Dy.CIT, Circle-3(3), Hyderabad V. M/s.Vibha Grotech Ltd., Hyderabad

ITA 935/HYD/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66410 (ITAT-HYDERABAD)
• Duration Of Justice: 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2001-2002
• Appeal Filed On: 11-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMISHA S GUPT
• Assessee Lawyers: V SHEKHAR BABU
• Keywords: Business expenditure; Earning of tax free income
• Section: 14A; 115JB; 147; 148; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.935/HYD/2012 ASSESSMENT YEAR: 2001-02 DCIT, CIR-3(3), TIRUPATI. .... APPELLANT VS. M/S. VIBHA AGRO TECH LIMITED, MADHAPUR, HYD. PAN:AACCV 8157 A RESPONDENT APPELLANT BY : SMT. AMISHA S. GUPT (DR) RESPONDENT BY : SRI V.SHEKHAR BABU (AR) DATE OF HEARING : 13-09-2012 DATE OF PRONOUNCEMENT : 31-10- 2012 ORDER PER SAKTIJIT DEY, J.M.: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER DATED 10-3-2011 PASSED IN APPEAL NO.0120/CIT (A)/GNT/09-10 AND IT PERTAINS TO THE ASSESSMENT YEA R 2001-02. 2. THE SOLITARY ISSUE INVOLVED IN THE APPEAL OF T HE REVENUE IS WITH REGARD TO ALLOWABILITY OF R & D EXPENDITURE CLAIMED BY THE ASSESSEE. 3. BRIEFLY THE FACTS ARE THE ASSESSEE IS ENGAGED IN THE ACTIVITY OF RESEARCH, PRODUCTION AND MARKETING OF HYBRID SEEDS OF VARIOUS FIELD CROPS. FOR THE ASSESSMENT YEAR UNDER CONSIDERATION THE ASS ESSEE ORIGINALLY FILED ITS RETURN OF INCOME ON 31-10-2001 DECLARING INCOME AT NIL AFTER ADJUSTING 2 ITA NO.935 OF 2012 M/S. VIBHA AGROTECH LIMITED, HYDERABAD. BROUGHT FORWARD LOSSES. SUBSEQUENTLY, A REVISED RET URN WAS FILED ON 31-3- 2003 DECLARING INCOME AT NIL UNDER THE NORMAL PROVI SION AFTER ADJUSTING BROUGHT FORWARD LOSSES AND INCOME OF RS.42,30,543/- UNDER SECTION 115JB OF THE ACT. AN ASSESSMENT ORDER WAS PASSED U/S 143 (3) ON 29-3-2004 BY DETERMINING THE TOTAL INCOME AT RS.13,38,180 AFTER SET OFF OF CARRY FORWARD LOSSES OF RS.15,76,572. THE ASSESSEE CHALL ENGED THE ASSESSMENT ORDER BY FILING AN APPEAL BEFORE THE CIT (A). AFTE R DISMISSAL OF APPEAL BY THE CIT (A) THE ASSESSEE FILED AN APPEAL BEFORE THE ITAT. THE ITAT ALLOWED ASSESSEES CLAIM OF EXEMPTION U/S 10(1) WIT H REGARD TO SALE PROCEEDS OF FOUNDATION SEEDS BEING AGRICULTURE INCO ME THE ITAT HOWEVER UPHELD AOS FINDING IN RESPECT OF EXPENDITURE INCUR RED TOWARDS R & D. ON THE BASIS OF THE FINDING OF ITAT IN RESPECT OF R & D EXPENDITURE THE AO REOPENED THE ASSESSMENT BY ISSUING NOTICE U/S 148 F OR BRINGING TO TAX THE R & D EXPENDITURE OF RS.22,39,051. SINCE THE ASSE SSEE DID NOT RESPOND TO THE NOTICES ISSUED U/S 148 AND 143(2), THE AO C OMPLETED THE ASSESSMENT U/S 144 READ WITH SECTION 147 BY DISALLO WING THE R & D EXPENDITURE OF RS.22,39,051/-. THE AO HELD THAT TH E ENTIRE ACTIVITY OF PRODUCTION OF FOUNDATION SEED