND ALSO FROM THE HUGE R & D EXPENDITUR E OF RS.1,21,20,901 INCURRED BY THE ASSESSEE, WE CAN SEE THAT THE ASSESSEE IS INVOLVED IN THE PROCESS OF SCIENTIF IC RESEARCH FOR DEVELOPMENT OF GOOD AND HIGH YIELDING SEEDS. THIS INVOLVES CERTAIN PROCESSES IN THE LABORATORIES FOLLOWED BY AGRICULTURAL OPERATIONS IN THE FIELD BY WHICH THE PARENT/FOUNDATION SEEDS ARE PRODUCED. THESE FOUNDATION SEEDS ARE THEN MULTIPLIED BY REPRODUCING THEM BY AGRICULTURAL OPERATIONS TO GET THE MARKETABLE PR ODUCE. AS SEEN FROM THE RECITALS IN THE ASSESSMENT ORDER, THE ASSESSEE IS PRODUCING THE PARENT SEEDS WHICH ARE SO LD TO SEED PRODUCTION ORGANIZERS/FARMERS. IT IS THE INCOM E FROM THE SALE OF SUCH PARENT SEEDS THAT IS CLAIMED AS AGRICULTURAL INCOME. THE DETAILS OF THE PROCESSES, IF ANY, UNDERTAKEN BY THE ASSESSEE IN THE LABORATORIES PRIO R TO CARRYING OUT THE AGRICULTURAL ACTIVITIES TO GET THE PARENT SEEDS HAVE NOT BEEN PRODUCED BY THE ASSESSEE NOR WA S IT ASKED FOR BY THE AUTHORITIES BELOW. UNLESS AND UNTI L THE DETAILS ARE CALLED FOR AND VERIFIED, IT CANNOT BE D ETERMINED WHETHER THE ENTIRE INCOME IS AGRICULTURAL INCOME OR NOT. 6 ITA.NO.909/HYD/2015 M/S. SUPER AGRI SEEDS P. LTD., HYD. IF, ON VERIFICATION, IT IS FOUND THAT SOME OF THE P ROCESS WAS CARRIED OUT IN THE ASSESSEES LABORATORIES, THEN TO SUCH EXTENT, IT WOULD NOT BE AGRICULTURAL ACTIVITY AND PROPORTIONATE INCOME WOULD NOT BE AGRICULTURAL INCO ME. WE FIND THAT NEITHER THE A.O. NOR THE CIT(A) HAVE EXAMINED AS TO THE PROPORTION OF THE BUSINESS OPERA TIONS AND THE AGRICULTURAL OPERATIONS CARRIED OUT BY THE ASSESSEE COMPANY. WITHOUT DOING THIS EXERCISE, THE LD. CIT(A), HAS ALLOWED THE CLAIM OF THE ASSESSEE AS RE GARDS AGRICULTURAL INCOME AND DIRECTED THE A.O. TO ALLOW THE EXPENDITURE ON RESEARCH AND DEVELOPMENT IN THE RATI O OF TURNOVER OF THE AGRICULTURE AND BUSINESS ACTIVITIES WHICH IN OUR VIEW, IS NOT REASONABLE. IN VIEW OF THE SAME , WE DEEM IT FIT AND PROPER TO REMIT THE ISSUE TO THE FI LE OF THE A.O. WITH A DIRECTION TO FIRST EXAMINE AND BIFURCAT E ACTIVITIES CARRIED ON BY THE ASSESSEE INTO AGRICULT URAL AND NON-AGRICULTURAL OPERATIONS AND THEREAFTER TO ALLOW THE INCOME FROM AGRICULTURAL ACTIVITY AS AGRICULTURAL I NCOME AND ALSO TO ALLOW THE EXPENDITURE ON RESEARCH AND DEVELOPMENT IN THE RATIO OF THE EXPENDITURE INCURRE D BY THE ASSESSEE ON SUCH ACTIVITY. 6. IN THE RESULT, APPEAL OF THE REVENUE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 10.02.2016 SD/- SD/- (B. RAMAKOTAIAH) (SMT. P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 10 TH FEBRUARY, 2016 VBP/- 7 ITA.NO.909/HYD/2015 M/S. SUPER AGRI SEEDS P. LTD., HYD. COPY TO 1. THE DCIT, CIRCLE - 3(2), HYDERABAD. 2. M/S. SUPER AGRI SEEDS P. LTD., H.NO.8 - 3 - 1503, 5 TH FLOOR, AKASH GANGA, PLOT NO.44, SRINAGAR COLONY, HYDERABAD. 3. CIT(A) - 3, HYDERABAD 4. CIT - 3, HYDERABAD 4. D.R. ITAT A BENCH, HYDERABAD 5. GUARD FILE