AND SALE OF MARKETABL E SEED IS ONE INTEGRAL ACTIVITY. THE INCOME ARISING OUT OF THE SAID ACTIVI TY BEING EXEMPT INCOME NO EXPENDITURE PERTAINING TO SUCH INCOME IS ALLOWAB LE U/S 14A OF THE ACT. 4. THE ASSESSEE ASSAILED THE ASSESSMENT ORDER BY F ILING AN APPEAL BEFORE THE CIT (A). IN COURSE OF HEARING BEFORE TH E CIT (A), THE ASSESSEE CONTENDED THAT THE ACTIVITIES UNDERTAKEN BY IT IS H YBRID RESEARCH, SEED PRODUCTION AND MARKETING. EACH ACTIVITY INVOLVES S EQUENCE OF PROCESSES. RESEARCH ACTIVITY INVOLVES THE SEQUENCE OF GERMPLAS OM COLLECTION, EVOLUTION, MULTIPLICATION AND UTILISATION HYBRIDISA TION, INITIAL EVOLUTION OF HYBRIDS AND VARIETIES, ADVANCE HYBRID TESTING AND O N FARM TESTING. PRODUCTION ACTIVITY INVOLVES PARENT SEED MULTIPLICA TION, FOUNDATION SEED MULTIPLICATION AND LABELLED/CERTIFIED HYBRID SEED P RODUCTION. MARKETING ACTIVITY INVOLVES ON FARM TESTING, RESULT DEMONSTRA TIONS TO FARMERS, 3 ITA NO.935 OF 2012 M/S. VIBHA AGROTECH LIMITED, HYDERABAD. DEALERS AND DISTRIBUTORS AND CREATION OF MARKET DE MAND. IT WAS CONTENDED THAT RESEARCH ACTIVITY IS NOT RESTRICTED TO CULTIVATION OF FOUNDATION SEED. THE SEARCH PROCESS DOES NOT END W ITH THE CULTIVATION OF BASIC SEED. IT IS A CONTINUOUS PROCESS FOR IDENTIFI CATION OF PROPER SUITABLE CROP FOR MULTIPLICATION, TO ANALYSE THE REQUIRED FR UITS TO GROW IN A GIVEN SET OF CLIMATIC CONDITIONS, TO PROTECT FROM DISEASE S OR PESTS, FOR BETTER YIELD, SUPPORT TO THE FARMERS. IT WAS CONTENDED THA T THE AO WAS NOT JUSTIFIED IN CONCLUDING THAT THE RESEARCH ENDS AT C ULTIVATION OF BASIC SEED, HENCE NO RESEARCH EXPENDITURE IS ATTRIBUTABLE TO CU LTIVATION AND PROCESSING OF HYBRID SEEDS. THE ASSESSEE IN SUPP ORT OF HIS CONTENTION RELIED UPON THE DECISION IN CASE OF WATER FALL EST ATES LIMITED VS. CIT 219 ITR 563 AND THE DECISION OF THE ITAT IN ASSESSEES OWN CASE IN ITA NO.469/HYD/2008 DATED 18-6-2010. 5. THE CIT (A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND TAKING NOTE OF THE DECISIONS RELIED UPON BY THE ASS ESSEE HELD THAT WHILE THE OPERATIONS ON LAND INCLUDING BASIC AND SUBSEQUE NT OPERATIONS BY EXPENDING HUMAN SKILL AND LABOUR FOR PRODUCING BASI C SEEDS CONSTITUTE AGRICULTURAL OPERATIONS. THE SUBSEQUENT OPERATIONS RELATED TO CULTIVATION AND PROCESSING OF HYBRID SEEDS CONSTITUTE COMMERCIA L ACTIVITY. THE R & D EXPENDITURE IS CONNECTED TO THE ENTIRE OPERATION OF THE ASSESSEE BOTH AGRICULTURAL AND COMMERCIAL. THEREFORE, THE R & D EXPENDITURE HAS TO BE ALLOCATED TO BOTH THE OPERATIONS ON THE BASIS OF TH E TURNOVERS OF BOTH THE DIVISIONS. THE CIT (A) THEREFORE DIRECTED THE AO T O APPORTION THE R & D EXPENDITURE TO AGRICULTURAL OPERATION AND COMMERCIA L OPERATIONS AND DETERMINE THE NET COMMERCIAL INCOME AFTER ALLOWING PROPORTIONATE R & D EXPENDITURE. THE FINDING OF THE CIT (A) IS EXTRACT ED HEREUNDER FOR CONVENIENCE:- 4.2. I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE APPELLANT GONE THROUGH THE ORDER OF THE AO AND CAREFULLY PER USED THE CITATIONS RELIED ON BY THE APPELLANT. THE ONLY ISS UE BEFORE THE 4 ITA NO.935 OF 2012 M/S. VIBHA AGROTECH LIMITED, HYDERABAD. UNDERSIGNED IS ALLOCATION OF R & D EXPENDITURE TO A GRICULTURAL DIVISION AND THE COMMERCIAL DIVISION BASED ON THE R ESPECTIVE TURNOVERS. IN THIS CONTEXT, IT IS IMPORTANT TO NOT E HERE THAT IN THE CASE OF THE APPELLANT ITSELF FOR THE ASSESSMENT YEA R 2001-02, THE JURISDICTIONAL TRIBUNAL AT HYDERABAD HAS HELD THAT THE ACTIVITIES OF THE APPELLANT CONSISTS OF AGRICULTURAL OPERATIONS A ND COMMERCIAL ACTIVITIES. THIS TRIBUNAL DECISION HAS BEEN REPORT ED AS THE CASE OF VIBHA AGROTECH LTD., VS. ITO REPORTED IN (2010) 314 ITR (AT) 231 (HYD). WHILE OPERATIONS ON LAND INCLUDING BASIC AN D SUBSEQUENT OPERATIONS BY EXPENDITURE HUMAN SKILL AND LABOR FOR PRODUCING BASIC SEEDS CONSTITUTE AGRICULTURAL OPERATIONS; SUB SEQUENT OPERATIONS CONSTITUTE COMMERCIAL OPERATIONS. NOW, IN AS MUCH AS THE R & D EXPENSES ARE CONCERNED THEY ARE CONNECTED WITH ENTIRE OPERATIONS OF THE APPELLANT. BUT, HOWEVER, AS THE APPELLANTS OPERATIONS INCLUDE AGRICULTURAL AND COMMERCIAL, THE R & D EXPENSES HAVE TO BE ALLOCATED BASED ON THE TURNOVER S IN BOTH THE DIVISIONS. IT MAY HOWEVER BE NOTED HERE THAT SINCE AGRICULTURAL INCOME IS EXEMPT FROM TAX, UPON ALLOCATION OF R & D EXPENDITURE, STILL THE AGRICULTURAL INCOME IS OUTSIDE THE TAX NE T, WHEREAS THE COMMERCIAL INCOME HAVING BEEN REDUCED BY PROPORTION ATE R & D EXPENDITURE IS TAXABLE. SINCE THE TURNOVERS ARE NO T READILY AVAILABLE FROM HE SUBMISSIONS MADE BY THE APPELLANT ; THE NET AGRICULTURAL INCOME AND THE NET COMMERCIAL INCOME I S NOT POSSIBLE TO BE MADE OUT. HENCE, THE AO IS DIRECTED TO APPOR TION THE R & D EXPENDITURE TO AGRICULTURAL OPERATIONS AND COMMERCI AL DIVISION BY THE RATIO OF THE TURNOVERS AND DETERMINE THE NET CO MMERCIAL INCOME FOR THE PURPOSE OF TAX. 6. THE LEARNED DR SUBMITTED THAT THE ISSUE IS COVER ED BY THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR THE ASSTT. Y EARS 2002-03, 2004-05 AND 2005-06 IN ITA NO.469/HYD/2008 AND OTHERS DATED 18-6-2010. 5 ITA NO.935 OF 2012 M/S. VIBHA AGROTECH LIMITED, HYDERABAD. 7. THE LEARNED AR RELYING UPON THE ITATS ORDER IN ITA NO.469/HYD/2008 DATED 18-6-2010 SUBMITTED THAT THER E IS NO CHANGE IN THE FACTS OF THE CASE FOR THE YEAR UNDER CONSIDERAT ION AND THE YEARS INVOLVED IN THE ORDER PASSED BY THE ITAT. THE LEAR NED AR SUBMITTED THAT THE ACTIVITIES CARRIED ON BY THE ASSESSEE CONSISTS OF AGRICULTURAL AS WELL AS COMMERCIAL OPERATIONS AND BOTH BEING DISTINCT ACTIV ITIES THE R & D EXPENDITURE IS ATTRIBUTABLE TO BOTH THE OPERATIONS. THE LEARNED AR ALSO RELIED UPON A DECISION OF THE HONBLE SUPREME COURT IN CASE OF WATER FALL ESTATES LTD. VS. CIT 219 ITR 563. 8. WE HAVE HEARD SUBMISSIONS OF THE PARTIES AND PER USED THE MATERIAL ON RECORD. THE ONLY ISSUE TO BE DECIDED IN THIS AP PEAL IS WHETHER THE ASSESSEE IS ENGAGED IN TWO DISTINCT ACTIVITIES I.E. , AGRICULTURAL AND COMMERCIAL AND IF SO WHETHER THE R & D EXPENDITURE CAN BE APPORTIONED PROPORTIONATELY BETWEEN THE TWO ACTIVITIES. IN THE ASSESSEES EARLIER APPEAL FOR THE SELF SAME ASSESSMENT YEARS, THIS BEN CH IN ITS ORDER REPORTED IN 314 ITR (AT) 231 HELD THAT THE BASIC SE EDS FOUNDATION SEEDS SOLD BY THE ASSESSEE CONSTITUTES INCOME EARNED FROM AGRICULTURE. THE ISSUE OF R & D EXPENDITURE NEVER FELL FOR CONSIDERA TION OF THIS BENCH IN THE APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2001 -02. 9. HOWEVER, THE ISSUE OF R & D EXPENDITURE CAME UP BEFORE THIS BENCH IN ASSSSEES APPEAL FOR THE ASST. YEARS 2002-03, 20 04-05 AND 2005-06. THE ITAT RELYING UPON THE JUDGMENT OF THE HONBLE A PEX COURT IN WATERFALL ESTATES LTD. VS. CIT (219 ITR 563) HELD T HAT THE ASSESSEE IS CARRYING ON TWO SEPARATE ACTIVITIES VIZ., AGRICULTU RAL ACTIVITY AND COMMERCIAL ACTIVITY. THE ITAT HELD THAT WHILE AGRI CULTURAL ACTIVITY CONSTITUTES DEVELOPMENT OF PARENT SEEDS. THE COMME RCIAL ACTIVITY INVOLVES DEVELOPMENT OF HYBRID SEEDS FROM THE PAREN T SEEDS. IT IS PROFITABLE TO OBSERVE THE FINDING OF THE ITAT IN TH IS RESPECT WHICH IS QUOTED BELOW:- 6 ITA NO.935 OF 2012 M/S. VIBHA AGROTECH LIMITED, HYDERABAD. NOW WE HAVE TO EXAMINE THE FACTS OF THE PRESENT CAS E IN THE LIGHT OF THE ABOVE RULINGS GIVEN BY VARIOUS COURTS. WE H AVE ALREADY CONFIRMED THE FACT THAT THE ASSESSEE HAS BEEN CARRY ING TWO ACTIVITIES VIZ., AGRICULTURAL ACTIVITIES AND COMMER CIAL ACTIVITIES. THE OBJECTIVITIES OF AGRICULTURAL ACTIVITIES IS PURSUE D BY DEVELOPMENT OF PARENT SEEDS AND COMMERCIAL ACTIVITIES PURSUED B Y DEVELOPMENT OF HYBRID SEEDS FROM THE PARENT SEEDS. THE PARENT SEED IS DEVELOPED BY ASSESSEE BY AN ACT OF AGRICULTURE. TH EREAFTER THE ASSESSEE SELLING THE FOUNDATION SEEDS TO THE FARMER S FOR FURTHER MULTIPLICATION AND THE FARMERS CULTIVATE AND M ULTIPLY THESE SEEDS AND THE HYBRID SEEDS SO PRODUCED BY THEM ARE SOLD B ACK TO THE ASSESSEE COMPANY. THE ASSESSEE COMPANY PROCESS THE HYBRID SEEDS TO PURCHASED TO SUIT THE DESIRED QUALITY AND SELL AS FINISHED SEEDS. THESE TWO ARE DIFFERENT TRANSACTION, THERE IS NO FORMAL AGREEMENT WITH THE FARMER WHEREIN THE FARMER IS PRO HIBITED FROM SELLING THE SEEDS TO PRODUCED BY THEM IN THE OPEN M ARKET. FROM THIS, IT IS CLEAR THAT THE FIRST TRANSACTION OF SAL E IS CONCLUDED, ONCE THE SALE IS TOOK PLACE. ONCE THERE IS A SALE AND ALSO A PURCHASE OF PRODUCT, THEN IT CANNOT BE TERMED AS INTEGRAL OR CO MPOSITE ACTIVITY. THUS, THE SOURCE OF PROCUREMENT FOR PARE NT SEED IS OWN PRODUCTION I.E., AGRICULTURAL ACTIVITY. THE SOURCE OF PROCUREMENT OF HYBRID SEED IS THE FARMERS. THE POLICY AND STRATEG Y FOR AGRICULTURAL ACTIVITY IS DIFFERENT FROM COMMERCIAL ACTIVITIES. ONE ACTIVITY IS CANNOT BE SAID TO BE ANCILLARY TO OTHER ACTIVITY. BOTH ARE GENERATED INDEPENDENT SOURCE OF INCOME AND FORMULAT E DISTINCT BUSINESS. WHILE DEALING WITH THE ISSUE OF ALLOWABILITY OF R & D EXPENDITURE THE ITAT HELD IN THE FOLLOWING MANNER:- ............................................. REVE NUE INSISTED NOTHING TO BE DEDUCTED WHEREAS ASSESSEE COMPANY CANVASSED FOR THE DEDUCTION OF THE WHOLE OF R & D EXPENDITURE. IN OUR OPINION, THE ASSESSEE 7 ITA NO.935 OF 2012 M/S. VIBHA AGROTECH LIMITED, HYDERABAD. COMPANY IS ENTITLED TO DEDUCTION ON ACCOUNT OF R & D EXPENDITURE BUT THE SAME HAS TO BE RESTRICTED IN PROPORTION TO THE TURNOVER BETWEEN THE AGRICULTURAL DIVISION AND THE COMMERCIA L DIVISION, AND THE AMOUNT RELATABLE TO COMMERCIAL DIVISION CAN ALO NE BE ALLOWED AS BUSINESS EXPENDITURE. IN THE FACTS AND CIRCUMST ANCES, WE DIRECT THE AO TO ALLOW EXPENDITURE ATTRIBUTABLE TO COMMERCIAL DIVISION IN PROPORTION TO THE TURNOVER BETWEEN THE AGRICULTURAL DIVISION AND THE COMMERCIAL DIVISION. 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.). ACCORDINGLY , THIS GROUND IN ASSESSEE IS PARTLY ALLOWED. 10. A BARE READING OF THE AFORESAID FINDING MAKES I T CLEAR THAT THE ITAT HAS HELD THAT R & D EXPENDITURE HAS TO BE PROPORTIO NATELY APPORTIONED BETWEEN THE AGRICULTURAL DIVISION AND COMMERCIAL DI VISION AND THE AMOUNT RELATABLE TO COMMERCIAL DIVISION IS TO BE ALLOWED A S BUSINESS EXPENDITURE. WE FIND FROM THE ORDER OF THE CIT (A) THAT HE HAS D IRECTED THE AO TO APPORTION THE R & D EXPENDITURE BETWEEN AGRICULTURA L OPERATION AND COMMERCIAL DIVISION AND THEREAFTER DETERMINE THE BU SINESS INCOME. IN OUR VIEW THIS DIRECTION OF THE CIT (A) IS FULLY IN TUNE WITH THE ORDER OF ITAT IN ITA NO.469/HYD/2008 AND OTHERS DATED 18-6-2010, HENCE CALLS FOR NO INTERFERENCE. WE THEREFORE UPHOLD THE ORDER OF THE CIT (A) AND DISMISS THE GROUNDS RAISED BY THE DEPARTMENT. 11. IN THE RESULT, THE APPEAL FILED BY THE DEPARTME NT STANDS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 31-10-2012. SD/- SD /- (CHANDRA POOJARI) ACCOUNTANT MEMBER (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 31 ST OCTOBER, 2012. 8 ITA NO.935 OF 2012 M/S. VIBHA AGROTECH LIMITED, HYDERABAD. COPY TO:- 1) DCIT, CIRCLE-3(3), HYDERABAD. 2)M/S. VIBHA AGROTECH LIMITED,HUDATECHNO ENCLAVE, MADHAPUR, HYDERABAD. 3) THE CIT (A), GUNTUR 4) THE CIT CONCERNED, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABA D. JMR*